Investors and friends always used to ask me what being a portfolio manager was like. Sometimes, like in a conference for instance, I couldn\’t really tell the stories I wanted to. I needed to keep things professional and, obviously, in sales mode, since many portfolio managers do.
Now that I no longer manage money, though, I can reveal several stories from the trenches from those days.
Investment committees are a pain
Many fund managers are accountable to an investment committee to get trades approved by senior executives. These committees are a joke, since the manager knows a good investment far, far better. Also, with any committee, trade ideas have a tendency to gravitate towards a common average, along with a manager is always trying instead to produce uncommon returns.
Once, while I was on holiday long ago, my investment committee chose to sell our shares of ATI Technologies Inc. At the time, my fund was the biggest shareholder within the company, and my committee didn\’t like the stock’s technical chart pattern.
Upon my return, I had been livid and threatened to quit. We bought back all of the stock at a higher level, and that i had some sweet revenge when ATI was acquired at a big premium about a year later.
Luck is sometimes more important than skill
In 1997, my mutual fund owned Bre-X Minerals Ltd. We\’d bought very early also it kept rising so we kept selling it. However i still had a decent-sized position.
My fund was supposed to be exclusively small caps, and Bre-X had quickly blossomed into a $4-billion company. My boss kept saying to sell it because it was no longer a little cap. I argued that I bought it if this was small, and so i should still be allowed to keep some.
But he kept on about it, and so i sold all my Bre-X shares, some of them to my boss\’s mutual fund, to keep the peace. A couple of months later, Bre-X was revealed to become a total fraud, but I could happily let my investors know that I had exited my entire position prior to it imploded. I looked like a hero, however it was complete luck.
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Pitching an idea to others might help your fund
In the spring of 2008, I found myself in Boston in front of 25 investment managers and analysts from Fidelity Investments, the world’s largest mutual fund manager. My colleagues and I were there to talk about an IPO, but they only wanted our views on one stock, Timminco Ltd., which was the hottest stock around at the time.
We spent 45 minutes explaining the silicon producer’s attributes, rather than making the initial presentation. Fidelity did not own any shares at the time, but six weeks later, it revealed that it had accumulated a lot more than 14% of the company, which explained a lot of the stock’s increase after our trip.
Ultimately, the stock was a disaster, but knowing that 25 from the brightest minds in the industry thought it was great helped ease the pain when it eventually blew up. And, obviously, our fund benefited while Fidelity was pushing the cost of the fill up with their huge buying spree.
It can be easy to be fooled despite a team of analysts
The fake Avon Products Inc. takeover proposal last week reminded me of many the same situation in the past. It seems anyone can write a press release about a takeover offer, and cause plenty of stock activity with no justified basis or intent to actually make a valid takeover offer.
In July 2005, the company behind the World Poker Tour was public (WPT Enterprises Inc.), and headlines trumpeted a cash takeover in a 100% premium. The stock traded at US$17, and the US$700-million bid was for US$35 per share.
Our investment team checked out the deal and decided it had been worth playing, so we started buying. As it turns out, the deal was almost as fake because the recent Avon one, and that we lost a big chunk of money on the trade.
That the so-called bid was initiated by one of the world’s best poker players, Doyle Brunson, didn\’t make us feel any better. We were completely and totally bluffed on that one. WPT was eventually bought, at a very low price, and also the shell company is now in the oil and gas business.
Sometimes everything works out just perfectly
An analyst and that i in 2009 discovered small businesses called Diedrich Coffee when it was trading near US$2 per share. What tweaked our interest? The company reported solid earnings and the shares had hit a brand new high, which we always want to see.
We thought, after doing some research, it looked very good, so we started buying. Our buying (it had been a small company at the time) pushed shares close to US$4. We thought it might double after that, so we were fine with that.
Well, business exploded out of the blue (it made K-Cups for coffee makers, which were removing like a rocket) and the shares quickly hit US$8, then US$10, then US$15, then US$20 – all within the space of the year. Our boss thought i was geniuses.
Then among the best things a fund manager may go through happened: antique dealer war erupted for Diedrich between Keurig Green Mountain and Peet\’s Coffee & Tea. The ultimate takeover bid by Green Mountain was US$35 per share.
That one certainly composed for a few of our mistakes that year.
Illustration by Chloe Cushman/National Post
Peter Hodson, CFA, is CEO of 5i Research Inc., a completely independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).