Born: Chicago, Illinois in 1942
Affiliations: Driehaus Mutual Funds, AGF Investments Inc, VAM Funds
Most Famous For: Richard Driehaus is famous as founder of Driehaus Capital Management which produced compounded annual return in excess of 30% net of all fees over 12 years. In the year 2000, Driehaus was named Barron’s “All-Century” team of the 25 individuals who have been the most influential within the mutual fund industry over the past 100 years.
Richard H. Driehaus is highly regarded in the investment industry as an expert in momentum investing. Although Driehaus is not as well known in public as the likes of Warren Buffet and George Soros, his performance record as a fund manager has been truly phenomenal. His extraordinary success as an investment manager can be attributed to his expertise in “aggressive growth” style of equity investment management.
Investment Management Career
Driehaus began his career in 1968 with his employment at A.G. Becker, where he worked in the Institutional Trading Department as a Research Analyst. Two years later he became the company’s youngest portfolio manager and was ranked among the top 1% of his peers measured by the A.G Becker Fund Evaluation Service. Before forming his own brokerage company “Driehaus Securities Corporation” in 1980, he worked at various other brokerage firms including Mullaney, Wells & Co. and Jesup & Lamont LLC. In 1982 he formed his second company, Driehaus Capital Management LLC which currently has $4.5 billion in assets under management.
Investment Philosophy
Driehaus views investors’ expectations of a company’s earnings growth as the principal driver of its stock price. Companies which have a record of strong and consistent growth in earnings have been most success full ones. According to Driehaus, the key to superb performance in the stock market is picking companies with the greatest potential for earnings growth. He has focused on small cap stocks instead of large cap stocks. Interestingly, the high growth small cap stocks that meet Driehaus’ criteria often sell at extremely high P/E ratios. His approach of stock picking is in sharp contrast to the more conservative approach called ‘value investing’ whereby an investor tries to find undervalued stocks having relatively low valuations evident by their low P/E ratios. He believes that such an approach of buying only stocks with average to below-average P/Es will automatically eliminate many of the best performers. Price to earnings multiples of growth stocks are usually very high. Driehaus believes that a stock trading at a seemingly very high multiple of current earnings may or may not be a good buy depending on the duration and rate of growth of its income stream. Furthermore, Valuation methodologies used by analysts are far from being absolutely correct and do not always capture the market dynamics. As such it is not appropriate to search for a ‘correct’ P/E ratio for a stock. Each company has a unique environment and competitive position in its industry and a company’s P/E ratio should be evaluated while taking into consideration a multitude of other factors.
Trend Follower/Momentum Strategist
Richard Driehaus is considered to be the father of momentum investing, which might be defined as identifying and buying stocks in a strong upward price move and staying with them as long as the upward move continues. The basic premise of momentum investing is that short term performance is repeated; winners continue to be winners and losers continue to be losers in the short run.
Technical Analysis
Driehaus invests primarily based on fundamentals. However, to better time his entries and exits and to confirm his stock selection, he considers technical analysis as an invaluable tool. He has been using charts for about twenty-five years and has found them to be very helpful and reliable. Almost always he buys strongly up trending stocks which are showing strength relative to the broader market. These stocks happen to be the ones which are frequently making new highs and therefore are in demand by the public. Obviously this strategy carries the risk of buying a stock at its top but Driehaus feels much more comfortable buying a stock that is rising in price rather than buying a stock that is already in downtrend and guessing when it will turn around. He believes that instead of reading just one chart it is far more useful to look at charts in multiple time frames e.g. daily, weekly and monthly because it gives investors different perspectives.
Market Efficiency
Richard Driehaus, though not a critic of the efficient market hypothesis, contends that stock’s price rarely equals company’s true value and he believes that there are apparent inefficiencies in markets which can be exploited to achieve superior returns. One such inefficiency is the so called “neglected firm effect” whereby stocks less followed by analysts tend to outperform the ones getting most analyst attention. Driehaus’ ability to find such stocks with exciting prospects has greatly helped him in getting above average returns.
Advice for Investors
Successful investing requires a lot of hard work and dedication. Driehaus’ advice to individual investors is that in order to succeed in market every trader should develop his own trading philosophy which matches his personality. This will more often require rigorous research and commitment of time. A carefully crafted investing strategy will provide her the confidence necessary to persevere with her methodology during hard times. There are times when even the most successful strategies don’t seem to work well and traders who don’t have faith in what they are doing tend to get frustrated.
Philanthropist
Richard Driehaus has a truly a multidimensional personality. In addition to being a fund manager he is also famous as a philanthropist. He has contributed to a wide variety of philanthropic and community-service oriented projects, individually and through the efforts of The Richard H. Driehaus Foundation and the Richard H. Driehaus Charitable Trusts.
Quotes
“The stock market is like a woman. You observe her. You respond to her. And you respect her.”
“You don’t have to be right the majority of the time, but you do have to take advantage of the situations when you are right”
References
“The New Market Wizards (Jack Schwager, Harper business 1992)”
“Investment Gurus (Peter Tanous, New York Institute of Finance, 1997)”
“The Global-Investor Book of Investing rules, invaluable advice from 150 master investors (Philip Jenks, Stephen Eckett, 2002)”
By Muhammad Raheel