Value Library

The following is an excerpt from the ABC Perspective - April 2003 - Pg. 3

Years ago, I remember asking a former co-worker of mine how he survived the terrible bear market of 1973-74. That period included the Mid-East oil embargo, the Yom Kippur War, looming economic recession and rising interest rates.

In fact, this portfolio manager did exceedingly well. He managed to not only survive this wretched stretch but, more importantly, he put up some incredibly spectacular numbers. As a result, this powerful performance enabled this co-worker to attract substantial pools of money in the late 1970s. Ultimately, it helped forge an astonishing and very successful money management career for this individual.

As I recall, this manager had tremendous self-confidence and sharp instincts. He also had the courage of his convictions. He was a superb common stock analyst, however, he astutely recognized that often the crucial timing-element was beyond his control. Accordingly he remained flexible in approach and realistic in action. I often marveled at his ability to ferret out deep value and potentially growthy stock selections. His patience appeared boundless. In simple terms he did good analytical work and then trusted his instincts.

In explaining his 1973-74 success he related that he was carrying a 25% cash reserve at the onset of the bear market. Near the market bottom he came to the conclusion that the market was fundamentally cheap. While he felt that it might get a little cheaper, he was convinced that the Dow Jones Average was within 5-10% of its cycle lows. Accordingly he divided his cash war chest into three equal parts and committed each third at successive market declines. After spending his last third in August 1974, at the then Dow Jones low of about 575, I asked him what he did next……after all, he was out of cash. With a big Cheshire cat grin he replied, "I prayed". While the market recovered briefly, it did retest the 575 low, four months later in December 1974. Although his patience was severely challenged and he faced the wrath of his many anxious investor-clients he stuck with his instincts and firm conviction. This trust in himself finally paid off since the Dow Jones soon after recoiled and embarked on a remarkable mid 1970's to late 1990's run. This secular bull market surge eventually peaked at over 11,000 in 1999.

Now some 29 years later, my former co-worker has long since retired after an extraordinary, successful investment career and personal financial prosperity. Looking back, the secret to his achievement appears rather simplistic: tried and true investment principles; trusting one's instincts; and adhering to one's disciplines and focus. These factors are well worth remembering.

Irwin A. Michael, CFA