The Greatest Investor You’ve Never Heard Of
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When considering the greatest investors of all time, certain names come up: Warren Buffett, Peter Lynch, Stan Druckenmiller.
There are several more that could be added to the debate. But one that’s unlikely to come up is George Michaelis.
And that’s a shame. Because his approach to investing was both timeless and accessible to the average investor. It also achieved incredible results.
Michaelis resurrected a closed-end fund called Source Capital. Source was founded in 1968 by a “gunslinger” of the go-go investment era. Go-go was a time when the public became enamored with the glamour stocks of their day like Xerox and Polaroid. Source not only invested in high-flying growth stocks, but it was especially partial to speculative and illiquid securities. Unsurprisingly, the fund nearly collapsed during the market crash of 1969-70.
Thankfully for Source, Michaelis’s approach couldn’t be more different.
Michaelis was brought into the fund in 1971. The firm had fallen so out of favor that it traded at half its net asset value. This steep discount attracted Buffett’s partner Charlie Munger, who bought 20% of the fund. His position was liquidated in 1977 for double the initial investment. A great return to be sure. But in hindsight, he bailed out too soon.
Michaelis became head of the fund in 1977. In the decade that followed, his patient, value-oriented style helped the fund achieve an 823% total return. That’s over 3x the S&P 500’s return of 266% over the same period.
There isn’t an abundance of material written about Michaelis. He didn’t work at a high-flying hedge fund that amassed billions of dollars. Closed-end funds are an obscure, under-the-radar part of the investment world.
Another factor is that his life was cut short. Michaelis died in a biking accident at the age of 59 in 1996, just as the 24-hour news cycle and era of cable news were taking hold.
Thankfully a few interviews do exist. The most notable was featured in the book The New Money Masters by John Train. If you really dig, you’ll also find them in select newspapers and financial publications. These are 30+ years old, so not all of them are readily accessible on the internet.
I’ve compiled the gems from those interviews. They are separated into 5 Dos and 5 Don’ts. These rules were key to Michaelis’ success and are incredibly relevant today:
The five dos
- Hold some cash. Michaelis likened this to preparing for the proverbial 100-year storm. “It is most unlikely to occur, but one has to survive if it ever does.”
- Pay up if earnings power is exceptional. Michaelis wasn’t a “cigar butt” investor, looking for cheap discarded businesses that may have had one proverbial puff left in them. He was prepared to pay up to buy a stock. But the underlying business had better be quality; that meant high returns on equity and assets, with earnings power that was not hostage to the business cycle.
- Be patient. “I don’t think anyone can time the market.” While the time horizons of those around him were growing increasingly shorter, Michaelis resisted the temptation. “If I’m right about a company, three years from now we’ll be in good shape. But it might be that long.”
- Use investor emotions to your advantage. “I don’t get too optimistic or too pessimistic. I look for businesses where I have great confidence in the long term, and then I go in and accumulate the stock when other people are most pessimistic and sell when everyone is more optimistic.”
- Know your strengths and weaknesses. “There are many ways to succeed (as an investor), but you must learn what you are good at in order to play to those strengths.”
The five don’ts
- Get spooked by volatility. When you own a stock, you own part of an underlying business. “Stocks are much more volatile than the businesses they represent.” We could all benefit from paying less attention to stock price performance and more attention to how the actual businesses are performing.
- Overcomplicate things. Michaelis was wary of derivative instruments. As he put it, just as many people fail in the investment world because they are too smart as because they are too stupid. He believed that intellectual investors can be drawn to complicated ideas at the expense of recognizing the simple and obvious. Notably, Michaelis warned about the opacity and potential chaos in the collateralized mortgage obligation market two decades before they collapsed during the great financial crisis.
- Chase performance. Today we take investment performance monitoring as a given, but in Michaelis’ day the science of tracking portfolios, establishing risk metrics and comparing to appropriate benchmarks was still being developed. He considered it a necessary evil, warning that it was making investors more short-term oriented. “(Investment performance can) tell you how you would do if (the) future were the same as the past – but it won’t be.” Coming from a money manager that could have easily leaned on their track record, that’s saying something.
- Predict. “I manage investments on the presumption that no one can predict the future. I just try to develop intelligent investment approaches based on possible assessments of the future.” Michaelis kept his mind open to a number of outcomes rather than trying to predict which outcome would ultimately play out.
- Wait for market clarity. There is never perfect clarity in financial markets, and the past few years have been no exception. Michaelis reminds us that “the market always goes up well before it’s clear that problems are solvable.”
These lists comprise an investment blueprint that produced nearly unbelievable results. Every investor would do well to take these lessons to heart.
Michael Joseph, CFA is a portfolio manager and deputy chief investment officer at Stansberry Asset Management. He is a member of the CFA Institute’s Practice Analysis Working Body and sits on the board of Copper State Credit Union and the advisory board of the Arizona Council on Economic Education. He can be contacted at [email protected].
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