TCS Daily


Learn to Earn

By James K. Glassman - January 2, 2003 12:00 AM

For the past 20 years, a newsletter based in Annandale, Virginia called the Hulbert Financial Digest (866-428-6568) has been keeping track of the performance of other newsletters. Of the original ones it monitored, only 17 remain, and, at last count, the model stock portfolios of only three of them beat the market as a whole over that time: the Prudent Speculator, No-Load Fund X and the Value Line Investment Survey.

Value Line, which I discussed with enthusiasm in my last column, is not really a newsletter but a research service, so the final tally is two winners out of 16 survivors.

That's an awfully poor record, but the reason to read a newsletter is not to mimic its recommended portfolio and not to follow its market-timing advice - dubious suggestions on when to jump in and out of stocks. Instead, the reason is to get ideas - about individual companies, mutual funds and sectors -- for further research or just for entertainment and enlightenment.

In this second and last part of this examination of tools of the trade, I will focus first on the newsletters I use and admire and then on helpful investment books.

Newsletters

The best of the bunch is a true digest - a compilation of short pieces, mainly about individual stocks, culled from other newsletters. The Dick Davis Digest (800-654-1514), published twice monthly since 1982 and inexpensive for a financial newsletter at $145 a year, draws from about three dozen other newsletters, many of them obscure, in each issue. It is well edited and easy to read.

In the most recent issue, for example, the Digest chose as its "spotlight stock" Smithfield Foods (SFD), the nation's top pork producer. An excerpt from Positive Patterns, a Missouri-based monthly newsletter edited by Bob Howard and Elizabeth White, notes: "Our confidence in Smithfield CEO Joseph Luter comes from many years of observing him. . . . His word is reliable. When he says something to the investment community, he is measured and accurate. He does not 'live' for the next quarter's earnings." My kind of guy.

Smithfield, by the way, is down by about one-fourth from its high in April and trades at a price-to-earnings (P/E) ratio of 10, based on estimates of next year's earnings.

The Prudent Speculator (877-817-4394), published in Laguna Beach, Calif., since 1977, is another newsletter that's crammed with offbeat stock ideas. Editor John Buckingham, who succeeded his mentor, the late Al Frank, has a penchant for inexpensive value stocks with good balance sheets. Together, they have compiled the best record for stock performance since 1982, according to Hulbert.

A recent issue highlighted Keynote Systems (KEYN), which helps companies manage their Internet businesses. It's a tough racket, and Keynote is still not profitable (though it expects to be next year). Positive signs, says Buckingham, are sharply rising revenue in key divisions and an announcement to buy back 37 percent of its own stock at market prices.

Buckingham's picks are often more speculative than prudent. The portfolios that he and Frank put together have been 70 percent riskier than the market as a whole over the past 10 years, but there's no questioning the newsletter's uncanny ability to find winners, including, in recent years, oil service firm Offshore Logistics (OLOG) and home builder D.R. Horton (DHI).

At the other end of the risk spectrum is the weekly Dow Theory Forecasts (800-233-5922), whose choices, according to Hulbert, are about one-third less risky than the market. Unlike Buckingham, editor Richard Moroney is a market timer. He uses a fairly simple system called "Dow theory," derived from the work of Charles Dow (1851-1902), to decide the proportion of stocks in a portfolio. My advice is to ignore the market timing (Moroney is recommending a cash position of 25 percent) and concentrate on the newsletter's excellent features on individual stocks and industries.

The most recent issue, for instance, anticipates war with Iraq by examining winners and losers among sectors in 1991, the year of the Persian Gulf War. Biggest winners: leisure and gaming (up more than 60 percent), followed by footwear and specialty retail.
Dow Theory, based in Indiana and founded in 1946, publishes a weekly Focus List comprising, at last count, 17 top-rated stocks, most of them blue chips, including PepsiCo (PEP), Wells Fargo (WFC) and Philip Morris (MO).

Other newsletters I read regularly:

OTC Insight (800-955-9566): Rated first by Hulbert for the past 15 years, this letter edited by Jim Collins has been a superb picker of Nasdaq stocks. A recent top selection, Immucor (BLUD), sells systems that analyze human blood.

Bob Carlson's Retirement Watch (800-552-1152): Editor Carlson, who chairs the Fairfax County pension system, mainly concentrates on asset allocation and smart financial husbandry. But his market comments (not timing!) are astute, and he makes valuable mutual fund suggestions, including Heartland Value (HRTVX) for small caps and American Century Equity (TWEIX) for core holdings.

Growth Stock Outlook (301-654-5205): The exasperating curmudgeon editor of this newsletter, Charles Allmon, has been bearish for about 15 years. Again, skip his market-timing advice and look at his stock picks, like New Plan Excel Realty Trust (NXL), a REIT currently yielding 8.5 percent.

No-Load Fund X (800-763-8639): Editor Janet Brown uses a complex rating system to select mutual funds in four classes, ranked by risk. The newsletter's choices have returned an annual average of 16 percent in the past 10 years, second only to the Prudent Speculator out of 66 newsletters, according to Hulbert. Tops among "higher-quality" funds is Yacktman (YACKX).

Another excellent mutual-fund letter is the No-Load Fund Investor (914-693-7420), edited by Sheldon Jacobs, who provides good information on bond, as well as stock, funds.

Grant's Interest Rate Observer (212-809-7994): The eponymous James Grant doesn't pick stocks (though an issue of his newsletter will often present a long analysis of a single company). Instead, he comments on broader financial trends and events that affect the market. Grant has been bearish for the past decade or so, but I forgive him because he's such a terrific writer. But Grant's does not come cheap; it's $775 a year.

Books

The best investment books don't tell you simply how to do it but how to think about it. This is a category where some of the best works were written long ago and, as a happy consequence of the market boom of the 1990s, have been revived in new paperback editions.

A good example of this phenomenon tops my list: Burton Malkiel's "A Random Walk Down Wall Street" (Norton), first published in 1973. Malkiel clearly explains the efficient-market thesis: No one knows today what stock prices will do tomorrow, so tomorrow's movements appear random from today's perspective. Prices today reflect all available information (including the best guesses about future developments), so they are "efficient." As Malkiel says, "Future steps or directions cannot be predicted on the basis of past actions."

On the other hand, remember the admonition of super-investor Warren Buffett: "Observing that the market was frequently efficient, [economists] went on to conclude incorrectly that the market was always efficient. The difference between the propositions is night and day."

I would substitute "nearly always" in place of "frequently," but Buffett is right that markets can make mistakes, and you shouldn't ignore a company that's exceptionally cheap. You may really be getting a bargain!

Malkiel, however, teaches us a powerful lesson: Be humble. Every stock price is set by thousands, even millions, of buyers and sellers with vast amounts of information. Do you really think you know better? You may, but you'd better be awfully smart. The random-walk thesis makes a good case, first, for buying index funds and staying broadly diversified; second, for not fretting too much about the price of the stock you are buying; and, third, for not trying to time the market.

An even older classic with powerful relevance today is Benjamin Graham's "The Intelligent Investor" (HarperCollins), first published in 1949. Graham, a brilliant Columbia University professor and money manager, was mentor to Buffett, who wrote the preface to the most recent edition. As John Train wrote, "Graham's greatness was in knowing when to say no." As a value investor, he stressed the idea of "margin of safety" and, as Buffett put it, he taught that you should "look at [market] fluctuations as your friend rather than your enemy -- profit from folly rather than participate in it."

Philip Fisher, who started his career as a money manager in 1933, wrote in his 1958 book, "Common Stocks and Uncommon Profits" (Wiley): "Does the company have a management of unquestionable integrity?" If not, stay away. That's good advice today as well.

Fisher's greatest insight was his chapter on when to sell stocks: "If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." He goes on to elaborate on the word "almost."

More recently, "Stocks for the Long Run" (McGraw-Hill), a 1995 book by Wharton finance professor Jeremy Siegel, has appeared in a new edition to buttress the important message that stocks are by far the best asset class if you can hold them for long periods. They return far more than bonds, and, over time, the riskiness of a diversified stock portfolio declines dramatically -- to below the level of bonds.

Peter Lynch, whose stewardship of Fidelity Magellan made him the most successful mutual fund manager of all time, wrote a wonderful book a decade ago called "One Up on Wall Street" (Fireside), whose central argument was that small investors could do better than Wall Street pros simply by paying attention to businesses they encounter every day. Stock opportunities can be found at the mall or on the job or by reading newspapers and magazines (especially trade publications).

Lynch also espouses sound asset allocation principles. Like Siegel, he's a fan of stocks for the long run. You should have no trouble finding the book, but if you can't, get one of his sequels, such as "Beating the Street" (Fireside). The message is the same.

Four of my favorite books on business and financial history are Peter L. Bernstein's "Against the Gods" (Wiley), on risk, from ancient times to the present; John Brooks's "Once in Golconda" and "The Go-Go Years" (both also published by Wiley), on the Great Crash and its aftermath and on the 1960s, respectively; and, more recently, Roger Lowenstein's "When Genius Failed" (Random House), about the collapse of Long-Term Capital Management in 1998.

By the way, Lowenstein and especially John Brooks, a New Yorker writer who died in 1993, are excellent writers in a group (including Graham and Fisher) whose prose is often tough going. The best business writer of all is the pseudonymous Adam Smith (George J.W. Goodman), whose 1968 book "The Money Game" (Random House), which described the look and feel of Wall Street better than anything since, is still worth reading, though harder to find than some of the other classics cited here.

Two excellent financial books published this year are "Bubbleology" (Crown), on the science of stock market bubbles, by my American Enterprise Institute colleague Kevin Hassett, and "Take On the Street" (Pantheon), by Arthur Levitt Jr., former chairman of the Securities and Exchange Commission. Levitt's book combines an exhortation to investors to take more responsibility for their financial lives (since the pros are often out to fleece them) with solid practical advice on mutual funds, brokers and the like.

Finally, there's another book published this year: my own "The Secret Code of the Superior Investor" (Crown), a primer in 47 bite-size chapters. But impartiality and modesty prevent me from mentioning it.
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