A Buying Opportunity?

For a long-term investor, someone whose time horizon is three to five years instead of six to 12 months, this could be a buying opportunity, according to Jeffrey Fisher. A good time to buy stocks normally too expensive to purchase.


Some favorable signs he pointed to in a recent talk he gave: the supply of stocks has been reduced--because of company buybacks and consolidations. Interest rates are low. There’s abundant capital, on a global basis. Bonds seem expensive.


Among Fisher’s favorite stocks are: Gilead Sciences, Pepsico, ConocoPhillips, United Technologies, Becton Dickinson, Accenture, and AllianceBernstein.


Fisher, a CFP, is the founder and principal of Quadrant Capital Management in Montclair. Before that, he was vice president in the private bank at J.P. Morgan. Previously, he managed Fleet Bank’s New York City private banking office. He began his career at Citibank.


In his talk, Fisher suggested that financial stocks like AIG may have even more suffering to endure, so he’s not rushing in. Such companies may have a lot more to write-off in this economic slowdown. “There’s still too much risk.”


And he observed that it’s harder to catch a falling knife than it is to pick a knife up off the floor.


Should investors have fled the current dismal market in advance—or flee now? It’s hard to predict when stocks will retreat—and hard to predict when they will rebound, he pointed out. “No one rings a bell when stocks are at their heights or at their lows. So stay with your target asset allocation.”


If you go from 40% in stocks to zero percent, he warned, “There’s a lot of hubris in that, and the penalty for being wrong can be great.”


Still, consider making “tactical departures at the margins.” Last year, for example, he shifted a bit from small caps to large caps. (A wise move, as it turned out.)


Rebalancing can help, too. If Google was 3% of your portfolio and it rose to become 5%, you might have been wise to bring it back to 3%. You would also have been wise to rebalance during the tech craze of the late ‘90s—or you might have ridden the wave all the way up, then down.


By rebalancing, you may look foolish initially if the stocks keep going up. But you won’t get seriously depressed if the stocks start falling off a cliff. And you’ll have captured, and kept, some profits.


Rebalancing also means that if stocks start plummeting, “You need to start buying, although there’s the risk of being early.” But when those stocks rebound, “You’ll have the closest thing to a free lunch.”


In choosing stocks, Fisher looks for a “story”—a persuasive case for the stock. “How the numbers may play out is a story.” And he always asks himself: “What can go wrong?”


How many stocks do you need? Thirty or 40, Fisher suggested, despite the academics’ recommendation of 15 of 20. So that “one wrong call doesn’t devastate your portfolio.” And if you own uncorrelated assets—investments that don’t zig and zag together--your ride will be smoother.


If you want better-than-market returns, Fisher continued, “You can’t look like the S&P 500.” You must underweight or overweight certain sectors, although “it requires a lot of conviction.”


He is still underweight financials: The potential losses are still not “baked into the prices.” And he’s overweight health care – not pharmaceuticals like Lilly, Merck, and Pfizer, but biotechs and companies into medical devices. After all, if the Democrats win next year, Fisher suggested, “There will be broader health-care coverage, and higher health-care spending.”


While asset allocation is vital, security selection does matter, he acknowledged. United Technologies has done much better than General Electric, Pepsi better than Coke, Lowes better than Home Depot.


Some other points Fisher made:


* Commodities “are a unique asset class, not being correlated with stocks.” He recommended that investors go with a mutual fund, such as PIMCO Real Return, or exchange-traded notes.


* While today’s markets are certainly more volatile than they have been recently, historically such volatility seems fairly normal.


* Although the recent decline has been nasty, it could have been much worse. “It feels uncomfortable, but it’s not as bad as it feels.”


* Residential real estate is certainly looking “ominous,” considering that we haven’t had a decline like this since the Depression. And it’s “not easily contained.” Fisher expects the malaise to continue into next year—until homeowners accept that they must lower their prices even more.


* Regarding bonds, Fisher said that the rating agencies “need some reform” (in view of the sub-prime mess). Right now, municipal bonds “are not greatly at risk.” But investors aren’t being paid well enough to buy long-term bonds. As for foreign bonds, he believes that the fall in the U.S. dollar is largely played out, so investors may want to hedge their international bond exposure.


* To follow the economy, Fisher suggested that people focus on jobs—weekly employment trends, monthly job reports.


Fisher has an MBA in finance from the Columbia Business School and received a B.A. from Columbia College cum laude and Phi Beta Kappa.