Investment Legends: The Wisdom that Leads to Wealth

By Barrie Dunstan

Part-philosophy, part-business strategy and part-biography, Investment Legends provides fascinating insight into the key ingredients required for successful investing, as explored through the experiences and tips of fifteen of the world’s leading investors.

Drawing on his forty years in the business, leading Financial Review journalist, Barrie Dunstan has travelled the globe interviewing the cast of characters in this book. Throwing the net far and wide, Dunstan’s subjects include those virtually born into the business, such as Barton Biggs and Peter Bernstein, as well as others who came to investment via the card tables at Las Vegas or the ski slopes of Switzerland. Each interview provides insights about the legends - who are they, how do they think about investment, what do they believe is most important, why these beliefs matter, and when they might change their mind.

In this captivating book, you’ll get to meet some of the world’s leading lights in the investment world. Share in their secrets to success, and follow their dramatic journeys, led by the guiding hand of wise and insightful author, Barrie Dunstan.

• Language: English
• Publisher: Wiley
• Release date: Jan 24, 2012
• ISBN: 9781742169026

Book preview

Introduction

When you write a book called Investment Legends, at some stage you need to ask: what exactly makes an investment legend? My original idea in 2006 was simply to see how many really interesting investment leaders I could interview for a series in the Australian Financial Review. It was only when the project progressed towards a book and the working title emerged that I began to grapple with the term ‘investment legend’.

It certainly wasn’t a title many of the subjects particularly liked. Indeed, one of the legends suggested that very few of the people in the book would agree to be described as ‘legends’ — and, he added, that attitude was probably why they had been successful. My initial criteria was whether the person was readily recognised in the investment industry and acknowledged as someone who had made a major contribution and impact on investing. In Australia, a few of the overseas legends didn’t necessarily pass that recognition test — but I relied on other household names to carry the list for the newspaper series. In the end, however, I found that I had inadvertently assembled a list of people who were, indeed, significant players in the investment industry. Luckily — since dull subjects don’t work, either for newspaper profiles or books — it also turned out they were very interesting interviewees.

I found I had selected people whose fame was based on a variety of achievements. Some people like Warren Buffett and Charlie Munger, plus Fidelity International’s Anthony Bolton and Capital Group International’s David Fisher, had stellar records of consistently above-average investment returns. Others had taken their ideas and applied them to build or help fashion major investment houses. Bill Gross at PIMCO, Gary Brinson at Brinson Partners and Jack Bogle at Vanguard are well-known examples.

Less well known perhaps, were the stories of Lew Sanders at AllianceBernstein and Ray Dalio at Bridgewater. Then there are the genuine bearish or contrarian characters such as GMO’s Jeremy Grantham and Swiss-born Marc Faber. Apart from the performers and the builders, there also was a group we can call the thinkers: the wise old man of the industry, Peter Bernstein, and Martin Leibowitz with his incredible academic output. And then there were the strategists, such as Barton Biggs and Abby Joseph Cohen; the thinkers whose predictions provide a continual diet for the markets.

Finally there was the question of an Australian legend. It was a daunting task to find someone who would not be overshadowed by the overseas legends — and the task proved too difficult for the AFR series, given the deadlines for copy. However, in 2007 Sir Ron Brierley agreed to represent the locals, with his New Zealand origins providing a nice, rounded Australasian representation. He also added to the spread of investment approaches, as someone who has produced long-term gains from corporate takeovers. He has done this with flair and a certain amount of buccaneering style — and he has earned his legend status by outlasting his competitors of the 1960s, 1970s and 1980s.

Much of this rationalisation of what made an investment legend came later. The initial list was scribbled out on paper in 2006 after the original idea. I had interviewed several of the subjects in the past and the AFR had published them as one-off articles. But I thought the occasional articles didn’t provide full value for the paper or for our readers, considering what these interesting money managers had to say. So the idea emerged to do a series of interviews and to present them at the end of the overseas visit as a series that would provide more impact than single interviews. Luckily the editor, Glenn Burge, agreed.

Conceiving the idea was the easiest part. I then had to make contact with some busy and sometimes reclusive legends — and try and fit them into a reasonable time frame that the AFR’s travel budget could accommodate. The original wish list ranged far and wide and was very hopeful. It included Harry Markovitz, and hedge fund maestros Julian Robertson, George Soros and Mark Holowesko. There were others I sought unsuccessfully: it was not possible to interview the now late Sir John Templeton, founder of the Templeton Group. Former Fidelity star fund manager Peter Lynch also wasn’t available and David Swenson, who runs the highly successful Yale University portfolio, proved elusive. My final list was a compromise between an original wish list and what, finally, was feasible and manageable. In the end, it comprised 15 articles on 16 overseas investment legends, with Warren Buffett and his deputy chairman Charlie Munger bracketed together.

It’s a journalist’s dream to be able to contact well-known people and get an interview. The reality is that, often, you have to be lucky. You also need people to help you. Gary Brinson, for instance, had largely dropped out of sight after leaving the UBS group in 2000. Before then, he was one of the most influential men in investment management. But I happened to interview one of his former colleagues at Brinson Partners, Jeff Diermeier, in Australia and he kindly put me in touch with Brinson. Earlier initial meetings with people like David Fisher and Peter Bernstein had only come about through the intervention and kindness of other local investment people. The meeting with Barton Biggs was organised through his long-time friend, Dave Marvin of Marvin & Palmer. The interviews with Anthony Bolton, Lew Sanders and Marty Leibowitz were organised thanks to the help and cooperation of Australian executives of their groups, such as Michael Bargholz, Australian head of AllianceBernstein who, though overseas, secured Lew Sander’s approval at short notice. Diermeier, the chief executive of the CFA Institute, also invited me to the CFA conference in Zurich, where I was able to interview Marc Faber on his home turf.

So, in May 2006, I set off. All the subjects had agreed to an interview — except for Buffett and Munger who, pursued by journalists all the time, are oblivious to such requests. Instead, with thousands of others, I made the pilgrimage to Omaha, Nebraska, to the Berkshire Hathaway annual meeting. There, instead of just a one or two hour interview, I was able to listen to Munger and Buffett answering questions for about six hours at the annual meeting and several hours of grilling by the press at their press conference the next day.

In the interviews with the legends I was not attempting to secure immediate news stories (though Bill Gross did provide me with a nice tale on Ben Bernanke’s first slip-up in his relatively new role as the chairman of the Federal Reserve Board). In any case, because of the time gap between the interviews and eventual publication, I deliberately did not question the legends in detail on current investment matters. Rather, I sought to find out what had shaped them during their life and their education, what brought them into the industry, a little of their investment philosophy, the people who had influenced them during their career and who, among their peers, they admired.

There was, inevitably in such a group of high achievers, some cases of ego and the occasional disagreement with another legend. But I also discovered a brotherhood among investment managers — a willingness to admire their peers who had succeeded and excelled, and a recognition that what mattered was to achieve the best results for those whose money they were investing. And I found I had, perhaps inadvertently, assembled an array of investment people whose styles and activities covered the vast, complicated world of investment today.

I always had the idea of a book in the back of my mind. Even halfway through the interviews, Ray Dalio told me forcefully that I had to turn the interviews into a book. Subsequently, Peter Bernstein’s typically generous praise emboldened me. When I took the deep breath and committed to the idea, Lesley Beaumont of John Wiley became a willing helper. (Her father, Geoff Wright, had originally turned me into a book author with Understanding Finance with the AFR in the late 1980s.) So, late in 2007 I returned to the original interviews as published in the AFR in October and November of 2006. I have updated them, using additional material or parts omitted originally for space reasons. In addition, most of the legends kindly helped to update their interview by telephone or email and staff at John Wiley guided the project.

By the time this process was underway, world investment markets were being rocked by the turmoil in credit markets, sparked by the subprime crisis in the US. Normally, newspaper journalists thrive on such a major story that sweeps through markets, but, for someone writing a book with a slightly longer life than a news story, this turned out to be a major distraction. In general, because of the fast-moving nature of financial crises, this book does not attempt any detailed analysis of markets or economic conditions as they developed late in 2007 and into 2008.

Some of the legends had been uneasy about aspects of markets in 2006 during the initial interviews. Gary Brinson and Bill Gross, in fact, specifically pinpointed the subprime loan problems in May that year. Jeremy Grantham was also talking a bear market. Many of them have been active commentators on the ongoing saga since the middle of 2007 and this is reflected in some individual interviews. It may take time before it is possible to write definitively on the subprime crisis. What is clear is that it is having (and will continue to have) a major impact on investment markets, but that might need to be the subject of another book.

The subprime crisis has also had its impact on some of the legends. Abby Joseph Cohen at Goldman Sachs moved to a less bullish view. And the bears, such as Marc Faber and Jeremy Grantham, came into their own, with Grantham producing a much more pessimistic view of the next few years than the general consensus in his interview in late 2007. And Peter Bernstein, with his historical perspective, was shaken by the decline.

Now I realise that many readers — while fascinated by the characters represented here — also might hope to find some profitable answers about how to approach their own investments. To allay any disappointment, the book was always intended to be more about the ‘legends’ rather than about ‘investment’. Hopefully, most of the legends reveal something about the qualities it takes to invest successfully and to build a successful investment portfolio and business. Some of them had very strong ideas about how to approach investment; others were agnostic and simply preferred to follow what had worked best for them. But, if I may borrow from Barton Biggs’ own book, Hedgehogging, ‘This book is not a how-to primer. There are no enduring answers about how to invest successfully in these pages because I have none.’

The investment lessons preached by Warren Buffett fill many books (there are several available on the market). The Berkshire approach isn’t about market timing. Buffett and Munger seem to have refined the knack of investing down to a few points: they don’t pretend to know everything and don’t venture beyond the sphere of knowledge. More importantly, they need to trust the managers of businesses they invest in.

What does this collection of legends tell us about investment? The messages are wide and mixed but one important one stands out: you should make large, significant investment decisions only when you can recognise that markets or stocks are at extremes — and these extremes don’t come along very often. The corollary of this is simple: be a long-term investor rather than a short-term speculator. A pretty boring lesson, really. But it was repeated, interview after interview.

Gary Brinson stresses the limited number of examples of extreme valuations in his investment life; Jeremy Grantham thinks there were only a handful of such big moments in his life. Charlie Munger believes investors should follow the rule of successful racehorse betters who wait (and wait . . . and wait, if necessary) until they can see a good bet. His investment partner, Warren Buffett, advises to invest only in what you understand and, in a baseball analogy, preaches to swing only when you get a really ‘fat pitch’. Even apparent contrarians like Marc Faber emphasise that you need to understand economic and market forces before going against the general fashion and Ray Dalio makes it clear that it is important to make sure that you know how, as well as when, to bet.

Against all the active managers trying to find the right stock among thousands, Jack Bogle argues that it’s better to buy the whole haystack in an index fund rather than to spend time and money searching for those needles. While there’s a lot of glamour in what the active managers talk about, for the average investor, the Bogle approach is a good starting point — concentrate your efforts on what you can control, notably costs and taxes.

The Australasian legend, Sir Ron Brierley, might feel diffident among the overseas luminaries. But he has done what most of his local contemporaries failed to do — thrive and survive in the ultra-competitive area of making money via takeovers. He became a legend during the entrepreneurial days in Australia when he realised that many listed companies were worth much more dead than alive. There was one difference in his takeover career: he survived the investment crash and rose again. He also has produced investment returns, running at more than 17 per cent a year compound in Guiness Peat Group shares (his current listed investment vehicle) since he acquired control in 1990.

These investment legends are, like most top people in any industry, intelligent, well educated and street smart. A few, like Peter Bernstein, were marked out for a life in investment, but many arrived via more circuitous routes. Several showed their entrepreneurial streak early by dabbling in the stock market — Ron Brierley in New Zealand, and Ray Dalio and Lew Sanders in the US (in Dalio’s case, like Peter Lynch’s, using tips heard caddying at the local golf course). Bill Gross approached the markets a different way — via the blackjack tables in Las Vegas. Marc Faber gravitated into economics because that course at his Swiss university left him more time for skiing. David Fisher and Anthony Bolton drifted into investment from other areas of business, while Barton Biggs, though a son of an investment manager, tried writing and teaching before finding his niche. (Biggs, who studied literature at Yale under Robert Penn Warren, produced a delightful book, Hedgehogging, in 2006, which was ostensibly about investment management and hedge funds, but which also contained beautifully crafted essays on Fibonacci numbers and the 20th-century economic great, John Maynard Keynes.)

Jeremy Grantham migrated from England to America to the Harvard Business School (and to escape the drudgery of his stepfather’s business) — and found himself in Boston at the right time in the go-go 1970s. Both Lew Sanders and Abby Joseph Cohen recognised earlier than many in the investment industry how computers could be harnessed to make analysis easier, quicker and better. Marty Leibowitz’s training and inclination appeared to set him up for life as a mathematical-based investment academic, but he still spent many fruitful years in Salomon’s bond department and running TIAA-CREF, the largest defined contribution pension fund in the US, as its chief investment officer. Gary Brinson overcame modest beginnings to specialise in finance — and fell in love with the new capital markets theorists, while Jack Bogle discovered mutual funds and indexing in his Princeton senior thesis (sparked by an article in Fortune Magazine).

Many of the legends have played a major role in shaping the business of investment management, both in theory and in practice. Some have been mainly market players, adapting and learning their skills over the years. Others — such as Gary Brinson and especially Marty Leibowitz — have been responsible for pushing out the boundaries of investment thinking. Bill Gross was one of the first to recognise how to apply theories about generating alpha and transporting it across asset classes. Similarly, Ray Dalio recognised early how the distinction between alpha and beta sources of investment returns could be used in practical investments — and coined his own term for it: post-modern portfolio theory.

And, while all this was happening, Peter Bernstein was thinking, writing and observing it all — and, essentially, pulling the threads together to make sense of it in his two books, Capital Ideas and Capital Ideas Evolving. If it had not been destined by a strict alphabetical order, I would have made Bernstein the first chapter anyway, as the quintessential investment legend who, with his own insights and contributions, has made sense for us of the unprecedented changes in investment since the 1950s.

Warren Buffett is almost in a category of his own. He has been the subject of hundreds of books and is the world’s best known and most celebrated investment manager, as demonstrated by his multi-billionaire status. He has an encyclopedic memory of investment decisions and one-liners, is a wizard at the bridge table and had read every book on investment in the Omaha public library before he was 11 (some of them twice). He has a sense of fun that extends to entertaining shareholders by strumming the ukulele. Most significantly, however, he and Charlie Munger have produced investment results which, according to investment theory, simply shouldn’t be possible. But still, the figures show, they have outperformed over more than 30 years. No wonder shareholders of Berkshire Hathaway fret about who can replace their chairman. Charlie Munger, the often neglected one of the pair, has a keenly honed mind which ranges across many disciplines. He can turn in an instant from wisecracks to talking about Gaussian distributions (named after the German Carl Friedrich Gauss, who first set out the normal distribution curve in 1809).

By the time I had completed the last interview with Anthony Bolton in London (who combined meticulous research and long-running investment outperformance with composing modern classical music), I felt had been privileged to talk with some of the most influential people in the investment industry. I had heard some fascinating stories of how these people found their way into their jobs and seen first hand, their enthusiasm and passion for their job.

I have been a reader of books on investment legends for decades, such as John Train’s Money Masters series and Peter Lynch’s One Up on Wall Street. In preparing for the interviews and writing the book, I turned to several more recent volumes on Warren Buffett and to Charles Ellis’ Wall Street People. In addition, Ellis’ book about Capital Group, Capital, was a great help in understanding David Fisher.

This book, incidentally, also illustrates the fundamental interdependence of all players in the investment markets. While Fisher is a fundamental, active stock-picker, the Capital author, Ellis, is a great believer in the virtues of index investing and his book has a foreword by Burton Malkiel, another index believer (and author of A Random Walk Down Wall Street). Indeed, Malkiel remarks in his foreword that it might seem he and Ellis were pretty unlikely people to produce a book about a company which has prospered by active stock picking. This in turn led Malkiel to defend the efficient market theory (on which index investing is based) in an intriguing way. He argued that the theory of efficient markets needs a few professionals (presumably like Fisher) operating to ensure all the information is incorporated immediately into markets. In return for their time and effort, they are ‘allowed’ to earn above-average market returns. As Malkiel argues, ‘the market could not be efficient if everyone simply invested in index funds. Paradoxical as it may sound, markets need firms such as Capital to ensure that low-cost indexing is, in fact, a winning strategy’.

Charles Ellis had first entered my investment consciousness back in the late 1980s when I belatedly discovered his paper called The Loser’s Game, in which he compared the investment game to the game of tennis in which the professionals aimed for the winning shots. It was not until 2007 that I managed to meet Ellis and discover another ‘titan of finance’ (as his friend Malkiel calls him). Typically unfazed by my late recognition of him, Ellis generously agreed to write the preface for this book. Given his place in the industry and his own book, Wall Street People (with James R Vertin, 2001, John Wiley & Sons) it might have been better if he had done the entire book.

It is a measure of the legend status of my subjects that, after doing the interviews once for the newspaper series, most of them agreed to back-up interviews for this book. I thank them; they were quality professionals — and also some of the nicest people I’ve interviewed. I hope this book manages to capture their experience, skill, passion and enthusiasm.

Barrie Dunstan

Melbourne, Australia

April 2008

Chapter 1

The Chronicler and Historian

Everybody simply forgot that risk exists. Amazing — never been anything like [the subprime crisis] that I can think of.

Peter Bernstein

Peter Bernstein was a troubled investment legend during in the 2007 travails. Always a student of risk, he has been troubled by the reckless disregard of it by