The Sequoia Fund is a legendary American mutual fund known for its long-term success and deep roots in the world of value investing. It was founded in 1970 by Bill Ruane and Rick Cunniff, two highly respected investors from the “Graham-and-Doddsville” school of thought. The fund's creation story is directly tied to Warren Buffett. When Buffett decided to close his original investment partnership in 1969, he didn't want to leave his partners in the lurch. Instead of starting his own mutual fund, he directed them to Bill Ruane, a friend he trusted implicitly to manage their money with the same discipline and focus on intrinsic value. This powerful endorsement cemented Sequoia's reputation from day one. For decades, the fund has practiced a concentrated, long-term investment strategy, focusing on buying wonderful businesses at fair prices and holding them for the long haul, embodying the principles that Buffett himself championed.
The tale of Sequoia's beginning is a cornerstone of value investing lore. In the late 1960s, Warren Buffett felt the market had become too speculative and irrational, making it difficult for him to find the “cigar butt” bargains that had fueled his early success. He decided to liquidate his investment partnership and return the capital to his partners. Unwilling to leave them without a guide, he did something extraordinary: he recommended a competitor. He wrote to his partners, “I am delighted to be able to tell you that Bill Ruane… is now in the process of forming a fund… I have told him that I would be happy to have my 'relatives' join him.” This was the ultimate vote of confidence. Buffett knew Ruane from their time studying under Benjamin Graham at Columbia University and trusted him to be a prudent, intelligent, and honest steward of capital. Ruane & Cunniff, the firm managing the Sequoia Fund, thus became the unofficial successor for Buffett's partners, inheriting not just their capital but also a legacy of patient, business-focused investing.
Sequoia's strategy is a masterclass in classic value investing, but with an emphasis on quality that evolved over time, much like Buffett's own style. It is not about buying statistically cheap stocks but about owning exceptional businesses for the long run.
Unlike many mutual funds that own hundreds of stocks, Sequoia has historically run a highly concentrated portfolio. It often holds fewer than 25 stocks, with its top ten positions making up a significant portion of its assets. The logic is simple but powerful:
The fund's primary goal is to identify businesses with durable competitive advantages, often called an economic moat. These are companies that can protect their profits from competitors over long periods. Key characteristics they look for include:
Sequoia invests with the mindset of a business owner, not a stock trader. They have an extremely low portfolio turnover, often holding stocks for many years, if not decades. This patient approach allows them to ride out short-term market volatility and let the power of compounding work its magic over time. They believe that true value is realized over years, not quarters.
Studying the history of the Sequoia Fund offers invaluable lessons, including a powerful cautionary tale.
Sequoia's stellar long-term track record is a testament to the virtues of patience. In a world obsessed with daily price swings, Sequoia's success proves that a long-term, business-like approach to owning a handful of great companies can be a winning strategy.
No investor is infallible, not even the legends. In the 2010s, Sequoia made a massive, concentrated bet on Valeant Pharmaceuticals. The company’s aggressive, debt-fueled acquisition strategy initially produced spectacular returns. However, its business model was later exposed as deeply flawed and ethically questionable, causing the stock to collapse by over 90%. The Valeant disaster was a painful chapter for Sequoia, leading to massive losses and a rare public apology to its shareholders. It serves as a stark reminder of the dangers of over-concentration and the importance of questioning a company's accounting and ethical practices. It highlights a critical risk: when a concentrated bet goes wrong, it can severely damage a portfolio. This episode underscores the lesson that even the most brilliant investors can make colossal mistakes, and a healthy dose of humility is essential for long-term survival.