Investing Tips, From a Few Who Know

Imagine that some of the nation’s brightest mutual fund managers could sit in your living room for an afternoon, taking your questions and explaining where they see the greatest investment opportunities today, and the biggest risks.

You’d learn a lot--and probably so would they.

Last Thursday and Friday, the downtown Chicago Marriott ballroom essentially became a huge living room as nearly two dozen well-respected fund managers explained their investment philosophies and took questions from an audience of several hundred big and small investors.

The event was the annual Enterprise Conference sponsored by mutual fund tracker Morningstar Inc. What follows, in capsule form, are some key themes of the meeting:

* The ‘90s Investor Is an Opportunist: Many of the fund managers rejected the concept of sticking to a rigid investment structure in picking stocks and bonds. Certain formulas may have worked well in the 1980s, but the tough U.S. economy and the rapid pace of business change suggest that the successful investor of the ‘90s will be the flexible investor.

Robert Sanborn of the Chicago-based Oakmark Fund, for example, owns an eclectic mix of stocks in his $700-million portfolio. All share one trait, he said: The stocks don’t reflect the underlying value of the businesses’ assets.

His top holdings include cable TV issues such as Liberty Media, downtrodden drug firms such as Eli Lilly, defense companies such as Martin Marietta and South African diamond mine giant DeBeers.

“I think flexibility is our greatest asset,” said Sanborn, the second-best-performing stock fund manager overall last year (up 49%).

Thomas Putnam, who manages the FAM Value Fund in Cobleskill, N.Y., urged investors to reject complicated investment concepts in favor of simpler ones.

“Your investment philosophy should be based on common sense,” Putnam said. If you buy an individual stock, he said, you should have a thorough understanding of the business. “If you can’t explain (the company) to an 8-year-old, you probably won’t be successful with it.”

* Invest Intelligently Where Others Fear to Tread: Putnam, whose small-stock fund gained 25% last year, suggested that individual investors would be wiser to follow their own instincts than listen to most of what they hear on Wall Street. “Your success will depend on your ability not to follow the herd,” he said.

Richard Weiss, co-manager of the Strong Opportunity Fund in Milwaukee, said he and colleague Carlene Murphy focus on the underfollowed and the unloved.

“Our best investments are made by looking at parts of the market that others are ignoring,” Weiss said. One example: He and Murphy made a big bet on stocks of small energy companies a year ago.

“The catalyst was an announcement by (oil field services firm) Baker Hughes that there wasn’t a single exploratory well drilling for natural gas in the continental U.S.,” Weiss said. At that point, “I thought, ‘It can’t get any worse than this.’ ” And indeed, energy stocks have since rocketed, led by a surge in natural gas prices on growing supply worries.

Similarly, James Gipson of the Los Angeles-based Clipper Fund sold the last of his long-term bonds early this year when investor demand for bonds reached a frenzy, pushing yields to 20-year lows. Looking instead for investments that nobody wants, Gipson found major drug stocks such as Johnson & Johson and Merck.

While many Wall Streeters believe the drug stocks may yet go lower as proposed health care reform takes its toll on industry profits, Gipson noted that investors’ overt bearishness on the stocks is similar to Wall Street’s total disdain for bonds in 1981, when Treasury yields reached 15%-plus.

That was precisely the time to buy bonds, Gipson said. “It’s fear and nervousness that create opportunity,” he said.

* Prepare for Lower Returns--but Don’t Panic: Investors should be prepared to earn significantly less on stocks and bonds in the balance of the ‘90s, most of the managers said. The 17%-plus annual stock market returns of the last 12 years simply aren’t sustainable.

More likely, annual stock fund returns in the 8% to 10% range will be about the best investors can expect in the ‘90s. That would be in line with the market’s historical returns.

But while some experts suggest that investors won’t sit still for 8% returns--that they’ll abandon stocks and return to bank savings certificates if the market indeed disappoints--some fund managers believe the public knows better than to try and return to the “good old days” of having bank accounts and little else.

James Riepe, managing director of the T. Rowe Price funds in Baltimore, argued that “savers have become investors because they had to”: The lack of job security, the decline in housing values, and the rise of health care and long-term care expenses have forced Americans to search for better returns on their money than what short-term investments can pay, Riepe said.

He doesn’t believe that tide can be reversed. “The single greatest fear of investors is outliving their money,” Riepe said. And the only financial investment that has historically provided long-term growth is the stock market. “Investing is no longer the playground of the wealthy,” Riepe said. “It’s a necessity for most of us.”

* The Great Growth Industry of the ‘90s: Where are the greatest stock opportunities in this decade? Hands down, many managers urged investors to look at the telecommunications field, including cable TV, long-distance firms worldwide and the media companies that will supply information over the burgeoning computer and cable networks.

“The ‘interactive couch potato’ trend is the most important investment trend for the balance of the decade,” said Mario Gabelli, head of the New York-based Gabelli Asset fund. His favorite ways to play that trend include Paramount Communications, Time Warner, GTE and Lin Broadcasting.