Investment Gurus: A Road Map to Wealth from the World's Best Money Managers
432
Investment Gurus: A Road Map to Wealth from the World's Best Money Managers
432eBook
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Overview
Product Details
| ISBN-13: | 9781101215494 |
|---|---|
| Publisher: | Penguin Publishing Group |
| Publication date: | 01/15/1999 |
| Sold by: | Penguin Group |
| Format: | eBook |
| Pages: | 432 |
| Sales rank: | 488,054 |
| File size: | 2 MB |
| Age Range: | 3 Months |
About the Author
Read an Excerpt
INTRODUCTION
I assume this is not the first investment book you ever read. You may have read some books about the stock market or even one of the recent bestsellers by Peter Lynch, the legendary fund manager who successfully managed the largest mutual fund in America, Fidelity Magellan. Perhaps you were intrigued enough to want to read more about phenomenal money managers and glean from their own stories what it is that makes them great. Perhaps you want to know if there are identifiable common traits or methods used by these top managers that allow them to succeed so brilliantly, and so consistently, while so many others fail or are destined to mediocrity.9 Well, if I guessed right, you won't be disappointed. And I promise you a lot more.
Here's what I consider it my mission to deliver:
· Informative, revealing, and sometimes passionate discussions with some of the greatest investment minds today.
· An analysis of the investment skills and attributes of the Gurus as we attempt to zero in on what works in stock market investing and, equally importantly, what doesn't.
· A timely and revealing look at the latest, state-of-the-art techniques that we investment consultants use to find and track investment genius and how to use these same techniques in your own investment program.
· An investment program you can use to either choose stocks yourself or select your own Guru to do it for you. Again, we will focus on what works.
· One last promise: we will clear the air of some of the annoying noise that is often promulgated under the guise of investment advice. You don't have time for that. I don't either.
This is a mission of financial discovery. We are not only going to talk to great money managers, but also to great academics whose work will help us understand just how investment markets work and what we can realistically expect from them. We will ask the managers tough questions about how they do what they do, and we are going to try to find out not just how, but why they succeed. We will delve into the different characteristics of these Gurus and try to isolate those traits that appear to contribute to their success. We will discover if, in fact, there are traits common to all of them, or simply an assortment of characteristics and talents that makes this group of people so successful. In the end, once we identify these special attributes, we will see if it is possible to emulate them in some way to help us in our own investment decisions.
Investment Gurus focuses on one type of investing: common stocks. That's because common stocks are what most of us understand and invest in because they are the best investment over time. I don't want to dazzle you with exotic investment techniques that you will have no use for in your own investing life. (I confess, I've made one exception just to give you a glimpse into the future of investing.) But, in general I take it for granted that you are too busy to spend a lot of time reading about techniques you can't use.
My goal is for you to emerge from the time you spend with me a much better investor. Therefore, you will not find interviews with hedge fund managers, currency traders, arbitrageurs, derivatives specialists, and the like. That's because there is nothing that you and I can learn from those people that we can apply to our own investment strategies. Trust me, you will not learn how to trade currencies like Paul Tudor Jones or do Yen/Deutsche Mark swaps like George Soros by reading a book, but you can learn something from managers who buy and sell stocks and do it superbly. That's not to say that some of our Gurus don't use exotic techniques on occasion. A few of them do, and you will end up understanding most of their practices and why they use them.
You may be wondering why I am eager to write this book. As a professional investment consultant, I spend most of my waking hours analyzing investment manager performance as well as manager traits and characteristics. Obviously, of the 20,000 or so registered investment advisors only a handful can be truly great, and I was curious to see what those few were really like. What do they have in common, if anything? What is it about them that propels them to the top of their class? And, most importantly, what can we learn from them?
My firm, Lynx Investment Advisory, Inc., unlike other registered investment advisors, does not manage money. We are part of a small group of advisors who are hired as investment consultants by individuals and institutions, to find and monitor the best money managers in the business. Large institutions hire consultants so they don't have to listen to hundreds of sales pitches from brokers and money managers. Besides, they figure, the really great managers, the Gurus, if you will, are not likely to be out hustling new business. They don't need to!
Why have I been successful at picking managers and making investment decisions, and why do I think I can help you do it, too? Well, I began my career supervising institutional salesmen as head of the international division of Smith Barney; later, as CEO of a New York Stock Exchange investment banking firm, I realized that true investment genius was rare indeed. In starting Lynx, I made it my life's work to analyze and identify the true Gurus, those great investment minds that stand apart from the thousands who offer investment advice to others. Today, my firm advises dozens of institutions, large and small, as well as individuals, some of whose names you would recognize, in creating long term investment strategies.
The investment consulting business has become quite sophisticated. Frequently, new tools appear that help make analysis of risk, returns, and how these important factors interact easier. The Nobel committee has seen fit to recognize these achievements by offering the Nobel Prize to economists in investment disciplines. Two of our Gurus are among the recipients of the Nobel Prize in economics. I want to share some of these tools with you so that you may profit from these advances in our business to enhance your own wealth.
Oh, yes, there is something else. After over thirty years in the financial services business, I have become extremely annoyed at the type of investment advice that is promulgated to the public. There are a number of things that I find difficult to understand and even more difficult to accept. For example, why is it that so many books and articles are intent on misleading investors about the time tested acknowledged paths to investment success? Why is it that publishers and writers prey on an unsuspecting public by giving them the equivalent of get-rich-quick schemes for making money in stocks? Yes, I'd love to own "Ten Stocks to Double in Three Years" or "The Hottest Growth Stocks for the Nineties." I only wish it were so easy.
How about the books of advice from so-called successful investors? There's a 17 year old whiz kid who wrote an investment book. Is that where you expect to find great investment wisdom? How about investment advice from a barber or a dancer? They've got books on investing out there, too. Let me ask you something: if you heard that a young kid, or maybe a plumber, had come up with a neat way to perform appendectomies, would you buy his book and give it a try? Or would you stick with a medical doctor? Why is it that when it comes to investing, anyone who is a bit successfully thinks he or she can tell you how to do it better than the professionals who devote their lives to it? Do you really believe that there is some sort of investment voodoo out there that the millions of professionals who have been working in the field just happened to overlook? Beats me.
In Investment Gurus, I will expose you to the greatest minds in investments today and show you how to get rich the safest way possible: with common stocks. You will hear the voices of these great masters and learn from them. I don not want you to fall prey to silly advice. I will teach you to distinguish lucky investors from those with true investment wisdom. We will clear the air of all this nonsense, I promise. I will take you on an excursion to visit the greatest investment minds of the century and then show you how to apply their collective wisdom to insure your own investment success. You will also learn some state-of-the-art techniques now being used to analyze risk and return in stock market investing. At the end, I will offer some specific investment advice using the techniques we have learned from the Gurus.
Common stocks are the single best investment over time in American history. Period. The key phrase is "over time." Since the early twenties, no asset class has performed better than common stocks, including the effects of the 1929 crash, the Great Depression, and more recent calamities like the Crash of 1987.
If you have any doubts about this, take a look at the chart on the next page. Ibbotson Associates calls this chart: "Wealth Indices of Investments in the U.S. Capital Markets." I call it: "The chart that hungry stockbrokers consider the greatest chart in the world." It tracks the performances of Small Company Stocks, Large Company Stocks, Long Term Government Bonds and Treasury Bills back to 1925. It also throws in the Consumer Price Index figure which is a good gauge of inflation. In a nutshell, this chart tell you that if you had invested one single dollar in these investment classes way back then, this is what you would have at the end of 1995.
To make this exercise a little more interesting, let's assume that Grandpa and Grandma had decided to invest $2,000 for you in 1925. Grandma wanted to invest the money in stocks, because she figured those big companies would keep on growing. Grandpa had a different notion. He was somewhat of a visionary, you see, and he foretold the crash of 1929, which would occur in just a few years, and he even predicted the depression, so the last thing he wanted to do with his grandchild's money was risk it in stocks. No, the only way to assure there would be something left was to put the kid's nest egg in safe U.S. government treasury bills. After all, a company could go broke, but the U.S. government wasn't likely to. So, not being able to agree on a course of action, Grandpa and Grandma compromised (which, incidentally, is why they stayed married so long). They decided to split the money: $1,000 to stocks, $1,000 to T-bills. The chart tells you what happened. Grandpa's $1,000 grew to $12,870, at the end of 1995, barely outpacing inflation since the equivalent CPI ending value over the same period was $8,580. Grandma's stocks grew your $1,000 to $1,113, 920. So you are now a millionaire. Bless her soul. (Yes, I know the chart shows that if your $1,000 nest egg had been invested in small company stocks, you would now have over $3.8 million, but let's not push the example that far.) You can see why stock brokers and mutual find salesmen just love this chart.
A couple of postscripts. Granma's wisdom not withstanding, she only made one decision and let it rest for 70 years. You and I aren't that patient. What's more, Grandma didn't have any gurus to guide her in her investment strategy. She let the market do all the work, and you are about to hear some very convincing voices who think that Grandma had the right idea all along. But you will also see that most of our Gurus do much better than the market as a whole, and that is what we are going to strive to do was well.
Many of the techniques we use in my investment consulting business to select investment managers for our clients will be disclosed in this book. Indeed, we will put them to work in the process of interviewing the different investment talent. You will learn important risk measures used to analyze the risk investment managers take to achieve their returns, and you will also hear about the importance of style in investing in common stocks. To set the stage, here are the criteria we used to select the Gurus:
An investment approach that makes sense:
That sounds obvious, doesn't it? But so many of the newer approaches in investing may sound goo, and even foolproof, but they somehow flunk the test of logic and reason. (I was educated by the Jesuits so this is important to me.)I'm not talking about what the experts think. Is this investment approach sensible for our money? I expect that from the Gurus. I don't have to understand every detail of their complex investing procedures, but it had better make basic good sense to me.
Outstanding Investment Performance Over Time:
You will not find any hotshot, young wizards in this work. I really am baffled by people who think that novices with relatively short track records can be great investors by anything other than luck. In this book, you will find only seasoned pros. Great beginners didn't make the cut. This is not a book about individuals who lucked out with two or three great years in the bull market. What can you learn from that?
Low Relative Standard Deviation:
If you don't know what standard deviation is, you will soon, but the short explanation is that it is a tool we use to measure the volatility of a portfolio. By comparing a specific portfolio's volatility to, say, that of the market as a whole, we can assess the relative risk of the portfolio relative to the market. The theory here is that if your portfolio's volatility-how wide the range of ups and downs in price is over time-is high, your portfolio is riskier than one with lower volatility.
High Sharpe Ratio:
This is a relatively new tool used in our profession to measure risk adjusted return. It is name after its creator, Professor William Sharpe, who won the Nobel Prize in economics and is one of our Gurus. In plain English, the Sharpe ratio measures how much extra return you get for the risk you were willing to take. The theory is that if you are prepared to take extra risks, it is because you want extra returns. The Sharpe ratio measures how good a job you or your investment manager did in achieving that goal.
Multi-Disciplines:
We looked at mangers who use different styles and size attributes. You'll learn the importance of style in investment management, if you don't know it already. You'll also learn why it is important to look at the size of companies you invest in. Simply put, some mangers specialize in small companies, others medium-sized, and, still others, large companies.
These are the criteria used to select the Gurus. We often refer to these criteria as "screens" The anthology is to a screen which sifts the data, or particles, or gold for that matter, so that you end up with only those results that conform to the criteria you set. I have purposely not created a mechanical selection environment, one which for example, might have ruled out managers who had not had an annualized return of, say, %20. Anyone can do that. We are delving deeper into the risk-adjusted performance of great managers over time. We are searching for the roots of investment genius, the traits and attributes that contribute to greatness, to Guruhood.
You might also be wondering how much prior investment knowledge you will need to enjoy and profit from this book. The answer is not very much. The fact that you have Investment Gurus in your hands suggests, at the very least, you must be interested in investing. I expect that you probably already read one or two other investment books at some point. If you haven't the best place to start is by reading The Only Investment Guide You'll Ever Need by Andrew Tobias. That's one of the best investment books I have ever read, and I turn purple with envy over Andy's writing ability. Likewise with Peter Lynch's books.
Before we blast off on our journey of discovery, we'll start with a little "flight training." To get the most out of these interviews, you'll need to understand how and why the different managers were chosen and what sort of questions we'll be asking them. To make sure we're all talking the same language, I'll take you through a little primer of up-to-date investment terminology complete with examples. So, Part One includes some ground rules and a few definitions. Some of this information will be familiar, but you may not be sure exactly what it all means. I'll provide a refresher and an introduction to some really interesting techniques now being used by consultants and other professionals to analyze returns and risk. There have been great strides in this area, and I think you'll be impressed. I want to quickly add that this is not a book for techies. It is important to me that this book be in English as you and I know it. Throughout this book, we will explain complex and arcane investment terminology in plain English.
In Part Two, get your ticket and grab your pencil and pad. We're off to the first interview. The interviews are really conversations with some of the greatest investment minds of our century, those investment managers who stand out from the crowd and display true investment genius. We will also be speaking with some of the greatest academic investment minds, people who have contributed enormously to the art and science of investments in common stocks. We need to hear these voices to understand the present state of investment thought. As we move from one interview to the next, we will keep in the back of our mind what we have already learned and we will correlate the information we learn from our practitioners and the academics, in our search for clues that lead to the secret of true investment success.
In Part Three, we'll lay our notes out on the table and sift through the data. We will discuss the key points gleaned from our interviews and analyze the results. The questions we seek answers to include:
· Is investing in stocks the most intelligent path to wealth for most of us?
· If we invest in stocks, are we better off doing it ourselves or letting someone else do it for us?
· Is it possible to consistently beat the market?
· Which style of investing is best?
· What are the key characteristics of investment geniuses?
· What did we learn from the Gurus that we can use in our own investment program?
· How can we replicate the Gurus' success?
Having heard what the Gurus have to say, we embark on our mission of discovery, in full possession of the information we have acquired. Have the academics and top money managers discovered the ultimate formula for wealth in common stock investing? Do the precepts of the investment science of today correlate with the actions and behavior of the most successful practicing money managers? If so, we're on to something. Next, we'll ask how can each of us use this information to maximize our own wealth.
One of the key things we will seek to learn is how to avoid mistakes. We will see how to reduce our risk by avoiding dumb investment moves. On the positive side, we will consider investment alternatives, investment styles, and, how to practically apply what we have learned. We will determine what the right investment strategy is for each of us. We will also consider the possibility of having one or more of these (or other) Gurus manage our money for us. We'll examine how professional consultants, (like me) select investment talent and put them to work, and how you can put these techniques to use in your own investment program. We will conclude with some specific investment advice and sample portfolios you can actually use, based on the techniques we will have uncovered in the course of our interviews.
One thing I have learned in thirty years: there are very few true investment geniuses. Perhaps that's why so few money managers ever beat the market as a whole for extended periods of time. So unless we throw away all the books and buy an index fund, we had better be very, very careful, and very, very clever in our selection of investment talent or in our own selection of stocks.
By now, you know that I want more than anything for you to emerge from our time together as a much wiser investor. Often, people think they can be as good an investor as Peter Lynch just by reading his books. Really! (Where are the readers' yachts?) Please don't expect that overnight you will become as good as our Gurus, but you can count on being exposed to some of the greatest talent investing stocks and bonds, and stocks and bonds are what you and I buy most of the time. Some of the Gurus manager mutual funds we can buy, others have high minimums most of us can't reach. All have something to say that will help us enhance our own knowledge and wealth.
Thanks for coming along.
Table of Contents
Preface, ixForeword, xiii
Pt. 1 The Landscape, 1
Introduction, 3
Tools of the Trade, 13
Pt. 2 The Gurus, 31
Michael Price, 33
Richard H. Driehaus, 53
Mario Gabelli, 77
William F. Sharpe, 89
Peter Lynch, 111
Laura J. Sloate, 133
Scott Sterling Johnston, 149
Eugene Fama, 167
Bruce Sherman, 179
Eric Ryback, 197
Merton Miller, 213
Foster Friess, 229
Van Schreiber, 247
Rex Sinquefield, 257
John Ballen, 281
Roger F. Murray, 301
Robert B. Gillam, 321
David E. Shaw, 341
Pt. 3 The Route, 365
Your Road Map to Wealth, 367
Crafting an Intelligent Personal Investment Plan, 387
Index, 405