He was a close confidant and friend of Warren Buffett. We are talking about William J. Ruane, the founder of the legendary Sequnia Fund. In this article, you will learn who Ruane was and how he became a super investor.
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William J. Ruane - The birth of a superinvestor
William J. Ruane (1925-2005), founder and former chairman of Ruane, Cunniff & Co. Inc, was an average student in school and struggled with his engineering studies. He did not invent an earth-shattering idea in value investing. By studying under Benjamin Graham and recognizing the talent of his classmate Warren Buffett, Ruane became a legend of value investing.
It is a classic case study that success in finance does not require extraordinary talent. But Ruane had a gift for clearly spotting a great idea and, with it, a profitable investment:
Namely, this one in the person of Berkshire Hathaway (BRK.A & BRK.B). He also had the courage to secure the Berkshire Hathaway truck. Buying Berkshire Hathaway stock and driving it all the way may have been the single best idea that turned an average student into a legendary investor.
If you took Berkshire out of Ruane's portfolios, the track record might be less remarkable. This is the ultimate proof that all you need is a few great ideas in your life, and you do not need an IQ beyond 125 to become a super investor. You do, however, need an almost religious belief in the power of the Graham-Buffett system and the discipline to follow it.
The Bible of Wall Street
When the late Bill Ruane attended his fund's annual investor meetings, his beaming smile could light up the whole room.
From his point of view, Benjamin Graham's "Securities Analysis" is the Bible of Wall Street, further even of the Old Testament. In this unbeatable investment classic, Benjamin Graham answers all the important questions about investing. Graham's analytical methods have endured for more than 70 years. Bill Ruane has virtually devoured the Wall Street bible, as he calls it, and he has incorporated the knowledge he has learned into his investment decisions.
Warren Buffett recommended this fund manager
In 1969, the number of potential new investment targets for Warren Buffett diminished considerably. He knew that, as in any bull market, Mr. Market was getting used to paying more and more for a company - and eventually stock prices rose so high that there were simply no new investment opportunities left at that time. That's why he decided to stay in cash and wait for the inevitable crash.
The bull market began in 1942 and peaked in 1965. Yet in 1969, four years after that peak, the market was still overpriced, so Buffet kept his assets mainly in cash in his portfolio - and his investors became restless. Some expressed disappointment that Mr Buffett had been sitting mainly on cash for a long time and, as a result, had not been able to achieve the wonderful 20% plus returns of the last decade.
You wanted him to invest. What now? Should he pay more for a good company or dissolve the partnership?
Would the market do what it has always done and crash, or somehow continue to defy "financial gravity"?
Buffett has always maintained that the only way to invest successfully is to buy wonderful companies at attractive prices - and if you cannot, do not invest. So in 1969, rather than violate the fundamental valuation principle of his investment selection that had brought him so much success, he ended the partnership.
At that time, many partners wanted to know who to invest with. Buffett told them they could buy Berkshire Hathaway shares, but not to expect him to do anything other than wait for better opportunities.
But if they wanted to invest in the market, he recommended only one fund manager: William J. Ruane, founder of the Sequoia Fund. After management fees were deducted, the Sequoia Fund returned 15.48% a year from its inception in 1969 to 2007, compared to 11.68% for the S&P 500 over the same period.
A technical idiot went to Harvard
William John Ruane was born on 24 October 1925 in a middle-class neighbourhood in Chicago and grew up in suburban Oak Park, Illinois, where he attended a Catholic school and was an average student. He graduated from the University of Minnesota in 1945 with a cum laude degree in electrical engineering. He joined the Navy immediately after graduation and was on his way to Japan when World War II ended.
After the war, he worked briefly for General Electric (GE), only to find he did not like engineering. "I'm an engineering idiot," he told Forbes in 1999.
He enrolled for Harvard Business School and found his calling when a professor asked his class to read the classic textbook Securities Analysis (1940), which helped focus his interest. Although he knew nothing about stocks, he was impressed by the approach that authors Benjamin Graham and David Dodd took to financial analysis. After graduating in 1949, he worked for Kidder Peabody, where he stayed for almost 20 years.
Ruane recalled interviewing with a Wall Street investment firm. There he was told that college graduates were paid USD 35 a week, while Harvard Business School graduates were paid USD 37.50.
Source: Wikimedia Commons
The first meeting with Warren Buffett
In 1950, Ruane and Buffett took a course taught by Benjamin Graham at Columbia University. There they learned that the quality of revenues was as important as the growth of revenues.
Ruane and his partner Richard T. Cunniff founded their own investment firm in 1969 after raising USD 20 million from investors. Most of their clients came on the recommendation of Warren Buffett, Ruane's former classmate and close friend.
Bill Ruane was a phenomenally successful businessman and an even more remarkable human being. Bill approached his philanthropic work with the same keen intelligence, careful attention to detail, concern for others and wonderfully uncomplicated humour that he brought to the business world. He also funded an educational programme for 26 New York schools and for 19 schools in Monroe, Louisiana, as well as schools for Indian reservations.
Ruane applied business principles to social projects, giving people bonuses for making positive changes in their lives.
He bet a man USD 250 that he could not quit smoking and was happy when he lost the bet. Every summer he held a small carnival parade in the street, including pony rides.
The four key elements of Ruane's success
When we read through Bill Ruane's writing, we come across four key components that could explain his success:
- strong intelligence
- meticulous attention to detail
- caring for others
- wonderfully light-hearted humour
Ruane's Four Rules for Smart Investing
During a course he taught at Columbia University, Ruane laid out the four rules that defined his investing career:
1. buy good business models.
The most important indicator of a good business model is return on investment. In almost all cases where a company achieves an above-average return on capital over a long period of time, the reasons are that it holds a unique position in its industry and/or has excellent management. The ability to achieve a high return on capital means that the profits that are not distributed as dividends remain in the company. These profits are reinvested to provide good future earnings and equity growth with low capital requirements.
2. Buy companies with price flexibility.
Another indication of a protected business position is pricing flexibility with low competition. In addition, price flexibility can provide an important hedge against capital losses during periods of inflation.
3. Buy net cash generators.
It is important to distinguish between reported income and cash income. Many companies must use a significant portion of their profits to reinvest in the business just to maintain operating funds and earning power. Because of this economic understatement, many companies' reported profits can significantly overstate their true cash earnings. This is especially true during periods of inflation. Cash earnings are those earnings that are actually available for investment in additional assets or for payments to shareholders. It is worth highlighting companies that are able to generate a large portion of their profits in cash. Ruane had no interest in tech stocks. He stressed the importance of understanding a company's problems. There are two types of depreciation: 1. Wearing things out. 2. Replace things (obsolescence).
4. Buy shares at moderate prices.
While price risk cannot be completely eliminated, it can be substantially reduced by avoiding high-multiple stocks, whose price-earnings ratios are subject to tremendous pressure once expected earnings growth does not materialize. While it is easy to identify outstanding trades, it is more difficult to select those that can be bought at a significant discount from their true underlying value. Price is the key. Value and growth meet at the optimum. Companies that could consistently reinvest 12% with a 6% interest rate deserve a premium.
