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Institutional Portfolio Ideas 413

free-fall in late 2008 and early 2009, I noticed several value funds that were
down about as much as some of the growth funds, which is unusual.

Comparing Growth versus Value Results
Over the previous 12 business cycles, it’s been my experience the best
money managers during a cycle produced average annual compounded total
returns of 25% to, in a few rare cases, 30%. This small group consisted of
either growth-stock managers or managers whose most successful invest-
ments were in growth stocks plus a few turnaround situations.
The best undervalued-type managers in the same period averaged only
15% to 20%. A few had gains of over 20%. Most typical investors haven’t
prepared themselves enough to average 25% or more per year, regardless of
the method used.
Value funds will do better in down or poor market periods. Their stocks
typically haven’t gone up a large amount during the prior bull market peri-
ods, and so they will correct less. Therefore, people who want to prove the
value case will pick a market top as the beginning point of a 10-year period
to compare value with growth investing. This is an unfair comparison in
which value investing may “prove” more successful than growth-stock
investing. The reality is if you look at the situation fairly, growth-stock
investing usually outperforms value investing over most periods. I am also
not convinced over- and under-weighting relative to the S&P 500 Index is as
wise as some managers believe.

Weaknesses of the Industry Analyst System

Another widely used expensive and ineffective practice is to hire a large
number of analysts and divvy up coverage by industry.
The typical securities research department has an auto analyst, an elec-
tronics analyst, an oil analyst, a retail analyst, a drug analyst, and on and on.
But this setup is not efficient and tends to perpetuate mediocre perfor-
mance. What does an analyst who is assigned two or three out-of-favor
groups do? Recommend the least bad of all the poor stocks she follows?
On the other hand, the analyst who happens to follow the year’s best-per-
forming group may recommend only two or three winners, missing many
others. When the oil stocks boomed in 1979 and 1980, all of them doubled
or tripled. The best shot up five times or more.
The theory behind dividing up research is to allow them to be an expert
on an industry. In fact, Wall Street firms may hire a chemist from a chemi-
cal company to be their chemical analyst and a Detroit auto specialist to be