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The Breeder?s Cup of Investing

By sleepin'dawg ·
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By Chris Mayer
October 23, 2008


In a scene from Douglas Adams? Life, the Universe and Everything, Arthur Dent and his alien friend Ford Prefect end up at a cricket match in modern-day England. A crowd of spectators is enjoying the game when a giant spaceship descends from the sky and hovers directly over the field. But only Arthur and Ford notice the ship.

Ford explains that the ship is using a ?Somebody Else?s Problem field generator.? Essentially, the device makes people think the spaceship isn?t their concern ? effectively rendering it invisible. Ford and Arthur can see it because they know what they?re looking for?while the crowd remains completely oblivious.

That?s how I feel sometimes when sifting through the big financial news sources. The pages and airwaves have stories loaded with opportunities, but few people seem to be paying attention. Investors see headlines but assume they?re someone else?s problem?letting thousands ? even millions ? of dollars in potential profits slip by.

Of course, it?s a little more complicated than just reading the news. Finding the next trends means connecting the dots?following stories to their logical conclusions.

Consider the first trend I see ahead?

The Hunt for Effective Leadership

It seems each week there?s a story about a change in leadership at one big company or another. Sometimes it?s just time for a new person to take the helm, like Delta Air Lines? Richard Anderson, who took over for the retiring Gerald Grinstein. Or sometimes it?s a question of performance, like when Paul Pressler stepped down as head of The Gap. But more and more often, there?s a scandal involved. Among the more colorful examples of late is the tale of Gregory Reyes, former CEO of Brocade Communications. In August 2007, he was convicted of securities fraud, among other charges.

I expect several more stories like this to come to light in the next few months. And with them, a new trend will emerge. Investors will demand companies hire reputable, upfront CEOs. They?ll also flock to companies that already have proven management teams in place.
Bruce Berkowitz, manager of the Fairholme Fund (one of my favorites) sums it up nicely:

?We tend to be more about the jockey than the horse? You don?t have to predict the future if you know the company has the assets and the management to do well in difficult times. I believe that's when the seeds for exceptional performance are planted.?

The basic idea is that you can make great gains in the stock market by betting on a proven manager, or jockey. If you invested in Berkshire Hathaway knowing nothing except Warren Buffett?s track record ? that would be an extreme case of betting the jockey.

Obviously, if you have a great jockey on an old nag ready for the glue factory, there is only so much anybody can do. So if you can find a nice pile of assets and couple that with a great jockey, then you can have something special.

Dawg ]:)

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