Richard Driehaus built a fortune by rejecting the most repeated investment advice on Wall Street. Where others preached patience, value, and diversification into mediocrity, Driehaus bought stocks making new highs and let winners run. His approach shares fundamental DNA with trend following: price is the signal, not the noise.

Everyone wants to be rich, but few want to work for it.

The Paperboy Who Read the Wall Street Journal

From the Chicago Sun-Times:

Richard’s mom was Irish, and he takes after her. The only son of a mechanical engineer, he went to St. Ignatius and DePaul but, “I credit more of my success to what the nuns taught me at St. Margaret’s.” The School Sisters of Notre Dame got their message through to Richard Driehaus. “The sisters told us that you’re responsible for your own actions.” The kid rang doorbells in Brainerd growin’ up. “Hi, Mrs. Murphy. I’m Richard Driehaus, your paperboy, collecting for the Southtown.” The paper delivery was 35 cents then, but most of the ladies would give him two quarters and tell the lad to keep the change. “I would make several dollars a month in tips, and at Christmastime I would make as much as $25 or $30.” He bought his first shares of stock with the newspaper route money when he was 13. At Ignatius he read the Wall Street Journal in the cafeteria. The story goes that one day at St. Margaret’s, Sister Henricka asked the class, “What’s 3 percent of $10,000?” Everybody but Richard raised their hand, and Sister asked him why. He said, “Sister, I’m just not interested in 3 percent.”

That line — “I’m just not interested in 3 percent” — is the whole story. Driehaus was not looking for safety or steady coupon clipping. He was looking for price movement, for stocks in demand, for the market’s revealed preferences rather than an analyst’s modeled ones. The nuns taught accountability. The market taught asymmetry.

The stock market is like a woman. You observe her. You respond to her. And you respect her.

Observe, respond, respect. That three-word framework is closer to a complete trading philosophy than most 300-page investment texts. It describes a reactive, price-driven discipline — one that listens to the market rather than argues with it.

Unconventional Wisdom in the Investment Process

Excerpts from a speech given by Richard Driehaus:

Often, the opportunities for truly attractive investments are not obvious. In fact I frequently have to challenge what appears to be conventional wisdom. Today, I would like to present a similar challenge to you. I assume that most of you are relatively conservative investors, with capital preservation as one of your major goals. I also assume that, as conservative investors, you would probably agree that the best way to preserve capital is to use a sensible asset allocation. The challenge is, what is sensible?…Now let’s move to our second area: things I’ve learned while investing money over the years.

A Stock’s Price Is Rarely the Same as a Company’s Value

The first thing I’ve learned is that a stock’s price is rarely the same as the company’s value. The reason for that is the valuation process is flawed. Stock prices are heavily affected by market dynamics and by investors’ emotions. These emotions swing widely from pessimism to optimism. Also, many investors buy stocks with the intention of holding them for 1 to 5 years based upon information that really only applies to a short-term time horizon. While the information they are using to invest may be valuable, it is often the wrong information for their investment timeframe. If people invest in a company based on current information, they have to be prepared to act on any changes in that information in a much shorter time frame than most investors are prepared to do.

This is not merely a critique of value investing, it is a description of market reality. Price is a real-time vote. Valuation is a projection. Driehaus trusted the vote.

Investment Paradigms Worth Avoiding

I don’t know how best to define a paradigm other than to give you one. But, I can say that they are beliefs that most people have. Unfortunately, they are often outdated and really no longer true. However, people tend to hold onto these beliefs. In fact, they search for evidence to support them and reject information that conflicts with these paradigms.

Buy Low and Sell High

Perhaps the best known investment paradigm is buy low, sell high. I believe that more money can be made buying high and selling at even higher prices. I try to buy stocks that have already had good price moves, that are often making new highs and that have positive relative strength. These are stocks that are in demand by other investors. What is the risk? Obviously, the risk is that I’m buying near the top. But, I would much rather be invested in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around.

This is momentum investing stated plainly. Trend followers will recognize it at once: price strength is evidence, not a warning. A stock making new highs is a stock the market is selecting. That selection matters more than any analyst’s price target derived from last year’s earnings model.

Just Buy Stocks of Good Companies and Hold onto Them

Another mistake: just buy stocks of good companies and hold on to them; that way you don’t have to pay close daily attention. I would say: buy good stocks of good companies and hold on to them until there are unfavorable changes. Closely monitor daily events because this will provide the first clues to long-term change. Remember, just as the business value does not equal the stock price, things are always changing, and yesterday’s good company may not be today’s great investment.

The world changes. So do companies. Holding because you once made a sound decision is not a strategy, it is inertia. Driehaus demanded ongoing attention, ongoing evaluation. His system was not passive.

Don’t Try to Hit Home Runs; You Make Money Hitting a Lot of Singles

A third paradigm is don’t try to hit home runs, you make the most money by hitting a lot of singles. I couldn’t disagree more. I believe you can make the most money hitting home runs. But, you also need a discipline to avoid striking out. That is my sell discipline. I try to cut my losses and let my winners run. Perhaps that’s a paradigm too, but it is one that works.

Cut losses. Let winners run. Every serious trend follower operating today traces this principle back to its source. Driehaus did not arrive at it through a different path, he arrived at the same truth from the equity side. The philosophy transcends asset class.

You Must Have a Value-based Process

Often when I talk to consultants, they like to see a very systematic, value-based process. They think that each stock has to be submitted to some type of disciplined, precise and uniform evaluation. But the real world is not that precise. I’m convinced that there is no universal valuation method. In fact, in the short run, valuation is not the key factor. Each company’s stock price is unique to that company’s place in the market environment and to its own phase in its corporate development.

The Best Measure of Investment Risk Is the Standard Deviation of Return

Another paradigm and one that I deal with frequently is that the best measure of investment risk is the standard deviation of return. In other words, volatility. But, volatility only measures risk over the short-term. We are discussing long-term objectives. For most investors, a major long-term risk is portfolio underperformance, due to insufficient exposure to high returning, more volatile assets. In my opinion, investment vehicles that provide the least short-term volatility often embody the greatest long-term risk.

This reframing of risk belongs in every serious trader’s vocabulary. Low-volatility instruments are not safe. They are slow. Long-term underperformance destroys capital as reliably as any drawdown. Driehaus understood that smoothing your returns on the way up costs you far more than a bumpy ride through a winning position.

It’s Risky to Place Your Money with a ‘Star System’ Manager

It’s risky to place your money with a star system manager. I disagree! In any industry, performance is achieved by the stars. Working with a diversified group of investment management stars is probably the safest way to invest. Think about it: great ideas, inventions and works of art have always been created by individuals, not groups or committees. This is also true in the investment business: good long-term results have been achieved by talented individuals.

The Driehaus Connection to Trend Following

Richard Driehaus was not a turtle. He did not trade futures. He operated in equities, managing money through Driehaus Capital Management in Chicago. Yet his framework overlaps with trend following on every core principle: follow price, cut losers, ride winners, reject the consensus narrative, treat volatility as an asset rather than a liability.

He was originally profiled in New Market Wizards by Jack Schwager, the same book that gave serious traders a structured look at what separates sustained performance from lucky streaks. The common thread across every Wizard in that book is not genius or inside information. It is discipline around process, and the courage to let price lead.

Driehaus built his career on exactly that courage. He started with newspaper tips turned into stock purchases at age 13. He ended with a firm that managed billions. The distance between those two points was not luck — it was a clear, repeatable, price-driven investment process that most of his peers spent their careers arguing against.

More on Driehaus

• Richard Driehaus was originally profiled in the New Market Wizards
• Richard Driehaus Home Page

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