Page 553 - How to Make Money in Stocks Trilogy

420 INVESTING LIKE A PROFESSIONAL

We provided product to another Midwest institution, but it was of doubt-
ful value because the institution had a cast-in-concrete belief that any
potential investment had to be screened to see if it passed an undervalued
model. The best investments rarely show up on any undervalued model, and
there’s probably no way this institution will produce first-rate results until it
throws out the model. This isn’t easy for large organizations to do. It’s like
asking a Baptist to become a Catholic or vice versa.
Some large money-management companies with average records tend to
fire the head of the investment department and then look for a replacement
who invests pretty much the same way. Naturally, this doesn’t solve the
problem of deficient investment methods. Security Pacific Bank in Los
Angeles was an exception to this rule. In July 1981, it made a change in its
top investment management. It brought in an individual with a completely
different approach, a superior investment philosophy, and an outstanding
performance record. The results were dramatic and were accomplished
almost overnight. In 1982, Security Pacific’s Fund G was ranked number
one in the country.

Penny-Wise and Performance-Foolish
Some corporations put too much emphasis on saving management fees, par-
ticularly when they have giant funds to be managed. It’s usually an actuary
who convinces them of the money their pension fund can save by shaving
1
the fee by ⁄4 of 1%.
If corporations have billions of dollars to be managed, it makes sense for
them to increase their fees and incentives so they can hire the best money
managers in the business. The better managers will earn the extra 0.25% or
0.50% ten times over. The last thing you ever want is cheap advice in the
stock market. If you were going to have open-heart surgery, would you look
for the doctor who’ll charge the absolute least?

How to Select and Measure Money Managers

Here are a few tips for organizations that want to farm out their funds to
several money managers.
In general, portfolio managers should be given a complete cycle before
their performance is reviewed for the purpose of deciding whether to
change managers. Give them from the peak of one bull market period to
the peak of the next or from the trough of one cycle to the trough of
another. This will usually cover a three- or four-year period and allow all
managers to go through both an up market and a down market. At the end