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Seventy-nine-year-old Don Brown of Minneapolis in the US has been a Wall Street investment manager since 1960 and has outperformed the S&P 500 in all but two of those 55 years. That’s a track record that would make even Warren Buffett weep.
His father Clayton got into the business in 1930, when the great crash of 1929 was just a year into its devastating rampage. That means his family-run investment firm has seen every market crash of the last 87 years.
“In fact, the crash of 1929 was the reason my dad got into the business. He was one of the early pioneers in investment management and he got into the business because the firm he was working for at the time, HM Billsby of Chicago, completely failed to see the crash coming. So we were schooled by my dad to look for the signs of weakness in the market and we’ve been pretty good at it,” says Brown, a former US marine who still rises at 3am every morning to work out.
“Another reason my dad got into the business was because he could not bear the corrupt practice of brokers selling stock to unwitting clients in a collapsing market just to generate revenue for themselves. This wiped out a huge amount of wealth for ordinary people after the crash of 1929.”
The current market outlook
So does Brown see another crash coming?
“No, I don’t. I was a bit taken by surprise by the drop in stock prices at the start of 2016, but my indicators tell me we hit a market bottom [in the third week of January]. The market will go up from here. We’re still in a major bull market that started in 2009, and what we’re seeing is a fairly major sell-off, but it’s not the start of a bear market. I partly blame this market nervousness on [President] Obama.
The confidence that people have in the US is not what it was a decade ago.
“I don’t see a bear market on the horizon. I see the Dow going to 27 000 from its current level of 15 800. Maybe I’m too optimistic, but I see this darn near happening.”
What about those who say world financial markets are on a cliff edge awaiting a “black swan” event that will cause the prices of all assets to tumble on a scale never before seen? “I’ve been hearing that kind of nonsense since I got into the business in 1960. It won’t happen. I think [former Federal Reserve governor] Ben Bernanke did a superb job in managing the US economy through the difficult times post the 2008 crash.”
Brown has probably seen more market crashes than most in the business, and he remembers every one of them as if they happened yesterday. In 1970 there was a 40% drop in the US markets, which was a devastating drop at the time. 1973 to 1974 saw another 50% drop, which was the biggest drop since 1929, as a result of the oil crisis and the corruption surrounding then US President Richard Nixon.
There were smaller markets crashes in 1987 and the early 1990s, followed by the crash of 2007 to 2009 when equities dropped 50%. “In the 2007 to 2009 crash I started building up my cash to about 70% and then started buying in October 2008, which was a bit too early. Then came the Lehman Brothers (banking) collapse and I started offloading more stocks. But by May of the 2009, two months after the absolute bottom of the market, I was fully invested in stocks. My portfolios did very well in those years.”
His winning formula
Brown’s market philosophy is that there are times to be fully in cash, and times to be fully in stocks. He is currently 25% in cash, but wished it was more. “I didn’t expect 2016 to start the way it did, and usually I am prepared for this kind of thing.
“When I move to cash there are certain things I look for. I keep a lot of stats of the market. For the last 12 to 15 months, the stats of the market have shown no momentum up or down. It’s the strangest period I have ever seen. But the recent drop in prices is a good time to be buying.
Now the market has entered buy territory, his preferred stocks are Ford, General Motors, Microsoft and Boston Scientific.
“One great lesson I learned is you never have to hurry. If this is the bottom of the market, there will be a 30- to 60-day period where equities can be purchased at these levels. If I’m wrong, I’ll know within 30 to 60 days, and I don’t mind being wrong now and again – just not all the time.” He likes Ford for its 5% dividend yield, its price-to-earnings multiple of eight times and the fact that you can now buy the stock for less than its book value. It’s a similar story at General Motors, another US carmaker which is virtually debt free, with profit expected to rise by around 12% this year. Brown says he buys stocks that he thinks will double in value in four years.
Microsoft looks the best it has looked for many years. Earnings have been flat to down for seven quarters, but it has now turned the corner. “Bill Gates is back as chairman of Microsoft and that means a lot to me. They will benefit from the number of computer devices in the market and some of the new products they are working on,” says Brown.
Boston Scientific is another company on the up-and-up. The company produces medical devices and has some new products, which Brown is excited about.
“It used to be a growth stock, and then went into a slump. It’s cut costs, improved margins, shifted products around and earnings will start to do well. Intel is another stock I own, and I’ve been impressed with how it held up during this latest market drop. It’s reinventing what it’s doing, and it has some very bright research people. It offers a good dividend, and I can see five years of great growth, and I see it reaching an all-time high within about five years.”
A proven track record
Brown learnt everything he knows from his father, and never took an investment course – “though I sure could teach one,” he says with a wink. “When I joined my dad’s company in 1960, I spent six months reading about companies, boards of directors, and management. We looked for guys with a good track record and followed them. My dad taught me how to read balance sheets and income statements.”
He pays little attention to the financial media and doesn’t heed the research of other analysts. He does it all himself. “I only trust my own research,” he says.
There are a few people he pays attention to: Leon Cooperman of Omega Advisors, Larry Fink of BlackRock Inc, and Warren Buffett. These are men with a long track record of success in the market, who blend their decades of hard-won experience with a good dose of common sense.
Brown hews rigidly to his father’s ethical code of protecting his clients’ wealth and avoiding the conflicts of interest that come when investment management crosses over into the broking business. He charges a 1% annual fee on portfolios he manages, and prides himself on his impressive track record. It’s a track record built on rigorous stock selection. He follows companies with good managers who have been tested in the most trying markets and it is a philosophy he has no intention of changing.
This article originally appeared in the 11 February 2016 edition of finweek. Buy and download the magazine here.
