Five Times Lucky
LUCK HAS BEEN A KEY element in my financial journey. My good fortune has come in stages, beginning with my parents teaching me the lessons of saving and moderate spending. They valued education, supporting me as I attended first Yale for my undergraduate degree and then Harvard Business School.
After business school, I was fortunate to be hired as a junior analyst by the Rockefeller family office. This got me into the investment world, that most interesting line of work. In the early 1960s, there were no courses on investing at Harvard Business School. Obviously needing to get educated on investing, I was delighted that my employer would pay the cost of courses at New York University night school.
Over the next several years, I worked on my PhD. My timing was fortunate. Older professors taught traditional securities analysis, while younger faculty taught modern portfolio theory and efficient markets. I also studied to become a Chartered Financial Analyst. This three-way education gave me a unique opportunity to learn advanced best practices in investment management.
Meanwhile, I had moved on to Wall Street, taking a job with Donaldson, Lufkin & Jenrette, a leading research-based stockbroker. I was assigned to cover major clients in Boston, New York and Philadelphia. Each client had a stellar team of bright, hard-working, highly competitive analysts and portfolio managers, and each of these teams had its own concept and process for winning the battle for superior investment performance.
With several dozen clients, I was blessed with an extraordinary opportunity to learn from each. I was also able to see that as smart and hard-working as each group was, they were competing against each other. They all read the same research coming out of Wall Street and they all had access to the New York Stock Exchange, where corporate filings required by the Securities and Exchange Commission were available.
Two things seemed clear: Not all could win every year, and those who won this year seldom won again next year. As performance measurement firms were soon able to document, over the long term, many investment managers were falling short.
Case closed. The next phase of my good fortune was a series of annual three-day seminars I was privileged to lead, eventually for 30 years, in which the leading portfolio managers came together to discuss investing. This ���best of the best��� assemblage made it even more clear that the competition in The Money Game���as George Goodman, writing under the pen name ���Adam Smith,��� dubbed it in his bestselling book���was superb and intense.
During a break in one of the seminar���s sessions, my friend Jay Sherrerd, co-founder of the investment firm Miller, Anderson & Sherrerd, said, ���Did you know you can get Neff at a significant discount?���
John Neff, widely recognized as one of the all-time best mutual fund managers, had recently launched a dual-purpose closed-end fund named Gemini, after the mythological twins. Half the money in Gemini got all the dividends and half got all the capital gains���and all the losses. A severe bear market was particularly punishing to the value stocks in which John specialized, so Gemini���s capital shares had taken a terrific beating. Because Gemini was a closed-end fund rather than a regular mutual fund, its shares traded on the stock market. At that time���1974���the capital shares were selling at a steep discount to the value of the fund���s already-depressed portfolio.
Lucky me, I knew John well. He had a strong record of outperforming the market, and was unusually focused on understanding and managing risk. This presented me with a special opportunity. Believing the market was seriously oversold, particularly for the value stocks that John specialized in, I made an assumption that the market would not go down more than an additional 20%. Then, with maximum margin, I put all I had into Gemini���s capital shares. In a few months, the bear market turned into a bull market, and value stocks outperformed the overall market. John���s picks beat value stocks generally, and the double leverage of the duo-fund structure���and my hefty use of margin���multiplied one another in a most wonderful way. It was my first notable investment win.
My second winning experience came with Greenwich Associates, the consulting firm I founded in 1972. The firm had a profit-sharing retirement plan. Each year, the firm contributed 15% of each person���s earned income. Added to this was the 2% to 3% left behind by those employees who didn���t stay five years and so missed full vesting. And added to this was our early years��� practice of investing in closed-end mutual funds that were likely to go open-ended. These open-endings���or conversions to regular mutual fund status���had the effect of eliminating the gap between the fund���s share price and its higher underlying portfolio value. As Senator Dirksen once said, ���Pretty soon, it can add up to real money.���
Meal ticket. My third winning experience was the best. I was pleased to be invited to lunch by Sandy Gottesman, the much-admired senior partner of First Manhattan and one of Greenwich Associates��� clients. I hoped this would give me an opportunity to get him to adopt our recommendations for the firm���s stockbrokerage business.
As we sat down at his regular table at his club, Sandy said, ���We are not going to renew our engagement with you in stockbrokerage this year and I���d like to tell you why. Our research is focused on creative investment ideas, but your research shows that institutions want us to organize around coverage of whole industries. We don���t want to do that. You also show that clients want us to get into block trading, which we also do not want to do. It���s too risky for us.���
I was about to offer Sandy our program on investment management for large corporate pension funds, but he said, ���I know you have a great program on big pension funds, but that���s not our market. We focus on smaller funds.���
The conversation was effectively over and our lunch orders hadn���t yet come. To fill the void, I said, ���Sandy, thank you for being so open and courteous with me about your decision.��� Then, knowing Sandy was a very successful investor, I asked him to share his experiences with great investments.
He replied with one word: ���Berkshire.���
I had heard about Warren Buffett and the Buffett Partnership, so I asked, ���How long have you invested in Berkshire Hathaway?���
���A long time.���
���How long would you expect to continue owning it?���
���Forever.���
While we ate our lunch, Sandy told me the Berkshire story, about how Buffett took control of an ailing New England textile company in 1965 and turned it into the vehicle he used to make a slew of extraordinarily successful investments, with an early focus on insurance. He then used the insurance company ���float��� to make further investments, eventually building what today is one of the world���s largest companies.
Lucky as Sandy���s recommendation was, it was actually perfectly matched by a fortunate situation. My partners and I had agreed to create a reserve fund in case our small firm ran into a bad earnings situation, so we wouldn���t have to each scramble to put up more capital if we had an operating loss. The fund was only $100,000, but we thought that would be enough, if and when an emergency developed. The money was raised by simply slow-paying our year-end bonuses by a few months. We had agreed that the money would be invested in safe stocks and that I would recommend the portfolio. By the time Sandy had finished his reasoning for holding Berkshire Hathaway forever, the obvious move was to invest the whole fund in Berkshire. The result over nearly five decades has been superb���more than 300 times our cost.
Embracing average. My fourth winning experience in investing: not losing the money I had made. I accomplished this by investing in index funds at Vanguard Group. Over the past 20 years, nearly 90% of actively managed stock mutual funds have fallen short of the market averages, often by large amounts. I believe indexing has saved me from considerable grief and losses. Indexing has also saved me time and concern. Other than Berkshire, my investment program is and has been simple: index.
I was so convinced by indexing���s virtues that I became a proponent even before I could invest that way. In 1975, for the Financial Analysts Journal, I wrote an article entitled ���The Loser���s Game,��� where I argued, ���The investment management business (it should be a profession but is not) is built upon a simple and basic belief: Professional money managers can beat the market. That premise appears to be false.��� More than a decade later, that article turned into a book that���s now entitled Winning the Loser���s Game and which has gone on to sell more than 650,000 copies.
My fifth winning experience in investing may surprise readers, but it���s the one part of my experience that others might enjoy including in their overall financial strategy. I certainly recommend each person give it careful consideration. It���s been a big win for me.
Scholarships for talented young people, that enable them to get first-rate educations and make the most of their talents, are a wonderful way to strengthen our society. It can also lead to unmatchable personal satisfaction. For me, providing scholarships for exceptional young people has been a joy. The importance that my parents put on education, and the steps they took to ensure I got the best available, has been a huge part of my success. It���s a gift that I am more than happy to share with others. What a wonderful investment!
Charles D. Ellis is the author of 18 books, including Winning the Loser���s Game,��which is now in its 8th edition, with 650,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale���s investment committee. Check out his earlier articles.
After business school, I was fortunate to be hired as a junior analyst by the Rockefeller family office. This got me into the investment world, that most interesting line of work. In the early 1960s, there were no courses on investing at Harvard Business School. Obviously needing to get educated on investing, I was delighted that my employer would pay the cost of courses at New York University night school.
Over the next several years, I worked on my PhD. My timing was fortunate. Older professors taught traditional securities analysis, while younger faculty taught modern portfolio theory and efficient markets. I also studied to become a Chartered Financial Analyst. This three-way education gave me a unique opportunity to learn advanced best practices in investment management.Meanwhile, I had moved on to Wall Street, taking a job with Donaldson, Lufkin & Jenrette, a leading research-based stockbroker. I was assigned to cover major clients in Boston, New York and Philadelphia. Each client had a stellar team of bright, hard-working, highly competitive analysts and portfolio managers, and each of these teams had its own concept and process for winning the battle for superior investment performance.
With several dozen clients, I was blessed with an extraordinary opportunity to learn from each. I was also able to see that as smart and hard-working as each group was, they were competing against each other. They all read the same research coming out of Wall Street and they all had access to the New York Stock Exchange, where corporate filings required by the Securities and Exchange Commission were available.
Two things seemed clear: Not all could win every year, and those who won this year seldom won again next year. As performance measurement firms were soon able to document, over the long term, many investment managers were falling short.
Case closed. The next phase of my good fortune was a series of annual three-day seminars I was privileged to lead, eventually for 30 years, in which the leading portfolio managers came together to discuss investing. This ���best of the best��� assemblage made it even more clear that the competition in The Money Game���as George Goodman, writing under the pen name ���Adam Smith,��� dubbed it in his bestselling book���was superb and intense.
During a break in one of the seminar���s sessions, my friend Jay Sherrerd, co-founder of the investment firm Miller, Anderson & Sherrerd, said, ���Did you know you can get Neff at a significant discount?���
John Neff, widely recognized as one of the all-time best mutual fund managers, had recently launched a dual-purpose closed-end fund named Gemini, after the mythological twins. Half the money in Gemini got all the dividends and half got all the capital gains���and all the losses. A severe bear market was particularly punishing to the value stocks in which John specialized, so Gemini���s capital shares had taken a terrific beating. Because Gemini was a closed-end fund rather than a regular mutual fund, its shares traded on the stock market. At that time���1974���the capital shares were selling at a steep discount to the value of the fund���s already-depressed portfolio.
Lucky me, I knew John well. He had a strong record of outperforming the market, and was unusually focused on understanding and managing risk. This presented me with a special opportunity. Believing the market was seriously oversold, particularly for the value stocks that John specialized in, I made an assumption that the market would not go down more than an additional 20%. Then, with maximum margin, I put all I had into Gemini���s capital shares. In a few months, the bear market turned into a bull market, and value stocks outperformed the overall market. John���s picks beat value stocks generally, and the double leverage of the duo-fund structure���and my hefty use of margin���multiplied one another in a most wonderful way. It was my first notable investment win.
My second winning experience came with Greenwich Associates, the consulting firm I founded in 1972. The firm had a profit-sharing retirement plan. Each year, the firm contributed 15% of each person���s earned income. Added to this was the 2% to 3% left behind by those employees who didn���t stay five years and so missed full vesting. And added to this was our early years��� practice of investing in closed-end mutual funds that were likely to go open-ended. These open-endings���or conversions to regular mutual fund status���had the effect of eliminating the gap between the fund���s share price and its higher underlying portfolio value. As Senator Dirksen once said, ���Pretty soon, it can add up to real money.���
Meal ticket. My third winning experience was the best. I was pleased to be invited to lunch by Sandy Gottesman, the much-admired senior partner of First Manhattan and one of Greenwich Associates��� clients. I hoped this would give me an opportunity to get him to adopt our recommendations for the firm���s stockbrokerage business.
As we sat down at his regular table at his club, Sandy said, ���We are not going to renew our engagement with you in stockbrokerage this year and I���d like to tell you why. Our research is focused on creative investment ideas, but your research shows that institutions want us to organize around coverage of whole industries. We don���t want to do that. You also show that clients want us to get into block trading, which we also do not want to do. It���s too risky for us.���
I was about to offer Sandy our program on investment management for large corporate pension funds, but he said, ���I know you have a great program on big pension funds, but that���s not our market. We focus on smaller funds.���
The conversation was effectively over and our lunch orders hadn���t yet come. To fill the void, I said, ���Sandy, thank you for being so open and courteous with me about your decision.��� Then, knowing Sandy was a very successful investor, I asked him to share his experiences with great investments.
He replied with one word: ���Berkshire.���
I had heard about Warren Buffett and the Buffett Partnership, so I asked, ���How long have you invested in Berkshire Hathaway?���
���A long time.���
���How long would you expect to continue owning it?���
���Forever.���
While we ate our lunch, Sandy told me the Berkshire story, about how Buffett took control of an ailing New England textile company in 1965 and turned it into the vehicle he used to make a slew of extraordinarily successful investments, with an early focus on insurance. He then used the insurance company ���float��� to make further investments, eventually building what today is one of the world���s largest companies.
Lucky as Sandy���s recommendation was, it was actually perfectly matched by a fortunate situation. My partners and I had agreed to create a reserve fund in case our small firm ran into a bad earnings situation, so we wouldn���t have to each scramble to put up more capital if we had an operating loss. The fund was only $100,000, but we thought that would be enough, if and when an emergency developed. The money was raised by simply slow-paying our year-end bonuses by a few months. We had agreed that the money would be invested in safe stocks and that I would recommend the portfolio. By the time Sandy had finished his reasoning for holding Berkshire Hathaway forever, the obvious move was to invest the whole fund in Berkshire. The result over nearly five decades has been superb���more than 300 times our cost.
Embracing average. My fourth winning experience in investing: not losing the money I had made. I accomplished this by investing in index funds at Vanguard Group. Over the past 20 years, nearly 90% of actively managed stock mutual funds have fallen short of the market averages, often by large amounts. I believe indexing has saved me from considerable grief and losses. Indexing has also saved me time and concern. Other than Berkshire, my investment program is and has been simple: index.
I was so convinced by indexing���s virtues that I became a proponent even before I could invest that way. In 1975, for the Financial Analysts Journal, I wrote an article entitled ���The Loser���s Game,��� where I argued, ���The investment management business (it should be a profession but is not) is built upon a simple and basic belief: Professional money managers can beat the market. That premise appears to be false.��� More than a decade later, that article turned into a book that���s now entitled Winning the Loser���s Game and which has gone on to sell more than 650,000 copies.
My fifth winning experience in investing may surprise readers, but it���s the one part of my experience that others might enjoy including in their overall financial strategy. I certainly recommend each person give it careful consideration. It���s been a big win for me.
Scholarships for talented young people, that enable them to get first-rate educations and make the most of their talents, are a wonderful way to strengthen our society. It can also lead to unmatchable personal satisfaction. For me, providing scholarships for exceptional young people has been a joy. The importance that my parents put on education, and the steps they took to ensure I got the best available, has been a huge part of my success. It���s a gift that I am more than happy to share with others. What a wonderful investment!
Charles D. Ellis is the author of 18 books, including Winning the Loser���s Game,��which is now in its 8th edition, with 650,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale���s investment committee. Check out his earlier articles.The post Five Times Lucky appeared first on HumbleDollar.
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