Investment maverick

Ron Muhlenkamp doesn’t have much on the walls of his office.

The stark white vertical surfaces probably owe to the fact that Muhlenkamp & Co. moved into its offices in a new office park on Stonewood Drive in Wexford just this summer. While Muhlenkamp, who manages the company’s sole mutual fund, the Muhlenkamp Fund, talks about markets, inflation, interest rates, taxes and his passion of finding good companies, a cable financial channel flickers silently on the television screen on his desk to his left.

The Wall Street Journal is unfolded on a table behind him. A stack of documents holds one corner of his desk, a large computer screen another.

For Muhlenkamp, it’s anything but work.

“The reason I do it is it’s more fun than anything else I can find,” says Muhlenkamp. “There are more variables out there than anyone knows about.”

And he likes to have fun. He owns a Harley Davidson motorcycle and a Porsche. At 57, he enjoys senior league softball and an occasional game of pinochle.

“I’m not a great spectator,” he admits.

Of course his clients don’t really care what’s on his walls. They do, however, care very much about the human capital inside them.

A mutual fund and its manager, after all, make money for customers by buying and selling the right stocks at the right times, and Muhlenkamp has done that exceptionally well since the fund opened in 1988. The fund, valued at $395 million, has Morningstar’s top rating with five stars. Its five-year average return is nearly 15 percent, a performance Muhlenkamp attributes to a fundamentally simple philosophy: “We look for good companies at reasonable prices,” he says.

That simple, no-frills approach isn’t surprising, given Muhlenkamp’s Midwest roots. He grew up on his family’s Ohio farm, just east of the Indiana border. He tells the story about his father, who didn’t eat or sleep for two days when he took out a mortgage at 5 1/2 percent.

He also reveals how a sense of community while growing up shaped him.

“When you grow up on a farm and your neighbor breaks his arm, you go over and milk his cows,” says Muhlenkamp.

There aren’t as many opportunities to be neighborly in quite the same way in suburban America, but he and his wife, Connie, volunteer at their local fire company in Bradford Woods.

His penchant for things mechanical, fleshed out on the farm, where the ability to fix things is a prized skill, led him to MIT, where he earned a bachelor’s degree in engineering. But the prospect of designing bridges and buildings grew less attractive, and he became enamored of business.

He earned an MBA from Harvard in 1968 and set out to build a career in the less predictable but, to him, more interesting world of business and finance.

“It occurred one day to me that machines are pretty simple,” Muhlenkamp says. “People are a little more interesting.

He started his investment career with Berkley Dean & Co. in New York City as a portfolio analyst, then spent five years at Integon Corp., an insurance holding company where he also worked as a portfolio analyst and pension fund manager. During that period, he says, he developed the core of the investment philosophy that he practices today.

He came to Pittsburgh in 1975 to work for investment banker C.S. McKee, but by 1977 had launched the Muhlenkamp Co. as a financial management firm. In 1988, he formed the Muhlenkamp Fund.

Simple, not easy

Muhlenkamp’s approach seems remarkably simple on its surface: Buy good companies with strong upside potential and plan to hold them awhile, keeping in focus larger factors like interest rates and inflation.

But his investment philosophy and the reality of the complex nature of making money in the financial markets illustrate the distinction between the simple and the easy. His premise may be fundamental, but its execution is far more demanding on the intellect, on the psyche, and, it turns out, on the stomach.

“At crunch time, it’s not a mental challenge, it’s more a stomach challenge,” says Muhlenkamp. “Frankly, I get paid more for my stomach than my head.

Not that he gazes into a crystal ball, reads tea leaves or throws darts to pick companies that will allow his fund to sustain its growth. Muhlenkamp looks at lots of Value Line data to sniff out companies that are what he characterizes as Buicks selling at Chevrolet prices.

He looks at a company’s performance, particularly return on equity; sustained performance over time; management skill, especially how well the company controls costs; and labor relations. He quizzes the CEO on whether there are Wall Street analysts who understand the company, how it measures success and at what point employees begin earning incentives. All the while, he’s keeping an eye on the trending of inflation and interest rates.

The point of all of this sifting and crunching and investigating is to find values that an individual investor might not recognize and that the investment community has largely ignored.

“This top-down approach, combined with a focus on firms with healthy return on equity that trade cheaply, has produced one of the mid-value category’s finest long-term records,” says Morningstar analyst Brian Portnoy.

Looking at the data from his point of view can lead to interesting choices. Earlier this year, Muhlenkamp saw consumer demand and interest rates pointing to strength in home building, even though the economy looked like it was cooling.

He also saw growing strength among the public company builders, whom he says are taking market share “from the local guys with a hammer.” He was impressed with their ability to not simply build more houses but to be more cost-conscious and thus more profitable. The combined factors led him to invest in NVR Inc. of McClean, Va., a residential builder and mortgage banker with $1.5 billion in sales.

“What we call the investment climate is largely set by public opinion,” Muhlenkamp says, “and to some extent, my job is to exploit it. We tell our clients my job is to disagree with them. There’s no stock that you can’t buy for yourself. The only reason you would hire me is that you believe I can buy different stocks and bonds, hopefully for valid reasons, than you can buy yourself.

“The only way that I can do something different is I have to believe in something more than I believe in public opinion.”

So it’s little surprise that Muhlenkamp steered wide of the dot-com phase of the market, one he says cycled in about 18 months. During that period, he says there were two markets — the hype market and the rest.

“What we were saying is if you believe there’s going to be an upside, you’ve got to believe there’s going to be a downside. We were playing one and ignoring the other,” he says.

An optimistic view

At a time when analysts, politicians and pundits are wavering about the country and the economy’s future, Muhlenkamp’s outlook is remarkably sunny. Fair interest rates, low inflation and ample capacity in most industries, he says, augur well for the consumer.

“In an economy as free as ours,” Muhlenkamp says, “the consumer is king. In a free economy, every improvement is a new standard. The consumer is relentless.”

And nothing — not even the jolt the country took on Sept. 11 — can blunt the spirit and determination of Americans when it comes to living out their dreams, says Muhlenkamp.

“I don’t see anything that has killed the desire or the opportunity for Americans to better themselves through their own efforts,” he says.

In his own effort to better himself and the fund he manages, Muhlenkamp spends a good deal of time on the road, speaking to a couple of thousand of people each year. Last year, he rented a mobile home so he and his wife could travel to some of his engagements and he could do research.

His son, Jack, who handles information technology for the company, rigged up a satellite link so he could stay connected to the office and the markets. This year, he bought his own RV.

“Some of the companies that look interesting are smaller than they used to be,” Muhlenkamp says. “If I can put an office in a motor home, I can travel, see the country … and work at the same time.”

It might be work, but we’d bet it’s more like fun.