The Distinguished Speaker Series hosted Richard H. Driehaus at the Metropolitan Club Oak Room on March 1st, 2017. Mr. Driehaus is founder, chief investment officer and chairman of Driehaus Capital Management LLC. In 2000 he was named to Barron’s “All-Century” team whose players were deemed the most influential in the mutual fund industry over the past 100 years. Mr. Driehaus aim was to divide his presentation into three sections: Early Years, Investing, and Industry Trends.
He began his presentation by referencing the difficulties his father had in developing a residential lot his family owned. Although his father had a steady paycheck as a mechanical engineer, he was not able to afford his goal of developing the land for his expanding family. Mr. Driehaus at that point began thinking about how he would make sure to achieve his goals.
When he was 13, Mr. Driehaus spotted the NYSE quotes in a local newspaper. When informed about what the NYSE quotes meant, he became fascinated and soon found that his calling was the investment industry.
Mr. Driehaus argues that the principals of Taoism are applicable to the stock market. Taoism stresses living in harmony with the universal laws of nature. Nature has given man both a creative and analytic side to his brain. You must be able to use both sides of your brain to understand the market.
Mr. Driehaus shared the following market insights:
- Stock price will almost always never equal a company’s intrinsic value. The valuation process is flawed.
- It is better to concentrate in sectors as certain sectors will have better outlooks than the market as a whole.
- More money is made by buying high and selling higher (positive relative strength).
- Hit home runs, not singles and avoid striking out (cut your losses).
- High turnover reduces risk; take a series of small losses but not a big loss.
- Standard deviation is a poor measure of investment risk.
- The greatest long term risk is not having enough exposure to risk.
Mr. Driehaus emphasized that continuous observation is needed for investment analysis. Knowledge gained must then be applied in the context of a rapidly changing environment. You must maintain belief in your core principles for the long-term to succeed.
Mr. Driehaus had the following observations of the industry and current equity market:
- A 60/40 equity/bond allocation will not be aggressive enough for retirees due to longer life spans.
- As inflation becomes hotter bonds will be less attractive than stocks.
- Active managers have been losing assets due to the lower fees associated with indexing.
- Meaningful alpha generation is not easy in this environment but still doable.
- Active management will outperform when interest rates normalize as equity dispersion will be greater.
- Expect a greater shift to international equities.
Following his presentation Mr. Driehaus fielded questions on a number of topics:
- Investing in growth stocks allowed him to prove himself more quickly.
- Hedge funds are paralyzed because they want safety; they are not taking on enough risk to differentiate themselves.
- Look closely at volume when you’re thinking about selling one of your winners.
- His philanthropy emphasizes that architecture is very important. Big box retail has killed a number of small communities and failed to protect the “sense of place”.