BY WARREN BOROSON

COMMENTARY

BOROSON ON MONEY

Most investment strategies that work wonders turn out to be, alas, seven-day wonders.

They stop working.

A key reason is that many people start using this terrific strategy and the investments it recommends stop being cheap. An example would be purchasing the highest-yielding Dow stocks.

A remarkable exception to this rule is the value strategy, which would be buying the stocks of good companies when they are selling them for less than they are worth for. Why does this strategy continue to work? Possibly because it’s hard for any rational human being to buy a stock that almost everyone would loathe. Like currently, an example would be Hewlett Packard.

Peter Langerman, chairman, president, and CEO of Franklin Mutual Advisers in Short Hills, believes that a good investment strategy needs to be consistently successful. So many people “are right only once – and then stop being right.” They avoid Bear Market No. 1; succumb to Bear Market No. 2.

The Mutual Series funds are part of the giant Franklin Templeton family, and they look for stocks selling at only 50%, 60%, or 70% of their intrinsic value. (“Intrinsic” value is what a company would really be worth if it sold all its assets.) “By buying stocks for less than they should be selling for, we build in a cushion,” said Langerman. “And hopefully there will be a catalyst to unlock the value.”

Langerman told an audience of investors in Ridgewood last week that he isn’t looking for a company that makes the greatest new product. “We don’t use technical analysis, or track consumer sentiment, or look at momentum.” Instead, Mutual – as he called it -- simply looks for stocks worth more than they are selling for based on such things as their hard assets. “At the end of the day, we ask, what is the company worth?”

Any number of things can cause a stock to sell at a discount – such as a bad quarter. Also, a lot of subjectivity is involved in choosing the stocks. “Our information is imperfect,” Langerman said, even though it’s far better than it was 20 years ago.  “Now we have information overload.”

His funds also look at bonds in trouble, as well as mergers and arbitrage – which, he added, can be dangerous if a deal falls through. “Don’t try this at home.”

Langerman said Investors have been averse to stocks since 2007, when they may have lost 40% to 70% of their money. As a result, many had fled to bonds. And if interest rates go up, of course existing bonds will lose value. And while he doesn’t think there’s a bond “bubble,” as some have warned, it may have created an opportunity for investors to consider buying equities at a time when bond yields are “anemic.” He concluded, “It’s a pretty good time to own equities.”

Some other points Langerman made:

I had mentioned knowing someone who had all of his money in one Mutual Series fund, and Langerman was dubious.  He said that while the individual funds have 175 or 200 stocks, they are a good place to put a significant chunk of money. “But I wouldn’t put 100% of my money in any one vehicle because of the modest risks. There are benefits to greater diversification.” He even put in a good word for growth stocks - stocks, unlike value stocks, of companies doing well.

In answer to a question, he said that the Mutual Series funds have done about as well as index funds in recent years. But the Mutual Series funds have had the advantage of being less volatile and less risky.

When to sell a holding? “Once a stock reaches its fair value, it’s time to say good-bye.”

Are the funds as aggressive in dealing with management as they were in the past? Langerman said the funds remain aggressive, except that the funds may not publicize their activities now.

Foreign stocks are currently cheaper than U.S. stocks, but generally the U.S. is a better place to invest. (His funds are about one-third invested outside the U.S.)

He listed companies like Research in Motion and energy companies like Apache Oil, Baker Hughes, and American Oil amongst the ones he likes.

Langerman struck me as not only exceedingly smart, but well spoken.  And one thing he said that was worth remembering: “You never have 100% certainty.”

I have been following the Mutual Series funds since Max Heine, the founder, was running things. And I was there when – after hearing various people describe their different but successful investment strategies – Heine made the comment: “All roads lead to Jerusalem.”

And I have interviewed his successor, Michael Price, many times. “We really kick the tires,” he said, explaining the funds’ success.

Langerman initially joined Heine Securities Corporation (predecessor of Franklin Mutual Advisers) in June 1986. He served as CEO of Mutual Series beginning in 1998 and as the chairman of the fund boards beginning in 2001, before leaving in 2002 to oversee employee pension funds as the director of New Jersey's Division of Investment.

He rejoined Mutual Series in 2005.

Langerman began his professional career in 1977, serving on the audit staff of Arthur Young & Company, where he earned his CPA designation.

He graduated magna cum laude from Yale University, earning his bachelor of arts degree in Russian Studies. He holds a master's degree in accounting from New York University Graduate School of Business and received his Juris Doctor degree from Stanford University Law School.

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