TMF: There are plenty of individual investors out there who try to pick stocks for themselves, as opposed to going into mutual funds. Given that you folks at Legg Mason and all the other fund companies out there are doing this full time, are so steeped in this, and bring so much to the table, is it realistic to think that individual investors can compete? What is your advice for the individual investor?
Gay: It truly is a profession. It's not something, we believe in any way, that you can do part time. So we take our responsibility very seriously, and we are a 100% dedicated and intensely passionate about finding the best business value for these companies. I know many individuals can be quite successful and have a natural gift for finding undervalued securities. But you really have to be careful about your level of diversification and understand your time horizon.
I think many people -- maybe it's an influence of the "information overload" society that we have -- want instant gratification. The very best investment managers of our time are ones that tend to be very long-term oriented. In fact, Michael Mauboussin did a study last year before he joined us, where he did a survey of the very best money managers. The qualifications were they had to run the same pool of assets for at least 10 years. I think there was a certain threshold of assets. He didn't want to compare a micro account manager with a super large-cap manager. The things that he found were that the managers that produce the best long-term returns tend to have very low turnover and, interestingly, lived outside of New York and Boston.
TMF: Like Omaha and Baltimore....
Gay: He did this before he came to Legg Mason. And Bill [Miller] was one of the managers on the list. But yeah, they were in Denver, Colo. They were in Omaha. They were in Tennessee. Mason Hawkins at Southeastern Asset Management, I think, was one of the ones on the list. So they were in places where the noise factor is not as high. I think there's a lot to be said for being outside of New York and not constantly keeping up with the neighbors. It's a really interesting read, and I think it is really good advice. Michael also wrote a piece called "Decision Making for Investors."
TMF: I've read that; it was terrific.
Gay: Part of what we hope to be able to provide to all of our investors are these thought pieces that Michael is working on that hopefully can help improve their decision making as well. Michael, Bill, and Ira Malis, our director of research, attended a Santa Fe Institute conference not too long ago. It was called "Sports as a Complex Adaptive System." So we were all, of course, giving them a hard time about this. But it was actually a really interesting seminar -- did you read the book Moneyball?
TMF: I sure did.
Gay: Well, Paul DePodesta [the former Oakland Athletics assistant general manager, who was featured in Moneyball] was one of the speakers. Basically, the idea behind Moneyball, as you know, is that statistics can tell you a lot more about the potential for success than observations. And I think those individuals and many money managers tend to overweight things that are not as important and underweight things that are very important longer term. So one of the pieces Michael Mauboussin just wrote, which hopefully will be released and posted soon, is just basically taking those ideas that they gained from exposure to this group of sports people. [Note: Bill Nygren also talked about Moneyball and sports as they relate to investing.]
TMF: Let's talk about the temperament of successful investors. A while ago, there was an article that described Bill Miller immediately after 9/11 and how he didn't let emotions affect his investment process.
Gay: I know the article that you're talking about, and I thought that was a little of a cold characterization. I promise you, he was incredibly upset. Obviously, especially given how close it was to our industry, it was a huge effect on Bill personally and all of us here. The thing is, he is unbelievable at separating emotions from fundamentals. And I think that this idea about the market that we talked about at the beginning of our conversation about why certain things happen in the market, sometimes they happen just because the market got bad news about some economic report. Maybe the market is up today because consumer confidence is at a two-year high. Maybe the market was down last week because a couple of companies didn't say the next quarter's numbers were going to be as good as the whisper number.
Many times you observe this disconnect between fundamentals of a business and emotional reasons why certain companies trade them. You would not be surprised if, God forbid, we had a terrorist attack in New York or Washington, if the market's going to be down. Everyone would expect that. Did the value of IBM (NYSE: IBM ) change from one day to the next just because of that? Well, maybe you could justify some level of degradation in their business level because of people's behavior, but really, you can't make a direct correlation. And that, I think, was the thrust of that. He's very good about being analytical about every situation and saying, "Okay, let's start over. Let's understand what the basic picture is and getting the right description down of a business," and then making a decision after that. I have been here for quite a long time relative to the time he's been here; it's truly amazing to observe how rational he is.
Read Matt Logan's complete interview with Mary Chris Gay:
- Lessons From the Value Trust
- Pay Up for Growth
- Beat the S&P 500
- Golden Rule of Investing
- Value in a Diverse Team
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