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Financial planning, Investment and Self Managed Super Fund Article
From the Horse's Mouth
By Lester Wills
1st July 2003
This article may be out of date.
This is my version of a 2003 interview of seven Living Legends who have been investing in bull markets, bear markets and just about everything in between for a long time. The seven investment experts are:
Peter Berstein: Founder & President of Peter L. Berstein Inc. and has managed billions of dollars of individual and institutional portfolios
Jack Bogle: Founder & board member of each of the mutual funds in the US$550 billion Vanguard Group of investment companies. He founded Vanguard in 1974, and created the first Index Mutual Fund, the Vanguard 500 Index Fund, which is the largest fund in the US with approximately US$68 billion in net assets
Gary Brinson:Founder & retired chair of Brinson Partners Inc and is a recognised authority on global investing
Warren Buffet: Regarded as the greatest stock market investor of modern times. He has been Chairman and CEO of Berkshire Hathaway Inc since 1970
Dean LeBaron: In 1969 he founded Baterymarch Financial Management and is recognised as one of the first foreign entrants in the nascent securities markets of Brazil, India, Russia and China
John Neff: He was the manager of the US$13 billion Vanguard Windsor fund for 31 years and is also an author on investing
Sir John Templeton: Renowned as the pioneer of global investing he created some of the world’s largest and most successful international investment funds
The seven were asked about what experiences as investors that taught them useful lessons:
Templeton: Playing poker while trying to work my way through university. I played against rich guys who were playing for fun whilst I was doing it to win. I listened and learned what their families were investing in and found it was all in one country. So I decided I would focus on being an adviser for people to invest worldwide.
Buffet: When I was 19 and read “The Intelligent Investor” by Ben Graham. I got three ideas from the book that have been the cornerstone of everything I have done since. I look at stocks as part of a business rather than simply things that go up and down. I took to heart his Mr. Market saga, which I consider vital to having the right attitude towards market fluctuations. Finally, the margin of safety.
I bought my first stock when I was 11. Three shares at $38 and so did my sister. It promptly fell to $27. It was June 1942 and the Dow was at 92. My sister reminded me of the latest price every day on the way to school. I grew tired of it and so when it reached $40 we sold out, making $5.00. The stock then went up to something like $212 shortly afterwards. I decided from there, on not to talk to anybody about what I did and just think by myself.
Neff: The largest worst investment I ever made was U.S. Industries. It was a conglomerate, it was cheap and it had good diversification across eight or ten different industry lines, but it never really had critical mass in any one of those areas. I lost around 50%, probably one of my worst ever investments, so that stuck with me as a potential seeker of critical mass.
Berstien: 1958 when stock yields got down below bond yields, something that had never happened before. At that time my two partners, veterans of the Depression, assured me that this was an anomaly that would correct itself as stocks would obviously have to yield more than bonds all of the time. I am still waiting.
It took quite some time to realise that it was not going to be a return to depression times, that we had a growth situation. Beginning in 1958, the word “growth” started to come into people’s vocabulary and people began to believe in equities. It was a dramatic turning point and taught me that anything can happen.
LeBaron: Batterymarch brought a package of 160 nearly bankrupt companies. The package itself was intended to be safer with higher return than any one company, which it was. However, it also caused a 10% drop in business, as people did not want any form of bankrupt company in their pension fund.
Brinson: I have learnt that extreme dislocations in markets inevitably occur, and they also inevitably correct themselves. One needs to learn from that, the discipline of being patient and having the conviction of one’s own analysis.
Bogle: 50 years ago I entered the business with a number of preconceptions based upon my experience of researching my senior thesis at Princeton. I had written that “Mutual Funds must serve shareholders (fund members) in the most efficient, honest and economical way possible and can make no claim to superiority over the market averages”.
After 15 years, I threw this out the window and merged Wellington Management with a group of hot shot young managers who I (mistakenly) believed would be permanent winners. They came and went, just like the new breed in thetechnology boom. I ended up getting fired.
That enabled me to create a new company that got me back to where I was in 1951. It was a mutual company operating at cost and the first thing we did was create the world’s first index mutual fund.
The group was asked what are the most important changes in the investment profession over the last 30 years and for next 30 years?
Templeton: When I began in 1937 there were only 17 security analysts, now there are 7-10,000 mutual funds and over 3,000 security analysts. Looking forward, progress is speeding up in every area. On Wall Street, the amount of money changing hands is now 1,000 times as great as when I was born.
Buffet: If you look back the turnover of portfolios within professionally managed funds was a fraction of the turnover experienced today. There is no greater focus on looking at long-term prospects of a business and trying to prosper from the actions of business rather than the actions of the stock market.
Bogle: Investment used to be about stewardship; today it is about salesmanship. There used to be about 300 broad based equity funds and now there are 5,000, many of them narrowly based and speculative specialty funds, often created and sold just when they shouldn’t be bought. Next, equity fund costs have more than doubled. Portfolio turnover has risen seven fold, from 15% to 110% a year. This is long-term investing?
Another important change is the ability of management companies to make unimagined amounts of capital by going public or selling out to a conglomerate. Many entrepreneurs are in this business, not to make money for clients, but to make money for themselves, and the sooner the better.
In all, the mutual fund business has turned from a profession into a business. The industry should return to its roots.
Neff: Looking forward, the lack of professionalism is what I think they will remember.
LeBaron: The role has changed from a statistical job to an analyst profession and then to an investment function, which includes administration, marketing etc.
To the future, I think we are still experiencing and will continue to experience for 10 years or longer, the aftermath of the bubble of the 90’s. This will result in bureaucratic solutions, which could make things worse. Oversight boards and new rules designed to correct yesterday’s problem. They will make the return to professionalism more difficult because it’s going to be mandated from outside rather than internalised as something that one thinks about in a fiduciary sense all of the time.
Bogle: I think that the fact that the rewards are so huge for managers has played a major role in this change for the worse.
Brinson: Looking back, first, we can observe some movement toward recognising that it’s a global marketplace of assets and asset classes. Second, there have been important developments of quantitative techniques for analysis and risk management. Third, over the last ten years we’ve gone from a passive to active attention to corporate governance. Fourth, time horizons have become too short.
Looking ahead I think the most important thing is to point out how important it would be to earn another percentage point compounded for 30 years by driving down costs.
Berstein: One of the problems with this market has been “benchmarkitis” on the part of clients. I think that will change. Warren Buffet does not give a damn where the S & P is.
Buffet: The ultimate irony of the investment business is that there’s no question that an obstetrician will deliver babies better than the husband or the wife. But in the investment world, somebody who will seek out the lowest way to participate in business and doing it consistently will achieve results that exceed those of investment professionals. It’s the only industry I can think of where the professional’s efforts subtract value from what the layman can do himself.
Bogle: In my thesis I cited Lord Keynes’ view that professionals would move away from focusing on an enterprise’s value and join ignorant individuals in speculating on changes in the public valuation of stocks. I disagreed, saying that mutual fund managers would “supply the market with a demand for securities that is steady, sophisticated, enlightened and analytic. A demand based on the intrinsic performance of a corporation rather than on the public appraisal of the price of a share”.
Keynes was right and I was wrong.
It is time we begin to act the way I suggested because that is the way professional investors should act.
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