The typical stock-fund manager is a sheep in wolf clothes: passively mimicking the market, with only a few small, shy bets.
By taking the opposite approach, Wilmot H. Kidd III set one of the greatest long-term records in investment history.
Over the past 20 years, Kidd’s
Central Securities Corp.
, a closed-end fund, has outperformed Berkshire Hathaway Inc. By Warren Buffett In the 25, 30, 40, and even nearly 50 years of Mr. Kidd’s time, Central Stocks beat the S&P 500 by a resounding streak.
His key to success? Patience, focus and courage.
On December 31, Mr. Kidd, 80, will step down as chief executive of Central, although he will remain as chairman. The fund has assets of $1.3 billion.
Don’t feel bad if you’ve never heard of Mr. Kidd. He doesn’t have a LinkedIn page; even only one photo of him can be found on the net. He attributes my recent conversation with him to, at most, the fifth interview he has given in his half-century-long career.
But Mr. Kidd is a role model for smart investing and thinking.
In 1962, business historian Alfred D. Chandler Written that “unless structure follows strategy, results are inefficient.”
Instead, at most asset managers, strategy follows structure. As a result, the funds own too many stocks, trade too often, and charge too high a fee.
It’s no surprise that most active managers underperform market-tracking index funds that charge a fraction of their fees.
At Central Securities, Mr. Kidd ensured that the structure followed the strategy — with astonishing results.
If you had invested $10,000 in Central Securities at the end of March 1974, when Mr. Kidd officially took over, you would have nearly $6.4 million by the end of October, according to the Center for Price Research. stock. The same amount put into stocks in the S&P 500 would grow to $1.9 million. Central stocks are growing year-on-year at 14.5% with dividends reinvested, compared with 11.7% for S&P 500 stocks.
That’s not to say Mr. Kidd has never been less productive. Over the past 10 years, according to Morningstar, Central has lagged the S&P 500 by an average of 3 percentage points a year as the tech giants have been ahead. (So far in 2021, Central is doing well again.)
Central Securities Corp., a closed-end fund run by Wilmot Kidd, has been beating the market for a considerable length of time, faltering only slightly in recent years.
The company was founded in 1929 as a closed-end fund. In that structure, new investors buy shares from someone else – rather than from the fund itself. Cash doesn’t flood in when stocks are overvalued, nor do investors reclaim their money from the fund during bear markets. That allows the closed-end fund to manage its portfolio without having to manage its own investors.
Central Securities is internally advised, which means Mr Kidd and his two co-managers, John Hill and Andrew O’Neill, work for the fund itself – not for a management company that collects the fund’s fees. The fund’s expenses are sitting at 0.54% this year, well below the average for other closed-end or mutual funds. (Mr. Hill will become chief executive officer on January 1.)
Mr. Kidd, his family and family background own nearly 45% of the fund. “We always say: We are in business to make money for the stockholders, not the stockholders,” he said.
Portfolio managers brag about their “long-term” capabilities if they hold stocks for a year or longer. Mr. Kidd made those people look like everyday traders. He typically holds stocks longer than many other portfolio managers are alive. Central has owned
Analog Devices Inc.,
its second largest position, in 34 years. Mr. Kidd organized
Murphy Oil Corp.
for more than four decades, from 1974 to 2018.
Over the past 15 years, Central’s annual portfolio turnover has averaged 11%. That means it holds its typical stock for nearly a decade — about six times longer than the average performing mutual fund or closed-end fund, according to Morningstar.
Owning stock for years, rather than months, minimizes transaction costs, reduces the burden of researching new holdings, and allows Central to dig deeper into a business.
“We want to own as much of the growing companies during their growth as possible,” Mr. Kidd said. That allows compounding to work its magic.
“It takes time to learn to live with an idea,” he says. “All these portfolio managers [who sell stocks within a year], I don’t believe they even know what they own.”
Another way Central’s structure follows Mr. Kidd’s strategy: The fund does not hold small positions in hundreds of stocks. “We always felt you had to focus,” he said. “You have to have a few big positions, you have to own a lot of things that work.”
The average actively managed US stock fund owns at least 160 stocks and only a third of the assets in its top 10 stocks, according to Morningstar. Central has 33 slots, with a full 57% of its funds in the top 10.
Isn’t that a risk? As Mr. Kidd wrote in his 1978 annual report, “Risks can be mitigated through a deeper and more active knowledge of the affairs of the companies in which we invest.”
Mr. Kidd’s bet is not merely big, but bold: 22% of Central’s assets are in Plymouth Rock Co., a Boston-based auto and property insurance company whose stock not even publicly traded. Mr. Kidd met the future founder of Plymouth Rock, James Stone, while the two were working on Wall Street in the late 1960s. Mr. Kidd said: “He was very smart and we still keep in touch. In 1982, Central Securities became the first outside investor in Plymouth Rock, with a final cost of $3.5 million; its remaining shares, worth $700,000, on the fund’s books for $293 million.
Plymouth Rock was one of several shares Central held in private companies in the 1980s, the early days of private equity and venture capital, before such deals flooded buyers. . like nowadays.
By structuring the fund around a larger bet strategy, focusing on fewer companies, Mr. Kidd took advantage of capturing long-term trends.
In the mid to late 1970s, Central made huge profits investing in companies like Murphy Oil, Cities Service Co. and Ocean Drilling & Exploration Co., together peaking at around 30% of the portfolio.
But Mr. Kidd is also open to new projects. Around 1969, he was a young investment banker at Hayden, Stone & Co. and helped draft the prospectus for a fledgling company called
Although Intel delayed its public offering until 1971, Mr. Kidd knew co-founders Robert Noyce and Gordon Moore.
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That led Central a few years later to take sizable positions in some of the rising tech stars of the day, including stocks like Informatics General Corp. Through a small holding in a venture fund, Central acquired an indirect stake in Compaq Computer Corp., and Mr. Kidd noticed Plymouth Rock insurance agents using mobile Compaq computers on the scene.
“We can see that this is part of the revolution that Noyce and Moore have started, and that laptops have been taken seriously in business,” he said.
By 1982, Mr. Kidd decided the energy boom was almost over. Within a few years, Central had shifted from being one-third of its assets in energy to one-third in technology – and making huge profits again.
When I asked Mr. Kidd if he attributed his long-term success to luck or skill, he gave a long, quiet, dry laugh before saying something I don’t think I’ll ever forget: “Skill is just realizing when you’ve got lucky.”
He explains, “That’s when you’re lucky enough to invest in a great company, and suddenly you realize how lucky you were, and you buy more. It’s a skill, I suppose. That — and keep what you have and don’t lose it. ”
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