Original Air Date: July 12, 2002
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Program Summary
Karen Gibbs and Geoff Colvin opened the program by noting that despite politicians' efforts to bolster investor confidence, the markets plunged, possibly because stocks are still expensive.
The Dow is still ahead of where it would have been on a traditional curve, Geoff said. Had the Dow Jones Industrial Average followed its historical growth pattern rather than skyrocketing over the last 20 years, it would only be at about 6,300 today, Geoff said.
Karen pointed out that Warren Buffett has, in the past, described falling markets as opportunities to get more for your money.
Neither statement made Geoff and Karen feel better about the market.
However, Geoff was encouraged by the fact that Morgan Stanley's notoriously bearish chief global strategist, Barton Biggs, has decided that it's time to buy stocks.
Investors weren't buying this week, though, as the major indices fell. Also falling was Wyeth, a stock pick from the July 5 broadcast. The analyst who named the stock as a pick, Vadim Zlotnikov, still believes in his recommendation, Karen said.
Roundtable
Karen and Geoff interviewed value fund manager Jean-Marie Eveillard and accounting expert Howard Schilit during Friday's round table discussion.
While the bear market has driven some investors to the edge of tears, Eveillard has been successful for the past year, Colvin said. The good fortune is largely a matter of cycles, said Eveillard, whose funds were relatively poor performers during the technology bubble of the late 1990s. "I was on the verge of tears three years ago," Eveillard joked. "So this is a cyclical business."
Much of Eveillard's success has been tied to a successful use of gold as insurance against the bear market, the hosts noted. Gold is a hedge against "bad things happening" to stock fundamentals, Eveillard said. The most important of those fundamentals is free cash flow, Eveillard said.
"If you and I, we owned a business, what we would worry about is the amount of free cash which the business generates," he said. "That's what's truly important. Particularly today where earnings per share are simply not to be relied upon. We never take the reported numbers at face value... We try to figure out what the economic profits of the business are, which don't necessarily coincide with the accounting numbers."
Eveillard's stock picks include Rayonier and Tyco. He's also interested in the corporate bonds of Lucent and Level Three, which have good odds of surviving, Eveillard said.
Despite his current interest in Tyco, Eveillard pointed to the company as an example of an organization whose accounting is questionable. Schilit agreed, and described Tyco as a company whose true financial performance was difficult to discern becauase the company took so many restructuring charges related to its acquisitions.
Investors should know how their companies make money, compare cash flow to reported profits and read proxy statements, Schilit said. A company raises a red flag if its cash flow is moving in a different direction that reported profits, he said. And proxy statements are critical because their descriptions of related-party transactions indicate what kind of people are running the company, Eveillard added.
Geoff answered a viewer's e-mail question on stock options. Only two members of the S&P 500, Boeing and Winn-Dixie Stores, currently include the cost of stock options in their reported earnings, Geoff said. But don't be surprised if other large companies follow suit soon, he added.
Phillips interview
Karen and Geoff also interviewed Don Phillips, managing director of Morningstar, which recently revamped its mutual fund rating system. The new system should help investors properly diversify their portfolios and encourage them to buy good funds in unpopular sectors, Phillips said.
A long-term view is important with mutual funds, because it takes time to truly gauge the ability of a fund manager, Phillips said.
Good fund managers should have a passion for their work, said Phillips, who mentioned two funds as up-and-comers: William Blair Small Cap Growth and Dodge & Cox International. He also cited two funds, American Heritage and Berkshire Focus, as funds to avoid.
Next week: Money manager Robert Turner
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