Winning the home run hitter's game

(Money Magazine) -- Investing is not only about buying the right assets at the right time. It's also about having rules that keep you from doing dumb things at the wrong time.

Of all the great fund managers who have appeared in Money Magazine over the past decades, no one proved that point better (or more entertainingly) than Ralph Wanger, the wisecracking, philosophizing manager of the Acorn Fund.

Wanger at his Chicago office with an unofficial adviser.

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Wanger set out in 1970 to invest in small companies; through 2003 he did that and only that, with remarkable success. While the S&P 500 index climbed 12.1 percent a year, Acorn racked up an annualized 16.3 percent, one of the best records ever.

Wanger, 72 and retired, recently met with Money's Jason Zweig. As usual, Wanger asked nearly as many questions as he answered - and in the process found time to explain why life is like laundry, why focus matters and what Babe Ruth teaches us about stock picking.

Q. Why do you think you turned out to be a good investor?

A. At Acorn we had a clear philosophy - to be long-term holders of smaller companies with financial strength, entrepreneurial managers and understandable businesses - and we stuck to it.

Sticking to it is key. Richard J. Daley's one ambition was to become mayor of Chicago. Not President, not ambassador to the U.N., just mayor of Chicago. And since he already was mayor of Chicago, his life was much simpler. I thought that was worth emulating.

Q. Anything else?

A. I had always thought that to be a good investor you needed to hit a lot of singles and not strike out often. I was wrong. Investing, especially in small companies, is a home-run-hitter's game.

Q. When did you learn that?

A. Late '70s, maybe. The point is, 99 percent of what you do in life I classify as laundry. It's stuff that has to be done, but you don't do it better than anybody else, and it's not worth much.

Once in a while, though, you do something that changes your life dramatically. You decide to get married, you have a baby - or, if you're an investor, you buy a stock that goes up twentyfold.

So these rare events tend to dominate things. At Acorn, for example, I might have owned 300 stocks at any given time; most disappeared into the laundry basket.

But 10 might go up many times in value, and they made all the difference.

Look, how many home runs did Babe Ruth hit in his best year?

Q. Sixty, in 1927.

A. How many times did he strike out that year?

Q. Darn, I used to know that. I think it was...

A. Why don't you know?

Q. Uh, because when you hit that many home runs, it doesn't matter how many times you strike out.

A. Exactly. You're a great straight man.

Q. Thanks. So how many times did Babe Ruth strike out?

A. Don't know. Not interested. It's the winners that count. You want to have big positions in your winners, and the losers are trivial, eventually.

Q. But you can't just run out and find a stock that's going to rise twentyfold. No one can see that clearly into the future.

A. If you're looking for a home run - a great investment for five years or 10 years or more - then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge.

Q. For example?

A. A $600 PlayStation now has more computing power than you could have gotten 20 years ago for $100,000. So you don't want to invest in the computing power itself; those prices keep dropping. You want what's downstream from the technology.

Years ago I bought International Game Technology, which took a simple microprocessor, packaged it with coin slots, called it a slot machine and sold it to casinos for $8,000. It was a great stock.

Q. Are the principles of investing helpful elsewhere in life?

A. Being disciplined, being honest, having a set of rules and following them no matter what, thinking long term, controlling your emotions - these are all useful. But only so useful and only in part of life. You don't want to treat your wife or your kids like an investment.

I mean, you don't want to say, "Kid, you got a D-minus in English. I'm selling you." That doesn't work.

Editor's note: In 1927, Babe Ruth struck out 89 times.