my age, and we have been friends for years. His investment management
firm, Fayez Sarofim & Company, has had a superb record, and Fayez is a
truly great investor. He runs his firm with an iron but benevolent hand
and is quite conservative.The firm has grown to be a large business. On
the other hand, he loves to speculate in his personal portfolio. He makes
giant macro bets and uses big leverage. I have always thought he would
be great running a hedge fund. I was very skeptical that he would have
any interest in Traxis, and I suspected the salesman was just using us to
get face time.
“Absolutely not,” said the guy.“Fayez told me he was definitely interested.”
I am amazed. He doesn’t need us, but I knew dinner with
Fayez would be a treat, both gastronomically and intellectually.
Fayez’s spacious house is loaded with fine impressionist paintings,
young children from his most recent marriage, and piles of research reports.
In his elegant, paneled library there are stacks of reports on the
floor, on the sofa, and on the coffee table. Despite a bevy of servants,
charming disorder envelops the house and grounds. Bicycles, basketballs,
and roller skates are piled on the porch, and here was this rotund,
slightly rumpled, elderly Egyptian pharaoh in a dark suit and wearing a
vest presiding serenely over the carnage. The clan and the entourage
seemed completely happy and utterly at ease.
We had a wonderful, elaborate dinner with Fayez and his oldest
son, who is in the firm. Fayez is a baroque character. He has always had
impeccable taste in restaurants, wine, food, cigars, art, and stocks. He has
both an ample waistline and a lot of money to show for it. He has invested
his clients’ money in high-quality consumer growth stocks that
have world-class franchises and that don’t have to reinvent themselves
every five years the way tech stocks do. His criteria require that they
also generate free cash flow so they can buy back their stock and
raise the dividend. He argues that in a slow-growth, low-inflation,
low-interest-rate world, stocks with these characteristics will have
great scarcity value and will sell at very high P/Es, just as they did in
the late 1950s and early 1960s.
This has always been his investment style. Buy and hold great
growth stocks. “My favorite holding period is forever,” he says with a
wry smile.The only difficulty is that companies with these characteristics
are hard to find and usually are very expensive.We talked about
Pepsico. Fayez thinks its earnings can grow 12% per annum even
though its revenue growth is more like 6% to 7% and it is in very competitive
businesses. He is convinced that management is exceptional.
Fayez is also very enthusiastic about the shares of the large U.S. drug
companies. Relative to the rest of the market, these stocks are currently
as cheap as they have ever been. He argues that while they face more
regulation, are suffering through a new-product slump, and probably
won’t grow as fast as they have in the past, the drug companies remain
great growth franchises.With their legal problems, he views them as being
in a similar sold-out position as Phillip Morris was a decade ago.
Growth, says Fayez, is about earnings and dividends growing faster than
inflation, so the shareholder increases the purchasing power of his or her
income stream from the investment. He mentions Merck shares he
bought 30 years ago for an elderly cousin.The current dividend is now
twice her cost. I calculate that over that period, Merck’s dividends have
risen three times as fast as inflation.What a marvelous way for a taxpaying
individual to compound purchasing power!
That said, identifying which of the current crop of growth stocks
are going to be the long-run winners is a far more difficult, nay, almost
impossible, task. Bernstein, the New York research firm, did a study of
the likelihood of a company maintaining growth status years into the
future.The frightening results are in Table 6.1. Over the past half century,
your odds of identifying a growth stock you can hold for 20 years
are 4% and only 15% for 10 years. Even for 3 years, they are just a little
more than 50%. Healthcare (in other words, big pharma) and consumer
staples have somewhat higher success ratios. And what the study
doesn’t say is that when a growth stock falls from grace, the landing is
not just hard, it’s usually a crash. However, Fayez has his own magic.
His portfolios for wealthy individuals have very low turnover, and his
5-year growth stock persistency record must be around 60%, which is
spectacular.
It was a marvelous, stimulating evening swapping ideas. My partners
were charmed by Fayez. The food and wine were magnificent. However,
once again I question whether we had raised any money, as I know
how Fayez loves to speculate with his own portfolio. He didn’t ask us
anything about our macro process, besides.
Addendum: At any rate, I was wrong: Fayez invested with us.We
were honored.
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