THE STORY OF BAXTER, U. S. STEEL, AND JOHN MAURICE
Back in the Good Old Days at Putnam (circa 1973), when the Nifty Fifty were the only game in town and the Putnam Advisory Company -- which was every bit as big a Nifty Fifty player as Morgan's Carl Hathaway, who got all the media coverage -- was bringing in new accounts almost daily, the advisory managers used to make regular trips to the trading room to deliver a stack of buy tickets for their Core List stocks and a stack of sell tickets for the stocks they had inherited.
One afternoon, John Maurice, the manager of the Putnam Growth Fund, a card-carrying contrarian and one of the best and most astute money managers I have ever worked with, looked at the advisory manager who had just brought in that day's stack of buy and sell tickets, and said "Do you mind if I ask you something?"
"Sure."
"Do you even wonder if U. S. Steel, which you're selling at five times earnings, might possibly be a better stock than Baxter, which you're buying at 50 times earnings?"
"No," came the instant reply. "We were sold to our new client as a growth stock manager, and a growth stock manager we shall be."
But -- the deeply-depressed U. S. Steel WAS a better stock to buy in 1973 than the immensely-exploited Baxter. Not only that: the money that came flooding into Putnam in 1973 and 1974 because of the sensational past performance of high-quality growth stocks left just as quickly towards the end of that decade, due to the underperformance of those growth stocks.
We have thus seen money forced out of value shops and into growth shops before. Although we will be the first to admit that things are not the same now as they were then (the problem now is deflation, not inflation), we still know how that story ended -- and this story is going to end the same way, sooner or later, just as surely as night follows day. When the pendulum starts swinging the other way, and what causes it to start to do so, though, is anybody's guess. The fact that ALL the mutual fund inflows in January and February, as reported by Bob Farrell, came into the top 25 funds, and that there was a net outflow of $5.5 billion from the other 7000+ funds, indicates that the tide has not started to turn yet; success is still begetting success.
One final note: When I told this story in Boston recently, someone reminded me that the Nifty Fifty performance which crested in 1973 caused John Neff to come within one quarter of being fired at the time. Neff stuck to his style of investing, though, and his fund subsequently performed so well, and got so big, that it had to be closed to new investors 15 years later. Carl Hathaway's did not.
-- Walter Deemer