Contrarian tips for go-nowhere markets
| New York
For those who like roller coasters, last week's stock market swings could have made the most daring rider a little weak-kneed. After closing Monday at 1,738.74, following the historic 508-point drop, the Dow Jones industrial average had rocketed to about 1,940 by 10:30 Tuesday morning. The Dow then fell to 1,710 after lunch, and took a couple more climbs and falls before ending the day at 1,841.01.
``The range for the day looked like the range for a whole year,'' observes Dennis Stattman, managing director of Meridian Management Company, Little Rock, Ark. ``It's difficult to say where value lies that will be true 48 hours from now.''
Even when the stock markets are calmer, managers have a hard time agreeing on where to put money. The market's volatility has accentuated these differences.
In a week that some anticipated, though not to this degree, the Dow closed down 295.98 points to close at 1,950.76. Records were set and broken: a 508-point fall and 22.6 percent decline Monday, a 102-point gain Tuesday and 608 million-share volume, and a 186-point gain Wednesday. The New York and American Stock Exchanges shortened their trading days by two hours Friday, today, and tomorrow to get through the paper work that resulted from heavy trading. Other exchanges and boards of trade also cut back their hours.
Some managers saw opportunities in the falling markets to buy blue chips they would not recommend at higher levels. Others took advantage of a strengthening bond market.
Then there are the contrarians, those investors who do the opposite of what most investors are doing. ``As stocks of good value rise in price and become popular, the contrarian will sell them,'' explains James Fraser, of Fraser Management Associates Inc., Burlington, Vt.
``In a sense, it turns emotions upside down, because it's hard to avoid fashion and buy what no one else wants. Still, over the long term, it seems to be a successful strategy,'' he says.
Contrarians do not outperform the bull markets, generally. ``We do our best work in markets that go nowhere,'' says Mr. Fraser, who manages assets of $100 million. ``You don't get five years like the ones we've had too often, where people have been able to make 20 percent a year. People will get back to making 5 percent to 6 percent a year. But if you do your work, you can get 10 percent,'' he says.
Mr. Stattman says the contrarian approach has worked for Meridian, which manages $300 million in equity portfolios.
``We're willing to do things that are unpopular,'' he says. ``A great majority of investors focus on a year or less, so when you take a longer-term view, you have less competition and you can do what you want.''
He says two years ago Meridian bought oil stocks, while others were worrying about declining oil prices. ``But when you took the longer-term perspective, companies weren't exploring and we still need to put gas in our cars,'' he says.
Some investors, like Fraser and Stattman, adhere to a contrarian approach without apology; others like certain parts of it, but do not want to be labeled contrarians.
``If I think it's unsound, I don't care what anyone else is doing,'' says Robert Torray, who manages money in Bethesda, Md. Many people invested in blue chips after Monday's fall, but Mr. Torray did not. ``I'm glad I didn't do it. I have every reason to think the blue chips are not worth the price even at Monday's prices,'' says Torray, who thought 1,300 on the Dow was too high.
The contrarian approach helps discipline thinking, says Dean LeBaron.
``You question the consensus, which is easy to fall into in the investment community, and although it may be correct, it may be built into prices,'' says Mr. LeBaron, a trustee of Batterymarch Financial Management in Boston, a $10 billion firm. ``You try to make an independent assessment.''
Some of these managers find value in the stock market, and one has turned to bonds. David Dreman looks at companies with price-earnings ratios below market value, big capitalization, and reasonably good growth.
``By using low price-earnings ratios, we don't get carried away paying too much for stocks,'' says Mr. Dreman, managing director of Dreman Value Management in New York. ``The stocks that ran away we liquidated in the bull market and took the profits as the stocks went up.''
Of the $3 billion he manages, Dreman has roughly 20 percent in cash, although he just reinvested some in stocks. The company tries to keep 16 industries represented in portfolios.
In this market, Dreman urges caution. ``We just had a tremendous shock, he observes. ``It's very dangerous to commit to the market too early, because there could be a secondary shock. I would only nibble a little bit, and hold on to what you have.''
Fraser says he is paying attention to basic industry stocks, like General Motors and Mack Trucks. ``We're buying industrial products that help American industry,'' he says. Added to his list are interest-sensitive stocks, because he thinks interest rates will not rise, and regional banks without overseas loans.
Meridian Management has been buying stocks that reflect good businesses with solid balance sheets, Stattman says. These have mainly been blue chips with some sensitivity to interest rates.
Batterymarch invests fully in equities. Stocks are chosen by the strength of a company's individual components, rather than the company's price-earnings ratio, LeBaron says. The company likes stocks in multi-industry companies, raw materials, and manufacturing.
The stock market does not appeal to Torray, however. He has invested between 50 percent and 70 percent in Treasury bills and short-term bonds. In 1982 he was fully invested in stocks. ``You can't lose money in what we're invested in now,'' he says.
The market is highly unattractive, Torray says, because ``stocks have been grossly inflated, there is too much leverage throughout the system, and the biggest balloon of all is the Japanese market. You're just asking for trouble. These are all signs of a highly unstable situation.''