MANAGING YOUR MONEY / Earning More, Keeping More : SEARCHING FOR GEMS : <i> As the United States becomes a nation of investors, experts caution to be choosy and wait patiently for the real bargains.</i>
Stock prices are high, interest rates are low, money is pouring into mutual funds at a record pace, and many investors are listening nervously for the music to stop.
Conventional wisdom says maybe you should think of selling some stocks or mutual funds, retreat into cash. But what are you going to do with the cash when Treasury bills are paying just 3% and bank savings accounts are paying even less?
Pulling the covers over your head won’t help. Even 7% in interest income won’t keep you ahead if you allow for taxes and inflation. Yes, 3% inflation is low--but it’ll also wipe out one-third of your capital in only 10 years.
When saving for any purpose, the best way to preserve your capital is to grow it, by buying individual stocks or investing in mutual funds.
The Dow is hovering near record levels, but this is no routine market rally. It’s a shift in U.S. history. Americans are putting so much money into mutual funds, 401(k) accounts and other investment plans that the long-dormant national savings rate is finally rising again. According to the Federal Reserve System, Americans are now saving 7% of their disposable income.
That’s making us a nation of investors, a throwback to the 19th Century, when the British financed canals and railroads in the United States. But today’s hot investments are in Asia--except for recession-plagued Japan--in Latin America and in U.S. companies with opportunities here and abroad.
Very interesting, you say, but how does an ordinary saver invest in Asia or Latin America--or in the right U.S. companies or mutual funds, for that matter? You practice and you follow the pros, just as if you were taking up tennis or golf.
The advice of master investors is disarmingly simple: Patience, selection and independent judgment are the chief requirements of investing.
“It usually pays to wait patiently for the rare bargain in first-class assets rather than swing for the fences with a succession of exciting speculations,” wrote John Train, a veteran investment expert in his 1983 book, “Preserving Capital.”
“Be patient and choosy. Throw away 20 companies for every one you” invest in, writes Clayton Fisher, son and grandson of two highly successful investors, who has just published “The Stock Market Explained for Young Investors.”
Don’t follow the crowd. Right now, for example, every stock market guru in the country is urging you to invest in “emerging” markets--countries that used to be called “developing” or “poor”--because that’s where economies are booming.
But if that’s good advice, how come Warren Buffett--believed to be America’s richest man--isn’t really following it? For what he calls his “international portfolio,” Buffett points to investments in Coca-Cola and Gillette.
His reasoning is simple: What really is happening, from southern China to northern Mexico, is that more than 1 billion people are raising their aspirations and consumption patterns. They’re buying Coca-Cola and using Gillette razors and other products. That’s why Atlanta-based Coke and Boston-based Gillette get more than two-thirds of their sales and profits from abroad.
And, as an investor, Buffett gets the benefit of that international success without taking any direct risk that those companies’ profits will disappear once they’re translated back into dollars. Maybe that’s how you get to be worth $8.3 billion.
Great story, but most investors shouldn’t risk their nest egg on one or two stocks. In fact, says investment expert Esther Berger, a specialist in women’s investing at Paine Webber in Beverly Hills, if you have less than $100,000 to invest, you should think only of mutual funds--which spread your risk by owning a variety of stocks or bonds.
Sound advice, but don’t forget that mutual funds also demand independent thought. If you can be scared out of a stock, a fund’s gyrations will frighten you also, says Peter Lynch, Fidelity Investments’ legendary fund manager, because “the best-performing funds commonly decline more than the average stock during a market correction.”
Lynch, who is now semi-retired and advises younger managers, notes in his book “Beating the Street” that 75% of all mutual funds don’t match the performance of the major market averages. That means that mutual funds should be a hefty part--but not the whole part--of your portfolio.
Lynch suggests investing in four or five different kinds of mutual funds: one for growth stocks, another for dividend-paying companies, a third for emerging markets and so on. This year’s laggard could be next year’s winner, he explains.
In addition, Lynch advises small investors to add a few individual stocks to their portfolios, looking always for the one or two “ten-baggers”--stocks that over time grow tenfold in value.
That’s precisely how most great investors make money. Buffett and his partner, Los Angeles attorney Charles Munger, have invested in fewer than two dozen stocks in the last 25 years through their holding company, Berkshire Hathaway.
But they’ve had some doozies, from Washington Post, now 80 times the price they paid in 1973, to Coca-Cola, now more than four times the price they paid in 1988.
Truly astute investors hope never to sell. “If the job has been correctly done when a common stock is purchased, the time to sell is almost never,” writes Philip Fisher of San Francisco in his book “Common Stocks and Uncommon Profits.”
Fisher, now 86 and patriarch of a remarkable investing family, has probably made commitments to fewer than 20 stocks in 60 years.
“I don’t want a lot of good investments,” he has said. “I want a few outstanding ones.” So he has held Motorola, Texas Instruments and Dow Chemical since the 1950s, profiting more than 100-fold in each case as those companies grew with advancing technology and the world economy.
But how do you find those “outstanding” stocks in the first place? By avoiding the crowd and looking for value, says son Kenneth Fisher, 42, whose Woodside, Calif.-based Fisher Investments manages $750 million for pension fund clients.
That means you don’t invest directly in Asia’s overheated markets right now--or in the media companies that all of Wall Street is chasing. But you do invest in companies that will play a role in the global growth that Asia and Latin America are engendering, Fisher says--”basic material industries like cement and steel and non-ferrous metals, areas the market ignores right now.”
Specifically, Fisher mentions Texas Industries, a Dallas-based cement and steel producer--it owns Chaparral Steel--that currently fulfills one of his criteria for an inexpensive stock.
In “Super Stocks,” the first of Kenneth Fisher’s three books, he introduced the concept of a price-to-sales ratio. To find a bargain, take the company’s total sales of steel or chewing gum or whatever and divide that number by total shares outstanding. Then divide the result into the stock price.
If the result is below 1.0--Texas Industries’ price-to-sales ratio was recently below 0.5--the company is worth investigating further, Fisher says.
Note that a ratio below 1 means a stock is only worth investigating--there’s no magic formula for success.
As Peter Lynch says: “You’ve got to do the work. Merely checking prices with a calculator and the newspaper is not work. Pull out the annual report, read the quarterly reports, read the business press.”
Good luck, and happy reading.
