Investors are always eager to share their investing victories, relating how they bought an otherwise-overlooked stock at a cheap price which subsequently soared. They’re less likely to trumpet their failures. That’s human nature, perhaps, but a trio of successful mutual fund managers bucked the trend on Wednesday evening when they shared some of their own biggest investment mistakes at a Morningstar Investment Conference session.
In a session called “Ahead of the Curve” moderated by Janet Yang of Morningstar, Chris Davis of Davis Funds, Will Danoff of Fidelity Investments and Dennis Lynch of Morgan Stanley Investment Management began by answering Yang’s first question. Since all three men are constantly looking to invest in companies that have strong competitive advantages, what, she asked, is common among the best corporate managers? Since as fund managers they constantly meet with company CEOs, what, she asked, “are you trying to suss out in those meetings?”
Danoff recalled that he once talked to Warren Buffett about this very topic, and that Buffett told him “don’t listen to any CEOs.” Rather, he counseled that Danoff could find what he wanted elsewhere, because “it’s all in the numbers.”
Since managers “give us updates because we may be their largest shareholders,” Danoff said, what he’s trying to learn about the management team is “Do they think long term? Do they think about their customers?”
“If you see 80 companies a month, a couple will stand out” from the rest, he said. The other managers agreed.
Davis said what he looks for is whether management “has the ability to adapt … the nature of capitalism is that high returns attract competition,” but such outperformance “is a temporal thing.”
The three, all of whom have been Morningstar Managers of the Year, also cautioned against portfolio managers who might be so focused on their specific areas that they miss the bigger issues around those areas. “If you have a portfolio manager or analyst who wears blinders,” said Davis, “it doesn’t make sense … the best PMs resist being put in a box.”
It’s not just money managers and analysts who can miss the big picture. Danoff said that corporate managers “don’t always realize what’s happening in their own industry,” using the example of how EOG Resources (EOG) was the first company to monetize the shale oil business.