Opportunity Is Everywhere for Smart Investors

Investors, as usual, read the headlines differently last week. And that’s why the stocks of strong, healthy savings and loan companies hit new highs after President Bush unveiled a program for dealing with the industry’s troubles.

Investors saw the doughnut, not the hole. Though Bush’s plan levied higher insurance charges on the savings and loan industry, the promise that sick S&Ls; would be weeded out meant brighter prospects for the healthy. And so the stocks of such firms as H. F. Ahmanson (Home Savings), CalFed, Golden West Financial and Great Western Financial all went up.

Which confirmed the insight of two prominent mutual fund managers, Peter Lynch of Fidelity Magellan Fund and John Neff of Vanguard Windsor fund. Both hold S&L; stocks in their fund portfolios because, as they explained recently in Barron’s financial weekly, they see a healthy mortgage industry despite problems at some S&Ls.; Mortgages are bigger, Lynch pointed out; the house that once was bought with an $18,000 mortgage sells today at a price requiring a $100,000 mortgage. As a result, business will grow for mortgage lenders, such as the S&Ls; whose stock prices rose last week.

The point of that story is what it says not of S&Ls; but of investors like Lynch and Neff. Though they’re very big investors--Lynch with $11 billion invested in 1,300 stocks, Neff concentrating $5.6 billion in about 70 stocks--their thinking is disarmingly simple and clear.

Plenty of Opportunity

In fact, it is the kind of thinking that any investor, amateur or professional, is capable of, Lynch maintains. And that’s the message of his forthcoming book, “One Up on Wall Street”: That the individual investor has a place in the stock market.

Opportunity, says Lynch, is all around you. Investors in Southern California could have seen long before professional Wall Streeters that Newhall Land & Farming was sitting on valuable properties. Newhall, the Valencia-based developer, has been a stock market winner, rising from about $11 a share six years ago to $51 today.

To be sure, you can do well in mutual funds: Magellan has posted average annual gains of 18% over a long period. Neff’s Windsor has a comparable long-term record and was up 27% last year. But what has helped the funds do well are their big gainers, such as Ford--which was losing money and selling for $3.50 a share in 1981 but is highly profitable and selling for about $56 today--a 16-fold rise in eight years.

Any investor could have made that winning investment in Ford, argues Lynch. It took no great sophistication to notice years ago that the company was producing more attractive cars. “This is not a complicated business,” he says. “All it takes is simple logic and fourth-grade arithmetic.”

Ignore Gloomy Forecasts

Why is Lynch, who earns a reported $3 million a year at Fidelity, preaching to the masses? Because he worries that individual investors are confusing gambling with investing, playing options on General Motors--in which they can be wiped out in short-term fluctuations of the stock when they should be buying GM shares and benefiting from long-term price appreciation and the growing dividend.

And he thinks it’s a mistake for investors to be put off by nervous economic forecasts. Both Lynch and Neff think reports of debt-burdened American consumers and corporations are overblown. Consumer interest payments, says Lynch, are a lower percentage of family income now than they were in 1970. And as for corporations, most of the major ones such as Digital Equipment, Boeing and General Electric have more spare cash than debt. “They are banks unto themselves,” says Neff.

What does that mean? That the companies may have values and capacity to earn income that remain to be fully recognized in higher stock prices. You can’t predict whether a company’s stock will rise tomorrow, Lynch explains in his book, but you can study its operations and draw conclusions.

“You’ve got to do the work, of course. Merely checking prices with a calculator and the newspaper is not work,” he says. “Pull out the annual report, read the quarterlies and business news, keep abreast.”

And have patience. “The big winners I’ve had have come in the third, fourth or fifth years I’ve owned the stock,” Lynch says. “I was underwater with Bank of America for three years.” He bought BankAmerica stock at $20 a share, and again when it dropped to $15, because he could see that the company was cutting its costs. But losses on bad loans kept increasing and the stock fell. Finally, says Lynch, “it got to $8 or $9 a share and I bought 2% of the company.”

Now BankAmerica has gone back to $21 a share, and Magellan Fund has a gain on its investment. But what persuaded Lynch to stick with BankAmerica all the way down? It was noticing, even when the news seemed to portend bankruptcy, that loan losses were declining while cost reductions continued. “The fundamentals of the investment hadn’t changed,” says Lynch calmly.

Clearly, investing takes nerve and isn’t as easy as Lynch suggests. But clearly, too, the amateur who does the work has a fair shot at the rewards.