Clicking on banner ads enables JWR to constantly improve
Jewish World Review August 27, 2001 / 8 Elul 5761

Philip Terzian

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Buy high, sell low -- IT'S BIG NEWS when The New York Times puts a business story on Page One. And the big news last week was: "Relentless Search for Growth Humbles a Mutual Fund Star."

The Star in question was James D. McCall, 47, stock picker for the Merrill Lynch Focus Twenty mutual fund. Mr. McCall's previous employer was another mutual fund, the PBHG Large Cap 20 fund run by Pilgrim Baxter, where his prowess in identifying and investing in technology stocks was so impressive that, according to the Times, Merrill Lynch "paid a ransom ... to win his services." In the two-and-a-half years that Mr. McCall labored at Pilgrim Baxter, the PBHG fund ranked first among funds that buy stocks in quick-growing companies, with average annual returns of more than 50 percent.

Merrill Lynch might be excused for believing that Mr. McCall would work his magic for the Focus Twenty fund, but to everyone's evident surprise, it hasn't worked out that way. Investors who paid more than $10 a share for Focus Twenty last year now find that the worth of those shares has been reduced to about two bucks. Of the $1.5 billion that Mr. McCall and his brokers collected from eager investors, all but $650 million has vanished into the ether. And Mr. McCall's strategy of investing heavily in a small number of hi-tech stocks has been less than rewarding: One of his biggest holdings, Enron, saw its value decline by eight percent one recent afternoon when its CEO suddenly quit. The value of another favorite, Ciena, dropped by nearly a third in a single day.

All of this has ranked Focus Twenty among the bottom one percent among funds of its kind, according to analysts, where its performance is significantly worse than average. But the Times headline notwithstanding, an 80 percent decline in value seems not to have humbled Mr. McCall. He remains, as Merrill Lynch might say, bullish on technology stocks, and disdainful of alternatives. While other "aggressive" portfolio managers have switched to more traditional sources of investment, Mr. McCall has stuck to his guns: "I'm not going to own an Omnicom or a Sony or a Viacom or General Dynamics," he says, "because they're growing in the single digits." Still, even Mr. McCall admits that "it's not easy managing a portfolio like this in this type of an environment."

At this juncture, I should issue two disclaimers. First, I am no expert in financial matters, even by journalistic standards. And second, my investments in mutual funds are comparatively stodgy: I tend to favor the old reliables over go-go stocks, and I buy them with an eye to old age (if I should be so lucky) not quick returns.

Still, reading this story on the front page of the Times, I kept pinching myself, figuratively speaking. Perhaps it was the fact that Mr. McCall, ever confident and self-satisfied, might have stepped out of the pages of The Bonfire of the Vanities, a Master of the Universe come to life. Or perhaps it was the fact that the Times seemed genuinely startled that a mutual fund based exclusively on high-tech stocks would have suffered during the past year. Even in the glamorous world of stock-picking, I should think, word must have spread that the bloom is off the Internet rose, that stocks have tanked, and that the high-tech economy is clearly in recession. It doesn't take an overpaid, overpraised and overvalued manager of a mutual fund to conclude that investors might be better served by switching strategies. Even "growing in the single digits" beats losing 80 percent of your value.

All of this illustrates what appears to be an immutable law of economics and public perception: During recessionary phases, people seem to think that the hard times will never end; and in times of prosperity, everyone is convinced that the bubble cannot burst. But in a capitalist system you don't have to live through more than one business cycle to know that stagnant economies eventually revive, and that bull markets don't last forever. We have probably taken sufficient measures to ensure that another Great Crash won't yield another Great Depression, but we have not yet perfected the defiance of nature.

At the same time, it remains startling to contemplate investors who would entrust large sums of money to people like James McCall, whose judgment seems largely grounded in arrogance, and whose success was attributable to luck and good timing. An infinite number of monkeys might well have picked successful high-tech stocks in the late 1990s.

There is a story, probably apocryphal, that when J. Pierpont Morgan was asked to impart a few words of wisdom about the market, he declared, "It will fluctuate." Obvious, but true. Investors in the Focus Twenty fund might take to heart another remark, also probably apocryphal, from another 19th-century sage, Phineas T. Barnum: The one about a sucker being born every minute.

JWR contributor Philip Terzian is associate editor of The Providence Journal. Comment by clicking here.


Philip Terzian Archives

© 2001, The Providence Journal