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Name	Smart money strategy
Bill Miller, Legg Mason	Profit From Falling Prices
Marvin Schwartz, Neuberger Berman	Find Out Where the Rich Are Putting Theirs
Jim Rogers, Rogers International Commodity Index	Think Outside the Box
Bill Nygren, Oakmark	Learn Where to Find Value in the Market
Bob Rodriguez, First Pacific Advisors	Brush Up on Bonds
Patricia Winans, Magna Securities	Watch Where the Heavy Hitters Are Betting

Bill Miller: How to profit from falling prices
By David Rynecki

An even dozen -— that's the number of years Bill Miller's Legg Mason Value Trust fund has beaten the S&P 500. And this year he's up a market-topping 24 percent. No fund manager has had a more remarkable streak. Behind this success is Miller's willingness to buy stocks like Tyco and Waste Management when other managers are running scared -- and then continue buying all the way down.

Why is dollar cost averaging such a key strategy for you?
Our approach can be summarized with the phrase "lowest average cost wins." For most investors if a stock starts behaving in a way that is different from what they think it ought to be doing—say, it falls 15 percent -— they will probably sell. In our case, when a stock drops and we believe in the fundamentals, the case for future returns goes up. Think of it like this: If the underlying business is worth $40, and the stock is $20, my rate of return is 100 percent. The lower the shares go, the higher the future rate of return and the more money you should invest in them.

It's not easy to step up and buy more as the stock is sinking.
No, you need emotional detachment, the ability to look at things rationally and quantitatively as opposed to dramatically and emotionally.

So tell us about Amazon.com.
We first bought Amazon on the IPO. The dumbest thing we ever did was sell it. We should have loaded up the first day. We bought again at around 80 bucks in 1999. The reason we bought it at that price was based on the economic model of the business—meaning our estimate of what gross margins would be at maturity, how big the business would be, how great its return on capital was likely to be. We also looked at the sales growth rate over time. When it became clear shortly after that Amazon was going to have to sacrifice some of that growth rate, the stock went from the 80s to $7.

And you continued buying all the way down?
Actually we stopped buying in late 1999. We started again in mid-2000 when the stock was in the 40s, and then we bought it all the way down. Our buying increased as the stock fell. If the stock was $35, we'd buy 50,000 shares; at $25, we'd buy 150,000 shares; and at $14 we'd buy 300,000 to 400,000 shares.

When did you finish buying?
At between $7 and $8.

You had a lot of critics on the outside during this period.
And on the inside. Not analysts, but clients. If you are managing money for a large pension account, a lot of its other managers are selling the same stock they see you buying. That makes them nervous, especially when the stock is falling every day and they are reading terrible things about it in the newspaper.

And now you are way up, right?
Our average cost is about $19. The stock is $46. We doubled our money.

So what's the best way for retail investors to put this into practice?
It's much safer to dollar cost average in funds than individual stocks. People typically buy funds that are doing well and sell funds when they are not doing well. Instead, they should sell what is working and buy what isn't working. The best way to do this is to average down an index fund. Your Vanguard index fund is not going to zero, whereas with an individual name, it could go to zero.

Isn't this risky—what if the fund doesn't come back?
As Earl Weaver used to say, you win more games on three-run homers than sacrifice bunts. That's the thing people in the markets don't understand as well as they should. A lot of people look to hit singles and sacrifice bunts and make small returns. But statistically you are far better off with huge gains because you are going to make mistakes. And if you are playing small ball and you make a few mistakes, you can't recover.

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Marvin Schwartz: Where the rich are putting theirs
By Andy Serwer

Marvin Schwartz is one of Wall Street's best-kept secrets. Though everyday investors may be unfamiliar with him, those well-heeled and in the swim know him to be an investing superstar. Schwartz, 62, now a principal with Neuberger Berman, began on Wall Street in 1961 toiling in the research department for $1.25 an hour. Today he presides over $5.5 billion of investors' money, which is a key part of Neuberger's crown-jewel wealth-management unit—a business that caught the eye of Lehman Brothers, which just agreed to buy the venerable firm. Schwartz's long-term investing record is outstanding. Over the 37 years he's been running money, Schwartz and his team of fellow value investors, known as the Strauss Group, have beaten the market 29 years. I recently sat down with the press-shy Schwartz in his offices for what turns out to be only the second interview in his career.

So you've seen all kinds of markets, Marvin. Where are we right now?
In a bit of sweet spot. Look, there's no question the bear market is over. It ran from March 2000 to March 2003. The economy has to kick in now, and I think it already has. Personal disposable income is climbing because of tax cuts and refi activity, and so too is GDP.

But aren't stocks expensive?
Stocks aren't as overvalued as the bears would have you believe. The median P/E on the S&P 500 is about 15 on 2004 earnings. We are looking for, and are able to find, good companies that sell for less than that. Year by year, the market goes up 75 percent of the time, and we just had three down years. Sometimes people tell me, "Marvin, you're always bullish." Well, it's served me pretty well, except for 2002.

So which stocks are you most bullish on?
The petroleum industry is very undervalued and attractive right now. Any oil analyst will tell you that oil will soon return to its "normal" price of $24 a barrel. That's wishful thinking. I pray for oil to go down because that would help the other 85 percent of our portfolio, but I believe we are inexorably moving toward a major energy crisis in this country. We like Anadarko. I just bought 50,000 more shares this morning. It used to be a Wall Street darling, but it hit some rough spots, and the stock now trades at $44. We think it will earn $5.50 this year and next. We also have Chevron, Conoco, and EOG Resources.

I see you own housing stocks. Isn't that business about to fall off a cliff?
I assume you mean because of higher rates, and sure, that's not a positive, but rates are still very low. Plus, what really drives this business is a healthy GDP and people having jobs, and you already know I am bullish on that. D.R. Horton has had earnings up for 100 quarters in a row. The stock sells for $30, and it should earn $4.60 next year. It sells for less than seven times next year's earnings! Centex is a brilliantly managed company. Pulte is another one we own. These companies are building affordable homes and gaining market share.

Are financial stocks a place to play?
Some of them. Citigroup is one of our largest holdings. At $44, it sells for 12 times next year's earnings and is one of the world's premier financial institutions. If a money manager needs to put dollars in the market, Citi is a stock he will buy.

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Jim Rogers: Why you should think outside the box
By Brian O'Keefe

The last time the market was in the doldrums, Jim Rogers made a fortune -— and then some. A co-founder of the Quantum fund in 1973 with hedge fund legend George Soros, Rogers helped guide the portfolio to a better than 4,000 percent return over the rest of the '70s as the S&P 500 rose less than 50 percent. He recently published Adventure Capitalist, a chronicle of his second around-the-world trip on the hunt for investing themes. (See Wall $treet Week with FORTUNE's May 23, 2003 interview with Jim Rogers)

Where are the current opportunities for investors?
The American stock market is not really the place to be right now and won't be for a few years. The best place to be for most investors is commodities, which is where the new bull market is. Supply is flat to down, demand continues to grow, and inventories have been worked down. So commodities will be doing well for several more years. And by the way, the bull market has already started. We launched a commodities index fund Aug. 1, 1998. That index fund is up 100 percent.

After your first trip around the world you invested heavily in Botswana and made a bundle. Any new opportunities like that?
If I'm correct that natural resources are going to do well, then obviously Canada and Australia are going to be better markets than the U.S. If you invest in natural-resource-based economies, you'll do better. I'm very bullish on China. There are other places where there are spectacular opportunities, like Bolivia. Bolivia has a stock exchange, but it's tiny at the moment. Bolivia has been a basket case for hundreds of years, but in the past 18 years it has had relative stability. More important than that, they've discovered gigantic amounts of natural gas in the past five years. That whole part of South America -- Peru, western Brazil, northern Chile—is opening up. It will be one of the great frontiers of the 21st century.

Aren't commodities a risky proposition for retail investors?
Anybody can invest in commodities. It's very simple. Commodities get a terrible rap because everybody has a brother-in-law who's lost his shirt in soybeans. That's true. The reason, however, is that they invested on very low margin. They didn't know what they were doing—and they put up 5 percent or 10 percent margin and got wiped out just on fluctuation even if they did. You can buy commodities the same way you buy stocks. People buy IBM, and if they buy $100,000 worth they put up $100,000. You can do the same with soybeans. And you don't have to worry about the wild fluctuations of thin margin. Look at Cisco or many other stocks in the past five years, and they've been much more volatile than commodities, for God's sakes. Commodities have been terribly unvolatile compared with the stock market. It's a bad rap.

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Bill Nygren: Where to find value in the market
Yuval Rosenberg

Bill Nygren knows how to spot a real bargain. By looking for businesses trading at deep discounts to their private sale value, Nygren has delivered an average annual gain of 8.5 percent over the past three years at his Oakmark fund, trumping the S&P 500 by 20 percent. But even before the bear market refocused every investor on value, Nygren was besting the benchmark. As manager of the Oakmark Select fund (OAKLX) since its inception in 1996, Nygren has steered the portfolio, which typically holds just 15 to 20 stocks, to annualized gains of 22 percent.

You said in June that even after the stock run-up we've had, there are still opportunities to beat bond returns.
I think the market is less attractive relative to bonds than it was when I wrote that. On the other hand, S&P earnings ought to be able to grow 6 percent to 7 percent a year and the dividend yield is about 2 percent, so I think it's reasonable to expect average equities to return 8 percent to 9 percent a year. [Compare that to] a world of 4 percent to 5 percent bonds. I certainly don't think that's an unattractive return for equities and we would hope that by finding stocks that meet our criteria we could do better than that.

How do you approach beaten-down names?
To hit our criteria, there has to be something on the surface that looks like it's wrong with the company. You look at the stocks that have had big negative reactions to earnings—we have had lots of those over the last two years—companies that we think at least historically have been very good companies and the stock prices have been treated very harshly because of earnings disappointments. The market treats most of those companies as if the problems they're having in a specific quarter are long-term secular problems with the businesses. We try to find the ones where the probability is that it's a short-term cyclical issue as opposed to the long-term issue. If we're right, then over time as the market recognizes it, the stock will again get priced as an above-average company.

How much importance do you place on how companies generate and use excess cash?
It's very important to us that management approach the reinvestment of free cash flow with the sole goal of maximizing the value of the stock. In some cases that might be building new plants and trying to grow the basic business. In other cases it might be making add-on acquisitions. Or sometimes it might be as simple as purchasing undervalued stock with your excess cash flow. We generally believe management of good companies that are undervalued have better things to do with the money than return it to us as dividend. We're happy to get dividends, but we don't have a preference for dividend income versus [having] the money be used to grow the value.

You took advantage of the market when it was softer to get into names like Anheuser-Busch and Home Depot—names that at earlier points you thought were too expensive.
Our goal is always to have the portfolio invested in the combination of best and cheapest stocks that we think are available. Three years ago, above-average growth companies were priced at such high levels that they didn't meet our investment criteria. We didn't think you'd earn good returns owning those stocks. So our portfolio back then had more mundane companies, at best average-growth companies, but they were selling at very large P/E discounts. Those stocks have gone up. The large-cap above-average growth companies have come down substantially -— to the point that we no longer believe that growth as a characteristic is structurally overvalued.

Sometimes people get confused when you try to contrast value versus growth investing. To us, growth is a positive characteristic and the more a company has of it the more we are willing pay for it. Despite that willingness, most times we think above-average growth is overpriced in the market. This is one of those unusual times where companies that have significantly above-average growth prospects have had recent difficulties, in many cases more due to the economy than to any company specifics. And with interest rates as low as they are, the theoretical premium that one should be willing to pay for above-average growth is increasing. At the same time the premium the market is willing to pay is decreasing. That's where we think the opportunity is being created. And you're correct, for a value manager most of the names that we've purchased over the last year have tended to be stocks that you would think of as growth companies. We just think the valuations make them value stocks.

Have technology stocks run up too much to be good values anymore?
In general I think technology is still more expensively valued than non-tech. So our portfolios are very light in that area. Beyond that it gets harder to discriminate. I don't think there's a category that I could give you to say, this is an industry people should put money into. In almost any category I'd say there are some stocks that look attractive and some that don't. I'd be very careful, other than the tech versus non-tech, to give a generalization of an area that people ought to be invested in.

So what's your favorite holding right now?
Our largest holding is Washington Mutual. It's the name I have the highest confidence in and the highest expectations for. The stock sells for just under $40 a share, or about nine times earnings for this year. Its dividend yield is just over 4 percent. The company has been growing earnings at a double-digit annual rate compounded for the past 15 years. Management personally owns a lot of stock. And importantly, we think it's developing the same kind of cost advantages vs. its peers that a company like Wal-Mart has vs. its peers. Most of their competitors have targeted high net worth clients. Washington Mutual has elected not to join that battle and instead is trying to use cost advantages to go after middle-class clients, much like Wal-Mart did in the retail business.

As of the second quarter you'd increased holdings in Bristol-Myers, Mattel, and Sprint. Do you still like each of those?
Still like and own all of those. Mattel is a company that we've owned for several years. Bob Eckert, the new CEO, previously had run Kraft. We think he's doing a tremendous job instilling cost discipline into a company that had been lacking that previously, and is spending money to the strong brands that Mattel already has in the toy business as opposed to spending to diversify the company. We think they should be able to earn something like $1.35 next year and grow at least at a high single-digit rate following 2004. So you're talking about a company that's under 15 times earnings that, again, we believe because of the strength of their brand is a superior company.

I see Bristol-Myers is in your top 25 as well...
Yeah. We own a lot of pharmaceutical stocks, and I think this story is as much an industry story as it is a Bristol-specific story. The pharma industry has generally sold at a premium multiple because of very favorable fundamental characteristics—above-average growth, above-average cash generation, below-average volatility in earnings growth. The industry has suffered a difficult year. FDA approvals of new drugs slowed dramatically. A number of key drugs came off patent, and political pressures on drug pricing increased. Despite those negatives, which are real, we see an industry that over the next five years ought to have a growth rate that is above the S&P 500 growth rate. In the meantime, many of these companies have dividends that yield significantly above the S&P 500.

Are there other names you've added?
You mentioned Budweiser, which we purchased two quarters ago. I still think it's very attractive. The basic concept there is you're paying about an average P/E for a company that we think has about the highest probability there is of achieving significantly above-average growth for the next five years. It has the largest market share in the U.S. beer industry, has gained market share in almost every year for the last decade—we expect that trend to continue. It's been doing intelligent things with free cash flow. It's not at a bargain basement price, but anybody who is ranking quality of companies would have to put Anheuser-Busch up near the top of the list and the P/E is more near the middle of the list today.

Last quarter's purchases, Harley-Davidson and ADP, both have performed quite well. I still like and own both names. But I would be less anxious to encourage people to buy those at this price than I would be Anheuser-Busch.

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Bob Rodriguez: What you need to know about bonds
By Janice Revell

Bob Rodriguez, a fund manager with First Pacific Advisors, based in Los Angeles, manages the FPA Capital equity fund as well as FPA New Income (FPNIX), a $1.1 billion bond fund. The New Income fund, which Rodriguez has managed since 1983, has consistently outperformed the Lehman Brother's Aggregate Bond Index over the past one-, three-, five-, and ten-year periods.

What is your outlook for the bond market?
Right now, there's limited value in the bond market. The base level of yields is too low, and it has been for some time. In our bond fund we're sitting on nearly 31 percent in liquidity. That's right at the high-water mark.

Why such a negative view?
We still think there's anywhere from 75 to at least 100 basis points of further interest-rate rise over the next 12 to 18 months. We've had the largest amount of stimulation, monetary and fiscal, as a percentage of GDP since World War II. If you don't believe it's going to work, you're long the bond market bigtime. If you believe the stimulation is going to work, you have to have your durations at the short end. In our case, we took them 50 percent shorter than we've ever done before. Our duration in the bond portfolio is 1.3 years.

So are we looking at a Nasdaq-like bubble in the bond market?
Here's another red flag: Which was the largest fund in the U.S. when the stock market peaked in the spring of 2000? Fidelity Magellan. An equity fund. Which was the biggest fund in the U.S. when interest rates bottomed? PIMCO Total Return [a bond fund]. You can't make this stuff up!

Does anything look good to you right now?
You have to be very, very selective. We think that one could do reasonably well in terms of yield with TIPS [U.S. Treasury Inflation-Protected Securities] bonds maturing in 2007. Right now they have a yield of around 2.91 percent, with the inflation assumption. That would give you a better yield than a money market and principal protection. I also like the short-maturity, high-yield area. But you want to be very careful investing there.

What about investment-grade corporate bonds?
We just don't see much of anything there. I wish we could be saying something different. It's one of those frustrating periods.

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Patricia Winans: Where the heavy hitters are betting
By David Rynecki

Pat Winans has her finger on the pulse of the market. As founder and CEO of Magna Securities in New York, she serves more than 100 of the largest insitutional investors in the country.

Where's the money flowing?
The biggest flow we've seen is coming out of the S&P 500 index-type investments and going into big value stocks. That's driven by the belief that big value stocks will benefit from the potential economic recovery and also because of the tax changes for dividends.

What does that say about expectations for the market and the economy?
Our investors think the economy is poised for a turnaround. Two years ago a lot of investment managers were being terminated by pension plans, which then put money into the S&P 500 because they didn't think the managers could beat the benchmark. Now that trend is beginning to reverse itself.

So there is renewed interest in blue chips?
Yes. Absolutely. That would include some of the defense stocks that seem undervalued relative to other large caps, as well as financials and oils. Drug stocks are also being bought.

Are your investors running from bonds?
Not anymore. Bonds have become really cheap, and if they continue to get cheaper, there will be a tossup between bonds and dividend stocks. No one wants to get back into bonds right now, but they will if bonds get any cheaper.