At age 16, serial truant Herbert Wertheim was given two options…
As a teen, Wertheim struggled in school. He found reading difficult. Though he thinks it was a case of undiagnosed dyslexia, his teachers in the 1950s were convinced he simply wasn’t working hard enough.
On a pivotal day in 1955, he stood before a juvenile judge, who offered him the choice between living in a youth reformatory until he turned 18… or enlisting in the U.S. Navy until he was 21.
Wertheim knew he had only one real option. So he chose the latter – a wise move that set him on the course to become one of the greatest investors you’ve never heard of.
Much to his surprise, the military provided the support system he never had… In his words, the Navy became his “mother and father and family.” There, he also discovered he had a superior aptitude for math, a passion for engineering and innovation, and an interest in investing.
After his discharge from the Navy in 1960, Wertheim’s work on vision systems at NASA led to a career in optometry. He developed a passion for visual research, prompting the launch of his company, Brain Power. Decades later, the company holds dozens of patents and has become the world’s largest manufacturer of optical tints used to color sunglass lenses.
Now 80 years old, Wertheim has revealed how he boosted his investment performance over the years…
In today’s essay, I will share these insights with you.
Let me start at the top… People who see what others don’t are often the product of a unique combination of experiences and interests. This is also true of Wertheim.
Wertheim understands firsthand how valuable a company’s intellectual property can be. After all, the company he launched as a side job in the 1970s has remained the largest manufacturer of its kind decades later for this exact reason.
Today, he’s worth billions – Forbes lists him among the 300 richest Americans alive, with an estimated net worth of roughly $3 billion – in part because he learned to apply the same principle to his investments.
In short, he found that the durability of superior intellectual capital creates spectacular long-term investments…
When Apple (AAPL) went public in 1980, Wertheim bought shares. Same with Microsoft (MSFT) in 1986. More than 30 years later, his combined position in the two tech giants – worth hundreds of millions of dollars – is a testament to the durability of their highly valuable intellectual capital.
More than a decade ago in Extreme Value, my colleague Dan Ferris told subscribers to buy another company with superior intellectual capital: Automatic Data Processing (ADP).
The company is the dominant force in payroll outsourcing, serving more than 810,000 customers globally. Readers who took our advice are currently up more than 580%.
Dan and I are always on the lookout for established companies with superior assets and durable competitive advantages. And my colleagues at Stansberry Venture Technology and Stansberry Innovations Report specialize in finding lesser-known companies with extraordinary intellectual capital long before others do.
Wertheim’s second valuable insight was that exceptional management breeds high investment conviction…
Back in 1990, Larry Mendelson was appointed chairman and CEO of aircraft-parts manufacturer Heico (HEI) following a proxy fight.
Mendelson wanted control of Heico for one reason: He believed he and his two sons could run it better as a family business.
Boy, was he right… Every dollar invested in Heico back in 1990 is now worth about $493. In other words, shares have compounded 23% per year, trouncing the market’s 7% average return over the same period. As Mendelson once quipped…
I get paid $1 million a year in salary, but if the stock goes up $1, my family makes $7 million. If it goes up $10, we make $70 million. Which do you think I care about more, my salary or the stock?
Mendelson and his two sons own about 19% of Heico shares. But the largest individual shareholder is Wertheim. He owns roughly 17% – more than mutual-fund giant Vanguard.
The two men have been friends for four decades. Wertheim knows Mendelson and his family to a degree others can’t. His confidence in their business instincts and integrity have given him the conviction to make Heico his largest holding, worth about $1.1 billion today.
It’s rare for investors to know a management team to the degree Wertheim knows Heico’s…
My colleague and friend Dan Ferris is one of the exceptions.
He has known key members of three exceptional management teams for years (one of them retired earlier this year). It’s no coincidence these businesses are also among our highest-conviction ideas.
Like ADP, one of them has been in our model portfolio for a decade. And I’d be surprised if all three companies weren’t still in there a decade from now.
Wertheim’s third key insight is one that longtime readers will be familiar with…
Give your ideas time to work, but cut your losses when they don’t.
Good investment ideas often take time to work out. Many of Extreme Value’s biggest winners – including Stansberry Hall of Fame recommendation Constellation Brands (STZ) – actually declined before eventually taking off.
Earlier this year, Wertheim said he was making a long-term bet on industrial conglomerate General Electric (GE) – a stock that has lost 60% of its value since 2017. He thinks its stellar patent portfolio in 3D printing will become far more valuable over time.
Engineers can now sit at a computer and design complex metal parts, then print them out on sophisticated 3D printers. The potential is massive.
At its Additive Technology Center in Ohio, for instance, GE used 3D printing to improve jet-engine performance by consolidating 855 engine parts into 12. The company also filed a patent application earlier this year for a process that uses blockchain to track and authenticate 3D-printed objects.
The future is bright for 3D printing, and given its broad patent coverage and know-how, it seems GE will be a huge beneficiary. What we don’t know is when the promise of 3D printing will actually pay off. So far, it has failed to live up to the hype… And it certainly hasn’t saved GE from a litany of other problems, given the meltdown in its stock the past few years.
At one time, Wertheim had a big stake in smartphone maker BlackBerry (BB), who saw its market share vanish thanks to Apple and Google parent company Alphabet (GOOGL). After watching his huge position diminish in value month after month, he finally sold.
My point is, nobody gets it right every time – not even Wertheim…
Despite his incredible success, Wertheim has also learned the hard way not to let losses get out of hand. If his GE thesis doesn’t work out before the losses get too steep, Wertheim knows it’ll be time to move on.
Every investor, regardless of age or experience level, would do well to embrace the three keys to Wertheim’s tremendous success.
If you’re looking for stocks worthy of holding indefinitely, pay close attention to the durability of these companies’ intellectual capital… make exceptional management teams your highest-conviction investments… and give your ideas time to work, but don’t hesitate to sell when they don’t.
A simple way to know when to sell is a “trailing stop.”
In short, a trailing stop is a basic exit strategy that you set up ahead of time. You’ll sell the stock if it falls a designated percentage from its high – 25%, for example. It’s a way to help keep your emotions out of your investments… and allow you move on from your losers.
If you want to be a successful investor, you must have an exit strategy in place from the beginning. And a simple 25% trailing stop is one of the best ways to get started.
Marc Chaikin built the system that isolated NVDA before it became the best-performing stock of 2023. Click here to get his latest buy. More here.
Source: Daily Wealth