Market Watch : In Long Term, It’s Survival of the Fittest : Stocks: Pasadena-based Provident Investment Counsel banks on solid companies to ride out temporary declines in the economy.
Wall Street has been acting lately as if the world is coming to an end, and as if the stock market is headed for the Big Zero. For long-term investors who are trying to sit tight with their stocks, this is a very trying time.
But the view from Pasadena-based Provident Investment Counsel might offer a bit of solace. Provident has been one of the hottest money managers of the past 10 years--not, however, because it forecasts the economy or shifts money around dramatically at every turn in the market.
Instead, Provident Chairman Robert Kommerstad says, his firm’s strategy is simply to buy good stocks and to let their gains compound long term, as opposed to constantly trying to “buy at the right time and sell at the right time.”
It sounds basic, yet it’s not an easy stance to maintain in a market such as the current one, Kommerstad admits. If you judge the market by its historical bell-curve pattern--the psychological trip from contempt of stocks, to confidence, then to concern and finally capitulation--Wall Street could either be at an early “concern” stage or a late “contempt” stage, Provident figures.
But Kommerstad has no interest in trying to predict the market’s next move. “We just try very hard to adhere to the stuff that we believe in,” he says.
That patient attitude has delivered solid results for Provident’s clients, who now have $4.5 billion invested with the firm:
* Provident’s stock accounts scored an average annual return of 19% in the 10 years ended Dec. 31. The Standard & Poor’s 500-stock index, in contrast, was up 17.4% a year in that period.
* Last year, Provident’s stock accounts soared 46.9%, versus a 31.6% gain for the S&P.;
With the market plunge of recent weeks, Provident’s portfolio is down about 7.5% year to date. But it’s still better off than the S&P;, which is off 11.1%, including dividends.
Provident continues to stick with many of the growth stocks that fueled its gains in the 1980s and in the first half of this year, names like Home Depot, Wal-Mart, Waste Management, Boeing, Tiffany and St. Jude Medical.
The dramatic selloff of those stocks since mid-July hasn’t soured Provident on its future. Although some analysts have suggested that growth-stock mania has been destroyed by the stocks’ abrupt plunge, Kommerstad thinks that attitude is absurd. He buys stocks of companies that are expected to increase earnings at twice the market average over time. Using pure logic, he asks, how can anyone believe that those stocks will under-perform the market in the long term?
“If there is any relationship between stock prices and earnings power, we’ll win out,” he said.
The 63-year-old Kommerstad and his team of 17 professionals are running against the recent trend in money management, which is to forget stock picking and instead just “index” one’s portfolio; that is, buy all the stocks in the S&P; 500, and thus be guaranteed you’ll at least match the market.
Indexing worked well in the ever-upward bull market of the 1980s, Kommerstad concedes. But this year has clearly shown that Wall Street is in a new era, where a stock’s individual qualities are much more important than what’s going on around it, he said.
Because Provident places a heavy emphasis on its own stock research, the new era suits the firm well, says Jeffrey J. Miller, 40, executive vice president. Especially in a slow economy, “it’s stock picking that will make a difference” in money management, he argues.
Although the firm’s size would allow it to invest in hundreds of stocks, Provident keeps its portfolios limited: The major stock portfolio has only about 60 names in it. Provident’s small-stock portfolio holds about 80. “You want to spend your time knowing your companies,” Miller said.
And although Provident doesn’t try to forecast the market, the firm does trim its stock positions when the facts suggest that prudence is warranted. In July, Provident began to pare its holdings a bit, raising the cash share of the portfolio from 10% to 20%, Miller said.
That’s where it stands now, he said. Even in the worst market environments, Provident has never had less than about 60% of its assets in stocks. If panic sets in, Provident believes that the only smart view is to look to the future, and the reality that good companies will prosper over time.
“There’s not a lot to do but keep your head,” Miller said. “This will pass.”
For individual investors, that may be priceless advice.
STOCK PSYCHOLOGY IS ALWAYS SHIFTING . . .
Pasadena-based Provident Investment Counsel uses this bell curve to illustrate the market’s typical pattern, from bull to bear cycles.
. . . BUT PROVIDENT KEEPS A LONG-TERM VIEW
How Provident’s stock accounts fared in the first half of 1990 and historically, versus the S&P; 500:
Period Provident S&P; 500 First-half ’90 +15.8% +3.1%
Annual averages, periods ending Dec. 31, 1989:
Period Provident S&P; 500 1 year +46.9% +31.6% 3 years +17.9% +17.2% 5 years +21.5% +20.2% 10 years +19.0% +17.4%
Source: Provident Investment Counsel
