I was, am and always will be a stock picker. It's what I do. When I read about Bill Miller's departure from Legg Mason, the first thing I could think about wasn't, wow, there's our premier stock picker separating from Legg Mason. Nope. I thought instead about how dangerous his concentrated approach is when one of the concentrations -- in this case, the airlines -- goes bad. Because as Karen Cramer always taught me, you are only as good as your last trade.
When I got started in this business, buying my first stock in 1979, there was no such thing as perfect information. In fact, you had to beg to get financials. That led to some amazing anomalies: Stocks could be radically ill-evaluated simply because there wasn't enough known.
Then when I joined Goldman Sachs as a summer associate in 1983, I got to a first-class business library and was astonished at all that could be gleaned. I had a firm send me a week's worth of research every Friday so I could know what people were saying at all the firms, not just Goldman.
I also had brilliant clients at Goldman who had done a massive amount of work themselves and I often piggy-backed off them after doing a lot of work. Again, hit a lot of home runs.
When I left to start my own hedge fund in 1987, we had a rotational shift going on, perhaps one of the best moments for deft stock pickers. We were going out of Heinz and into Alcoa (AA) . It was obvious and, again, lucrative.
That's when I really cut my teeth stock picking, aided by Karen Cramer's trading acumen and where she married technical with fundamentals and trading-desk chatter. You need to be positive on all three before pulling the trigger. I also used to have local newspapers sent to me from all over the country and have associates clip articles about small public companies I could examine. There were so many oddball ideas that had a huge void of info.
I had a great run, compounding at 24% after all fees vs. 8% for the S&P. In this day of cynical wisecrackers, I hear that somehow that's not so hot, but it was a total testament to stock picking and making very large bets -- like Bill Miller, but in a prudent way, using defined capital amounts via deep-in-the-money calls.
I can take the criticism. Why not? None other than John Bogle, the father of the index fund, called it extraordinary but added that the reason why I was able to do that was because I didn't take in too much money. He's right; I never ran more than $600 million. He said had I opened my fund and taken in billions, it would have hurt my performance for certain.
I agreed with him.
Which is what I think the real problem is. We don't like stock pickers right now, they have gone out of favor because the good managers are quickly overwhelmed by "money in." If you restrict the input, you can pick stocks to your heart's content. However, if you take in monster amounts of capital, you are not going to be able to meet the market on a consistent basis because your money may be bigger than the market will allow you to have, and you will either act like an index fund with a larger fee or you make concentrated bets like Miller, and if they go wrong you are done. Money management firms don't like all-or-nothing types. That's who's being put out to pasture.
I think there's a lot of noise right now about ETFs and algos and what they do to the market. But I spent a whole chapter of Get Rich Carefully showing you how these ETFs and algos can create amazing opportunities. Just think about last year at this time. The algos were set to explode when China hiccupped. They brought the S&P house down. But only a certain percentage of the S&P could really be dinged on an earnings basis. It was a terrific moment to buy.
Same with Brexit. Another incredible moment.
Or with the obsession with the Fed.
All of these are better moments than we have ever had since the days of imperfect info.
Sure, it is upsetting if you are trying to reason why higher oil allows the S&P futures to go higher. It's maddening to know that most people hate the market because the Fed has kept rates down, but again, that's opportunity knocking. But you must be nimble and you must not run too much money.
Ideally, you just want to run money for yourself. Who needs the glare? I try to keep my hand in with Action Alerts PLUS right now, but we are so hamstrung that while we pay attention to our holdings, we know they dramatically understate what we can do.
No matter. There's no way I am going to stop. I love identifying the Twilios (TWLO) and the Acacias (ACIA) and the NXPIs (NXPI) and the Facebooks (FB) . It is what I do best and why I am grateful for a show and a site. Sure, sometimes I wish I were back at my old hedge fund. But that will have to wait, and when it happens, it will only be about my own money. (NXPI and Facebooks are part of TheStreet's Action Alerts PLUS portfolio.)
The idea of running someone else's and having to perform at an absurdly high level leaves you prone to mistakes that are not worth risking, lest you, too, find yourself in Bill Miller's shoes.