Described as an all-cap, contrarian value manager, Kleinschmidt has managed the Tocqueville Fund since 1992. He has a BBA from the University of Wisconsin, an MA from the University of Massachusetts and is qualified as a CFA.
In his inimitable style, Forbes draws out Kleinschmidt on a host of investing topics ranging from index funds to gold and small caps.
On index funds
According to Kleinschmidt, most investors underperform the indices because they are unable to divorce their emotions from the ups and downs of the market, and tend to get out of the investment at the wrong time, or pile in when the market is already up.
Buy index funds by all means, he says, but you need to buy and stick with it – and it is here that investors commonly fail. “One of the reasons you pay a professional money manager is that he helps you keep a distance between your money and your emotions,” he says.
The key to making money in the stock market is to stay invested, says Kleinschmidt, and this is where the professional money manager can make all the difference.
On the miracle of compounding
Kleinschmidt says that an investor actually needs to outperform the index by a very small margin in terms of basis points to generate outsized returns. The real difference comes from using the miracle of compounding to enhance returns over the long term.
“If you can do 50-60-100 basis points better than the market, over a 20-year period, you can make a profound difference to the amount of wealth you accumulate,” he says, citing Albert Einstein’s famous quote on compounding being man’s greatest invention.
But the investor has to be committed for the long-term, says Kleinschmidt, as “investing is a marathon.”
“I am a value guy”
On his investing style, Kleinschmidt usually takes the opposite side of the consensus. That means he would look at stocks which are out of favor, or where consensus is rather bearish. “It’s very hard to make money when you agree with everybody else,” he observes.
Very often, a contrarian call may be successful simply because the time frame is different, he says, citing Target as an example. The recent adverse publicity may be bad for the stock in the short-term, but according to Kleinschmidt, there may be value in the company looking three or four years out.
Are individuals still leery of the market?
Kleinshmidt says that after the mishaps such as the tech bubble and the 2008 crisis, the view on investing may have undergone a structural, even generational sea change. He points out that through much of the recent rally in equities, huge inflows continued into bonds, where returns were poor compared to equities. This indicated that the Average Joe investor, in the current generation, may have shifted his view on what constitutes a judicious investment.
We are still in a tepid growth mode, he says, citing obstructive governmental policies that could make 2.5% growth the new normal. However, he does believe that underlying numbers in the US economy may have been clouded due to the weather, and that the real economy may be faring better than what these numbers say.
Interestingly, he says there is a very real probability that China could see a major recession after the massive “overbuilding” in recent years, and nothing grows to the sky. China, he says, could be the “fly in the ointment.”
On gold’s fall
Gold touched $1900 in an uncertain economic environment of poor growth, out-of-control deficits, and the unwinding in Europe, explains Kleinschmidt, and investors probably saw no end in sight for these problems.
Later, gold market participants concluded that things were really no longer as bad as they previously thought, and this led to the metal’s fall all the way from $ 1900 to $ 1200, says Kleinschmidt.
Gold will go up and down, says Kleinschmidt, depending on investors’ views on how well governments are addressing underlying economic problems, which in turn will reflect on countries’ currencies. “And as you know, gold is just the inverse of fiat currencies,” he adds.
Kleinschmidt current investments in small and midcaps
Kleinschmidt is seeing more opportunity in smaller companies rather than the big names. Currently his investments include Bob Evans Farms Inc (NASDAQ:BOBE), McDermott International (NYSE:MDR), Fusion-IO, Inc. (NYSE:FIO), Bill Barrett Corporation (NYSE:BBG) and Energy XXI (Bermuda) Limited (NASDAQ:EXXI).
Kleinschmidt large holdings
Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG), Xerox Corp (NYSE:XRX), Apple Inc. (NASDAQ:AAPL), Intel Corporation (NASDAQ:INTC), The Procter & Gamble Company (NYSE:PG), QUALCOMM, Inc. (NASDAQ:QCOM) are long term holdings.
Kleinschmidt biggest mistakes
According to Kleinschmidt, one of his biggest mistakes after the 2008 crisis was not watching the government closely enough, particularly in the case of the nationalization of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
He also regrets having made some early sales in a big winner such as Google Inc (NASDAQ:GOOG).
See the full interview below