Investment Experts Don’t Always Take Own Advice

Eric Miller, chief investment officer of Donaldson, Lufkin & Jenrette Securities Corp., recently asked 21 money managers who were assembled in Pebble Beach, Calif., about the strategy they are using to invest their own money.

Of the group, nine (or about 40%) said their personal strategy was more defensive than that of their clients, seven said theirs was about the same and five said they were more aggressive than their clients.

Like it or not, investment advisers don’t always practice what they preach--sometimes they tell clients one thing and do something quite different with their own money.

In fact, an informal survey that I conducted right before the October, 1987, crash showed that a number of folks who work closely with the stock market were pulling their own money out of the market even while most Wall Street firms were publicly professing unguarded optimism about the future of stocks.

Miller says he had a similar finding when he conducted a survey in 1987, just months before the crash. He said 60% of the investment advisers at that time said they were investing more conservatively than were their clients. They, of course, were the smart ones.

With the stock market now blithely moving to post-crash highs, I decided once again to ask the folks on Wall Street the big question: What are you doing with your own money?

What I found out was that these Wall Street pros--like most other investors--still remember the sting of 1987, and they’ve remained cautious about putting too much money into stocks. That, of course, also means that they’ve missed out of the big stock market windfall of 1989.

Here’s what some had to say:

Miller, who is 60, says he’s being fairly conservative because of his age. He has only about 25% of his investable money in the stock market. The rest is divided into a mix of cash, cash equivalents and bonds, the percentages of which Miller didn’t want to disclose.

Although Miller says he had predicted that the Dow Jones industrial average would go to 2,500 this year, he didn’t feel that the reward was great enough to offset the risk of having too much money invested in stocks.

Also, since Miller makes his living off the stock market, he didn’t want his paycheck and his investments riding on the same bet. “I didn’t see (the market) as having enormous potential,” Miller says, who adds that he will stick with his current portfolio mix unless his concerns about inflation grow.

Dudley Eppel, a managing director at DLJ, also has been cautious this year. “The only one who’s making money,” says Eppel, “is my wife, because she never sells anything.”

Eppel says his own investable money has been mostly in Treasury bills, which have been yielding around 9%. “I’m perfectly happy with 9%,” he says.

Like other victims of the crash, Eppel learned a lesson that actually hurt his portfolio’s performance during the past six months. “They,” he says, obviously referring to some mythical bad guys who steal wealth, “are not going to get a nickel back. Not after October.”

That William King, a trader with Prescott, Ball & Turben Inc. in Chicago, doesn’t like the stock market right now is obvious. He has 80% of his money in cash, and 20% in inflation-resistant gold stocks.

“People are too bullish,” says King. “So you are going to have limited upside.” With so many money managers being won over to an optimistic view of the market in recent weeks, King fears that the bulk of the money that could go into the market and push stock prices higher is already in the market.

Jack Conlon, executive vice president and director of the equities division at Nikko Securities, says that “like a lot of other people, I’ve been bullish (about the stock market) but haven’t pulled the trigger.”

He has about 30% of his investment money in bonds, an equal amount in stocks and the rest in cash. “My inclination is getting stronger and stronger to pull the trigger and buy some stock,” says Conlon. “I’m concerned that I might miss the boat.”

Conlon says he particularly likes stocks with takeover potential, such as Hilton Hotels and NWA Corp.; bank stocks like BankAmerica Corp. and Citicorp, and beat-up technology issues like IBM and Digital Equipment. When Conlon does pull that trigger, the 40% of his money in cash will end up in the stock market.

Suresh Bhirud, chief investment strategist at Oppenheimer & Co., turned cautious on the stock market about five months--and a couple of hundred Dow points--ago. About 20% of Bhirud’s money is in cash, about 30% in fixed-income investments and 50% in equities.

“I believe sentiment in both stocks and bonds is bullish. That means this is not the time I would get very aggressive,” Bhirud says. As for bonds, Bhirud thinks there is still plenty of time to get into bonds with long maturities before interest rates fall much more.

But if the economy does show signs of slowing, Bhirud says, he will increase the maturities on his fixed-income investments to lock in higher interest rates before they are no longer available.

Not everyone is cautious about the financial markets. L. Crandall Hays, director of investment strategy at Milwaukee’s Robert W. Baird & Co., says he’s 85% to 90% invested in stocks.

But Hays also is starting to have doubts. Last month, he pulled back from a 100% invested position and, he says, might take more and more of his money out of the market. “As (the market) goes higher, I’d pull back. If it hits 2,700, then I think it would be prudent to cut back some more.”

Is it time to start investing again in newspaper companies?

Drew Marcus, who follows the industry for Kidder, Peabody & Co., thinks that advertising that newspapers get from retailers is improving at a better-than-expected pace since early this year, and he’s cautiously advised clients that it is time to start buying the best--and only the best--newspaper stocks.

“Retail advertising is going to stabilize at a higher-than-expected level,” says Marcus, whose buy recommendations on Gannett Co. and the Washington Post helped those stocks during the past two weeks.

Retail advertising was up 3.8% in the first quarter, according to Marcus, which was the best gain in a year. He expects that this crucial advertising segment will improve by 4% this year.

“It’s still not back to the heyday,” says Marcus. “But it’s still a hell of a lot better than we saw in the third and fourth quarter of last year.” He thinks that both Gannett and the Washington Post--because of cost-cutting measures--will have good earnings growth this year.

Others, however, believe that newspaper stocks are risky, especially while there is still concern about a possible recession in the U.S. economy. And, they say, the small pickup in retail advertising that Marcus is seeing will not be enough to turn around the industry’s fortunes.

“We’re not looking for a pickup in retail advertising,” says John Morton of John Morton & Co., a Washington-based research firm that deals exclusively with media stocks. He says advertising revenue in general will grow 5% to 5.5% for newspapers this year--barely keeping up with inflation.

Dear Mr. Icahn,

It sure must feel good to pocket that $2 billion-plus you got from selling all those Texaco shares. But I can understand what a burden it must also be trying to invest so large an amount. You can’t really buy T-bills--it would be bad for your image as an in-the-know type of guy. And money market funds just wouldn’t get you a return that you’d be proud of.

So here’s some advice from your friends on Wall Street. I asked a number of people what they would do with the money, if they were you. Here are their answers.

- “I would wait, sit back and let the market try to guess what I’m going to do. He’s waited so long, why not wait another month or so. But it would depend on whether or not there was a compelling reason to do something quickly, i.e., to act as a spoiler in another merger. Then you might have to move faster.”--a Wall Street speculator.

- “Icahn wants to be a noted industrialist, so he might take the $2 billion and buy airplanes. On the other hand, he’s a trader at heart, so he may find it irresistible to go after USX Corp. My knee-jerk reaction would be to retire and stay on the Riviera, but I think I’d keep doing what I’m doing.” --a well-known investment banker who didn’t want to be well known on this particular question.

- “I’d probably buy a company. There are lots of stocks that haven’t moved at all in the last year, all through the basic-industry sector. These include aluminum, paper, chemicals--not every one, but most of them. That’s what I would do with it.”--Michael Sherman, chairman of the investment policy committee at Shearson Lehman Hutton.

- “I would put it to work, but exactly where I’d go is difficult to say. You have so much money and you want to take something big to make effective use of that much money. With the change of the guard at USX, there is a vulnerability. Anapte knows it. It’s a reasonable place to go.”--Monte Gordon, research director of Dreyfus Corp.

- “He’s a believer in the energy field, because of his positions in USX and Williams Cos. To think he might look back toward the energy field is an odds-on bet. If I had a $650-million profit, I would definitely look for another acquisition. I still think there are undervalued assets out there.”--Liam Dalton, chief executive of Capital Hill Group, a money management firm for wealthy people.

- “I’d quit my job and take off for Europe.”--a stock trader who also would partake of other pastimes that are unprintable.

As for me, here’s what I would do if I were Carl Icahn. First, I’d wait awhile to let the situation cool off. In a couple of months I’d start dropping hints that I have some suggestions for running USX Corp. Icahn, after all, does own 29.3 million USX shares, or around 11% of the outstanding stock, on which he already has a $410-million profit.

If that ploy isn’t sufficiently effective in getting USX’s management to do anything I wanted, I’d start leaking to the press that I was preparing an offer for the Pittsburgh-based steel and energy company. I’d even start talking informally to investment bankers about raising money. That always gets people’s attention.

USX’s stock closed Friday at $38 a share, so I’d hint that my bid would be in the high $40s. Then I’d make sure that the press found out that I was huddling with bankers.

By this point, USX should be very accommodating. Icahn has said he wants the company to split itself into two--one part consisting of the steel business and the other the energy operations. Perhaps he’ll start clamoring for a special dividend, or an increased regular dividend.

Icahn would have to be prepared to buy the rest of USX if push came to shove. But it probably won’t ever go this far, as Icahn discovered when he pulled this same ruse while going after Texaco last year. Soon USX’s stock will be up in price, and Icahn eventually will be able to sell his stock holdings.

Then everyone can start wondering which company is Icahn’s real target. Is it Union Carbide, in which Icahn is believed to own 3.5% of the company’s stock; Williams Cos., in which Icahn owns less than 5%, or some other unlucky company nobody’s thought of yet? I’ll save that speculation for another column.