Five Key Lessons from Top Money Managers E-Book

Scott Kays

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 374

Veröffentlichungsjahr: 2011

Beschreibung

An in-depth look at strategies and techniques of five of the country's best money managers

In Five Key Lessons from Top Money Managers, Scott Kays taps into the investment knowledge of five of the nation's foremost money managers-Bill Nygren, Andy Stephens, Christopher Davis, Bill Fries, and John Calamos. Through extensive interviews with these investment experts, Kays found five principles that are common to all of them. This book discusses each of these five principles in detail-and gives readers specific tools to implement what they've learned by developing a step-by-step process that incorporates all five principles. Kays even teaches readers how to screen for companies that meet the criteria for quality businesses and then analyze three of the qualifying firms to determine if they sell above or below their fair market value.

Leseprobe

CONTENTS

Preface

Chapter 1: The Return of Common Sense

We’ve Overcome Before

The Investment Masters

Investors’ Attitudes are Changing

Chapter 2: Andy Stephens

Personal Background

Stephens’s Investment Process

Constructing a Winning Portfolio

General Portfolio Management Principles

Creating Value

Western Wireless: A Case Analysis

Summary

Chapter 3: Bill Nygren

Personal Background

Nygren’s Investment Process

Home Depot: A Classic Nygren Buy

Summary

Chapter 4: Christopher C. Davis

Personal Background

Davis’s Investment Process

A Tale of Two Companies

Common Mistakes That Growth and Value Investors Make

Sell Discipline

Risk Management

Thematic Investing

The Mistake Wall

The Unrecognized Scandal

Summary

Appendix: Computing The Reinvestment Rate

Chapter 5: Bill Fries

Personal Background

Fries’s Investment Process

Summary

Chapter 6: John Calamos Sr.

Personal Background

Calamos’s Investment Process

Summary

Chapter 7: Five Common Principles of the Professionals

Investment Framework

Five Common Principles

Summary

Chapter 8: The Artist Meets the Technician

Process Comes From Philosophy

Building Your Philosophy

Sample Philosophy

Developing An Investment Process

Summary

Chapter 9: Finding the Blue Light Specials

Price Versus Value

Flying Saucers, Bigfoot, and Stock Market Bargains

Value Investing Versus Growth Investing

Analyzing Companies As Investment Opportunities

Summary

Chapter 10: Valuing Stocks

The Future Value of Money

The Present Value of a Future Income Stream

Developing a Valuation Model

Summary

Chapter 11: A Big Value in an Orange Box

Company Background

Management

Changing of the Guard

Changing the Company and the Culture

Opportunity or Head Fake?

Analysis

Chapter 12: PEs, PEGs, and IRRs

PE Ratio

PEG Ratio

Internal Rate of Return

The Extra Risk of High-Growth Companies

What’s Built Into the Price?

Summary

Chapter 13: Just Do It!

Running the Screen Play

Food, Finance, and Caffeine

One Final Note

Author’s Note

Appendix 1: Investment Resources

Appendix 2: Stock Investment Screen

About the Author

Index

Copyright © 2005 by Scott Kays. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Kays, Scott, 1960–

Five key lessons from top money managers / Scott Kays

p. cm.

Includes bibliographical references.

ISBN-13 978-0-471-71183-4

ISBN-10 0-471-71183-7 (cloth)

1. Portfolio management. 2. Investment analysis. 3. Investment advisors. I. Title.

HG4529.5.K39 2005

332.6—dc22

2004029120

To Lisa. You are truly my best friend. I could never thank you enough for all your love, encouragement, and support.

PREFACE

My firm has managed mutual fund portfolios for a decade and a half. Our selection process typically involves interviewing fund managers when possible before we invest clients’ money in their portfolios. The point of the interviews is to learn all we can about the managers’ strategies—why they buy a stock, why they sell, how they control risk, and so on. Over the years I have had the privilege of interviewing many of the top mutual fund managers in the country. I have also interviewed managers whose performances were less stellar—their funds may have performed well in certain environments, but they lagged their peers over longer periods of time.

I gradually came to realize that the truly outstanding managers who consistently outperform their peers share certain commonalities. I noticed they can better articulate their strategies—not that they are necessarily more formulaic in their approaches, but they have a clearer vision of the kinds of stocks they look for as well as the types of companies they want to avoid. The top managers have risk-control measures in place to limit losses while attempting to maximize their returns. They exercise extreme discipline in their approach and do not change their styles based on popular fads or to boost their short-term performances.

I decided to take a more formal approach to identifying the common practices of top equity managers and interviewed five of the country’s best. I specifically chose managers with very different styles and philosophies because, of course, it would be no surprise to find commonalities among professional investors with similar strategies. As opposed to relegating our discussions to generalities about their strategies, I asked in-depth questions about each step of their processes. One manager actually gave me a copy of the worksheet he uses to value companies. I even delved into the managers’ upbringings to see what early influences shaped their styles. Each manager was very generous with his time and reviewed and edited his chapter to make sure I accurately depicted the essence of his strategy. Chapters 2 through 6 capture the results of those interviews. I then pored over each manager’s process to pinpoint common practices. While each manager had very definite and distinct ideas about investing, I discovered five common practices that they all shared, which I present in Chapter 7.

I strived to make this book different from other books that have featured celebrity money managers in two ways. First, I wanted to give as much detailed information about the actual investment processes of the selected managers as possible. I go beyond their general beliefs and give insight into how they apply their strategies to the actual selection of securities.

Second, as opposed to merely identifying and discussing the managers’ common practices, I devote several chapters to developing an investment model that incorporates those practices. Understanding general investment principles is good, but I endeavor to give you specific tools to apply what you learn. In the final chapter, I examine three companies to illustrate how to use the model I develop.

As you read about our experts’ strategies, it will be glaringly obvious that none of them invest in exactly the same way. There is no single correct way to invest! That is why you must decide what works for you and what doesn’t.

Have fun implementing what you learn and experimenting with new techniques as you improve your skills and build your personal wealth. I hope you experience great rewards, both personally and financially, as you explore the Five Key Lessons from Top Money Managers.

ACKNOWLEDGMENTS

Without fail, each manager I interviewed for this book emphasized that his individual skills alone were not solely responsible for his success—it was a team effort. Writing a book is no different. Without the help of many others to whom I owe great thanks, this book would never have become a reality.

I want to thank each of our managers—John Calamos Sr., Chris Davis, Bill Fries, Bill Nygren, and Andy Stephens—for taking the time to talk with me and share their stories. Frankly, I was surprised at how down-to-earth and willing to help these men were, considering the level of success each has achieved.

Each manager had at least one representative assist me and coordinate their respective manager’s activities for this project. These men and women worked diligently to keep the process moving forward and provided timely responses to my inquiries. Many thanks to David Miller, Dan Greifenkamp, Desiree Malanga, KimMarie Zamot, Russell Wiese, Michael Neary, Kelly Arnold, Jeff Kelley, and Klaris Tamazian.

Susan Golomb proved why she is one of the top literary agents in the business. She believed in this book early on and represented me as the true professional she is. I cannot overstate the value of her services.

My editor, Pamela Van Giessen, championed this book at John Wiley and Sons. She provided valuable advice that made this a better work, and she spent numerous hours explaining the book business to me.

My partner, Alan McKnight, was a patient sounding board and helped me think through many of the concepts I discuss in the book.

My daughter Elizabeth helped me greatly with the final edit. She let me know when I had communicated clearly and when I had missed the mark. How many writers have the benefit of a teenage daughter who is also a published author?

Many thanks to all my children—Elizabeth, Eric, Seth, Rachel, Peyton, and Carole—for putting up with Dad being busy all the time for several months. I’m ready to resume my fatherly duties—visiting colleges, changing diapers, jumping on the trampoline, reading bedtime stories and Bible studies.

Oliver Welch, PhD, JD, CPA, CFP, has been a mentor to me for twenty years. Both a business coach and a life coach, he has always believed I could do what I set my mind to, with God’s help.

My dad, Ancil Kays, was a model of courage to me after losing his love of fifty-six years. He passed away as I was completing this book. I will miss him dearly.

Finally, I want to thank my wife, Lisa. She single-handedly ran the household and homeschooled our children while allowing me to seclude myself in the library and write, all while caring for a newborn. She encouraged me to pursue this idea from its inception, knowing all too well from my first book the sacrifices she would need to make. You’re the best, Sweetheart!

Scott Kays

Atlanta, Georgia

May 2005

More Praise for Five Key Lessons from Top Money Managers

Scott Kays has done a great job of extracting the golden nuggets of investment wisdom from five of the top investment managers. But the best part is the synthesis or “group genius” effect of the common threads they all share. This book is a “must-read” for serious long-term investors and their advisors.

Chris J. Dardaman, Jr.

CPA, CFP®, CIMA®, PFS, and CEO, Polstra & Dardaman, LLC

This book is an outstanding resource for those who either want to understand a bit about how the top money managers work or for those in the investment business to see how various money managers consistently apply their disciplines. Kays has given us a valuable resource which I recommend highly.

Ron Blue

President, Christian Financial Professionals Network (CFPN)

Kays’s book has something for both experienced and less experienced investors so that they can start investing in stocks immediately. The five lessons give insight into what separates the best investors from everybody else. And, unlike many other investment books, you don’t need a finance degree to understand the concepts discussed. It is one book you must read.

H. Oliver Welch

Chairman Emeritus,

Certified Financial Planner Board of Standards

CHAPTER 1

The Return of Common Sense

During the latter half of the 1990s, investors created one of the greatest stock market bubbles in our nation’s history. What began as a typical late-cycle push into aggressive growth stocks morphed into a self-perpetuating feeding frenzy of greed. Mesmerized by technology issues, market participants threw away common-sense investment principles and eventually propelled stock prices to incredible heights. “This time is different” became the mantra of investors.

As the technology bubble swelled, individuals staked their retirements on risky stock market bets. Like lemmings ignoring the cliff ahead, investors piled into grossly overvalued securities simply because they had been racing upward in value, hoping the party would last just long enough for them to make their fortune and leave. However, once they made their fortune, the seduction of still greater gains held them spellbound in a hypnotic clutch and kept them dancing into the wee hours.

A minority resisted the tide and sounded the alarm of a coming correction, but most investors ignored them as too old-fashioned to comprehend the potential of the new economy and the digital age we had entered. The forces of competition no longer applied. Earnings were a passé concept. The first companies to stake their claims in digital territories would rule for the foreseeable future.

Then common sense prevailed. Late in the cycle, many investors realized that entire classes of stocks were glaringly overvalued, and they decided to lock in the extraordinary profits they had garnered. Selling gained traction as stock prices tumbled. The market tried to rally back periodically as those desperate for further profits refused to concede defeat, but blind enthusiasm by investors who came to the party late could not overcome the dreadful fundamentals of a classic bubble.

The prophets of technology did not give up easily. As prices fell, they made their voices heard. “We haven’t seen a decline of 10 percent in tech stocks for years. This is a unique buying opportunity!” “A 20 percent discount in technology prices is unheard of. Buy now!” In the end, however, their efforts proved to be in vain as the turn in investor sentiment drowned their rally cries.

In addition to the valuation problems, other factors colluded to create a perfect economic storm. A contested presidential election that was eventually decided by just a few votes kept Americans glued to their television sets instead of spending at the malls. The impact of September 11, 2001, and the new specter of terrorism wreaked havoc with consumer sentiment. Spiking oil prices acted as a major drag on the economy. Finally, a parade of accounting scandals and corporate fraud destroyed investors’ confidence in the equity markets as several major corporations publicly acknowledged faulty bookkeeping and high-profile CEOs being led away in handcuffs became an all too familiar sight. Before it was all over, the stock market collapsed in an emotional sell-off that spared few companies.

In the two and a half years that followed March 2000, investors lost trillions of dollars of wealth accumulated during the previous five years. Businesses once thought of as keys to unlocking the future potential of our economy were crushed in the worst stock market downturn since the Great Depression. Multitudes of Internet companies folded, and major technology and telecommunication firms struggled for survival. The stocks of many fundamentally sound, reasonably valued corporations plunged alongside those of speculative enterprises. Even businesses such as Home Depot and General Electric, which continued growing their earnings throughout this period, eventually lost over half their market values.

At its nadir, the Standard & Poor’s (S&P) 500 dropped by half, while the tech-laden Nasdaq index lost 72 percent. The Dow Jones Internet index, the superstar of the stock market only a short while earlier, dived 93 percent.

As investors rummaged through the carnage that followed the bursting of the bubble, they asked themselves numerous questions: “How did we let this happen?” “Why didn’t we see this coming?” “How can we prevent something like this from happening again?”

WE’VE OVERCOME BEFORE

With all the problems since the turn of the millennium, many have concluded the stock market no longer represents a field of sound investing. However, the troubles we have faced in recent years, as bad as they seemed, were not too dissimilar from difficulties the financial markets have weathered in times past. Since the early 1960s, we have witnessed the assassination of a president, an unpopular multiyear war, two oil embargoes that eventually drove oil prices up twenty-fold, double-digit inflation, the resignation of a disgraced president, the threat of nuclear war, and unceasing conflicts across the globe. Yet because our economy rests on the foundation of free enterprise principles and the ingenuity of hardworking Americans, we have endured all those past storms and emerged from them a stronger nation. We will do so this time as well.

Key Point

The stock market is essential to the smooth functioning of our economy. If we believe our economy will rebound from its travails and continue to grow, then we must believe that a portfolio of well-run American companies remains a sound and viable investment option. The appropriate question is not whether we should use stocks to accumulate wealth but, rather, how can we distinguish between quality investments and poor ones. Fortunately, there are those who can teach us.

THE INVESTMENT MASTERS

Any field of endeavor, such as sports, business, or music, is typically populated by three classes of participants. First there is the majority, whose members establish the average and defend the status quo. They enjoy the activity in which they are involved, but they never become fanatical about it. Those participants fail to master the finer points that separate the winners from the also-rans.

Then there are those that comprise the minority who consistently perform above the average. Hungry to succeed, those individuals understand there is always room to refine their abilities, so they study their fields and work hard at mastering those things that make a difference in what they can accomplish. They realize that above average performance does not come by luck, but it results from skills they can learn and improve upon. These are the men and women who turn their activity into an art.

But almost assuredly a few individuals go beyond even the attainments of the minority to achieve an elite status and ascend into a class all their own. Those individuals don’t just push the envelope, they establish new envelopes. They are the true masters, the Bobby Fischers, the Wayne Gretzkys, and the Hank Aarons.

So it is in the investment world. A multitude plays the market and wants hot stock tips. Unwilling to learn the rudiments of investing, they invest in companies because “they’ve been going up.” The thrill of the action is as important to them as the profits they make. Those individuals invest for a number of reasons other than maximizing their returns over time. They may be looking for status among their peers by obtaining bragging rights about one of their winners. Or the brokerage commissions may simply be less expensive than airfare to Vegas. Those individuals know little about investing, but because they constitute the majority, their collective opinion often carries sway.

A minority studies the art of investing in a constant effort to increase their knowledge and improve their skills. Those individuals take the time to learn what matters when buying the stocks of publicly traded companies. They don’t gamble; they invest deliberately and purposefully, and they outperform the average investor as a result.

The true masters—legends such as Warren Buffett—set new standards and provide others with the vision for what can be achieved. Those individuals always seem to know what to do during troubling times when others are at a loss. They exercise tremendous discipline, holding religiously to a set of consistent beliefs they have developed over time. They focus on things and care about details others dismiss as unimportant. Most of all, they trust their judgment more than the opinions of others, regardless of how many people contradict them.

Key Point

What is often beguiling about the masters is the simplicity of their techniques. They often act puzzled when quizzed about the secrets of their outstanding success. “There are no secrets,” they will say, “only an unwavering dedication to time-proven principles.”

In the investment arena, many of the complex strategies only draw investors away from what really matters. What kind of pattern is the stock’s price chart forming? What was the stock’s relative strength last week? The masters classify these questions as irrelevant distractions. By staying focused on the important elements, the elite money managers have achieved tremendous success with their straightforward methodologies. Great investments sometimes demand gutsy moves, but more frequently they require executing the fundamentals with a single-minded passion.

The shame is that the straightforwardness of the money masters’ techniques often causes others to overlook those strategies. Investors are frequently not impressed with the faithful execution of investing fundamentals. Instead, they often want something flashy, something unusual, to give them an edge. So they search for something new and different while the money masters keep executing the same techniques that have served them faithfully for years, willing to miss out on fads to stay focused on long-term objectives. The naive talk of what should do well over the next few weeks; the masters consider the long run.

INVESTORS’ ATTITUDES ARE CHANGING

After experiencing the worst bear market in seventy years, like professional baseball players returning to spring training, investors are coming back to the fundamentals. As common sense returns to stock investing, so does the desire to learn what matters when selecting individual securities for accumulating wealth over the long term.

For this book, I have interviewed five of the country’s top money managers. All five are professionals who have consistently outperformed their peers over time.

In the pages that follow, I lay out the investment strategies and philosophies that have made these professionals among the best at what they do. Novice investors can absorb the fundamentals from what our experts graciously shared, while experienced investors can glean much from the masters’ accumulated wisdom and experience. Readers can focus on learning the techniques of any of the professionals, or they can assimilate important points from all of them into their own unique strategy.

Investors often experience frustration because while they understand investment principles, they do not know how to implement what they know. Therefore, instead of just discussing general principles and philosophies, I spend the latter half of the book developing a step-by-step investment process that incorporates the common principles found in the strategies of all the masters. The process breaks down the principles into action steps that ensure each potential investment receives the same level of attention and is graded by the same objective criteria.

CHAPTER 2

Andy Stephens

Lead Portfolio Manager, Artisan Mid-Cap Fund

Andy Stephens has been the Lead Portfolio Manager of the Artisan Mid-Cap Fund since its inception in June 1997. In both 2000 and 2001, the annual Barron’s/Value Line Fund Survey ranked Stephens the number one manager in its Growth Fund Category out of 213 managers.

A $10,000 investment in the Artisan Mid-Cap Fund made at its inauguration would have grown to $33,253 by the end of 2003; the same amount invested in the S&P 500 index would have grown to only $13,854. Like many growth funds, Andy’s fund performed exceptionally well during the bubble years of 1998 and 1999, generating a 110 percent return during that period and walloping the S&P 500 index by 54 percent and the Russell Mid-Cap Growth index by 32 percent. However, Stephens’s careful attention to value helped him continue his exceptional relative performance during the next three bear years, besting the S&P by 31 percent and the Russell index by an astounding 42 percent!