Fund masters reveal their secrets

By HANK EZELL

Cox News Service

June 19, 2005

ATLANTA — Suppose you could corral five top-rank mutual fund managers and get each one to explain how he goes about picking stocks.

Scott Kays, founder of Atlanta-based Kays Financial Advisory Corp., managed to do just that. "I thought that if I can find those things that most top money managers do, those have to be important things people should be focusing on," said Kays, a certified financial planner.

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The results are in his book, "5 Key Lessons From Top Money Managers," which will be released next month.

Fair warning: Do not expect this book to make you rich. Instead, expect it to explain what you'll have to do to improve your chances of being a successful investor.

It's a workbook, not a wish book.

Kays interviewed Andy Stephens of the Artisan Midcap Fund, Bill Nygren of Oakmark and Oakmark Select, Christopher C. Davis of Selected American Shares, Bill Fries of the Thornburg Value and Thornburg International Value, and John Calamos Sr. of Calamos Growth Fund.

Last week he sat down for an interview himself.

Q: Do you think most people do not have a systematic way of picking their investments?

A: Very few people have a systematic way. Probably the biggest thing these money managers do in common is that they know what they believe. They have thought through virtually every phase of the investment process and determined: 'Here's what I believe. Here's how I believe extraordinary situations should be handled. Here's what I'm trying to accomplish.'

That's probably the biggest thing that most individual investors lack. If you ask them what they're trying to do with their investments, the answer most often is: 'Make money. Try to find a stock that's going up.' But what kind of stock is that? What exactly are you looking for?

Q: Do most people take it out of magazines or newspapers or from buddies over the back fence?

A: I think so. There's so much more to determining if a company is quality or not. It's not that complex or complicated. You just have to know the right things to look for.

The big thing is most individual investors don't want to take a lot of time to look at ideas. And they don't know what to focus on. That's the key thing with these managers. They know what's important, they know what to focus on.

Q: If you want to work out your own investment philosophy and apply it diligently, how much time are we talking about?

A: It just depends on how far a person wants to go. You can do this with relatively little time. I think you can make very good, educated decisions about a stock by spending maybe 45 minutes to an hour on a company. I think you need to spend at least that much time; otherwise you're guessing.

But with 45 minutes to an hour, you can look up recent news, you can look up analysts' comments. You can make basic valuation calculations and have a pretty good idea if this company should do well or not.

Q: In your own investments, do you follow one of these guys, or have you synthesized from them? What have you learned?

A: Personally, I've tried to take things from each of them. One of the biggest things I learned is that there is a difference between selecting securities and managing a portfolio. I like an analogy that Andy Stevens used. He said, 'Portfolio management is having the most money in investments that do well and the least money in investments that do poorly.'

That's great. What he says is, you're going to make mistakes. The key is to try to minimize the impact from those mistakes and maximize the benefits from the stocks that do well.

Q: If you're an individual and you need to start from Square One, how do you come by that confidence?

A: The biggest thing a beginner can do is read and learn and start practicing. And don't bet the farm at first. Take time to get experience without putting huge amounts of capital at risk. Take the time to learn from what you're doing.

Understand upfront that you're going to make mistakes. But learn from those mistakes. I asked Bill Nygren, 'Of the investments you've made, what percent do you think were mistakes?' He told me, '40 percent.' Blew me away. [But] every one of these men said you're going to make mistakes. Don't be afraid of it, learn from it.

Q: You talk about the five key lessons from top money managers. Can you say briefly what they are and what we ought to know about them?

A: First, the managers have a very defined philosophy. They have thought through what they believe. Your philosophy forms the framework for every decision you make. It says, 'This is why you buy and this is why you sell.'

The second commonality with these guys is that they have very defined processes to implement their philosophies. The philosophy says, 'Here is what I want to accomplish.' The process says, 'Here's how I'm going to do it.' And they follow the same process every single time they make an investment or sell an investment. That way nothing falls through the cracks.

The third thing is they all buy quality companies. They would define a quality company as one that has sustainable earnings growth. In other words, they're not looking for a cheap company, one that may be a bad company but hopefully will get a rebound. They're looking for companies which are growing their value consistently. They're looking at companies as businesses, not just sheets of paper they they're buying.

The fourth commonality is that they just refuse to overpay for the companies they buy. Every one of them calculates what a company is worth before they buy it. They won't buy it until it's selling at that figure or less. They won't overpay.

The fifth thing is that they invest; they don't speculate. A lot of investors speculate and don't even realize it. Speculation is when you buy something just because you think it's going to go up in value. Investing is about buying a company at or below its fair value and that is growing its value.

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