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August 31, 2002

A Career With a Value Firm

By Tom Taulli

Michael Ray, a pro who wanted to trade stocks since he was a teenager, had once considered a career as a retail broker. "I soon realized that a retail broker is in a sales position and is not a trader," he said. "So I steered towards the institutional side."

It all began after he received an undergraduate degree in business from Towson State University. Ray's first professional job was in 1987 for Legg Mason, which is based in Baltimore, Maryland.

And he has been with the firm ever since.

In the Backoffice

Ray started in the backoffice, in the purchase and sales department. He later became an assistant trader and then a vice president and head trader. He now overseas all the trading for Legg Mason Funds Management. The desk has three traders. Assets under management are approximately $20 billion.

Ray work's for a storied firm. Raymond Mason founded Legg Mason in 1962. In fact, he is still chairman and chief executive. In 1970, he merged his firm with Legg & Company in 1970, a firm that was founded in 1899.

"Being a mid-level firm has many advantages," Ray said. "One that has been very important to me is training. I was able to learn many aspects of the business such as settlement, seeing a ticket go through the system and so on. Also, I have access to many high-level people in the firm."

Legg Mason has some of the top portfolio fund managers in the world, including Bill Miller. He is the only portfolio manager to beat the S&P 500 for the last eleven years. (A book published on his philosophy is called, "The Man Who Beats the S&P: Investing with Bill Miller.")

Every morning, Bill Miller and the other PMs have a meeting with the traders. "We talk about pertinent news, we review transactions, we talk about order flow," Ray said. "We also try to give the PMs market color. It's kind of like market intelligence."

Ray undoubtedly believes that the trading business is much harder now than just a couple of years ago. One big problem he identifies is decimalization. "I think it has resulted in much of the volatility," Ray said.

But he is undeterred. Ray believes that this is an opportunity for traders to be creative and to stand out. "I look at my role as having a fiduciary responsibility for making the right trades," Ray said. "All too often traders fail in this regard and they let the market or computers do the work."

At Legg Mason, the PMs have a strong value orientation. Ray has both short-term and long-term price targets. Moreover, throughout the trading day, he constantly monitors the market and tracks each security. "Our philosophy is to trade when we can, not when we have to," Ray said.

To that end, Ray says he depends heavily on sales traders on the Street. "This gives us a decided edge," he said. "We are very demanding. And our goals are very clear. We want efficiency and we want the best coverage that the sellside would give any other top client."

That goal is critical in the current environment. "The market definitely needed to come down," Ray said. "Valuations were outrageous. But this is a great environment for a value approach. Investors need to look for great management that can generate moderate growth."

Ray said that investors should no longer expect 12 percent or 15 percent annual returns. Instead, he thinks annual returns will settle around 5 percent to 6 percent. "I think about 2.5 percent of the return will actually be dividends," he said. "So, yes, things have really changed over the past few years in many ways."