I am going to talk about Richard Driehaus´s interview in the book The New Market Wizards of Jack Schwager. A very interesting interview despite its apparent simplicity.
Driehaus was one of the most famous fund managers of the second half of the Twentieth Century; before and after the book.
Richard Driehaus fund manager
He is one of the most respected and followed managers even today.
The first thing to point out about the interview is the fact that when Driehaus was young he would generally find the recommendations in the economic media useless. That is the first thing he learnt about investment.
As we should know, the advice of the “experts” usually comes late; the typical recommendations to invest in stocks that have been hot for a long time.
This man spent part of his youth studying as much economic literature as he could. His first 12 years as a manager he returned a whopping 30%, compared to 16.7 of the SP500.
Richard Driehaus strategy
His basic strategy was analyzing small caps with consistent profits, not very known to the public, and preferably with high PE ratios.
He understood that those high PE ratios could change dramatically over time.
When he joined A. G. Becker it was not after long time that the management noticed that his recommendations were the best of the company, and consequently gave him money to manage.
Richard Driehaus quotes
There is a definite market inefficiency there. Typically, the more the street covers a stock, the less opportunity there is.
One of the keys to his success is to give up stocks that made him a great profit and change to other new ones. I think it is something like investing in a 5 $ stock, waiting for it to go to 50 $ and then sell it, and invest in some new small cap stocks.
Another interesting moment of the interview was when he said that a co-worker gave him 104.000 $ to invest, and it was during the vicious 1973 bear market.
The initial investment was 60.000 $ at the end of the bear market, but his colleague had faith in him and kept the position. Almost 20 years later, the account reached 5.8 million $ after taxes.
That return speaks for itself about the abilities of this man.
Richard Driehaus trading
Despite basing his main analysis on fundamental analysis, Driehaus did not rule out technical analysis. He says about charts:
About twenty-five years. That probably says as much as anything about how helpful and reliable I have found them. They give you a very unemotional insight into a stock in an otherwise emotional market.
He would analyze the stocks and decide if they are good investments or not, but later he will decide when to buy them based on technical analysis and charts.
Despite he is not a short term trader, he says:
I would much rather invest in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around.
This is a very wise saying for small cap stocks.
Normally when a small company or a penny stock is falling 50%, it is a bad buy because those times the stock goes to zero quite often.
His investment ideas and strategies are a bit contrarian, like buying stocks with high PE ratio. Any customer that you advise buying a stock with an 80 PE ratio would run away from you. But Driehaus proved that it you study the stock well that may not be a bad idea; that present PE ratios do not mean much in the future.
This interview is another proof that there are other ways to make money in the markets, and you do not need to do day trading precisely.