TWST: Would you start with an overview of Atlanta Investment Counsel and
your responsibilities there?Mr. Davenport: Atlanta Investment Counsel, LLC, was formed in 1998 and I
am the President of the firm. Our only client is the mutual fund that I
manage and that is the Wisdom Fund. We are a small investment boutique
in Atlanta, Georgia, with only three employees. We probably will start a
separate account service by the end of the year. The principals of
Atlanta Investment Counsel, LLC, are Dr. John M. Templeton Jr., Gail
Zimmerman and John Donaldson.TWST: Tell us about the Wisdom Fund and its investment philosophy.Mr. Davenport: The Wisdom Fund was started because of our belief that
Warren Buffett is considered one of the greatest investors of all time
due to his investment strategy and philosophy. He has created quite a
bit of wealth for his shareholders over all these many years. We began
to see that in the last eight to nine years the stock market had placed
a substantial premium on the price of Berkshire Hathaway (BRK). We think
that Berkshire trades at a pretty significant premium to what it is
actually worth based on book value. Standard and Poor's has a 'hold'
recommendation on Berkshire Hathaway right now and has for the last
year. They think that the current price is higher than it should be.
However, that's something that Warren Buffett cannot control. The stock
market does that. The Wisdom Fund was started with the goal to eliminate
the real problem that we saw with Berkshire Hathaway, that being the
overvaluation. The Fund would buy all the publicly traded securities
that Berkshire Hathaway owns like American Express (AXP), Coca-Cola (KO)
and Wells Fargo (WFC), and own them in the same percentages that
Berkshire does. For the privately held companies that Berkshire owns, we
purchase what we feel would be the best proxies. For example, Berkshire
purchased Benjamin Moore Paint and Shaw Industries several years ago.
Since the Wisdom Fund could not purchase shares of those companies, I
bought Sherwin-Williams (SHW) and Mohawk Industries (MHK) as our
proxies. In summary, we attempt to emulate the investment portfolio,
both public and private holdings, of Berkshire Hathaway.TWST: So, if Berkshire Hathaway has 5% of its portfolio in Coca-Cola,
you would buy 5% in Coca-Cola for your Wisdom Fund?Mr. Davenport: Yes, we will own Coca-Cola in the Fund and in the same
percentage that Berkshire does. Or at least as close as we can possibly
can.TWST: Tell us about the actual decision-making process in your emulation
of Berkshire Hathaway's portfolio.Mr. Davenport: Warren Buffett makes no secret of, I believe, what he
looks for in companies. In fact, at his annual meetings, he always talks
about the Value Line Investment Survey being a great source of
information for him. He likes to look at companies that have long-term
track records. I try to look at the same kind of financial ratios that
Buffett might look at when I have to find a proxy for the Fund. There
are four different areas that I look for. One of them would be free cash
flow, and that certainly is very, very important to Buffett. I believe
that he looks for free cash flow of at least $50 million or more each
year. So I try to look for that number also. I believe, from reading
past annual reports and going to the annual meetings of Berkshire
Hathaway, that net profit margin is very important to Warren. So I try
to look for companies that at least have 15% or more net profit margins.
Return on equity is something that Warren Buffett talks about a lot and
I look for at least a 15% return on equity for the preceding three
years. The Wisdom Fund primarily owns companies with a market cap of at
least $500 million. Buffett has a strict valuation discipline that
incorporates a margin of safety into the price he pays. And so do we.
Successful investors spend a great deal of time calculating the fair
value of a company before they consider buying the stock. You just can't
pay whatever the stock market is currently asking for the stock. I think
many people in our industry tend to chase stocks and tend to probably
pay more than they should. We try to make sure that we have a margin of
safety.TWST: Are there any differences in your investment buys or sells,
compared to Berkshire Hathaway?Mr. Davenport: The only difference would be that we attempt to find
proxies to replicate Buffett's private holdings. That's where our
portfolio will differ from Berkshire Hathaway. In some instances, I
might have two or three stocks that are trying to replicate one of his.
A good example would is that Berkshire Hathaway owns Dairy Queen. Warren
Buffett certainly likes their Dilly Bars, and since we can't own Dairy
Queen, the Fund owns McDonald's (MCD) and Yum! Brands International
(YUM). The Fund has also owned Wendy's (WEN). So, where we differ is
that depending on the size of the privately held company he has, the
Fund may have two, three or even four proxies trying to replicate that
one investment that Berkshire owns. So the only difference would be just
in the holdings we have for our proxies.TWST: The performance of Berkshire Hathaway of course has been quite
outstanding. How has your Wisdom Fund fared?Mr. Davenport: We track the performance of our Fund versus Berkshire
Hathaway and the S&P 500. The Fund began on February 16, 1999. Since
that day, the Fund has outperformed Berkshire and the S&P 500. The
Wisdom Fund Institutional Class has an average annualized return of
+5.20% vs. Berkshire's +3.09% and the S&P 500's +1.63% since our
inception date. Of course there are quarters where Berkshire will
outperform the Wisdom Fund and vice versa. We feel the key to our
outperformance is due to the premium in the price of Berkshire Hathaway
that I previously talked about.TWST: One advantage with the Wisdom Fund would be that if Berkshire
Hathaway had a problem with one of its own companies and the Wisdom Fund
had bought a proxy holding, you wouldn't experience the problems that
Berkshire Hathaway had.Mr. Davenport: That's certainly true, unless it was an industry-specific
problem.TWST: How many holdings are there in the Fund?Mr. Davenport: Right now, it is a little larger than normal with 49
equity holdings. We have held bonds in the Fund when Berkshire has owned
bonds. We have held high yield corporates in the past and own some
international bonds right now.TWST: Is that a fluctuating number or are you always fully invested?Mr. Davenport: Berkshire Hathaway currently holds a large percentage of
its assets in cash and cash equivalents and has for the last several
years. Warren Buffet has said that he just doesn't see a lot of suitable
investments. The Wisdom Fund has on average held about 20% of its assets
in cash and short-term Treasury bills. This is a much larger amount in
cash than most mutual funds have. We hold the cash for equity purchases,
for when Berkshire might make a purchase.TWST: What are some of the holdings that you feel are representative of
the portfolio and tell us what some of your top holdings are and the
percentage of assets?Mr. Davenport: The largest holding in the fund is Coca-Cola, just like
Berkshire. Procter & Gamble (PG), which purchased Gillette, has become
our second largest holding and Buffett has even added to his holdings of
Procter & Gamble. American Express is the third largest and another
long-term holding of Berkshire Hathaway. Some of the next largest
holdings are actually proxies for Berkshire's insurance holdings.
Allstate (ALL) is about 4.5% of the portfolio. White Mountains Insurance
(WTM) has a 5% position in the portfolio. Washington Post (WPO) is a
stock that Berkshire has owned for many, many years, and that's about a
3.6% position in our portfolio. Another large holding is Kinder Morgan
(KMI), the natural gas transmission company, with about a 3.5% position
in our portfolio. Kinder Morgan is in our portfolio as a proxy for a
natural gas pipeline that Berkshire purchased a couple of years ago.TWST: What about the sell discipline? Is that exactly the same as
Berkshire Hathaway?Mr. Davenport: I wish I knew what Berkshire's sell discipline actually
is. Since we follow as closely as we can what Berkshire buys and sells,
we will sell our holdings after he sells his. Since we don't know when
that will happen, we always act after he does.TWST: What about the risk factors? Do they have any part of your
approach or is it purely dependent on Berkshire Hathaway or do you have
any extra risk protection?Mr. Davenport: We carry a large cash position like Berkshire Hathaway
does, and we follow what he does. The cash position helps performance
when the market declines. We don't have any predetermined selling price
on any of our holdings. One of our holdings, Sherwin-Williams, is a
proxy for Benjamin Moore. A Rhode Island judge entered a judgment
against Sherwin-Williams the last week of February and this adverse
ruling caused the stock price to decline by a double-digit amount. Even
though quite a few mutual funds sold their Sherwin-Williams stock, I
chose not to sell our shares. In fact, this was a classic buying
opportunity to add more shares.TWST: Your proxy company, in this case Sherwin Williams, if you did
decide to sell, would you then buy another proxy, another paint company,
to emulate Benjamin Moore?Mr. Davenport: If I were to sell the holding in the future, I would buy
another paint company to take its place. But only if I could find a
proxy that has similar characteristics to Benjamin Moore and selling at
discount to its fair value.TWST: Who are your typical investors?Mr. Davenport: Our typical investors are usually older investors who
know who Warren Buffett is and understand the investment philosophy as
practiced by Warren. Every investor is trying to buy assets for less
than they are really worth. This idea comes from Benjamin Graham and
David Dodd in their classic book, Security Analysis (1934). Our
shareholders are looking for a mutual fund that follows a disciplined
buy and hold approach to investing, and would like to invest like Warren
Buffett, but through a mutual fund.TWST: The Wisdom Fund is not affiliated in any way with Berkshire
Hathaway, but do you have any connection with the management of
Berkshire Hathaway?Mr. Davenport: No, we have no association with them at all and our
prospectus states on the front page that we are in no way associated
with Berkshire Hathaway. We don't want to give anyone the opinion that
we are. I have no prior knowledge of any buys or sells of the holdings
of Berkshire. We certainly have no inside information. I do own one
share of Berkshire Hathaway because I enjoy going to the annual meeting
each year in Omaha. I enjoy hearing Mr. Buffett and Mr. Munger speak and
meeting other like-minded value investors. I want to make sure that
people do realize that we are just trying to follow his investment
strategy with no ties to their organization at all.TWST: One good reason for investing in the Wisdom Fund is that it is
much cheaper than buying one share of Berkshire Hathaway.Mr. Davenport: Our minimum is only $2,000 and $250 for an IRA. Our share
price as of 2/28/06 was $12.70 per share and Berkshire's Class B was
about $2,886 per share.TWST: Tell us about the Class B, Class C or any other type of shares in
the Wisdom Fund?Mr. Davenport: We do have four classes of shares. We have a Class A,
Class B, a Class C and then our institutional class. The A, B, and C
classes are sold primarily through financial and investment firms.
Investors can also purchase the Fund through Fidelity Investments, TD
Ameritrade, E-Trade and others.TWST: What have I overlooked?Mr. Davenport: I think that you've asked a lot of good questions and I
really can't think of anything else that I could think of at the moment
except that we are trying to create wealth for individuals. It is
important for your readers to know what we do not do. We do not try to
time the market, we do not jump in and out of hot sectors of the market
and we certainly do not invest in momentum stocks. Like Mr. Buffett, we
are classic buy and hold investors.TWST: Are there any other money management firms out there that try to
emulate Berkshire Hathaway?Mr. Davenport: We, in fact, are the only mutual fund out of probably
11,000 mutual funds that actually replicates his portfolio. There are
many disciples of Warren Buffett, and I certainly consider myself one.
Many of the other managers deviate from Buffett's strategy in some form
or fashion. Some of those managers will hold Berkshire in their
portfolios. We do not own Berkshire shares in the Fund. So that does
make us unique and different, because no one else actually tries to
replicate Berkshire Hathaway's portfolio.TWST: With Berkshire Hathaway as a benchmark, you've still been able to
outperform.Mr. Davenport: That is correct.TWST: Thank you. (PS)Note: Opinions and recommendations are as of 3/2/06.C. DOUGLAS DAVENPORT
Atlanta Investment Counsel, LLC
3717 Haddon Hall Road, NW
Suite 200
Atlanta, GA 30327
(877) 352-0020Copyright 2006 The Wall Street Transcript Corporation
All Rights Reserved
General Investing >> Money Manager Interview >> March 13, 2006
C.DOUGLAS DAVENPORT
C. DOUGLAS DAVENPORT is the President of Atlanta Investment Counsel,
LLC, and the Portfolio Manager of The Wisdom Fund. He received a BS
degree from the University of Tennessee and a JD degree, cum laude, from
The John Marshall School of law. After serving as an officer in the U.S.
Army Medical Service Corps, Mr... More










