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Jewish World Review August 27, 2001 / 8 Elul 5761
Philip Terzian
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 dot.com 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
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