Thursday, June 22, 2006

Ken Heebner-Independent Thinking and Going Against the Crowd

There is an interesting article by John Birger of Fortune Magazine discussing Ken Heebner, "The Mad Genius of Mutual Funds." As Morningstar describes his CGM Funds' style as "too gutsy to be practical," I find his love of concentration to be very unique in a very plain vanilla mutual fund world where lemming-like behavior is the norm.

What is particularly impressive to me in his recent history is the ability to let go of his winners. Housing stocks were on fire for most of the last five years and Heebner was along for the ride. But in early 2005, he jettisoned his entire portfolio of housing stocks as a result of his concern for "funny-money mortgages" and moved into energy stocks.

Explaining his strategy:"I've made the most money when my strategy was something few people agreed with. My huge outperformance occurs when I find one of these very contrarian strategies - something supported by a lot of deep analysis - and implement it in a concentrated way in the portfolio. Like investing in oil in 2004, when everyone thought it was going back
to $25 a barrel. Or buying savings-and-loans in 1982, back when interest rates were 15%. I wish I could find one every year, but I can't."

He further adds:"When we discussed copper last fall, you clearly knew a lot more about the supply outlook than most commodity analysts. " Obviously, there is great value in doing very intense research, MPT be damned.

"So if all you do is talk to management, you're going to hear there's no problem. But I talked to a mining engineer from one of the companies [operating in Chile], and he started out saying, "We don't have a water problem, we get 700 liters per second from our mine in the southern part of the country." But then he mentioned how those guys up north, they get only four or five liters per second. I go, Really? He says, "Yeah they have to go 200 kilometers to get water." Was it that way two years ago? "No."

Many analysts pride themselves on their "close" relationships with management. Sometimes, all this means is that management has found a shill who is unwilling to ask the difficult questions. Listening to IR or management babel does little to gain understanding any more than reading most research reports. Speaking to customers, speaking to competitors, speaking to employees can often provide greater insight than just listening to the "company line."

The phrase, "Where seldom is heard a discouraging word" describes the typical investor relations experience.

Looking for the investable advantage is a huge part of being a successful investor. Just doing things unconventionally as we described in yesterday's post will get you out of the typical framework in which many investors confine themselves.

Concentration, intense research, and independent thinking set Heebner apart. These traits will set your portfolio apart as well!


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