Why You Can Still Invest Like Money Managers with Billions at Their Disposal

If you are an individual investor (like me!), it’s easy to imagine how the money managers with billions of dollars at their disposal would hold a huge advantage over us. Ray Dalio, who presides over US$150 billion worth of assets at his hedge fund Bridgewater Associates, once made a statement that would have reinforced the image:

“We have 1,500 people that work at Bridgewater, we spend hundreds of millions of dollars on research, and so on. We’ve been doing this for 37 years and we don’t know that we’re going to win. We have to have diversified bets. So it’s very important for most people to know when not to make a bet. Because if you’re going to come to the poker table, you’re going to have to beat me, and you’re going to have to beat those who take money.”

But if you think that paints the entire picture, then you would be mistaken as not every big-name money manager invests that way. Let’s take for instance, Tom Gayner of US-based specialty insurer Markel (NYSE: MKL).

A small team can be aces too

As the President and Chief Investment Officer of Markel, Gayner helps manage the company’s investment portfolio. Over the 20 years ended 2013, the value of Markel’s investment portfolio per share has compounded at 13% per year under Gayner’s guidance. His investing acumen becomes clear when we consider the following: 1) The S&P 500 Index (a broad US share market index) has gained just 8.6% annually in comparison; 2) Markel’s investment portfolio consists of both bonds and shares and it must be noted that bonds generally deliver much lower returns than shares.

Markel’s investment portfolio totalled US$17.6 billion as of the end of 2013. Take a quick guess as to how big Gayner’s investing team is, considering how he manages such a huge sum of money. The answer: Two. It’s literally just Gayner and his investing partner. My American colleague David Hanson, who met up with Gayner recently, explains (emphasis mine):

“I asked Tom [Gayner] why he chooses to keep the team so small. He explained since the stock portfolio’s annual turnover rate is typically between 5-10% and long-term ownership is so important to their philosophy, they do not want to buy stocks for the sake of buying stocks.

He presented the hypothetical scenario of an investment analyst being asked to pitch a stock to the rest of the team every week, and week after week, the analyst said, “I don’t have anything.” Eventually, he is going to start feeling the pressure to come up with something to make it look like he’s “doing something” and will pitch a potentially bad idea. By keeping the investing team small at Markel, Gayner is able to control the process and avoid making poor decisions.”

The emphasis I made in David’s explanation of Gayner’s preference for a small team is vitally important for individual investors like us. Given Gayner’s long-term investing approach, he has no real need to rely on a huge team given that what he really needs is in-depth knowledge of a handful of shares that he likes. With long-term investing also particularly important in helping us individual investors stack the odds of success in our favour (my favourite example – and I know I’ve been repeating this aplenty – is that of how the Straits Times Index (SGX: ^STI) has been historically shown to have dramatically lower odds of losing money the longer an investor stays invested in it), it’s perhaps gratifying to know that there’s no real need for thousands of analysts to crank numbers and fire spreadsheets for us in order to invest well.

Gayner’s also hardly the only successful investor with a tiny team. One very well-known example is that of Warren Buffett. For much of Berkshire Hathaway‘s (NYSE: BRK-A)(NYSE: BRK-B) history since Buffett took control of it in the 1960s, the US$315 billion American conglomerate had been famous for having him and Charlie Munger (Berkshire’s vice chairman) as being the main brains behind the bulk of its investing decisions.

One other less well-known example is that of the American investor Walter Schloss. Schloss started his career as a hedge fund manager in 1955 and ended it by 2003. During that five decade period, he had clocked 16% annualised returns for his investors, handily outpacing the S&P 500’s 10% return. When he liquated his US$130 million fund, the only other person working in the firm was his son, Edwin Schloss, who joined the elder Schloss only in 1973. Prior to his son’s entry to his firm, Schloss had worked alone.

Talking to management? That’s not needed – really

With billions at his disposal, it’s also perhaps easy to imagine that Gayner would have fast-track to any company’s management if he so wishes. But while it’s certainly great to have the office numbers of chief executive officers on your mobile’s quick dial, it’s clearly not a pre-requisite for investing success. In a recent interview Gayner had with another of my US colleague Matt Koppenheffer, he illustrates:

“For instance in the course of the last week or two, I don’t remember where I read it, but there was an article that profiled Bill Marriott. I believe he’s roughly 82 years of age, and it was his life story and how he started out working in the root beer stand, but then morphed into the hotel business. It was talking about what Marriott is doing now, with some of the newer designs.

Well, we’re Marriott investors. I’ve never spent any time with Bill Marriott. I don’t think I’ve even had the chance to shake his hand, although I’d very much like to do so. But we’ve owned that stock probably for the better part of 20 years.

I’m a Marriott customer. I can see and understand what they do, as a customer, as well as reading their financial statements and the annual report. So, even though I don’t know him, I can see and taste and touch and feel the product and the service.

I can read the financial statements. I can read profiles about him, and I can get as good a sense as possible without actually having a personal relationship with him, that enables me to make some judgment about the company that would not be wildly different than what any retail investor would have the opportunity to do.”

Foolish Bottom Line

As individual investors, there’s really no need to have a feeling of inadequacy in investing when compared to the big boys in terms of having the required resources. In fact, there are also times when we as individual investors have an edge over professional money managers.

In the Biblical story of the impish David slaying the giant Goliath, the former showed the world why being tiny can be an advantage. In the world of investing, even if David can’t slay Goliath, they can still stand shoulder-to-shoulder. Let’s remember that.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Markel and Berkshire Hathaway.