day the risk will happen. And when it does, you give it allback. After all, our Dimensional Fund Advisors small-cap portfoliounderperformed the S&P 500 for 6 or 7 years in a row. It’s back upagain now, but who knows when it will tank again? All you can sayis that small stocks are part of total wealth. [ should hold my shareof them, not just the S&P.
Tanous:Do you practice what you preach in your own investments,or do you secretly have an active manager on the side?
Miller: No. I do read the papers. Sometimes I get intrigued by theidea of a drug company that has a drug for obesity, or something likethat. I may take a flyer on some of those things.
Tanous:Boy, am I glad to hear that!
Miller: Yeah. But that’s strictly recreational. It’s not serious invest-ing.
Tanous:But for serious investing, I presume you invest in the mar-ket.
Miller: For the equity portion of my portfolio, yes. But I made amistake, probably along with many others in my generation wholived through the ’70s. I had too balanced a portfolio - too muchbonds, relative to stocks. Had I put more in stocks, ’'d be wealthiertoday!
Tanous:Many thanks, professor. That is no doubt worthy advice.
Indeed it is! Stockbrokers rejoice! Here is the noted economist,Merton Miller, telling us he wished he had put more of his own moneyin stocks. And once again, we are exposed to the prevailing viewamong academics that those of us who try to beat the market are justwasting our time. Sure, some of us will succeed, just like a few of uswill win the lottery or hit a slot machine jackpot.
204INVESTMENT GURUS
I found it interesting that Miller’s view of the efficient market hy-pothesis is not extreme. He allows that some people may be able toget information before others, d la Michael Price, and profit from thatinformation. However, he believes that in the aggregate, the extraprofits will only amount to the money spent doing the research. But,among those making those extra profits, there will be some who dovery, very well. Our challenge is to identify these winners and observehow they do it.
As I reread Miller’s comments, I was impressed by the elegance ofhis points, and the compelling explanations of his views on marketefficiency. Miller is an historic figure in the field af economics. Weasked him to stray from his normal field, the classic Miller andModigliani theorem. But the journey was worth it. This wise man - Idare not call him old - not only shared insights and wisdom with us,he did so with humor.
205FOSTER FRIESS
If you do a little research on Foster Friess, the high-energy managerof the Brandywine Fund, you’ll come across two or three stories prettyconsistently. One has to do with pigs in a trough - we'll ask him aboutit. Another involves his distaste for staff meetings and how he handlesthem. And there’s always the story about how Foster Friess behaveson airplanes. These are but a few of the anecdotes that herald thepeculiarity of this very engaging, and very successful fund manager.
A look at a typical Brandywine Fund quarterly report offers a clueto Friess’ management style. Rather than a dry statistical accountingof the last quarter’s performance, his reports read more like a highschool yearbook, featuring cheery profiles on employees, consultants,and even executives at the companies owned by the fund. (“Even withthe hectic demands of planning her Autumn wedding, Nicole stillmanages to devote some of her personal time to various charitableorganizations.”)
The Brandywine Fund celebrated its tenth anniversary on December31, 1995, having grown from a starting investment of $100,000 toa $4.2 billion fund, with more than 30,000, presumably very happy,shareholders. Average annualized return for ten years: 18.4%. Weshould be so lucky. As we will see in our entertaining and informativeconversation with Foster, the performance does come at a price. Theprice is, predictably, higher volatility than most other funds. You payyour money; you take your chances.
If I had to pick the single most impressive statistic about FosterFriess and the Brandywine Fund, it would not necessarily be that hemanages money for the Nobel Foundation in Stockholm, which hedoes. Instead, I can’t help being impressed that the employees ofMorningstar Inc., the premier firm in the tracking and rating of mu-tual funds, picked the Brandywine Fund as the leading investmentvehicle for their own 401(k) plan.
Tanous:When did you first get interested in stocks?
Friess: Hmm. I think it was when I took a University of Wisconsinbusiness course on securities analysis. The professor was very highon a local Milwaukee stock. I cashed in a $1,200 insurance policy myfather had bought me and wound up buying the stock two pointsINVESTMENT GURUS
above the published high. I lost so much money in it, at age nineteen,that I was determined to get it back.
Tanous:Nice answer! Your history is really interesting. In fact, oneof my clients, a prominent Virginia cardiologist, is the one who firstalerted me to Foster Friess. He’s a very big fan of yours. Friess Asso-ciates started, I believe, in 1974, with one client. But it was one heckof an account: the Nobel Foundation of Stockholm. That’s an impress-ive initial client.
Friess: Our slogan, Peter, when we started in 1974, was even moreimpressive. Our slogan was: “Friess Associates, serving with honestyand integrity since 1974”! It lost its humor by 1976, so we stoppedusing it.
Tanous:How did the Nobel relationship develop?
Friess: I was with a family in Delaware that had a relationship withthe Nobel Foundation. I worked with that family for ten years beforelaunching Friess Associates.
Tanous: Whatever happened to them?
Friess: They’re still doing what they’ve been doing. It was quiteunusual how that relationship developed. The father of the fellow Iworked for and his wife took a cruise to the Caribbean. On the cruise,they met a thirty-year-old-envoy from Sweden, named Nils Stahle,who was stationed in New York. They became good friends and keptin touch. Twenty years later Nils Stahle had worked himself up to bethe director of the Nobel Foundation. He called up his long time friendand said, we’re getting killed in these mortgages and fixed incomevehicles. Can you invest in some American growth stocks? That was1954. They started out with fifty or sixty thousand dollars in the 50s.Now it’s well over $35 million, just in the Brandy-wine holdings theynow have.
Tanous:In researching your style and the way you operate, I waspretty interested in what seemed to be a network approach to gatheringinformation on companies. Could you tell us a little bit about that?
Friess: We think that having antennae tuned into the field to findout what is happening, rather than having all of our informationcoming from presentations that CEOs make at cocktail parties, givesus the opportunity to understand how the real world is functioning.So basically what we have done is put people in Phoenix, Jackson,and Wilmington, and augmented that by getting to know stockbrokers
207PETER J. TANOUS
around the country in small regional firms, plus some consultants,who then create this network.
For example, in Phoenix, one of our researchers might take an ex-ecutive out who knows something about what’s going on in some ofthe data processing centers there. He knows which of the computers,like Amdahl versus IBM, might be better positioned to serve the needsof those major data centers. So it’s just the ability to kick the tires ona nationwide basis. As we go forward, we hope to expand this networkof consultants and brokers, and maybe even have additional offices.
Tanous:That’s interesting. You know, in this book we focus onprocess. What we’re trying to do is find out what makes a very fewindividuals’ performance so extraordinary. As I look at what you do,I think it’s safe to say that yours is a growth, bottom-up style. But Iwonder how accurate it is to call it momentum investing, which somepeople do, especially since you have such an aversion to high price-earnings ratios?
Friess: That’s well put. We kind of recoil at the description of usas “momentum” investors. Maybe we are that, but we don’t like tobe called that.
Tanous:For instance, one of my interviewees, Richard Driehaus[page 53], is a momentum investor but, as near as I can tell, P/Es area minor consideration in his case.
Friess: They’re very critical in ours. That’s one of our key consider-ations.
One thought worth touching on is your question about how indi-viduals have become so successful. I think the success of Friess Asso-ciates is not based on the individual. You’re interviewing me becauseI’m the guy who was the first fellow on the job and have become partof the success. But I think the reason we’ve succeeded is because ofthe contributions of every single person here who is dedicated to doinga good job. Anyone knows that managing $9 billion is completelybeyond the capabilities of one person. So the success that Friess As-sociates enjoys is not an individual success. It’s much more than that.I think what we try to do is to create a culture where everybodyrealizes that, and is appreciative of one another. We try to encourageeveryone, starting with the receptionist at the front desk, to treat thePepsi delivery man with the same amount of dignity and respect ashe or she would if the President of the United States came throughthe door.
208INVESTMENT GURUS
Tanous:! think that’s a wonderful thing to say. But from where Isit, I’ve got to try to sort out how much of what you are saying isreality. You have a reputation for being an awfully nice human beingand a modest one, to boot.
Friess: I don’t know. My wife would tell you I’ve got a lot of reasonsto be humble!
Tanous:How many stocks do you own, and what’s your turnover?
Friess: We have 220 stocks in our portfolio, with 180% turnover.
Tanous: With that high turnover, I guess there’s no getting awayfrom a standard deviation considerably higher than the market’s.
Friess: We do not relate to most of those tenets of modern portfoliotheory. Asking us about standard deviation would be like asking aplumber how many kilowatts he wanted to plug into a lamp. It justdoesn’t compute with us. The turnover, Peter, is a function of the factthat we have this pigs-in-a-trough displacement theory.
Tanous:! was going to ask you about that. I’m glad you brought itup. Please explain it.
Friess: The notion is, we always want to have the most dynamiccompanies in the portfolio. In our business, it’s so easy to get to knowa management, the product lines, get comfortable with everythingwe know about it, and know that it’s doing well. You can fall in lovewith these companies and overstay. By creating this forced displace-ment idea, we are constantly looking for new ideas. When we findthem, we force ourselves to displace some other company by limitingthe number of companies that we can own.
This comes from the pigs-in-the-trough experience. | grew up innorthern Wisconsin. I’d visit my friends on the farm. The father throwssome food to the pigs. There are fifteen to a trough. Across the barn-yard comes the sixteenth pig, who nudges himself on the trough. Thefifteenth, the one that got displaced from the end, doesn’t roll overand die. He isn’t sick. There’s nothing wrong with him. It’s just thathe’s full, and content, and wanders off.
Tanous:I guess he’s just as happy as a pig in a trough, wouldn’tyou say? But isn’t it possible, using this approach, that a perfectlygood company will get nudged out of the picture?
Friess: The companies that we’re displacing are sometimes veryexcellent investments. Some could have a 20% to 30% upside, andwould be considered a buy by many people. But we found one witha 60% or 70% upside. So the companies that we’re selling should be
209PETER J. TANOUS
good companies. If we’re getting into a position where we’re sellingbad companies, then we’re not doing our job. Every sale we make atFriess Associates should be of an excellent company, with good pro-spects. The only reason for selling is that we found something better.
Tanous:! want to go back to a point you just made. You said youreally don’t pay much attention to the normal industry measurementtools like standard deviation, presumably beta, and some of the otherthings. Why?
Friess: Because [ don’t think Andrew Carnegie, when he createdhis steel mill empire, thought about those. I don’t think ChristopherColumbus, when he came here to look for gold and treasure, thoughtabout them either. We’re that traditional.
Tanous:Basically, that means you’re much more focused on thefundamentals of what you’re buying. You’re more interested in thebusiness than in whether or not the stock has moved around a lot.
Friess: That’s well put. We try to think of ourselves as businessmenbuying businesses. We ask ourselves, what would this company beworth if the stock exchange closed down tomorrow and we suddenlyhad a private company?
Tanous:I understand that approach. I also understand that youmake it a practice to talk to the company’s competitors before youbuy the stock. Is that right?
Friess: Not only their competitors; we talk to their customers, theirsuppliers, and sometimes that’s how we come up with an idea. We'llbe talking to a company and we'll ask: Of all the companies you'recompeting with, who do you see the most often? Who do you havethe most respect for? Sometimes a competitor will reveal that; othertimes they won't.
Tanous: You know, it’s funny, when you say that it seems like suchan obviously smart thing to do, but it’s not something that comes upa lot when you're talking to money managers.
Friess: It’s due to our religion, so to speak, of focusing. We focuseach day on how we are going to make money for our clients. Wedon’t spend a lot of time finding out how other managers do that.We kind of prefer a monklike existence within the investment com-munity. We don’t have that much interaction with our peers unlesswe've been asked to speak on a panel or something.
Tanous:This starts to get to some of the elements of your success.You know the word that comes up the most often among very success-
210INVESTMENT GURUS
ful managers, and it applies here, is discipline. It seems to me thatdiscipline is important to you.
Friess: We work very hard on inculcating discipline in the newpeople who join our firm. But before they come in, we want them tohave those disciplines in place and then we fine-tune them. The peoplewho have been successful at Friess Associates, each and every one ofthem, are, in their own right, very highly focused people. An exampleis, Diane Hakala, who is a stunt pilot. She qualified for the worldchampionships twice. She was prevented from going once becauseher engine stopped at 700 feet and she ran her plane into a drainageditch. She walked away with a broken ankle. The focus that you haveto have to be a stunt pilot is dramatic. She takes that personality traitand puts that same degree of intensity and focus into the investmentresearch process.
Tanous: What does she do at your company?
Friess: She is one of our researchers. In our company, we also haveblurred the lines from those that traditional money managers mightuse. We don’t use the term “analyst” and “portfolio manager.” Weuse the terms “researcher” and “money manager.” In our culture whatwe're trying to create is the highly trained, highly experienced, highlymotivated, successful barracuda-type person in the trenches callingthe companies and making the decisions as to which companies weare going to buy or sell. We do not have a system where a more juniorresearcher makes calls and reports to the sophisticated, gray-hairedinvestment committee, who then blesses it, and then another seniortype person puts it in the portfolio. What we’ve done is empoweredthe people who have the most cutting edge understanding of what’shappening to the businesses. They are the ones who are pulling thetriggers. We have a system of checks and balances, where we have ateam leader who has to bless that decision before it finally comes tome for final blessing. But the way we’re organized, very seldom do Iever have to interrupt any of those decisions.
Tanous:What sort of people do you look for? What traits do youlook for among people who are going to be outstanding in this businessof finding and analyzing potential investments?
Friess: First of all, a high degree of intellectual honesty. Second,a high energy level, an intense eagerness to win, an ability to interacteffectively with people, and a natural curiosity. ] like to have people
211PETER J. TANOUS
with high energy levels, but who are called rather than driven. Andthere’s a big difference.
Tanous: Would you elaborate on that, please?
Friess: Well, all of us have a need for significance. We all makedecisions as to what gives us significance. I’ve found, in my life ex-perience, that people who desperately need to prove themselves havehigh energy levels and are driven. There are, on the other hand, peoplewho have the self-esteem and the significance already, who want togo out and manifest that for the benefit of others. They have the samehigh energy level. Remember the film “Chariots of Fire,” about theOlympic runners? One man ran for self-aggrandizement and theother to honor God.
Tanous:!/t almost sounds like a Calvinist culture, Foster.
Friess: An old missionary once reminded me, “our lives are not toearn God’s favor but to return the favor.” I don’t know that muchabout Calvin, but I will openly and eagerly try to share that the successthat Friess Associates has enjoyed has come largely because both mywife and J are trying to embody the ancient Judeo-Christian traditionson which our country was founded. That includes the writings ofMoses and David and Isaiah and Paul.
For example, these teachings declare that every one of us hasweaknesses. Early on I learned that I have weaknesses and my team-mates have weaknesses. Rather than beating them up and trying tochange them, which I try to do, unsuccessfully, at times, it’s muchbetter to accept people’s weaknesses and work around them. If oneperson is excellent at picking stocks, but he’s not as effective assomeone else with clients, then you design his job function so thathe can manifest his strengths to the best of his ability, and not getbogged down by being in a situation where his weaknesses will impedehim.
Tanous:Most people, Foster, would just call that good management.
Friess: Right. But I was a slow learner. I wanted each person to becapable of doing everything well. It’s not too hard to figure out, ifyou have an analytical mind and you’re analyzing stocks every day,that if you go out and see ten successful lives you might ask whatmakes them successful. And then you see ten dysfunctional lives andyou ask what makes them dysfunctional. It doesn’t take a brain sur-geon to sort that out.
Tanous:There seems to be a philosophy, even a deep faith, that
212INVESTMENT GURUS
permeates the discipline that you bring to picking companies. Is thatright?
Friess: Well, I think more importantly it permeates the culture. It’swhy a lot of good people like being part of this firm - because wetake their intelligence and their creativity and we give them the chanceto be forgiven when they screw up.
Tanous: You should write a book.
Friess: I’m talking about it. I'd like to put some of these ideas down.My wife, Lynn, suggested that if I do a book, I first ought to deal withthe issues of investment theory and stock selection and secondly, aspart of that, perhaps the notion of time management, another favoritetopic of mine. What we’re now thinking about is maybe we can comeup with a book that says “Managing Your Time, Money and Life!”
A lot of people say, Foster and Lynn have this religious base totheir lives. I always want to point out that every living human beingon the face of the earth has a religion. It just might not happen to bethe Judeo-Christian concept, or even one of the major five. But he-donism - eat, drink and be merry - is a religion. Materialism is a reli-gion which says, gee, if I have all these toys and all these things, thenthat is what creates my sense of well-being and that is what makesme important. Every person has religion.
Tanous:As I recall, the Calvinist issue is being very successful, ina monetary or other earthly sense, is a signal to your fellow man thatGod has already appointed you as one of the leaders. You have astraight path to Heaven, or something like that.
Friess: | would disagree 100% with that notion, because the Jewstaught that the rain falls on both the righteous and the unrighteous.In the Jewish tradition, you are taught to love your neighbor and beresponsible for the poor and to be forgiving. As I said before, I believethat our lives are not to earn God’s favor, but to return the favor.
Tanous: You keep mentioning Jewish culture. I recall reading thatyou're a fervent Christian. What’s the nexus between the two?
Friess: Christianity is a Jewish religion. What people forget is that,for the first 70 years after Christ died, most of the people who knewabout those incidents were Jewish. I guess it wasn’t until Paul got onsome boat and went to tell the gentiles about it, that it spread beyondthe Jewish people.
Tanous: Interesting point.
Friess: What’s so interesting in our culture today, Peter, is that
213PETER J. TANOUS
because of the ignorance of this fact in our culture, we have a divis-iveness that need not be.
Tanous:Fascinating stuff, Foster. If we're not careful, we'll end uptalking more about this than about stocks. Let’s move on. Let’s talkabout your sell discipline. I confess that I was a little startled, happilyso, when I read in your own literature that you describe your selldiscipline as “harsh and aggressive.” That gets to you.
Friess: What we want to remember, in this forced displacementidea, is that we want to be very callous, if you will, as we evaluateall the pigs.
Tanous: Which ones are full?
Friess: Which ones are full and content and which ones are leanand mean and hungry. It’s very easy to get emotionally attached tothe one that is fat and happy. Remember, we buy companies wherethe recognition is yet to come. Therefore, we seek out companies thatare in the process of changing their spots.
Tanous:Can you give us an example?
Friess: Sure. Going back to 1979, Tandy came out with their TRS80, model 2, I think it was called, that was their little PC. Nobodyreally knew about it, because everybody looked at Tandy as a retailerof third-rate electronic products in those not-too-impressive RadioShack stores around the country. Meanwhile, Apple Computer goespublic at what, 30 x or 40 x earnings, as the perceived industryleader. IBM had not yet entered the PC market. So, what happens isyou have a transformation, where suddenly people realize that thePC business at Tandy has gone from 9% of sales to 32% of sales. Themultiple suddenly gets revised from a retailing multiple to a techno-logy multiple as all the technology analysts figure out what theyhave.
Tanous:But you had to see that.
Friess: Right. And the reason we made fivefold on the Tandy invest-ment while people who bought Apple were under water for awhile isthat the public offering of Apple was so filled with euphoria. The highP/E on Apple created a bad investment with a good company,whereas Tandy was perceived as a less dynamic company than Apple,but the P/E ratio and the changing perception made it a fabulous in-vestment.
Tanous:Conversely, Foster, what kind of companies do you notwant to own?
214INVESTMENT GURUS
Friess: We typically do not like to own “concept” companies, likebiotechnology, where they’re going to lose money for the next threeyears, but this new drug is going to grow hair, or whatever, and it’sgoing to earn $5.00 a share in 2001. We also have a hard time gettingexcited about utility companies because that’s a politically-drivenprofit picture. You cannot grow beyond the demographics of a givenarea, except if you are able to get good pricing. If you start showingtoo much profit, the political process will take those prices away.
Third, we don’t like to invest in companies whose fortunes are de-termined by a small number of decisionmakers. For example, if youhave a peripheral company that only sells to IBM and two other majorfirms, the purchasing agent at IBM can do some damage to you.Conversely, a fast food operation is likely to have millions of custom-ers every day. We are more eager to be in that kind of investment.We also have an aversion to some of the financial stocks, where theearnings are a figment of accounting imagination.
Tanous:For example...
Friess: When a company could, for example, sell insurance policiesand spread the cost of the agent’s commission over the life of thepolicy, using, (1) their guess as to what that will be; and (2) makinga judgment as to what their losses are going to be, and, (3) creatingreserves based on that potential loss. That, too, is a figment of theirimagination and creativity, because you're selling a product for whichyou have no idea what the ultimate cost will be. There are somecompanies, where the accounting is very conservative and where thethings they are doing are viable. So, despite these comments, we don’twant to be so dogmatic that we aren’t open to shooting fish in abarrel if we find such a company in one of these industries.
Tanous: Your record, as you know, has been truly extraordinary.It’s rare to find somebody who so consistently beats the averages,particularly at a time when 80% of fund managers don’t beat theaverages. I can find no other thing to say except that your discipline,your approach to investing, and the fact that there’s a lot of hardwork involved, seems to be treating you well. But why do you thinkyour record is so much better than others? After all, Morningstar inaccording Brandywine its highest, five star rating for the past tenyears, ranks you as the number one performing fund with no load ordistribution charges currently available to the public.
Friess: It gets back to the people that are part of Friess Associates.
215PETER J. TANOUS
We've attracted an adequate number of people so that we don’t haveone person managing 80 or 100 different stocks, like some other firmsdo. We have divided up into small teams so that you might find threepeople following maybe 25 or 30 stocks. The ratio of investmentprofessionals to the number of stocks we own currently is running 8to 10 stocks per person, if you include as investment personnel ourtraders and the people who assist our researchers. Our “researchmanagers” take the calls from the brokers and make sure that the in-formation is forwarded to the researcher. If you take all 30 peopleinvolved in the investment process, you get a very nice ratio, focusedon those 25 or 30 companies.
Tanous:Looking at performance again, if we take the Lipper [amutual fund performance measurement service] numbers, among thetop ten U.S. growth funds for the last ten years, Brandywine Fund isnumber one for a single year, the last three, the last five, as well asthe last ten years, for funds currently available to the public with nodistribution charges or loads. Modesty aside, I think it’s safe to saythat Brandywine is the number one no-load growth fund.
Friess: I think it would be accurate to say that, according to thesenumbers, we were the number one ranked U.S. growth fund stillavailable to the public that has no load or distribution charges. Thatwould be the accurate statement, I believe. There was one fund whichwas a couple of percentage points above us for ten years, but theyare no longer available to the public.
Tanous:! think the most impressive statistic about you is that theMorningstar employees picked your fund overwhelmingly for theirown 401{(k)s.
Friess: We were flabbergasted when we heard about it. I was at asteeplechase on a Sunday, and a lady walks up to me and says, Gee,what a great article in The New York Times. I had no idea it was there,or that Morningstar had even selected us. That was the first time Iheard about it.
Tanous: You mentioned that one of the elements of your success isthat you are a time management freak. Well, that may be too strong.But tell me about your attitude toward time?
Friess: I’m very sensitive, now that I’m coming on 56 and havehad a few friends disappear off the face of the earth, that we have alimited amount of time here. I’m also aware that, if you take out apencil and say there are 365 days in the year, divided into 7 day
216INVESTMENT GURUS
weeks, of which five are typically work days, then you figure thereare ten or twelve holidays nationally, and most people have threeweeks vacation, that maybe two-thirds of the days, 240 out of the365, are supposedly work days. If you assume eight work hours, that’sone-third of the day. If you take one third of two-thirds, that’s two-ninths. So, 22% of a person’s life is supposedly in a work setting. Butif you figure 22% is for working, you have 78% to eat, sleep, and bemerry. You just want to use that 22% as effectively as you can.
Tanous:What’s your attitude about meetings?
Friess: Well, you probably know the answer to that.
Tanous:! admit I set you up with that question.
Friess: We don’t meet at Friess Associates if we can avoid it. Whenwe do meet, we meet in a room with no chairs. We also believe thata meeting should never be used to make a decision and never usedto transfer information.
Tanous:! know you'd rather do it by e-mail, but why?
Friess: When you transfer information in a written context youhave something to refer back to. If I say to you, Peter, let’s meet atSugarloaf Cafe tonight at 6:30, you could say, I thought you said 5:30or 7:30, or I thought you said Sweetwater. So the fact that you havethe ability to make it clearer makes the communication dramaticallybetter.
But what would be fun would be to take a sheet out of one of themagazines on your desk and read it and time it. Then read it out loudand time it. | read in one of these techie magazines, where they inter-view people like Bill Gates, that our ears process information at 30kilohertz and our eyes process information at 30 megahertz. Maybesome people are different, but I process information so much fasterand more effectively with my eyes than with my ears.