GETTING AN INVESTING GAME PLANCreating It, Working It, Winning It phần 8 pps

I think we can all learn a lot fromtheir experiences.Rick Lane Date of birth: December 22, 1955 Managing money since: 1981 Hobbies: Golf, skiing Fund: FMI Focus Symbol: FMIOX Morningstar

Bunker Portfolio

The idea for the bunker portfolio came at the height of the bear market

in 2002 Some people were really scared, especially in July when themarket dropped about 8 percent in a single month The bottom wasfalling out from under a number of individual stocks New clients wereasking what I would do with new money Even a conservative portfoliodidn’t offer enough security for some people

168 Step 7: Know Your Team

Table 7.16 Aggressive Portfolio Standard Deviation versus S&P 500 through June 30, 2002

So I created a safer portfolio (See Tables 7.17 and 7.18.) What did itentail? It ratcheted up the fixed-income component (defense) to 55 per-cent from the conservative portfolio’s 40 percent But even the stockfunds were chosen to provide defense How? All three of the funds usedfor this example are so-called hybrid funds.

Hybrids are one of a bear market investor’s best friends They arecomprised of a mix of bonds, stocks and cash Essentially, we leave it up

to these managers to make the allocation call During down marketsthese funds tend to be heaviest in bonds and cash To the extent they

Bunker Portfolio 169

Table 7.17 Bunker Model/Stock Funds 30 Percent

10%

10%

own stocks, these funds buy shares on a value basis at a very big discount.The historical returns in Table 7.19 give you a feel for the steady returnsthe portfolio has had.

The best and worst time periods in Table 7.20 underscore the factthat the real benefits of a bunker approach come in the tough years Nodouble-digit losses here But the double-digit gains never exceed 20 per-cent The bunker essentially holds down your investment fort

170 Step 7: Know Your Team

Table 7.18 Bunker Model/Fixed Income 55 Percent

As you can see in Table 7.21, the volatility of the bunker portfolio isthe lowest of all the models The scatter plot reflects this as well (see Fig-ure 7.4) Every fund is in the sought-after northwest or upper left portion

of the scatter plot That means each of the funds should give a higher turn with lower risk

re-Bunker Portfolio 171

Table 7.19 Bunker Portfolio Historical Returns through June 30, 2002

Source: Morningstar Multiyear data provided are average annual performances.

Table 7.21 Bunker Portfolio Standard Deviation versus S&P 500 through June 30, 2002

1 Year

Best March 2000 through February 2001 17.40Worst February 1994 through January 1995 –0.46

3 Years

Best January 1995 through December 1997 12.74

Source: Morningstar Multiyear data provided are average annual performances.

Step 7, Know Your Team: Summing Up

So there you have it Those are the four model portfolios If you can, fore investing run your fund picks through similar historical tests Youwon’t be sorry In case you want the numbers behind my current favoritefunds, Table 7.22 includes some statistical data on the funds I used Goahead Check them out Then go on in the next chapter to read aboutsome of my favorite managers Just don’t forget to keep doing your ownhomework, too That’s what counts over the long run

be-172 Step 7: Know Your Team

Figure 7.4 Bunker Portfolio Scatter Plot

Source: Morningstar.

I’ll briefly discuss a few of my favorite managers in this chapter Ineach case, I’ll focus on one fund, although many of these managers quar-terback more than that (Returns provided are load-adjusted Perfor-mance data was obtained from Morningstar, Inc.) I don’t agree witheverything these managers have to say, but I respect each of them and atone time have invested with them I think we can all learn a lot fromtheir experiences.

Rick Lane

Date of birth: December 22, 1955

Managing money since: 1981

Hobbies: Golf, skiing

Fund: FMI Focus (Symbol: FMIOX)

Morningstar investing style box: Small-cap blend

175

You won’t find hard-core growth managers among my manager picks cause I don’t like managers who take unnecessary risks with my clients’money Unfortunately, all too many growth managers do When I allo-cate funds to fit the growth section of my clients’ portfolios, I want some-one who thinks intelligently about risk Someone like Rick Lane I likeRick because he takes calculated risks.

be-Rick is something of a freestyler As you may recall, freestylers aresome of my favorite kinds of managers because they don’t get stuck in acategory They do their level best for their investors, whatever the mar-ket conditions Freestyle managers can cause some confusion in your re-search Exactly where do they fit in the portfolio allocation? At times it

176 Step 8: Get to Know the Players

All data are average annual returns through 9/30/02 and are provided by Morningstar.

To obtain a prospectus for FMI Focus call 800-811-5311.

can be tough to tell But ultimately, consistently good returns are whatcount.

Rick, who places himself in the small-cap blend category, uses valuetechniques to pick so-called growth stocks Actually, he rejects the idea

of any particular stock being a value or growth play Instead, he says allstocks are cyclical The key is to figure out which industries are poised toenter a growth cycle—and then buy the undervalued stocks in that in-dustry

He looks to buy a stock at a 25 to 30 percent discount to the pricethat the firm would fetch if bought by another company in its industry.Finally, he seeks out companies that occupy an important niche and thathave consistent earnings and good management To dig this informationout, Rick likes nothing more than to hop on a plane and investigate acompany up close He talks with everyone from management to suppliersand customers

Not all his stocks are winners, but he has learned that through sification he can cushion his losses Despite doing his best to analyze acompany, Rick says, there’s no stopping a management bent on defraud-ing investors However, he looks to a wide array of holdings for defenseshould it happen

diver-FMI Focus holds a relatively large number of stocks, especially for

a “focus” fund—nearly 100 at the end of 2001 In addition, as he feltstocks were becoming overvalued, Rick increased his cash holding Bythe end of 2001, FMI Focus had 10.4 percent of its assets in cash.Rick’s approach earned his fund an average risk rating from Morn-ingstar on both a three- and five-year trailing basis through June 2002.Rick appreciates risk, he says, because he has a large amount of hisown and his family’s money in the fund He also believes that it’s im-portant to be practical and sell a plummeting stock if you can’t figureout why it’s falling

He credits his grandfather and father—both stockbrokers—for ing him to follow his own path and avoid fads “I try to be a contrarianbut in an intelligent way,” Rick says Like I said, that’s my kind ofgrowth

teach-Rick Lane 177

Bill Gross

Date of birth: April 13, 1944

Managing money since: 1971

Hobbies: Yoga, stamp collecting

Fund: Harbor Bond (Symbol: HABDX)

Morningstar investing style box: High-quality intermediate-term

Arguably the most influential bond authority in the United States, BillGross isn’t the sort of buttoned-down Wall Streeter that you might ex-pect to lord over the staid world of coupon clippers Dubbed the “Bond

King” by Fortune magazine, he’s a playfully cerebral man who practices

178 Step 8: Get to Know the Players

All data are average annual returns through 9/30/02 and are provided by Morningstar.

To obtain a prospectus for Harbor Bond call 800-422-1050.

yoga and sometimes offers up his age in months (He was 696 months old

as of this writing.)

As legend has it, the young and mathematically oriented Bill firsthoned his money management skills at Vegas blackjack tables, where hespent six months turning $200 into $10,000 Later, after a tour of duty inVietnam, Bill used his gambling proceeds to help pay for his MBA tu-

“Basically, gambling and money management are pretty much thesame,” Bill says In each, he explains, the goal is to spread the risk andavoid becoming emotional while staying focused on the odds

Now, I can imagine that you’re scratching your head at this, cially considering all my warnings against high-risk investments Justhow could a self-avowed gambler be one of my favorite managers?The answer, as always, is in the performance Bill has consistentlyand successfully played the odds Bill is backed by a superior team ofmanagers and analysts whose assessments of interest-rate direction andthe overall global economy build a solid foundation for the funds’ moves.Their work hasn’t gone unnoticed Bill and his team at Pimco were col-lectively named Morningstar’s Fund Managers of the Year in both 1998and 2000

espe-Bill’s Harbor Bond fund, like many good fixed-income investments,has been an excellent hedge against bear markets For example, whilethe S&P 500 plummeted 28.2 percent in 2002 through the end of thethird quarter (September 30, 2002), Harbor Bond climbed 7.7 percent.Even in better markets, these funds are the types that offer investors achance for the defense to score I’d wager on Bill’s odds of success

Bob Rodriguez

Date of birth: December 13, 1948

Managing money since: 1974

Hobbies: Auto racing, watching movies with wife Sue

Fund: FPA New Income (Symbol: FPNIX)

Morningstar investing style box: High-quality short-term

Bob Rodriguez 179

Some people don’t understand how a conservative value investor like BobRodriguez could feel at home in the high-octane world of auto racing But

it makes perfect sense to me Bob, who loves racing with the PorscheOwners Club and the Porsche Club of America, also sees parallels betweenhis hobby and his professional life Both activities demand that risks andrewards are carefully balanced The price of recklessness is just too high.This skill is something Bob has clearly mastered and it is one of the rea-sons I have so much confidence in him He takes some chances to get to thefinish line, but he is always careful about minimizing downside risk As a re-sult, his FPA New Income fund has stayed the course over the long term.Bob has been at the helm of the fund since 1984 Bob is also some-thing of a Renaissance man—he deftly manages both bonds and stocks

in another fund His FPA New Income which, according to Morningstar,hasn’t posted an annual loss since 1984, also earned Bob Morningstar’stitle of Fixed-Income Manager of the Year for 2001

180 Step 8: Get to Know the Players

All data are average annual returns through 9/30/02 and are provided by Morningstar.

To obtain a prospectus for FPA New Income call 800-982-4372.

Bob’s investing style is one that wins by not losing, Bob says Whatdoes he mean by this? Typically between 55 percent and 70 percent ofthe fund’s assets are invested in government and agency securities Wheninterest rates are low, Bob buys more bonds with shorter durations toavoid getting caught with overpriced bonds when interest rates rise Hedoes the opposite during periods of high interest rates This approach hashelped to reduce volatility and make the fund a solid long-term player.While Bob’s approach means his fund’s return may lag other bondfunds for a lap or two, he’ll generally end up in the winner’s circle As wediscussed, it’s better to keep your eye on truly long-term performancethan any one given year Should a fund slide temporarily, ideally your di-versified portfolio will help cushion you in the short term until the mar-ket swings back into your favor So if you’ve found yourself a goodmanager who has proven himself or herself over the long haul, hang onfor the ride Let’s just hope that manager’s driving a Porsche.

Bob Olstein

Date of birth: July 7, 1941

Managing money since: 1980

Hobbies: Skiing, tuna fishing, golf, tennis

Fund: Olstein Financial Alert (Symbol: OFALX)

Morningstar investing style box: Mid-cap blend

Bob Olstein 181

Bob Olstein got badly burned back in 1968 when executives at a pany he was analyzing exaggerated the health of their business A rookiesecurities analyst on Wall Street, Bob took the executives’ bait and madehis first-ever stock recommendation.

com-“I thought my job was to go interview management and that theywould not lie,” Olstein recalls “I lost a lot of money for people.” But he alsolearned a valuable lesson A colleague showed Bob how a closer examina-tion of the balance sheet would have provided a heads-up on the problems.Bob has taken the advice to heart ever since In the 1970s Bob went on to

coauthor The Quality of Earnings Report, an influential newsletter dedicated

to the premise that the quality of financial numbers matters The reportstudied company financials and alerted readers to potential dangers.Bob has put his nose for numbers to work as a money manager, too,eventually opening his own shop in 1995 Still true to his beliefs, heavoids the opportunities to speak with management that many otherfund managers seek “I’d rather spend the night with an annual reportlooking at what they’re doing than going out and talking to them and in-terpreting what they are saying,” says Bob

What red flags does he look for? Numbers that smell funny, such asaccounts receivable that are rising faster than sales, suggesting that futuresales might be in jeopardy A clean balance sheet is only the first hurdle acompany must clear before it makes it onto Bob’s buy list He also wants alow price He seeks companies that are trading at least 20 percent belowtheir intrinsic value When the stock reaches the target price, he sells, ex-cept when a reevaluation determines a higher price is merited Bob firmlybelieves that selling is part of the key to winning, particularly in rockytimes “Anybody who has low turnover is at a big risk in these volatilemarkets because they’re not capturing profits,” says Bob

182 Step 8: Get to Know the Players

All data are average annual returns through 9/30/02 and are provided by Morningstar.

To obtain a prospectus for Olstein Financial Alert call 800-799-2113.

Alert

Controlling risk is integral to long-term performance, Bob believes.

“Long-term winners are the people who make the fewest mistakes.” Hereduces his risk by buying good stocks at bargain prices, and he doesn’tbet the farm on any one stock At any given time, Bob’s portfolio mayhold 100 stocks or more

As for categorizing himself, Bob doesn’t have a lot of patience for thefund “style” business “Hogwash” is just about his view on it Why? Be-cause all funds want to buy stocks that grow, not just growth funds Andall funds want to buy stocks that have some kind of value, not just valueinvestors And all funds’ performances should be compared to one an-other because every fund manager’s job is to make money, he says

“I’m an equity manager,” says Bob “I go across all disciplines and it’s

my job to make my clients money without taking a lot of risk.” Olstein’smultidisciplinarian approach is reflected by Morningstar’s rating systems

In May 2002 Olstein Financial Alert was shifted into the mid-cap blendstyle box even though Morningstar still places the fund in the mid-capvalue category I consider Bob a freestyle manager, and he calls himself

an eclectic value manager

But before you tear up your game plan strategy and head for thebeach on Bob’s advice, you need to hear him out He advises investors toinvest their money with different successful managers who practice var-ied styles He just prefers to think about the human beings behind thefunds rather than the labels

I really like Bob’s insight and agree with him—to a point I still lieve that categories are valuable guides that investors do well to payattention to Use them as frames of reference to pick your funds But if

be-a fund you’re considering doesn’t fit snugly into be-a set be-allocbe-ation you’retrying to fill, don’t forget the big picture Will the fund make youmoney in up and down markets? If the answer is yes, you want it Andthat’s where Bob’s fund has filled the bill for many of my clients year inand year out

Bob says he hopes to live to 100 and has no plans to retire Even if hedoes, he’s not a one-man band Bob has a solid team helping him re-search and invest So if you’re thinking of putting your money in hisfund, he’s ready for the long haul Just don’t ask him about styles

Bob Olstein 183