Beating the Street (6 page)

The NAIC Investors Manual, which the directors kindly sent to my office, contains several important maxims that can be added to the repertoire of the St. Agnes chorus. These can be chanted as you mow the lawn, or, better yet, recited just before you pick up the phone to call the stockbroker:

Hold no more stocks than you can remain informed on.

Invest regularly.

You want to see, first, that sales and earnings per share are moving forward at an acceptable rate and, second, that you can buy the stock at a reasonable price.

It is well to consider the financial strength and debt structure to see if a few bad years would hinder the company's long-term progress.

Buy or do not buy the stock on the basis of whether or not the growth meets your objectives and whether the price is reasonable.

Understanding the reasons for past sales growth will help you form a good judgment as to the likelihood of past growth rates continuing.

To assist investors in delving more deeply into these matters, the NAIC offers its investors manual and a home study course that teach how to calculate earnings growth and sales growth; how to determine, on the basis of earnings, if a stock is cheap, expensive, or fairly priced; and how to read a balance sheet to tell whether or not a company has the wherewithal to survive hard times. For people who enjoy working with numbers and who want to do more sophisticated investment homework than they've done up to now, this is a good place to start.

The NAIC also publishes a monthly magazine,
Better Investing
, which recommends stocks in promising growth companies and provides regular updates on their status. For further information, write to the organization at P.O. Box 220, Royal Oak, MI 48068, or call (313) 543–0612. This completes my unpaid and unsolicited advertisement.

The key to making money in stocks is not to get scared out of them. This point cannot be overemphasized. Every year finds a spate of books on how to pick stocks or find the winning mutual fund. But all this good information is useless without the willpower. In dieting and in stocks, it is the gut and not the head that determines the results.

In the case of mutual funds, for which the investor isn't required to analyze companies or follow the market, it's often what you know that can hurt you. The person who never bothers to think about the economy, blithely ignores the condition of the market, and invests on a regular schedule is better off than the person who studies and tries to time his investments, getting into stocks when he feels confident and out when he feels queasy.

I'm reminded of this lesson once a year, at the annual gathering of the
Barron's
Roundtable, when a group of supposed experts, yours truly included, gets involved in weekend worrying. Every year since 1986, I've participated in this event. In January we meet for eight hours to trade quips and tips, most of which end up in the publication in the following three weekly issues.

Since
Barron's
is owned by Dow Jones, its offices are located in the new Dow Jones complex overlooking the right bank of the Hudson River on the southern end of Manhattan. For marble and high ceilings, the lobby is the equal of St. Peter's in Rome. You enter it via moving walkways similar to the ones installed at international airports. There is a thorough security system that begins with the
check-in station, where you must reveal your identity and state the nature of your visit. Once you are approved at the check-in station, you are handed a piece of paper, which you must then show to the guard outside the elevator.

After you've passed this test, you're permitted to ride to the appropriate floor, where you have to pass through another locked door that is opened with a credit card. If all goes well, you eventually find yourself in the Roundtable conference room, where the table isn't round. It used to be U-shaped, but lately the organizers have collapsed one of the sides to form a giant triangle. We financial wizards sit along the hypotenuse while our hosts from
Barron's
question us from the base. This friendly inquisition is directed by
Barron's
editor Alan Abelson, the resident wit, who has done for finance what Dorothy Parker did for romance.

Above us are hanging microphones and a powerful bank of 13 1,000-watt spotlights, which are flipped on and off for the convenience of the photographers. While one of them takes candid shots with a zoom lens from about 13 feet away, another (a woman wearing kneepads) crouches just below our nostrils and aims upward for the close-ups. Aside from the photographers, the room is filled with
Barron's
editors, sound experts, and technicians, some of whom lurk behind a glass wall. Eggs could hatch in the heat from the overhead bulbs.

This is a lot of fuss to be made over a bunch of money managers of advancing age and graying sideburns, but we thrive on it. Occasionally a new panelist is added and an old one subtracted, but the regulars include Mario Gabelli and Michael Price, both of whom run highly regarded “value” funds that have recently come back into vogue; John Neff of the Vanguard Windsor Fund, who already was a legend when I started running Magellan in 1977; Paul Tudor Jones, a whiz at commodities; Felix Zulauf, an international banker and frequent worrywart who for all I know may be regarded as a raging optimist in his native Switzerland, where people tend to worry about everything; Marc Perkins, a money manager whom I got to know when he was a bank analyst; Oscar Schafer, who concentrates on “special situations”; Ron Baron, who looks for stocks that Wall Street doesn't bother to follow; and Archie MacAllaster, a savvy investor in the over-the-counter market.

On the 1992 panel, Paul Tudor Jones's spot was taken by Barton Biggs, chairman of Morgan Stanley Asset Management and a bargain
hunter with a global perspective. Marc Perkins's spot was opened up in 1991, when Jimmy Rogers, a
Barron's
fixture for five straight years, gave up Wall Street in favor of following the old silk trade route across China on a motorcycle. The last I'd heard, Jimmy had shipped his motorcycle to Peru and was riding around the Andes, 1,000 miles from the nearest broker. (He's since resurfaced on a nightly business show.)

Whereas most people's friendships are based on their experiences in college, or the army, or summer camp, ours go back to stocks. I can't see Ron Baron without thinking of Strawbridge & Clothier, an issue we both owned at the same time and sold prematurely.

Over the years, we've tried to develop a comeback capability, to keep up with Abelson's one-liners. In the actual transcript as published in
Barron's
, Abelson is identified only as
Barron's
or as “Q,” but he deserves personal credit for all of the following except the Schafer retort, which I've included because it lives up to an Abelson line.

J
IM
R
OGERS
: I do own one European company called Steyr-Daimler-Puch, which is a company that has been losing money for several years now.

A
BELSON
: … What else does it have going for it?

A
BELSON
(to Oscar Schafer): Are you short anything?

S
CHAFER
: Let me talk about one more long and then I'll talk about a short, if I'm boring you.

A
BELSON
: No more than usual.

E
D
G
OODNOW
(former panelist who touted Philippine Long Distance Telephone): I understand the service is not so good out in the provinces. One of the problems is that it's hard to get the guys to go up the poles to fix the lines because they sometimes get picked off by snipers. But other than that, they've got a very solid operation.

A
BELSON
: Do you call that a long shot?

P
ETER
L
YNCH
: I still like my ultimate savings and loan, which is Fannie Mae. It has a lot to go.

A
BELSON
: In which direction?

J
OHN
N
EFF
(recommending Delta Air Lines): What people are missing on the airline side …

A
BELSON
: Or near-missing …

M
ICHAEL
P
RICE
: We have, in real stocks, maybe forty-five percent of our fund.

O
SCAR
S
CHAFER
: Unreal stocks make up the other fifty-five percent?

M
ARIO
G
ABELLI
: And as you know, I've been recommending Lin Broadcasting for twenty years.

A
BELSON
: Too bad it never worked out!

M
ARIO
G
ABELLI
: I am talking about a multifaceted approach to a multifaceted problem.

A
BELSON
: Please, Mario, this is a family magazine.

J
OHN
N
EFF
: And in the past eight recessions, when you went down that much in the first two months of a quarter… I am inventing all this.

A
BELSON
: Like everything else you say!

The Roundtable starts promptly at noon and is divided into two parts. The first part is an overview of the financial markets, in which we are encouraged to discuss where the economy is headed and whether or not the world is coming to an end. This is the part that gets us into trouble.

These overview discussions are worth analyzing because they are no different from the thousands of similar exchanges that take place among amateur investors at the breakfast table, or at the health club or the golf course on weekends. It is on weekends that people have extra time to ponder the distressing news that comes our way via TV stations or the daily newspaper wrapped in a plastic bag by the delivery boys. Maybe there's a hidden message here: they are trying to protect us from the contents.

When we make the mistake of letting the news out of the bag, we are confronted with the latest reasons that mankind is doomed: global warming, global cooling, the evil Soviet empire, the collapse of the evil Soviet empire, recession, inflation, illiteracy, the high cost of health care, fundamentalist Muslims, the budget deficit, the brain drain, tribal warfare, organized crime, disorganized crime, sex scandals, money scandals, sex and money scandals. Even the sports pages can make you sick.

While catching up on the news is merely depressing to the citizen who has no stocks, it is a dangerous habit for the investor. Who wants to own shares in the Gap if the AIDS virus is going to kill half the consumers, and the hole in the ozone the other half, either before or after the rain forest disappears and turns the Western Hemisphere into the new Gobi Desert, an event that will likely be preceded, if not followed, by the collapse of the remaining savings and loans, the cities, and the suburbs?

You may never admit to yourself, “I decided to sell my Gap shares because I read an article in the Sunday magazine about the effects of global warming,” but that's the kind of weekend logic that's in force, sub rosa, when the sell orders come pouring in on Mondays. It's no accident that Mondays historically are the biggest down days in stocks and that Decembers are often losing months, when the annual tax-loss selling is combined with an extended holiday during which millions of people have extra time to consider the fate of the world.

Weekend worrying is what our panel of experts, in the first half of the
Barron's
session, practices year after year. In 1986, we worried about M-1 versus M-3, the Gramm-Rudman deficit reduction package, what the Group of Seven would do, and whether the “J Curve effect” would begin to reduce the trade deficit. In 1987, we worried that the dollar was collapsing, foreign companies were dumping their products in our markets, the Iran-Iraq War would cause a global oil shortage, foreigners would stop buying our stocks and bonds, the consumer was deeply in hock and unable to buy merchandise, and President Reagan was not allowed to run for a third term.

You couldn't worry all the panelists all the time. Some worried more than others, and some who worried one year were unworried the next, and a couple of us were often optimistic about the future, which added a bit of emotional buoyancy to the generally dire proceedings. In fact, the year we were the most optimistic about the future for the economy and the stock market was 1987, which ended with the famous 1000-point drop. The lone panelist to sound an alarm that year was Jimmy Rogers, who in 1988 rang the alarm bell once again, warning of an impending collapse of stock prices around the world. Rogers is famous for “shorting” stocks when he expects them to falter, yet in spite of his gloomy premonition, he had few shorts to recommend in
Barron's
that year or the next. A successful investor does not let weekend worrying dictate his or her strategy.

Here is a group of influential professionals who manage billions
of dollars that belong to other people, and from one Roundtable to the next we can't agree on whether we are facing an imminent global depression or an economic upswing.

It is worth noting that our worrying peaked in the 1988 Roundtable session, held two months after the Great Correction. We'd just suffered this major collapse in the stock market, so of course we were looking for another one for the following year. This leads to Peter's Principle #4:

You can't see the future through a rearview mirror.

Mr. Zulauf set the tone in 1988 with his opening statement that “the honeymoon, from 1982 to 1987, is over.” This was the most optimistic thing said all day. The rest of the time, we debated whether we were going to have a standard bear market, which would take the Dow average down to 1500 or lower, or a killer bear market that would “wipe out most people in the financial community and most investors around the world” (Jimmy Rogers's fret) and bring about a “worldwide depression like we saw in the early thirties” (Paul Tudor Jones's).