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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
By and large, I think the average investor should buy mutual funds and not individual stocks. With certain exceptions:
If he/she knows something important about a stock or industry that most other investors don't know.
If he/she buys a blue chip, especially when it's somewhat depressed (like Johnson & Johnson now). You don't need lots of talent to buy and hold a blue chip.
If he/she is on the level of a professional – or is receiving guidance from a professional.
The professional help could come from a newsletter, and one of my favorites is Morningstar StockInvestor.
The newsletter gives two model portfolios: Tortoise (value) and Hare (growth). The investment strategy focuses on stocks with "moats": strong protection against competition. Both portfolios have 20 plus stocks. Five stars is the highest rating.
On the Tortoise side, five-star funds include Exelon, Novartis, ExxonMobil, Lowe's Companies, Johnson & Johnson, TransCanada, Procter & Gamble, Home Depot, First American Financial, and Pfizer.The other stocks in the Tortoise portfolio are rated three or four stars – they may have been in the portfolio awhile, and their ratings may have declined a bit, perhaps as their prices rose.
The newsletter gives the estimated fair value of a stock, what the current price is, and suggests when you might consider buying or selling. Other information: yield, "stewardship" (only Molson Coors Brewing gets as low as a D), even degree of uncertainty about the fair value.
The biggest bargain seems to be First American Financial (FAF), with a fair value of $26 and a recent price of $13.06. The newsletter recommends that someone consider buying it at $13 (close to the recent price), and selling at $52 (!). Alas, its moat is narrow.
Paul Larson himself, the editor, tells me that he doesn't pay much attention to the "consider selling" price. But when the price rises slightly above the fair value, he begins trimming his position.
The most painful purchase the newsletter has made is Pfizer, with a loss of 59.4 percent since 2001. (I've always lost money on Pfizer myself.)
Biggest holding: Berkshire Hathaway, at 12.2 percent of the portfolio.
Over in the Hare portfolio, the biggest bargain may be Apollo Group, selling at $42.27, with an estimated fair value of $99. It's a five-star stock, along with Paychex, International Speedway, eBay, Western Union, Vulcan Materials.
Biggest losers: Cemex, down 63.2 percent since its purchase in 2006; Corporate Executive Board is off 61.6 percent since 2007. There are big winners, too. MasterCard is up a terrific 354.6 percent since its purchase in 2006.
Both portfolios have impressive long-term records. Tortoise is up 5.9 percent since inception (annualized), versus 0.1 percent for the Standard & Poor's 500. Hare has risen 4.7 percent since inception (annualized) versus 0.1 percent for the S&P 500. Inception was June 18, 2001.
Also in a typical newsletter: a report on the economy, in-depth reports on various stocks, brief reports on various other stocks not in the model portfolios (Campbell Soup gets three stars, Automatic Data Processing four, Medtronic five, Merck four, Novartis five, UPS four) and stocks to sell (Netflix and Boston Beer).
Now, the conventional wisdom is: Don't just buy one or two of a newsletter's recommendations. You may choose unwisely. You've got to buy the whole enchilada.
I don't follow that advice myself, and I doubt that many other investors do.
By the way, a rival of Morningstar StockInvestor, The Value Line Investment Survey, does not regularly report on how its model portfolios have been faring. It's also far more expensive than StockInvestor.
A print subscription to StockInvestor costs $165 a year; via PDF, $155. You can subscribe via 1-866-910-1145 (code AMS-NBP-Z10) or msi.morningstar.com.
Readers are invited to send financial questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
