Pros give some low-risk survival tips
By Adam Shell
USA Today
NEW YORK — There are ways to keep risks to a minimum and still make money on Wall Street while also getting a good night's sleep.
To find out how, USA Today screened fund-tracker Morningstar's database in search of U.S. stock funds that take "below-average" risk, have been run by the same manager for 10 or more years and whose returns have topped the Standard & Poor's 500 index this year and in the past one-, three-, five- and 10-year periods.
The database spit back 27 steady, low-risk funds. We interviewed managers running three of them — Bruce Veaco, co-manager of Clipper fund, Duncan Richardson of Eaton Vance Tax-Managed Growth fund and Joel Tillinghast of Fidelity Low-Priced Stock fund — and asked them for tips on how to avoid punishing losses.
The pros' 10 low-risk survival tips:
No unnecessary risks
Driving through the parking lot of Kmart at 80 miles an hour on a Saturday afternoon is apt to end badly. That's why people don't do it. The same level of common sense should apply to stocks. Before buying a stock, "you have to assess how much money you can lose," Richardson says.
Dump your dogs
When your stock picks don't pan out, check your ego at the door and get out before the losses pile up and bury you.
"Sell your losers," Richardson says. "It preserves your capital and keeps you in the game."
His suggestion: Sell any stock you own if it falls 10 percent below your purchase price.
Say you bought 100 shares of Cisco Systems at the worst possible time — its split-adjusted peak of $80.06 on March 27, 2000. If you sold the stock when it dipped 10 percent to $71.81 a few weeks later, you would have lost $825. Not great. But not bad when you consider those same 100 shares today are valued at just $1,661, or $6,345 below the purchase price.
Think like a contrarian
If you buy only what everyone else is buying, you'll miss out on sterling opportunities overlooked by the herd.
Often it pays to look beyond the big, expensive, brand-name tech stocks like Dell Computer and Intel that have gotten more media attention than Tiger Woods. Heck, 80 percent of the S&P 500 is non-tech.
"Don't chase the action. Seek out some cloudy areas," Richardson says.
Last year, retail stocks fell to fire-sale prices because investors feared a recession. Richardson bought stocks such as Lowe's on sale and was rewarded this year with a 57 percent gain.
Formerly beaten-down small stocks and value stocks (meaning undervalued vs. their underlying assets) have also fared well.
Shares of less-pricey value stocks, which had performed poorly during the tech boom, have rallied sharply. Many value funds are up 20 percent or more. Small-caps have fared well, too, witnessed by Fidelity Low-Priced Stock fund's 18 percent gain.
Know thy company
Sounds pretty simple, but many investors still buy shares of companies they know absolutely nothing about. "Most of the time when I ask friends who own tech stocks what the company does, I get a blank stare," Clipper's Veaco says.
That's a no-no. If you don't know what a company does or what it's really worth, you won't know whether you're buying the stock at a good price, he says.
Veaco says to scrutinize a company's annual report, especially the financials and the letter to shareholders. What's the company's strategy? Is it apologizing for problems? Is it doing what it said it would do? (To make sure, read reports from the past two years, too.) And don't ignore the footnotes explaining accounting details. "Some of the good stuff is buried in there," he says.
Use one investment style
The best investors stick to what they are good at. You should, too. For example, Warren Buffett, arguably one of the world's greatest investors, is a value investor who will build a position only in a company that he knows a lot about and that he believes is selling for less than what it's worth. Buffett steers clear of tech and other areas where he does not understand the business as well.
"You need some set of disciplines that you can stick to," Veaco says.
Don't overdose on stocks
You don't always have to be fully invested in the stock market. It's OK to hold cash if, say, you think stocks are too expensive, Veaco says. "It provides a margin of safety," he says.
Scour the 'new low' list
Look for stocks that already have low expectations. A good place to start is the list of stocks hitting 52-week lows. There's a lot of lousy merchandise on the sale rack, but you could find a gem. Veaco found hamburger giant McDonald's on the losers' list back in March and added to his position. The stock is up 20 percent since its March low.
Buy quality on sale
Sometimes a great company is treated like an also-ran or has-been on Wall Street. That's when you should pounce. But don't just buy a stock because it's well off its high. You must first determine whether it can regain its business and earnings momentum, Richardson says.
Consider Microsoft. At the start of the year, the stock was selling at about $43, more than 40 percent off its high. It was dogged by antitrust issues and signs of slowing growth. Figuring it was unlikely that the software giant would relinquish its supremacy anytime soon, Richardson bought the stock. It's trading at $62, a 44 percent jump.
Romance ugly ducks
When the Nasdaq was hitting its peak in March 2000 and many tech stocks carried triple-digit price-earnings ratios, homebuilder D.R. Horton was totally forgotten despite 20-plus years of sales growth and a P-E of about 5. It was selling for less than $10 a share. Tillinghast had to buy it.
"The market hated it because it wasn't a dot-com," he says. "Boring parts of the market" are often where the bargains are, he says. The stock has been trading in the $23 range, about a 140 percent gain in 18 months.
Think for yourself
Be skeptical. Question conventional wisdom. Use your critical thinking skills, Tillinghast says.
"Mary Meeker (dubbed 'Queen of the Internet' for her bullish calls) may have gone over the edge, but the investor should have critiqued her arguments," he says.
