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My Book Reviews

Category: Trader interviews
Published: 2000
Read: 2002
Reviewed: Jun 2010

This book carries interviews with 18 of the most successful mutual fund managers. The author talks to them about their jobs and their stock-picking criteria. With the exception of Bill Miller, none of them are very well-known. One thing that needs to be pointed out right away is that any book published around 2000 where money managers talk about how great their records are has to be discounted to some extent due to the large returns in the late 90s.

Because the interviewees are all mutual fund managers, the content and tone of the book are shaped in some important (and mostly negative) ways.

(1) Mutual fund managers usually only employ fundamental analysis and not technical analysis, so the book will appeal more to long-term investors, than to traders who are either short-term traders or use technical analysis.

(2) Because mutual fund managers are always in the market, there is very little about market psychology or investor psychology. This is because mutual fund managers simply don't care if the market drops because they are not going to switch into cash or lose their own money (so they are less interested in exit strategies or risk management).

(3) Another negative aspect of mutual fund managers always being in the market is that many of them are permanently (and blindly) optimistic. Bruce Behrens, when talking about the high market valuations around 2000, said that "the valuation shift, in my opinion, has been rational growth". Then, David Alger said that he bought Cisco at 60 times earnings, looking for the stock to go to 70 times. He also said that he thought that the internet stocks were attractive and that the Dow would be at 20,000 in a few years (i.e. by 2004). The apathy exhibited by these fund managers about valuation will hurt readers, most of whom are probably ignorant about valuation already. Some of these perma-longs are also, by extension, unwitting cheerleaders for corporate management. Bruce Behrens actually says that "Bernie Ebbers has been a master".

(4) Too much time is spent on the story of the actual mutual funds (like how they grew assets), as opposed to the stocks they hold.

(5) The fund managers are blatant cheerleaders for actively-managed mutual funds. Most of them don't recommend indexing at all, which is pretty ignorant considering that it is mathematically impossible for the majority of mutual funds to beat the market even before fees (let alone after fees). Then, when talking about the prospects for short-term traders, David Alger makes the completely ignorant and biased remark about how "you'll do well for three months, then you'll have one or two really terrible trades and lose all your money." Nice scare tactics.

Although these examples of biases and self-promotion are annoying, they are entirely expected and easy to brush off. So when the fund mangers actually do get around to talking about their investment criteria, the book is actually quite strong. There is a lot of the common advice for fundamental long-term investors (look at free cash flow, look at the business model), as well as plenty of unique insights. Here are some of the useful comments from the book:

  • Behrens: Doing some soul-searching will help you figure out your investment philosophy.
  • Behrens: "People don't want to pay you to lose a quarter of their money."
  • Behrens: "I have seen how one-issue oriented Wall Street can be."
  • Birken: Large companies do better in low inflation environments because large companies will have a higher productivity in an environment where there is no pricing power.
  • Birken: A company that requires a lot of capital is worth less than a company that doesn't, even at the same level of earnings. A company with higher debt is worth less than a company with lower debt even at similar earnings.
  • Calinan: "There's a certain mentality, a certain optimism you must have to be a growth investor."
  • Calinan: Small cap investing is far too labor-intensive for most individual investors.
  • Calinan: Large cap growth funds tend to act the same, but the disparities between small cap growth funds are huge.
  • Calinan: High turnover mutual funds tend to generate large year end distributions.
  • Christopher Davis: "The worst thing in the world is to think that your circle of confidence is bigger than it is."
  • Christopher Davis: "A lot of success in investing comes form humility."
  • Domini: Newer industries are less discriminatory and more meritocratic.
  • Lawson: "Many times investors really don't know what is going on in larger companies, because they are made up of so many different divisions."
  • Lawson: "If I can find a 40-cent dollar, that's wonderful."
  • Neal Miller reads 300 magazines in order to get a read on the social pulse.
  • Spiros Segalas: "Be appreciative of your limitations and know what you don't know."
  • Howard Ward: "The stock price that is rising rapidly is frequently a leading indicator of an upside earnings surprise."
  • Howard Ward: "People need to really get a sense as to when it's a good time to cut their losses and move on. You don't want to be a martyr about your ideas."
  • Bill Miller: "Most people, for whatever reason, seem more psychologically attuned to find companies that are growing, have great prospects, or for whatever reason have something people can get excited about. Valuation tends to be a much less important factor for most people than it is for me."
  • Bill Miller: "We do scenario analysis of the companies [that we own]...We try to map out the possible futures, assignment probability weightings to them, and figure out which ones appear to be most likely. Then we determine the value under that scenario."
  • Bill Miller's philosophy about the different theories of truth.
  • Robert Torray said he was "satisfied with finding only two or three new ideas a year."
  • Robert Torray: "Time dilutes both the advantage and disadvantage of the entry price."
  • Observations about companies: (1) Be careful buying companies that have cost-sensitive parts. (2) A company that sells a lower-priced product can sell to the wealthiest person in the world, but also to some of the poorest.
  • Observations about industries: (1) HMOs tend to be managed by highly promotional people and only grow through acquisitions. (2) Health-care is not really free enterprise at work. (3) Waste management sells a service no one wants, but is forced to buy. (4) Commodity companies have no power over what they charge in the marketplace.

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