We assume you don’t give a hoot about the market gyrations of the past three weeks.
Volatility is our friend. We try to use it to our advantage. We buy when stocks are down and do some cutting when they’re up.
I don’t think anybody should wait, especially in today’s average investment climate. Today markets move so fast that if you’re not in during a bull phase, you just miss out. Being fully invested is the best strategy because, more than two thirds of the time, stocks are going up. There’s always a reason not to buy into the market. There’s always a reason to be bearish. But despite its fits and starts, the economy will grow over long periods of time.
Unless you’re elderly, you should be almost exclusively in common stocks.
Concentrate on stocks. All the way up to 100 percent of the money that you don’t set aside for emergencies, or that you need in the short term. Keep that money in a money-market fund, a Treasury bill–some-thing with no risk and some return.
There’s always the risk of a 10 to 20 percent correction. I don’t see a 30 to 40 percent drop, because the economic expansion is progressing nicely. The risk of that steep a fall is fairly remote.
Ten percent might be an average annual return for the 1990s. We won’t see the 17.5 percent average of the 1980s. That may disappoint investors. If they ever grow very disenchanted, we’d have trouble. The Achilles’ heel of the stock market is the tremendous growth in mutual-fund assets. We don’t know what these investors will do in trying times, which inevitably occur.
Half of our measures are quantitative and half are qualitative. One rule of thumb is that we want companies with price-to-earnings ratios lower than their growth rates. For example, we’re buying Norwest Corp., a Minneapolis company that owns financial-services businesses. The price is 11 times earnings, and the growth rate could approach 15 percent. We’re also buying Mercury Finance in Chicago, which we feel will grow 20 to 25 percent annually. It’s a niche company that buys up auto loans, and its return on equity is high. Its price/earnings ratio is 22. We’re buying Charter Medical, a psychiatric-hospital system moving more into outpatient care. The psychiatric field has been under pressure, but Charter is a survivor that knows how to keep costs down. And we’re buying Columbia/HCA Health-care, which acquires hospitals and makes them more efficient. They’re adjusting well to the new health-care environment. I’ve been selling Tyson Foods. It’s a good company, but it’s selling at 19 times earnings, and it’ll have a hard time growing at more than 10 to 15 percent. I think it’s overvalued.
We learned in 1973-74 that there’s a downside risk in stocks-and a substantial downside risk if you pay too much for them. Making money back after a loss is hard to do. The law of numbers is against you. If a stock comes down 15 percent, you have to make an 18 percent return to break even. If it comes down 50 percent, you have to make a 100 percent return. We try to buy growth stocks at attractive prices. In recent years, as stocks have become so high priced, we’ve gone more to the value approach, buying good companies that have temporary problems. Both strategies work well over time.
No. We think the rise in interest rates, with a corresponding decline in bend prices, will continue. We’re concerned about inflation over the next six to 12 months. These factors will also make it far tougher to make money in the stock market. Selectivity of stocks will be the key. That’s good for us. We’re stock pickers.
When Nicholas Fund became public, there were only about 400 mutual funds. Today there are over 5,000. That has made money managers subject to a lot of short-term considerations. Some use gimmicky investments, like initial public offerings or derivatives, hoping to prop up their short-term return. Or they’ll grab “momentum stocks” as they rise, even though those stocks can blow up as they get overpriced. You can get badly burned chasing whatever is hot today. We advise investors to take a long-term view. If we perform, we’ll get money. If we don’t perform, we won’t get money-and we won’t deserve any.
It makes sense for an average investor with, say, $50,000 to use four different funds. I’d advise starting with a solid growth fund, an international fund, a small-company growth fund and a value fund.
I’m not opposed to people doing that with a portion of their money. But you can find mutual funds that beat the market averages over long periods of time. If I can earn you a 2 percent advantage over 20 or 30 years, you’ll make a lot more money. Compounding is a fabulous mechanism.
No. There’s far more opportunity-specialized funds, global finds, more money managers with different styles. But the three basic issues haven’t changed. What is the fund’s performance? Do its objectives match my goals? Am I giving my money to people who’ve proven themselves?
Sometimes you get too much money too fast. If you stay successful, you get even more. But when mutual funds get larger, it’s harder for them to perform. There are exceptions, like Fidelity Magellan. But it’s harder for us to buy the stock of a smaller company and make it meaningful in our performance when the Nicholas Fund stands at $3 billion.
If the fund has been a good performer, you should be patient for at least a year or two. A fund’s style can fall out of favor. And industries move in cycles. Funds with lots of health-care stocks had a great 1991 and a tough 1992 and 1993. I think it evens out over time as long as the same people are running the fund with the same investment philosophy. The worst thing a money manager can do is change his philosophy to chase after whatever is in vogue. That’s usually when a fund deteriorates, so if you see it happening to your fund, be careful.
