Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!tamsun.tamu.edu!mtecv2!americast.com!americast.com!usa-post From: usa-post@AmeriCast.Com Newsgroups: usa-today.bonus,americast.usa-today.bonus Subject: bonus Wed, Aug 26 1992 Message-ID: Date: 26 Aug 92 08:21:15 GMT Organization: American Cybercasting Lines: 166 Approved: usa-post@AmeriCast.com 08-26 0000 BONUS: Playing the big-name stocks USA TODAY Update Aug. 26, 1992 Source: USA TODAY:Gannett National Information Network Nancy Tracy is a long-term investor, and she tends to stick with big-name company stocks. So, as stocks were rocketing in the summer of 1987, she was a bit edgy but saw no reason to touch her largest stock holding: Sears. Too bad. Today, Sears shares are 31% below their 1987 peak of $59 1:2. "I felt comfortable with Sears," says Tracy, 45, who works for an insurance company in Gulfport, Fla. "It's a household name." Stock market to Tracy: So what? DOES SEARS HAVE COMPANY? Hundreds of stocks, many of them household names, have shared the same fate as Sears. The first eight months of 1987, the Dow Jones industrial average soared 826 points to a then-record 2722 on Aug. 25. Five years ago today, the Dow began a 983-point slide that ended with the Oct. 19 crash. Today, the Dow is at 3232, 19% higher than its 1987 peak. Yet one in five stocks has never gotten back to its peak in August 1987. Among those stocks: Sears, Kodak, Maytag, Marriott, Travelers, Chrysler, IBM, Pennzoil, Upjohn, Caterpillar, CBS, Goodyear, Xerox. ARE THE EXPERTS RIGHT? That list raises serious questions about the wisdom of the buy-and-hold strategy that so many experts preach. The experts say the way to get rich in the stock market is to buy stocks and hold on. Don't buy and sell actively and try to compete with professional traders. Identify a stock you think has good long-term prospects and hold them a long time. CAN A BROAD PORTFOLIO LOSE? If you followed that advice five years ago, however, you could have lost a lot of money buying a lot of great names. Clearly, big names and market leaders are no guarantee of safety. A portfolio of stocks cutting across industries can still produce losses, even as the market goes up. And being a long-term investor won't, by itself, bail you out of a bad stock. The list also highlights investor worries about companies that get so large they can't adapt and keep growing. WHY IS IBM STOCK DOWN 50%? Why is IBM stock 50% lower than five years ago? One reason is that personal computers and desktop workstations now can handle many tasks once handled by giant mainframes. IBM was slow to respond to the shift. So while it has stumbled, innovative PC marketers like Dell Computer have prospered. Sears was unable to match the low prices of Wal-Mart and too slow to update fashions like The Gap. Kodak, though rolling out digital photo technology now, hasn't had much new-product success in recent years. The disc camera was a flop. CAN YOU JUST STORE BLUE-CHIP STOCKS? "There is something fundamentally wrong with a company whose stock doesn't go up in five years," says Eric Ryback, portfolio manager of the Lindner Fund. In a fast-changing world, he says, "you are foolish to think you're safe buying a blue chip stock and simply putting it away." Such lessons are worth noting because by many measures the stock market now, as it was in 1987, is way too high. WHAT ABOUT MUTUAL FUNDS? Average dividend yields are 3%. Stock prices, on average, are 24 times per share earnings the past 12 months. Both are at the worrisome end of their historical range. Yet as interest rates fall, investors may feel compelled to plow money from bank deposits - where yields are shrinking - into the stock market. One simple solution is to buy through a stock mutual fund. That's the advice most pros offer. You get a diverse portfolio. You also get an active money manager to watch for potholes that may require some quick steering. WHAT'S THE ANSWER? Individual stocks, while riskier, still offer far greater potential rewards than a fund. And "buy and hold is still a good strategy," says Byron Wien, market strategist at Morgan Stanley. "You just can't apply it capriciously." Indeed, being selective and being patient are keys to choosing a good stock - especially in a vulnerable market. WHAT DOES BUFFETT DO? "I get about one good idea a year," says Warren Buffett, famed investor and chief of Omaha-based Berkshire Hathaway. "And when I buy a stock, I go on the assumption that the stock exchange will close the next day for at least three years." The ideal length of time to hold a stock? "Forever," Buffett says. He's owned shares of the Washington Post since 1973; insurance giant GEICO since 1976. And he's not shy about buying stocks now, even though the market appears high. WHAT DO HIS INVESTMENTS SAY ABOUT STRATEGY? Two weeks ago, Buffett disclosed that he had raised his stake in California bank Wells Fargo to 11%. Earlier this summer, he said he'd bought a 15% stake in defense contractor General Dynamics. Buffett won't comment on specific investments, but the GD and Wells Fargo deals offer a curious insight into his stock-picking strategy. The two companies have this much in common: They are in industries racked with turmoil, and seem to have a prescription for survival, a good sign that management is doing its job. WHAT ELSE CAN JUSTIFY AN INVESTMENT? But they are at opposite ends of where their shares have traded the last two years. GD, near an all-time high, is up 300% from its low two years ago. Wells has been stumbling and is down 30% from its high two years ago. "You have to look to a company's business for validation of your judgment, not to the stock market," Buffett advises. He notes that Coca-Cola went public in 1919 at $40 a share then fell to less than $20 within 18 months. But the company's prospects never changed and the patient investor has been rewarded: A single share of Coke at the initial price of $40 in 1919 is worth $1.8 million today. WHAT ARE SOME OTHER TIPS TO FOLLOW? Other money managers offer these tips: Buy stocks in companies whose business you understand; look for companies that produce goods at the lowest cost in their industry, because they will do best in a slow economy and probably beyond; stay with market leaders, because they're most likely to survive any industry shakeout; and always look for stocks that have low prices relative to things like a company's net worth and earnings. CAN THESE TIPS PREPARE YOU FOR INTANGIBLES? They don't always work. Who could have seen the extent to which real estate would collapse, making victims of big insurance companies, builders, and banks? In 1987, Marriott had long been regarded as one of the best managed hotel companies and developers. But its shares are 63% lower than five years ago because the company has taken hit after hit on declining property values. Other industries hit hard since August 1987: electric utilties, computer manufacturers, insurers and electronics makers. SO WHAT'S THE OVERRIDING FACTOR? The key, says Cecil Godman, director of investments at Gintel Equity Management, is "you have to find the new market leaders." Then hold five to 10 years. He says most of the companies whose stocks never recovered from 1987 will survive. But the market is saying that, in many cases, those companies may not be industry leaders in the future. Indeed, Godman and others interviewed for this story could name only a handful of stocks on the list that they thought were attractive buys. Among the stocks they're nibbling at: Goodyear, Chrysler, Kodak, Texas Instruments, IBM, Dow Jones, Travelers, Federal Express. IS PATIENCE ADVISED FOR THE REBOUND INVESTMENT? Some already show signs of rejuvenating. Chrysler jumped from $11.75 to $19.50 this year - up 66%, though it's still down 59% from its 1987 peak of $48. But, cautions Larry Berglund, portfolio manager at Pennsylvania Trust, if these depressed stocks "are going to turn around, you'll have plenty of time to get in." He advises waiting for proof of a turnaround, and that means seeing reported earnings growth. You might miss a move in the stock from, say, $10 to $30. But if the turnaround is real, he says, "It'll go to $70." Bonus Editor: Martin Baucom. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM