Morningstar Magazine - June/July 2017 - 16
Dispatches
The World's Greatest
Investors And
who are the successors
to investing's
great personalities?
THE OLD SQUIRREL
Ralph Wanger
The views expressed here are those of the
author and do not necessarily reflect the views
of Morningstar.
For the magazine's 10th anniversary issue, the
editor-in-chief asked me to name my all-time
favorite investors. (He forgot to specify
that they be living American stock investors.)
Or, he suggested, I could write about the future
of mutual funds. I did both.
Best Investors of All Time
Most of the really decisive investments in
the world have been in real estate. Some were
by really good guys making a living at it,
such as George Washington, who was very active
in frontier real estate as an explorer, surveyor,
and speculator. The westward expansion
of the United States at the end of the 18th century
was really a real estate boom with lasting
consequences. The champion success in this area
was Washington's Virginia buddy, Tom Jefferson,
who casually bought the whole center of
the continent from France, the Louisiana Purchase,
doubling the size of the United States for the
cost of a few cents an acre.
Three centuries before then, the Spanish rulers
Ferdinand and Isabella financed the exploration of
the New World for very little money, receiving
the unparalleled gold and silver wealth of Mexico
and Peru, in what was one of the highest ROI
trades imaginable. Spain spent the next 200 years
as the richest country in the world.
16
Morningstar June/July 2017
Leaping forward to the 20th century, Samuel Insull
built on the new electric technology of Edison,
Westinghouse, and Tesla. Insull invented the
corporate structure of the electric utility industry,
and he even helped form its government regulatory
agencies. This industry structure allowed the
easy financing of the utilities, and so electricity
output grew at 7% per year from 1910 to 1970.
This predictable growth allowed Insull's companies
to expand on high-rated bonds. Insull and his
imitators realized that they could create holding
companies to own these stable-growth
utilities by adding on another layer of bonds and
preferred stock, making Insull one of the richest
men in the world by the mid-1920s. The Great
Depression crushed the utility holding companies.
Insull went bankrupt and is regarded as a
failure by some historians, but the utility corporate
structure was a sound idea, and his legacy
continues to this day.
Mark Twain was the greatest American writer, but
not America's greatest investor. He had some
adventures with gold stocks in the late 19th century,
causing him to define a gold mine as "a hole
in the ground owned by a liar." However, his big
loss was in a venture capital project. He lost
all his money on an auto-typesetting machine that
didn't work out, leaving him bankrupt at age 59.
The public benefited because Twain had
to write many more books than he would have
otherwise to support his family.
The investor who did the most for me and my
Acorn Fund was an analyst named Perry Swenson,
who in 1973 told me that Houston Oil & Minerals
had discovered a large gas field in Galveston
Bay in Texas. I loaded up on the stock, and it was
the only stock in the portfolio that went up
in the 1973-74 bear market. Without that one
stock, it is likely that we would have closed
the fund in disgust, and you would never have had
the chance to read this charming essay.
The Future of Mutual Funds
The Acorn Fund made its reputation as a smallcap fund. Small-cap investing is hazardous
because every year small-cap companies become
zero-cap companies. It takes a lot of discipline and
good luck to make it work, and SEC rules
have made it hard for analysts to talk to company
managers. We did not use inside information in
our investing, but we did have the ability to
understand the long-term prospects for a company,
which led to an outstanding record.
Today, nobody wants to do the work to sift through
lots of stock stories, and unmanaged exchangetraded funds have taken over the market.
Actively managed mutual funds are in steep
decline and will be a small part of the investment world of the future. That will have
some effects on venture capital and private equity
investing, because without mutual funds to buy
IPOs, the capital formation process in this country
will have to develop some new channels.
Ambitious young people will always try to
make some money in the financial industry, and
if stock-picking becomes unpopular, then
the only way to do something clever will be in
developing asset-allocation schemes. Historically,
market-timing has been a foolish pursuit,
but it is possible that with the use of Big Data and
artificial intelligence, there will be a market
for some aggressive new funds.
There are some important factors that make
market-timing hard to do:
1 The market rises most of the time. There is
a big cost of being out of the market when the
market is still rising.
2 The stock market is a leading indicator, so most
economic time series cannot predict the market.
3 Human emotion will make you bullish at tops
and bearish at bottoms, so you will be continually
missing the moves.
I will miss the era of colorful fund managers
and bold investors. People like Peter Lynch, Mario
Gabelli, Ron Baron, and Warren Buffett are
great characters who have made many investors
a lot of money. There may be no successors
to these people. The move to passive ETF funds
has created a dramatic oversimplification
of mutual funds. The stories and adventures of
running a fund is being reduced to the triviality of
using an ATM. K
Ralph Wanger, CFA, ran Columbia Acorn Funds from 1970
to 2003.
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Contents
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