A Book on How Gurus Think That’s a Head Above Others
Investment success is part science, part art and oodles of luck. If you’ve ever wondered why some money managers seem to have more luck than others, it probably has to do with the way they approach the art and science of investing.
“Investment Gurus,” a new book by Peter Tanous (1997, New York Institute of Finance, $24.95, [800] 227-6943), does more to shed light on the methods behind the money mavens than any other finance book I’ve seen published in the recent past, and boy, have there been a lot of them.
In “Investment Gurus,” Tanous exposes modern market strategy and investment theory through chatty interviews with the thoughtful top of the investment world today: famous fund managers like Michael Price and Mario Gabelli; academicians like Nobel Prize winner William Sharpe, who gave us the most widely used measures of stock market risk; and Rex Sinquefield, spiritual leader of the burgeoning you-can’t-beat-the-market-so-just-buy-index-funds movement.
What’s odd about all the people chosen for this book is that they are all stock market winners with strategies that often are wholly incompatible with one another.
Price talks of finding stocks by hunting through the Yellow Pages, uncovering hidden assets in warehouses and making sure he pays less for those assets than they are worth.
Massachusetts Financial Services’ John Ballen uses heavy doses of intuition and goes for well-managed companies in industries that are growing fast. He concedes that it’s the rare (and probably great) stock that shows up in both his and Price’s portfolios at once.
Richard Driehaus, a Chicago money manager, doesn’t much care about sales formulas or warehouse holdings. What he does care about is catching waves of momentum in individual stocks: If everyone else is buying something, he wants it too.
All three managers beat the market on a regular basis, yet Sinquefield makes a convincing case for his argument that in the end, it isn’t worth the bother: He insists that the biggest bang for the buck comes from buying the whole market at the lowest possible transaction costs with the fewest taxable transactions.
What conclusions does Tanous draw from all of this? His view seems to be that passive management (the Sinquefield approach) works well, but stellar managers can buy you extra returns around the edges. And so he teaches readers to construct their own mostly passive portfolios, with great funds around the edges. Tanous does a credible job of explaining modern portfolio theory with clarity. You come away understanding why asset allocation is so important and how to construct your own portfolio.
You also come away with some stories that are inspirational, educational and entertaining. It’s striking how many of these “gurus” were already into following the market before they were shaving on a regular basis.
Money manager Laura Sloate, credited with being one of the few who can regularly beat the market without taking extra risks, does so on a talking computer: She’s blind and learned to tote up her father’s portfolio in her head, as a child.
Money manager Bruce Sherman got 10 shares of stock for his bar mitzvah and sold them immediately: He didn’t like what he saw in the company’s annual report. And so on and so on.
The stories are fun, the advice is solid, and this book is one of the few I’m going to keep for my shelf.
