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JK Take me back to 1976. How did the whole KKR experiment begin?

HK We started with $120,000. George and I each put up $10,000—that was all we had—and Jerry put up $100,000, because he was 20 years older. And then we went out to raise our first fund, a $25 million private equity fund. There was no such thing then, but the first people we talked with—mostly insurance companies we’d worked with at Bear—all liked what they heard. But the catch was they wanted to be the investment committee. Well, we’d just done that and had left Bear for a reason: to make our own mistakes and our own right decisions.

JK So no $25 million fund. What did you do?

HK George and I went to Joe and Rose Restaurant—there’s a picture of it right over there—and said, “Why don’t we go to eight individuals and ask them to put up $50,000 each for 5 years?” That would give us $400,000 a year. Then, if you’ve given us $50,000, in return you get the ability to come into any of our deals. But if you do invest, we want 20 percent of the profits.

JK How did you come up with 20 percent, which became the industry standard?

HK George’s father and my father were in the oil-and-gas business, and in those days there was something called “a third for a quarter.” If I had a lease and wanted to drill a well, I would go to the money person and say, “I’ll put up 25 percent of the cost, you put up 75 percent, and you’re going to get a two-thirds interest and I’m going to get a one-third interest for my 25 percent.” We thought 20 is close enough to 25. I’m often asked, “Why didn’t you pick 25 percent because that would have stuck and carried interest?” We were just trying to get started, so that was literally what we started from.

Read more: Q&A With Henry Kravis on 40 Years of Creating and Re-Creating KKR

Check out the best deep value buyout targets in the largest 1000 names for free on The Acquirer’s Multiple.

 

This was fun. Two photos from the launch of Concentrated Investing.

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The great Emanuel Derman, author of My Life As A Quant and Models.Behaving.Badly., and Professor at Columbia University.

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Charles Brandes, legendary founder of Brandes Investment Partners.

Click here if you’d like to read more on Concentrated Investing.

Buy my books Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (Wiley Finance, 2016) or  Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Concentrated Investing or Deep Value, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on The Acquirer’s Multiple.

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A Regional Bank That Can Trace Its Roots To The Year The American Civil War Ended

A family-run and owned regional bank that can trace its roots to the year the American Civil War ended. Run by one family for at least the last 113 years, the current president and chief operating officer succeeded his father in 2013 to create an unbroken line of sons running about 110 years and five generations.

It is not a growth stock. But, it’s a good value stock. The combined level of growth in deposits per share – this number is boosted by the annual stock buybacks – and the dividend yield is high enough to outperform the S&P 500.

It’s a safe and boring bank. When it’s priced to outperform the S&P 500, it should be bought.

Click here to learn more

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Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (Wiley Finance, 2016) chronicles many virtually unknown—but wildly successful—value investors who have regularly and spectacularly blown away the results of even the world’s top fund managers. Sharing the insights of these top value investors, expert authors Allen Benello, Michael van Biema, and Tobias Carlisle unveil the strategies that make concentrated value investing incredibly profitable, while at the same time showing how to mitigate risk over time. Highlighting the history and approaches of four top value investors, the authors tell the fascinating story of the investors who dare to tread where few others have, and the wildly-successful track records that have resulted.

Turning the notion of diversification on its head, concentrated value investors pick a small group of undervalued stocks and hold onto them through even the lean years. The approach has been championed by Warren Buffett, the best known value investor of our time, but a small group of lesser-known investors has also used this approach to achieve outstanding returns.

  • Discover the success of Lou Simpson, a former GEICO investment manager and eventual successor to Warren Buffett at Berkshire Hathaway
  • Read about Kristian Siem, described as “Norway’s Warren Buffett,” and the success he has had at Siem Industries

Concentrated Investing will quickly have you re-thinking the conventional wisdom related to diversification and learning from the top concentrated value investors the world has never heard of.

Order from Amazon: Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors

From the Inside Flap

If you’ve studied value investing, some of the names in this book may be familiar, but the majority probably won’t be. Nonetheless, they are a who’s who in concentrated value investing, each with their own unique story, skillset, and philosophies that have gained them tremendous wealth and accomplishment while flying below the radar—until now. Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors takes you inside the ledgers and playbooks of this select group of history’s elite value investors to uncover their secrets for the new generation of wealth builders.

Turning the practice of diversification on its head, concentrated value investors purchase a small group of undervalued stocks and hold them through the highs and lows of the long term. You will read a lot about the juggernaut of value investing, Warren Buffett, who amassed the legendary Berkshire Hathaway with this approach. But this motivating book shows you he wasn’t the first or only one. This eye-opening examination will have you re-thinking conventional wisdom on asset allocation and emulating such concentrated value investors as:

  • A former GEICO investment manager whom Buffett has named “a cinch to be inducted into the investment hall of fame”
  • Kristian Siem, who grew Siem Industries at 25.6% annually over the past twenty- five years by following two key principles
  • Edward Thorp and the formula he trusted to risk $662.5 million on to collect just $2.5 million in a rare opportunity
  • Trends, momentum, volatility, and volume all change day to day and create opportunities to pick up the undervalued stocks that grow into fortunes, as you’ll see in Concentrated Investing.

From the Back Cover

Praise for Concentrated Investing

MARIO GABELLI, CEO and founder, Gabelli Asset Management:

Concentrated Investing may not be for all fiduciaries but the principals highlighted in this book—such as Lou Simpson whose career I have tracked since his days at Shareholders Management to Berkshire Hathaway—underscore this proven approach to long term investing. Pick your best stocks and have concentrated holdings—just as Warren Buffett has done at Berkshire Hathaway.

JEAN-MARIE EVEILLARD, Senior advisor and former PM of the First Eagle Funds:

I used to run mutual funds, so I did not have permanent sources of capital (in the late 1990s, I lost 7 out of 10 shareholders in less than 3 years). Too bad, because I agree that risk is not volatility, it is the risk of permanent loss of capital. And, yes, it is hard to move away from the herd, but hey, most good things in life come hard. So, as this book suggests, in my next life, I will run a closed-end fund and have a concentrated portfolio.

CHARLES ROYCE, CEO and founder, The Royce Funds:

This is more than a book…it is a detailed compendium of the life and temperament of the greatest concentrated investors…the Simpson and Keynes stories are terrific testimonies to both their practice and their learnings over time…the stories of Simpson and Keynes alone…are worth the book price X 100.

CHARLES BRANDES, CEO and founder, Brandes Investment Partners:

The pervasive investment world definition of ‘risk’ today is price volatility. This book reminds us that this definition is a fallacy for true investors. It demonstrates that intelligent concentration is the ideal investment philosophy.

ALAN KAHN, CEO and cofounder, Kahn Brothers & Co. (Retired):

We all know of ‘the World’s greatest investor,’ Warren Buffett, but how many of us know the man whom Mr. Buffett chose to do HIS portfolio investing, Lou Simpson, who managed the vast portfolio of Berkshire Hathaway’s insurance subsidiary GEICO? The brightest stars, like Benjamin Graham, can be seen with the unaided eye. But this book trains the telescope on the less explored parts of the investment skies and provides us with the secret to success: run concentrated portfolios with permanent capital to prevent against capital withdrawals just at the depressed times when bold investment action is called for. Read! Enjoy! And get richer!

Order From Amazon: Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors

 

Singular Diligence HeaderAnd it’s growing earnings faster than sales

A bonus Singular Diligence report covering a large, U.S. stock with a highly predictable, good return on capital and a good growth rate.

It distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products. And it has unusually high margins.

This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be. How can a middleman mark-up basic, boring products like we’ve talked about here – mops, buttons, motors, light bulbs, etc. – by 50% to 70% over the price they paid for that product?

Click here to learn more

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This month’s Singular Diligence report covers one of the world’s largest marketing services companies.

Marketing services agencies are great businesses. When run right in terms of costs, capital allocation, etc. these businesses make for great long-term investments. They will be great businesses in 5, 10, and 15 years from now with many of the same clients.

We’ve picked the single best stock in the ad industry. It’s the company with the best financial results. It has the best history of capital allocation. Awards might not matter, but this company’ agencies win more awards than anyone else.

What does matter is price. It’s the best stock in industry and it’s the cheapest.

Click here to learn more

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This month’s Singular Diligence report covers one of the largest banks in Texas.

The bank has lower operating expenses than other banks, a higher efficiency ratio, high gross yields on its loans and low net charge offs. It is able to gather each dollar of deposits more cheaply than other banks. And then it makes more money per dollar of loans it makes because it receives a high yield for these loans while simultaneously charging off a lower than normal amount of each loan each year for its losses.

As a result, it has grown deposits per share 12 percent annually over the last 17 years while maintaining 20-25 percent dividend payout rate

Click here to learn more

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