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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
A good many smart people aren't optimistic about the stock market right now — like John Longo, a Ph.D. and Chartered Financial Analyst. He's clinical associate professor of finance at Rutgers Business School, and senior vice president and chief investment strategist for the MDE Group in Parsippany.
Longo thinks that we're in for years of slow growth, and at this point his portfolio is only 30 percent in the stock market.
He's worried about the budget deficit, and the fact that there's not much to cut...about the fact that Americans are saving instead of investing (it's both good and bad)...that taxes will inevitably rise ... that inflation will rear its ugly face again ... and that the stock market is not reasonably valued.
Other negative signs he mentions: Delinquency rates on mortgages are still increasing, with 10 percent missing mortgage payments ... 5 percent aren't paying their credit card bills ... 5 percent aren't paying their loans ... unemployment is still high (10 percent).What does he recommend?
High quality in general. Examples he gave: Wal-Mart, Coca-Cola, Microsoft.
Blue-chip stocks that pay solid dividends. A fund he mentioned: Schafer Cullen High Dividend.
A floating-rate mutual fund, like Fidelity's.
Foreign investments -- despite the "home country bias" (people tend to invest the most in their own country). Countries like the BRIC countries (Brazil, Russia, India, China) tend to have good balance sheets. He also referred to the Big Mac theory: If a Big Mac costs $3.50 in the U.S. and $1.80 in China, China's market may be almost 100 percent undervalued.
Master limited partnerships, like Kayne Anderson, which pay high interest.
Good hedge funds, like Highbridge Statistical Market Neutral, AQR (it stands for Applied Quantitative Research), and TFS (the last has closed to new investors).
Some other stocks he mentioned favorably: Medco, Comcast, Duke Energy. (Remember: He isn't going to tell you when to sell.)
Off-the-beaten track investments, like foreclosed real estate and structured settlement funds.
Despite Longo's worries, he doesn't recommend that investors keep all their investments in bonds. That would subject them to interest rate risk -- their bonds would plummet in value if interest rates rise. In fact, one of the worst investments you can make now, he
thinks, is long-term bonds.
Besides, he pointed out, only a handful of corporate bonds have the highest safety ratings (AAA) — bonds such as IBM's and Johnson & Johnson's.
Some other points he has made in recent talks:
• "Buy-and-hold" – the notion that you should just stick your stock certificates in a drawer and forget them – "is dead." One reason: Stocks that have lost you money are ripe candidates for sale. In fact, the big difference between professional investors and amateurs, Longo believes, is that the pros are ready to sell their losers – and let their winners ride. The amateurs hold on, dreaming that their losers will revive. And they tend to sell their few winners, fearing that their lucky streak will not last.
His own father, Longo said, still owns Lucent – although he has lost 90 percent or so of his original investment. "I hope he lives long enough to break even."
His counsel: "Don't be afraid to sell."
• While buy-and-hold is dead, market-timing doesn't have a new lease on life. Market-timing, in his definition, means: All or nothing – in stocks, bonds, or whatever. It doesn't mean lightening up in times like these.
• Avoid traps – like illiquid, non-transparent, leveraged investments. And don't chase short-term gains.
• In building a portfolio, try to make your investments "non-correlated." So that if one sinks, another may go up – and vice versa.
Assume that the stock of a company that sells suntan lotion rises 20 percent when it's sunny and falls 10 percent when it's rainy.
Assume that the stock of a company that sells umbrellas rises 20 percent when it's rainy and falls 10 percent when it's sunny.
If you buy both, theoretically you'll have a nice gain whether it's rain or shine.
That's the idea behind non-correlated assets.
• Your high-turnover holdings belong in your tax-favored accounts, your low-turnover investments in taxable accounts. Reason: for the strongest shield against possible taxes.
• Set "stop-loss orders" – when a stock falls a certain percentage, have it booted out. So you don't wind up with an 80 percent or 90 percent loss (as with Kodak and General Motors). A stop-loss of 10 percent or 15 percent might be appropriate for conservative assets, a stop-loss of 20 percent or 25 percent for volatile stocks. While you cannot set a stop-loss order on a traditional mutual fund, he noted, you can have a "mental" stop – a decline that should set off an alarm clock.
• If you want to buy municipals, "ladder" them – have different durations, so you can readily capture new bonds with higher rates. Focus on the safer, general obligation bonds. While munis will benefit when tax rates go up, he noted, they will be hurt when interest rates go up.
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Longo told of a memorable visit that he and a bunch of Rutgers students took to Omaha to chat with Warren Buffett a few years ago. They spent several hours with him, then he took them to lunch. Buffett even picked up the check.
On Ebay, a lunch with Buffett costs $1.8 million. And although I myself wrote a book about Buffett (a splendid one, by the way), and repeatedly entreated him for an interview, he continually and courteously turned me down.
MDE Group, by the way, has consistently been rated one of the best registered investment advisers in the country by the business magazine Barron's.
You are invited to send personal finance questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it
