Tanous Details Anatomy of Investment Bankers

0 Comments | Insight on the News, Nov 9, 1998 | by Stephen Goode

According to Peter Tanous, a stockbroker with a stellar short-term record may be a shooting star about to flame out. He advises investors to look at market strategy and investment theory.

Peter J. Tanous likes to joke that "an economist is someone who didn't have the personality to become an accountant." He has a degree in economics and is president of fan investment-advisory group but has no shortage of personality. Tanous has written a book, Investment Gurus, that has been so successful in hardback (50,000 copies sold) that it is being brought out in paperback in January, along with the hardback of his new book The Wealth Equation.

Investment Gurus, subtitled A Road Map to Wealth From the World's Best Money Managers, contains Tanous' conversations with 18 men and women, from Michael Price and Richard H. Driehaus to Laura J. Sloate and David E. Shaw, whom he regards as the top of the heap in money management and among academics in the investments field. It also contains Tanous' own wisdom gleaned from almost four decades of experience.

Insight: How dire is the U.S. financial situation today?

Peter J. Tanous: It is dire in the context of today. The good news is that history teaches us these things change. What investors should be grateful for is that we are experiencing a return to more normal valuations, instead of continuing with the crazy valuations that we have seen over the past few years. Take the notion that stocks can continue to go up 20 percent a year indefinitely. Surely it does not take a rocket scientist to tell investors that this is impossible.

Insight: There are pundits who are predicting disaster.

PJT: Because it sells books and magazines. Give me a break! The problem with the pundits when they comment on Wall Street is that they are always trying to predict what's going to happen. The reason they're always wrong is that the event that changes the direction of the stock market is almost always unique, and the reason it's almost always unique is that once we've experienced the problem we tend to learn how to solve it.

For example, it is not likely that there will ever be a Great Depression again in the United States. Why? Because we know how to avoid such problems. It also is unlikely that we will have 20 percent interest rates and big-time inflation again. We think we know now how to prevent such problems.

What this tells us is that when we get an economic upheaval, it is very likely to be something we don't know or haven't experienced -- such as what we're going through now.

Insight: And what is that?

PJT: Look at what has happened over the last few years that is different from the past. We all grew up in the era of the Cold War, when you had one-third of the world communist and therefore economically inefficient. Now, all of a sudden, there is no communism and everybody is producing. World productivity has risen, led by the United States.

Remember all those wrenching downsizing scenarios our economy went through? The poor 50-year-old who loses his job and is out mowing lawns? After it was all over-- and it took a few years -- guess what? The United States ended up being the most productive country in the world, and that fueled this wonderful stock-market boom we've experienced over the last few years.

Now we have a situation in the midst of this worldwide productivity in which certain economies that haven't made the adjustments we've made are having difficulty competing.

We also have a situation in which, with communications being as free as they are, information flows between markets at a far faster rate than formerly. Now we have this notion we didn't have before that events in Indonesia can impact the United States not two years from now but instantly.

So I laugh when I see all the Wall Street pundits predicting what the market's going to do and why. My point is that we can't predict what the market is going to do. It's going to do something for reasons that you don't know -- and if you did know, so would a lot of other people, and the market would do the opposite.

Insight: You interviewed 18 great money managers for your book. What makes them the best?

PJT: They're very dedicated. They're very focused. But those are qualities common to other professions, too. I think many of them have a sixth sense that you cannot define. If you could define this type of greatness, it would be replicable, and it is not replicable!

How come there are only 20 or so great investment gurus out of the 20,000 professionals in the field? The first conclusion is that the guru business is a very hard one. Are there people with three-year performance records who beat the market? Sure. There's tons of those, but you can't tell the difference between that and luck.

When they get to 10, 15 or 20 years, you begin to say, these guys are skillful. That's where you get the handful who are really good at it -- the Peter Lynches, the Michael Prices, the Mario Gabellis.

Insight: Any other qualities to look for in an investment guru besides a long track record?