208 AFTERWORD
This does not mean we do not have an occasional bad year, bad
quarter, or bad month. It simply means when you add up all the times
we lost money relative to the market, using any time period, the amount
of money we lost was smaller than the amount of money we made when
we outperformed the market.
In this respect, the record of this fund is not far different from other
focused portfolios. Think back to the performance of Charlie Munger,
Bill Ruane, and Lou Simpson. Each one achieved outstanding long-
term performance but endured periods of short-term underperfor-
mance. Each one employed a business valuation process to determine
whether stocks were mispriced. Each one ran concentrated, low-
turnover portfolios. The process they used enabled them to achieve su-
perior long-term results at the expense of a higher standard deviation.
Michael Mauboussin, the chief investment strategist at Legg Mason
Capital Management, conducted a study of the best-performing mutual
funds between 1992 and 2002.^1 He screened for funds that had one
manager during the period, had assets of at least $1 billion, and beat the
Standard & Poor’s 500 Index over the ten-year period. Thirty-one mu-
tual funds made the cut.
Then he looked at the process each manager used to beat the mar-
ket, and isolated four attributes that set this group apart from the ma-
jority of fund managers.
- Portfolio turnover.As a whole, the market-beating mutual funds
had an average turnover ratio of about 30 percent. This stands in
stark contrast to the turnover for all equity funds—110 percent. - Portfolio concentration.The long-term outperformers tend to
have higher portfolio concentration than the index or other gen-
eral equity funds. On average, the outperforming mutual funds
placed 37 percent of their assets in their top ten names. - Investment style.The vast majority of the above-market per-
formers espoused an intrinsic-value approach to selecting stocks. - Geographic location.Only a small fraction of the outperformers
hail from the East Coast f inancial centers, New York or
Boston. Most of the high-alpha generators set up shop in cities
like Chicago, Salt Lake City, Memphis, Omaha, and Baltimore.
Michael suggests that perhaps being away from the frenetic pace
of New York and Boston lessens the hyperactivity that perme-
ates so many mutual fund portfolios.