A ROAD MAP TO WEALTH FROM THE WORLD’S BEST MONEY MANAGERS PETER J. TANOUS FOREWORD BY ANDREW TOBIAS PREFACE BY RICHARD C. BREEDEN Prentice Hall Direct Library of Congress Cataloging-in-Publication Data Tanous, Peter. Investment Gurus / Peter Tanous. p. cm. ISBN 0-7865-8714-8 1. Investment advisors - United States - Interviews. 2. Stocks. 3. Portfolio management. I. Title. HG4928.5.T36 1997 332.6 - dc20 96-42939 CIP © 1997 by Peter Tanous Foreword copyright 1997 Andrew Tobias Preface copyright 1997 Richard C. Breeden All rights reserved. No part of this book may be reproduced in any form or by any means, without permission in writing from the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles Jointly Adapted by a Committee of the American Bar Association and a Committee of Publishers and Associations ISBN 0-7865-8713-X Prentice-Hall International (UK) Limited, London Prentice-Hall of Australia Pty. Limited, Sydney Prentice-Hall Canada Inc., Toronto Prentice-Hall Hispanoamericana, S.A., Mexico Prentice-Hall of India Private Limited, New Delhi Prentice-Hall of Japan, Inc., Tokyo Simon & Schuster Asia Pte. Ltd., Singapore Editora Prentice-Hall do Brasil, Ltda., Rio de Janeiro DEDICATION Most of us recall individuals who influenced our lives early on, perhaps in school or in early career stages. I dedicate this book to five wise men who influenced me not early, but later in my personal and professional life. It just proves that you are never too old to learn. To: George N. Frem Joseph J. Jacobs Charles H. Percy John H. Sununu and the late Philip C. Habib ABOUT THE AUTHOR PETER J. TANOUS is President of Lynx Investment Advisory, Inc. of Washington D.C., a registered investment advisor. Lynx provides consulting services relating to the selection and monitoring of money managers. Its clients include institutions and individuals worldwide. Before founding Lynx, Tanous was Executive Vice President and a director of Bank Audi (U.S.A.) in New York City. Prior to joining Bank Audi, he was Chairman of Petra Capital Cor- poration, a New York Stock Exchange member firm, which he co- founded. During his 15 years at Smith Barney, Inc., Tanous served as the International Director. He was also manager of its Paris office and a Director and member of the Executive Committee of Smith Barney, International. He is currently a director of Cedars Bank in Los Angeles, and a director of Interstate Resources Inc., a paper manufacturing company based in Virginia. Mr. Tanous has written articles on the securities industry which have appeared in French and English publications. In addition, he has authored and co-authored three novels which have been translated into several foreign languages. Mr. Tanous received a Bachelor of Arts degree in economics from Georgetown University in 1960. He has served as a member of Board of Advisors of Georgetown’s College of Arts and Sciences. A long time resident of New York City prior to moving to Washington D.C., he served as a trustee of the Browning School, a private school in Manhattan. In 1991, Mr. Tanous was the recipient of the American Task Force for Lebanon Philip C. Habib Award for Distinguished Public Service whose prior recipients have included Senator George Mitchell, Gov- ernor John Sununu, and Senator Bob Dole. He was awarded the Ellis Island Medal of Honor in 1994. Peter Tanous is married to the former Ann MacConnell. They have three grown children. CONTENTS Preface ix Foreword xiii Part One: The Landscape 1 2 Introduction 12 Tools of the Trade Part Two: The Gurus 29 31 Michael Price 49 Richard H. Driehaus 70 Mario Gabelli 80 William F. Sharpe 99 Peter Lynch 118 Laura J. Sloate 133 Scott Sterling Johnston 149 Eugene Fama 160 Bruce Sherman 177 Eric Ryback 191 Merton Miller 206 Foster Friess 221 Van Schreiber 231 Rex Sinquefield 254 John Ballen 271 Roger F. Murray 288 Robert B. Gillam 306 David E. Shaw Part Three: The Route 329 330 Your Road Map to Wealth 349 Crafting an Intelligent Personal Investment Plan PREFACE America’s investment markets are the most active and efficient in the world. These markets provide capital to more than 10,000 com- panies ranging from the tiniest venture-stage company to giant multinationals. Local, state, and national government agencies and a host of trusts, partnerships, and other special purpose entities also seek funds. To a degree strikingly different from most other countries that rely nearly exclusively on their banking system, the United States public securities market is the principal avenue for financing the broader United States economy. Issuers offer securities ranging from traditional stocks and bonds to highly complex structured instruments and esoteric derivatives. Thousands of different mutual funds offer individual investors both diversification and professional management. For investors, this pro- fusion of issuers represents a world of investment opportunity. Investor choice in the American capital market extends beyond the type of instrument and the specific issuer to span the spectrum of risk. Under our system, investors have the right to take risks according to their own risk tolerance and to seek out extraordinary gain even at the risk of painful loss. With millions of individual decisions eval- uating risk and reward, the market as a whole represents a distillation of economic judgment about risk that is far more accurate than any government body could ever hope to be. If choice is the dominant characteristic of this extraordinary market, choice also complicates the task facing any particular investor. In Investment Gurus, Peter Tanous interviews many of the nation’s leading investment managers and some of the academics who have helped establish the intellectual underpinning for today’s investment strategies. These interviews present, in their own words, the strategies that some of the best-known professionals have brought to their in- vesting. These stars of the investment profession express many views on the relative merits of growth and value stocks and on different theories for producing above-average returns. As we listen to what the suc- cessful managers say, it becomes clear that choosing risk wisely in order to obtain higher than market returns is in many respects the