Paul Cabot was born in Boston in 1898. He attended Harvard University, where he was nearly expelled for firing a rifle from his dormitory window. Despite this, he graduated in 1921 and completed an MBA at Harvard Business School two years later. During a brief stint at First National Bank of Boston, he studied the experience of British investment trusts.
He struck out on his own a year later to found State Street Investment Corporation (not to be confused with the better-known State Street Corporation), one of the first mutual funds, which he ran until retiring 34 years later in 1958. He also was in charge of Harvard's endowment between 1948 and 1965.
What was his strategy?
As late as the 1920s, most investment managers believed that stocks were too risky, and that people should hold most of their money in bonds instead. Cabot was one of the first money managers to argue that stocks should form the core of a portfolio (though he didn't rule bonds out entirely). He was also one of the first to base his investment decisions on financial modelling of expected earnings.
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Did this work?
During the first four years of his fund, when the fund was small, it returned 434% to investors. Returns were lower over the next decades, but they still beat the overall market. Under his watch, Harvard's endowment grew from $245m in 1950 to $952m 15 years later (this includes donations that flowed into the fund, but was largely due to investment returns). This return of just under 10% per year was an impressive achievement given that part of Harvard's money was invested in bonds and more conservative investments.
What were his biggest successes?
Cabot's best investments included the food processing company Kraft when it was a tiny dairy company, as opposed to the huge multinational conglomerate it is today. He kept around 40% of the fund's portfolio in cash during the 1929-32 crash, but when the US left the gold standard in 1933, he realised that the worst of the problem was over. As a result he aggressively ramped up the proportion of shares in the portfolio to 90%, enabling the fund to benefit from the prolonged rally.
What lessons does he have for investors?
Cabot's great insight was to see the merits of stocks when others shunned them (both at the start of his career and in the Great Depression). He understood how sober analysis of a company's finances and prospects can lead to great rewards.
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