Stock Market Wizards: Interviews with America’s Top Stock Traders (Market Wizards, #3) by Jack D. Schwager

MICHAEL LAUER
The Wisdom of Value,
the Folly of Fad
Just to set the record Straight, Michael Lauer was reluctant to do this inter-

view. Nothing personal, you understand. In fact, he admits being a fan of
the earlier Market Wizard books. It's just that he doesn't think he quali-

fies as a "market wizard"—at least not yet. "Perhaps after I've done this
for ten years, maybe then I'll qualify," he says.
Well, Lauer hasn't been managing a fund for ten years, but in the
seven plus years that he has, very few can match his combination of stel-

lar returns and low risk. Since inception in January 1993, Lauer's flagship
fund has realized a 72 percent average annual compounded return net
after deducting all fees (an estimated 97 percent gross return, trouncing
the corresponding 13 percent return for the Russell 2000 (the stock
index that most closely matches Lauer's investment universe) and the 20
percent return for the S&P 500. A $1.0 million investment in Lauer's
fund at inception would have grown to an astounding $51.7 million in
just over seven years (net to investors after deducting fees), compared
with corresponding figures of $2.4 and $3.7 million for investments in
the Russell and S&P 500 indexes.
You might think that with such lofty returns, Lauer must be taking
some huge risks. Amazingly, Lauer has achieved his stratospheric returns
while keeping losses both small and short-lived. The maximum peak-to-

valley equity decline in Lauer's flagship fund was a moderate 8.7 per-

cent, and it has never taken more than four months for the fund to reach
a new high.

Another notable feature of Lauer's performance is that even though
over 90 percent of his returns were earned on the long side, he has man-

aged to do remarkably well during declining market periods. Since the
inception of his Lancer Offshore fund nearly five years ago*, the S&P
500 has registered sixteen monthly declines for an aggregate loss of 60
percent. During those same losing months, Lauer's fund earned a cumu-

lative positive return of 66 percent.
Although Lauer emphasized what he considers the relative brevity of
his track record, his trading experience (a personal account) predates his
fund manager career by over a decade. He acknowledged that the aver-

age return for his personal account was even higher than for his funds,
but he downplayed this track record as irrelevant, because it was
achieved using leverage and involved a much lower asset base.
Lauer's flagship fund currently manages over $700 million. The capi-

tal under management could be significantly greater, but he is closed to
new investors and even returns assets when profits cause the funds he
manages to grow beyond what he considers an optimal size. Since Lauer
deliberately restricts himself to a small number of major stock invest-

ments at any given time (for reasons detailed in the interview), he could
increase the amount of money he manages by simply expanding the small
number of his holdings. Lauer, however, explains that he is very happy
with the status quo. His operation currently consists of only two traders,
two analysts, and several support staff—and he likes this cozy arrange-

ment. He has no desire to increase the size of the firm.
As a college student, Lauer supported himself by driving a cab during
the night shift, an experience he considers far more relevant to his later
success than his formal education. He graduated in 1979 with a B.A.
degree in international relations (he later earned an M.B.A. in finance).
Being fluent in several arcane languages, Lauer briefly went to work for
one of the government intelligence services, an experience he declined to
discuss for confidentiality reasons.
In 1980 an influential family friend, whose judgment he respected,
advised Lauer that he could find a more attractive career path in the

Stock Market Wizards: Interviews with America’s Top Stock Traders (Market Wizards, #3) by Jack D. Schwager