Explorer Fund advisor shares 50 years of investing wisdom
January 23, 2014
What are the keys to being a successful investor? After a career spanning more than five decades, John "Jack" J. Granahan could be an expert witness on that subject.
Mr. Granahan joined Wellington Management Company in 1962, where he worked closely with John "Jack" C. Bogle, who started Vanguard in 1975, and John Neff, the storied manager of Vanguard Windsor™ Fund. In the 1970s, he managed Vanguard Explorer™ Fund and Vanguard Morgan™ Growth Fund. He then started his own firm, Granahan Investment Management, which became one of the advisors to the Explorer Fund in 1990.
Mr. Granahan, age 77, retired from portfolio management at the end of 2013. He remains chairman of the firm, and his co-managers, Jane M. White and Gary C. Hatton, continue to serve as advisors to the Explorer Fund. (Learn more about the Explorer Fund.)
Vanguard.com recently interviewed Mr. Granahan about lessons learned from his career. The following are excerpts:
What qualities does an investment manager need to be successful?
Mr. Granahan: I've found that a long-term outlook is very important. Some might question how much you can know about the long-term prospects of small emerging growth companies, the focus of our firm. But small-cap growth requires the imagination to look beyond the current quarter or the current year, to take a longer view.
In terms of a personal temperament, curiosity is really important. By that, I mean the desire and the wherewithal to look beyond the surface and to dig deep to see what's behind the numbers.
I'd also mention humility, and that's because our business is a business that's dealing in the future and, therefore, with uncertainty—particularly with small-cap growth. And as a result, you're going to make a lot of mistakes. The difference between patience and stubbornness is important to recognize. You really have to avoid the stubbornness, and I think a dose of humility really comes in handy.
On the other hand, you have to have confidence too. One does get challenged in this business, but experience and knowledge will improve one's confidence that overall your batting average is going to be good. Understanding the arithmetic of the open-ended potential of winners in the small-cap company portfolio is an advantage to the manager. I think these are extremely important things.
At our firm, we've also emphasized in-depth research and building relationships with the managements of the companies in which we invest.
Which of those qualities that you mention is most applicable to an individual investor?
Mr. Granahan: For individual investors, I'd say that the long-term outlook is very relevant. I mentioned the challenges that go along with investing. One of the biggest challenges is not overreacting to short-term developments. That's why long-term perspective has to be an important part of your investment philosophy.
Who helped shape your investment philosophy?
When I joined Wellington Management in the early 1960s, Jack Bogle was running the company, and he certainly was one of my mentors. What came from Jack that was deeply embedded in me, and I'm sure the other analysts and portfolio managers at Wellington, was the importance of knowing our role as fiduciaries with our client's assets. Putting the clients first was something that we learned very profoundly. That has been a guidepost for me over the years. Other things about working for Jack Bogle: He certainly always expected the best out of people and set a very high bar in terms of meeting that requirement.
The second person that I was very fortunate to work with as a mentor was John Neff. John was just beginning to develop his management of the Windsor Fund. He and I went out and visited companies together, and I learned a great deal from those experiences. I think of John as the analyst's analyst: his approach to examining the fundamentals of a company, getting to know the management, and then putting your imagination to use to envision what could happen to a stock price versus the current price. All of that was extremely helpful to me.
In what ways have the financial markets and the investment profession changed during your career? In what ways have they stayed the same?
Mr. Granahan: One of the biggest changes that I've seen has to do with the efficiency of the market—the pace at which information gets distributed and digested. Compared with when I began in the business, information about stocks is disseminated much more rapidly than it ever was.
Today's business is dominated by professionals, just like us at Granahan Investment, who are poring over the data. In the past, gathering data was important to the process. Today, filtering and evaluating that data has become primary in the process.
We do think the market's efficiency in the small-cap area is less because there's less coverage of these companies than the larger ones. But nevertheless, there's greater efficiency in all market segments. It's very different than it once was when a smaller fraction of the market was influenced by the professional investor.
What's remained the same is that, ultimately, earnings drive stock prices. The only difference now is there is the willingness by the market periodically to discount potential earnings further and further in the future.
Looking back over your career, what are you most proud of?
Mr. Granahan: The first thing that comes to mind is the firm that we've built. Granahan Investment Management has been in business since 1985, almost 30 years. We keep the client first in everything we're doing. I'm very proud of our long-term relationship with Vanguard.
We've been able to create a culture that attracts people who really love to do research, who like to do the things that we've been talking about: visiting companies, getting to know them well, gaining the trust of the managements, and then getting to be the experts.
The investment process that I, together with other people in the management here, have been able to hone is something we're very proud of. We especially value the structured diversification in our portfolios of growth through companies in different life cycles. We refer to them as: "Pioneers," "Core Growers" and "Special Situations."
I know that Jane and Gary, who both helped start our firm, and the rest of the team will continue to do an excellent job managing our portion of the Explorer Fund. The best is yet to come, as I tell people.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Prices of small-cap stocks often fluctuate more than those of large-company stocks.