Ronald Muhlenkamp is the founder and president of US fund management firm Muhlenkamp & Company. After setting up in business in 1977 he rose to prominence with a successful investment strategy that continues to seek out good quality companies with strong profits at an attractive price.
Background
In his book Ron’s Road to Wealth: Insights for the Curious Investor, Muhlenkamp describes beginning his investing career in 1968, just as the bull market of the 1960s was about to run head long into the bear market crash of 1973-1974. That collapse triggered a market-wide rethink on investment knowledge and conventional wisdom and led Muhlenkamp to begin an extensive study of fundamental and technical investment management philosophies.
His research led to a proprietary method of evaluating both equity and fixed income securities, which his firm continues to employ. He is a regular fixture as an investment commentator in the media and produces numerous articles and newsletters covering a wide spectrum of investment topics.
Investment strategy
Muhlenkamp’s strategy looks for companies with a high return on equity (ROE) at a reasonable price. ROE is basically a measure of how much profit a company earns in relation to the total amount of shareholder equity found on its balance sheet. Muhlenkamp likes this measurement over other growth indicators because a company whose ROE is higher than its growth rate is likely to be generating lots of cash. While companies can be responsible for spending cash in fruitless ways, Muhlenkamp figures that lots of free cash flow means the stock is in control of its own destiny – so it’s a useful starting point.
While Muhlenkamp has conceded that his methods have required tweaking in response to changing macro conditions over the years, the ultimate aim is to find companies with strong balance sheets, low debt and strong cash generation as measured by ROE. In an interview with Steve Forbes in 2011, Muhlenkamp said he looked to buy these companies when they are cheap “and then hold them as long as they fulfil our expectations”.
According to the American Association of Individual Investors, which has scrutinised Muhlenkamp’s approach, he derives a required equity return by taking the inflation rate and adding a premium for either bonds or equities. “This required return is then used to arrive at a required return on…
