For anyone who believes in the school of hard knocks, the last couple of years in the money management business have been a real education. From the tech collapse to accounting frauds and bankruptcies, mutual fund managers have encountered a string of horrors that few people could have predicted.
Not many can get their money or pride back. But some of the brightest managers have learned or remembered some valuable lessons. Get ready to take some notes. Your only protection is to own a diversified portfolio of 20 to 30 securities or more, which should also provide a valuable cushion when you make your own mistakes. "No matter how much work I do, I expect to be wrong 20% to 30% of the time, because I didn't perceive changes in the economy, a company or the consumer," he says. "Or because I am not clairvoyant." Thankfully, Muhlenkamp missed the Internet bubble and the Enron collapse. His fund's three-year annualized return of 11.7% beats the S&P 500 by almost 15 percentage points. "We've looked smart over the past three years, but we could have done better." He knows from experience that bad news always shows up in the stock price first. "The price will give you warnings long before the fundamentals will tell you something is wrong," he says. On a weekly basis, Muhlenkamp monitors the performance of his stocks relative to the S&P 500. When their prices start deteriorating, he knows he should sell. "I learned this lesson 20 years ago," he says. "Most of the time I do it. But some of the time I make mistakes." Muhlenkamp now knows that he should have sold his stock in Calpine ( CPN), the independent power producer, when the stock weakened relative to the S&P last summer. "We have a sizable position in Calpine, and we still think it's a good company," he says. "But, by my own rules, I should have sold it in 2001." Indeed, it's down 83.8% over the past year. "Sometimes it's better to cut your losses and wait," he adds. "If you're right on the fundamentals, you can always buy it back."