CFA Institute

Beyond Wall Street: The Art of Investing by Steven L. Mintz; Dana Dakin; Thomas WillisonReview by: Martin S. FridsonFinancial Analysts Journal, Vol. 54, No. 6 (Nov. - Dec., 1998), pp. 86-87Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4480128 .

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BOOK REVIEWS

The General Art and the Contrarian Art of Investing

Martin S. Fridson, Editor

Beyond Wall Street: The Art of Investing. By Steven L. Mintz, Dana Dakin, and Thomas Willison. John Wiley & Sons, 605 Third Avenue, New York, NY 10158-0012, 212-850-6000 or 1-800-225-5945. 226 pages, $24.95.

Are institutional investors mis- guided in choosing investment advisors on the basis of specific styles of portfolio management? In any given year, growth funds may outperform value funds or vice versa, but only a handful of managers of any school beat the averages over the long run. Beyond Wall Street: The Art of Investing shows that radically dis- similar approaches are repre- sented among the select few who succeed. Perhaps trustees should simply pick the managers who produce the best results.

During the 31 years in which value apostle John Neff ran the Windsor Funds, the P/E of his holdings typically averaged 9-11 times. In contrast, growth-oriented Brandywine Fund's Foster Friess rarely buys a stock with a P/E of less than 16. At Rosenberg Institu- tional Equity Management (RIEM), quantitative specialist Barr Rosenberg operates "on the conviction that a properly pro- grammed computer can discern price inefficiencies even in a mar- ket that is largely efficient." (p. 60)

Neff reports, on the other hand, that he never used a computer at Windsor Fund. As for turnover, the champion investors' average holding periods vary from five years for Mark Mobius of Temple- ton Emerging Markets Fund to two years for Neff and six months for Friess, whereas Rosenberg sometimes trades in and out of a stock in the space of a few hours.

The common thread among outstanding money managers appears to be superior (but not illicit, i.e., inside) information. Neff is legendary for his com- mand of facts, gathered by poring over financial statements and grilling senior managers. Friess, hoping to pick up tidbits about companies' prospects, goes so far as to interrogate strangers that he meets on airplanes. Rosenberg gains an edge by mobilizing mas- sive data-processing capabilities:

Some 200 phone lines con- nect news of more than 15,000 companies world- wide to RIEM, in Orinda, California. The lines import rivers of data, from fluctuat- ing stock prices and trading volumes in dozens of global markets, to changes in com- panies' financial pictures and reactions by other insti- tutional investors. Comput- er programs crunch these numbers and identify stocks to buy and sell. (p. 60) In his ceaseless search for

promising situations, Mobius logs almost 100,000 air miles annually and often works seven days a week from 8:30 a.m. until as late as midnight. During various

research junkets, by his account, he has crash-landed in a Chilean cornfield and sought cover from gunfire in a Manila hotel during an attempted coup d'etat. For all his trouble, Mobius reckons he has done well if 60 percent of his stock picks work out favorably.

Considering the labor inten- siveness of successful investing, Beyond Wall Street's authors are sound in observing:

For ordinary part-time in- vestors, who lack resources or access to the vast quanti- ties of information that cause securities prices to fluctuate, any attempt to beat the market in the long term pits them against the money managers described in this book and the hun- dreds of other professionals who comb the market daily for underpriced securities. The part-timers' informa- tion search is likely to be fruitless, if not disastrous. (p. 85) Adopted from a Public

Broadcasting System documen- tary, Beyond Wall Street also pro- files investment luininaries William Sharpe, William Gross, Gary Brinson, and Peter Bern- stein. The book contains a fair amount of elementary exposition of financial terms and is clearly intended for a general audience. Seasoned professionals, however, will also find the masters' analyt- ical insights stimulating.

The authors have performed creditably in organizing the mate- rial, despite the fact that their pro- fessional expertise is somewhat

Martin S. Fridson, CFA, is chiefhigh- yield strategist at Merrill Lynch & Company in New York.

86 ?Association for Investment Management and Research

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Book Reviews

tangential to investment manage- ment. Steven L. Mintz is the New York Bureau chief of CFO Maga- zine, and Dana Dakin and Thomas Willison work as marketing and communications consultants to the financial services industry. More intimate familiarity with the field might have prevented such errors as placing Paul Samuelson at the University of Chicago (instead of the Massachusetts Institute of Technology), stating that Mexico let the peso float in late 1995 (instead of 1994), and referring to a supposed 1932 edi- tion of Benjamin Graham and David Dodd's Security Analysis, a book first published in 1934. By the same token, the majority of practitioners probably share Mintz, Dakin, and Willison's mis- conception that it was Michael Milken who first demonstrated, around 1970, that the interest pre- miums on low-rated bonds exceed their default losses. (Harvard pro- fessor Arthur Stone Dewing reached that conclusion in 1926.)1

Similarly, many profession- als believe the canard, repeated in Beyond Wall Street, that former Cit- icorp Chair Walter Wriston "said sovereign debt is always good" (p. 50). In reality, Wriston merely stated (after the developing coun- tries had already begun reneging on their obligations in 1982) that sovereign governments do not undergo bankruptcy proceedings in the manner of insolvent corpo- rations. At the time Citicorp made the developing country loans, Wriston certainly understood that some nations might fail to pay, as had often occurred during his own lifetime.2

Even if Beyond Wall Street recycles a few myths, it also dis- penses unconventional wisdom about the sources of superior investment performance. Mintz et al. make a strong case that relent- less pursuit of not-yet-discounted information can lead to excess returns. Unfortunately, the pro-

cess is so costly in terms of man- hours that few investment organi- zations are likely to undertake it. And without this element, the vaunted built-in advantages of their styles (small-capitalization, momentum, or what have you) will probably avail them naught.

Contrarian Investment Strate- gies: The Next Generation. By David Dreman. Simon & Schuster, 1230 Avenue of the Americas, New York, NY 10020, (212) 698-7000. 464 pages, $25.00.

By 1980 when money manager David Dreman's Contrarian Invest- ment Strategy appeared, scholarly studies by Francis Nicholson and Sanjoy Basu had already begun to verify value investors' long- standing belief that stocks with low P/E multiples produce superior risk-adjusted returns. Since that time, as Dreman shows in Contrar- ian Investment Strategies: The Next Generation, academic support for going against the crowd has mush- roomed. Even stalwart supporter of the efficient markets hypothesis Eugene Fama has confirmed that over long periods, unloved issues, as indicated by their low P/Es and low price-to-book-value ratios, outperform glamour stocks-and not merely as a consequence of higher volatility.

Aiming at the general reader, Forbes columnist Dreman extols the long-run benefits of buying the cheapest quintile of a 1,500- stock large-capitalization uni- verse. Clearly, however, owning a portfolio of 300 securities is not feasible for most individuals. One might suppose, therefore, that Dreman recommends investing in a mutual fund managed solely on the principle of identifying the lowest-P/E quintile.

One would be mistaken. "Buying the entire asset class" is not how most contrarians actual- ize their theories. Instead, they rely on subjective stock picking,

just as their growth stock and emerging markets counterparts do. The reason "style" managers ballyhoo the premium returns of an entire class of stocks is to per- suade prospective clients that they will have the wind at their backs. In fact, by limiting their holdings to potentially unrepre- sentative subsets of the class, the managers often dissipate any inherent advantage of a style.

With commendable generos- ity, Dreman shares his personal criteria for selecting specific con- trarian stocks. Among these guidelines is the perceived ability to maintain high earnings growth and dividend yield. Because of this ultimate reliance on subjec- tive judgmer.ts, Contrarian Invest- ment Strategies can offer no objective, fail-safe technique for avoiding lemons. Westinghouse, which Dreman confesses he bought in 1990 at $25 and bailed out of at $17 (it went down to $10) "scored high by every contrarian strategy."

Retail investors may con- clude that, rather than expose themselves to such huge security- specific risks, they are better off buying Dreman's mutual fund, which has been ranked in the top of its peer group for the past decade. Naturally, these individ- uals must bear in mind that past performance is not necessarily indicative of future results. They should also remember that, as Dreman freely admits, value stocks sometimes underperform other categories for years at a time.

For investment professionals, Contrarian Investment Strategies provides a treasure trove of useful research findings. Readers learn, for example, that positive earnings surprises provide bigger boosts to out-of-favor stocks than to in-favor stocks whereas negative surprises hurt in-favor issues more than out- of-favor issues. Dreman notes that the quantitative selection criteria

November/December 1998 87

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