Transcripts

"Of Mutual Interest,"-John Waggoner, Mutual Fund Columnist at "USA Today"

SUSIE GHARIB: In tonight's "Of Mutual Interest," two ways your mutual fund portfolio can profit from the bear market. Here's John Waggoner, mutual fund columnist at "USA Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: It's not easy to think of something good to say about this stock market, unless you happen to have too darn much money. But if you're a true optimist, you could say that the recent carnage has revealed some real bargains. And if you're a mutual fund investor, you have several ways you can take advantage of Wall Streets fire sale. Your first strategy: invest in a value fund. Value managers look for beaten up stocks and wait for them to return to fair value. These funds have been pretty well clobbered themselves: the average large-cap value fund plunged 37 percent last year. Nevertheless, they tend to perform well in the 12 months after a shellacking. Your second strategy: invest in a closed-end fund selling for a deep discount. Closed-end funds issue a set number of shares and sell them on the stock exchanges. Many times, however, the share prices of these funds are less than the fair value of their holdings. A closed-end fund's holdings might be worth $8 a share, for example, but the current market price could be just $7. In Wall Street parlance, that means the fund is selling at a 12.5 percent discount. Currently, you can buy closed-end value funds whose share prices are anywhere from 1 percent to 20 percent below the value of their holdings. That's like getting a double value. Now, it's unlikely that the fund will sell everything at once and give shareholders an immediate profit. Nevertheless, you're buying cheap stocks cheaply and that's a pretty good bet. But don't buy a fund that's down far more than its peers, simply because it's cheap. A lagging fund often remains a laggard. And these days, nobody has enough good money to throw after bad. I'm John Waggoner.