George Washington, Benjamin Franklin, Ben
Graham, Sir John Templeton, Warren Buffett, Jason Zweig
Introduction
Almost every year on
the Saturday evening nearest to February 22nd my wife, Ruth and I attend the
birthday dinner celebration for George Washington, the first and greatest US
president. At each George Washington's
Birthday celebration The Mount Vernon Ladies Association* presents a thought-provoking after dinner
speaker. This year's speaker was Walter Isaacson, the scholarly author and
biographer of great Americans from Benjamin Franklin to Steve Jobs. He is also the current president of the Aspen
Institute, whose summer sessions I have attended. His talk at Mt. Vernon focused on the
comparison, contrast and coordination of George Washington and Ben Franklin.
*Ruth is a long time member of the Life
Guards, a support group for Mount Vernon.
We all react to various
inputs into our daily lives through many filters, but often through the
singular vision which guides our intellectual actions. For my sins, I tend to
think about my roles as a fiduciary investment advisor and investor in mutual
funds and similar vehicles as well as an investor in selected financial
services stocks. My reactions to the Mt.
Vernon dinner speech are within this context.
While Mr. Isaacson's
talk was about these two great Americans' political evolution from different
starting points, I could not avoid thinking about the inputs these two
successful leaders and entrepreneurs would have on my portfolio management and
investment challenges of today. Think about the character of George Washington,
the military leader and major farm landowner, who was willing to face unknowns
against long odds of success in his search for his own and his country's
growth. In contrast was Ben Franklin the poor boy who looked for inexpensive
strategic investment at bargain prices. While Dr. Franklin's successful commercial
ventures focused on his editorial and business skills as a publisher, too
little attention is paid to his initiation of a colonial postal system where
mail could go from Massachusetts to Virginia directly rather than being routed first
through London. In effect this postal system became the glue that
allowed the separate and fractious colonies to begin to evolve into a somewhat
unified country.
Washington: growth, Franklin: value
Intellectually through
my narrow eyes I perceive George Washington as our first growth focused
investor leader and Ben Franklin as our first innovative value seeker. These
were the progenitors in the more modern world of Warren Buffett and Charlie Munger
as future focused "growth" investors (both of whom I am looking
forward to hearing at their Berkshire Hathaway** annual meeting this
year) and Ben Graham and Sir John
Templeton as valued-focused investors.
**
Securities that I either own or are in the financial services fund that I
manage or both.
Picking winners
Long time
readers of these posts and my book Money
Wise have learned that I was first educated about security analysis by
handicapping (analyzing) at the race track. The key to regularly coming away
from the track as a winner was first to avoid losers by not having a betting
interest in every race and being highly selective in betting on the difference between
the probabilities and the odds dictated by the weight of other people's money. I try
to apply the same general approaches to selecting funds for portfolios of funds
and individual investment management stocks. These processes are very different
than reading the standard Request For Proposal (RFP) that is a highly
quantitatively driven search filter for institutional management mandates.
These documents’ authors believe that they are dealing with commoditized skill
sets that can easily be selected quantitatively. Going back to my racetrack
education I recognize that this approach leads to backing favorites. A study of
past betting results (past performance) reveals that favorites win a minority
of the time and when they do the returns are low and usually can not
meaningfully offset the losses when the favorites don't win.
To me
successful selection is much more an art form than a science. The art form has
to do with understanding the way particular people work successfully in
competition and combination with other skilled players. Thus to me the key
skills of selection are more akin to the brilliant curators of museums than
mathematical screeners. The great curators mix some of the talents of George
Washington and Warren Buffett looking for growth beyond
the present and the two Bens (Franklin and Graham) innovative bargain
purchasers.
Understanding the development process
In general,
most equity portfolio managers start as security analysts, as I did. Many fixed
income managers start off on a trading desk. Why is it that there
are considerably more analysts and traders than institutional portfolio
managers? Is it the normal pyramid of responsibilities and related compensation
within institutional management organizations? Yes, that is one factor, but not
the only one. Good analysts and traders, those with winning records of
selections are absorbed in their focus on essential details
of particular investments in the current time frame. But this kind of highly
competitive knowledge is not enough to make good portfolio managers. The big hurdle that these
bright people need to get over is similar to the selectors using RFPs to pick
managers. A collection of securities having very similar characteristics is
like a symphony orchestra that can all hit the equivalent of high Cs, or a
museum that shows only all the artwork of an artist produced in a single year
of his or her development. The risk in such a collection is the likely homogeneity
of results when impacted by the unknowns that occur.
George
Washington thrived on dealing with the unknowns that others did not perceive. A
sound portfolio can survive and prosper often under a number of different
conditions including the unexpected. This requires moving away from the comfort
zone of intense knowledge into the spheres of the less known. Many analysts and
traders can't comfortably make the jump. Just combining securities of different natures is
not good enough, portfolio managers need to have an effective knowledge of
trading desks. They need to understand what kind of trading orders their traders
can execute well, including the difficult trades. Often the trading desk is the
first source of the recognition that something is happening in a particular
security, sector, or market. I view traders as an important source of market
intelligence. Apparently false rumors which could be true are often as
important to the future as facts that turn out to be true.
Additional concerns of portfolio managers
A working knowledge of
compliance is a necessary set of skills for today’s portfolio manager. Many
smart and essentially honest analysts, traders and
portfolio managers stray over the somewhat indistinct lines of their actions.
Often in their mind obligations to clients lead them to inadvertently breech a
compliance barrier which can prove to be expensive for all concerned. Another
skill in the real world is to manage the portfolio to fulfill its marketing
position. This is what the customer expects. Often part of the commercial
responsibilities of a successful portfolio manager is to become a spokesperson
for the particular product or the firm.
Some senior portfolio managers move up their corporate ladders and
become a managing executive with responsibility for managing people, including
difficult people like themselves. Most are unprepared for this by their
formal education or by the Chartered Financial
Analyst (CFA) readings and exams. Every now and then former analysts that I
have known move up through their organizations and become CEOs of their firms,
including some which are publicly traded. As one moves up in this world the
track record becomes muddied by other people's actions and so selection of
which firm to invest with does not lend itself to statistical sorting.
Selection by DNA
My friend Jason Zweig
has a thought-provoking piece in Saturday's Wall Street Journal, questioning how DNA or more accurately, the critical
life experiences of our parents, shape our investment thinking. He points out that
Ben Graham’s mother was "wiped out" by unwise speculation in 1907,
and a somewhat similar experience by John Templeton's father shaped both of
their investment practices. Graham and Templeton first looked at the
downsides and then for bargains. Sir John carried his management process by
wide diversification across national borders.
What did I learn about
myself from this article? I am driven to attempt to protect my family, including
future generations, from an historical pattern
where eventually the spenders in the family overcome the earners and investments suffer. I am not just thinking in terms of
securities investments, but also life investments of time, money, and a lot of
effort into life activities that are neither personally rewarding nor benefit a
larger group. This has lead me into attempting to set up some controls to
protect members of my family from wasting their opportunities.
Please
share with me confidentially what investment DNA you think is driving your
current investments.
_____________________
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Copyright © 2008 - 2014
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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