Invest Wisdom

Tom Forester and the Forester Value Fund posted a tiny 0.4% gain in 2008. That’s nothing special until you consider that Forester Value was the only stock fund to make money last year, beating the S&P 500 by more than 37 percentage points.

Tom Forester of the Forester Value fund

The fund, which invests in large-cap value stocks, only had around $30 million in assets last year. But as you can imagine, its popularity has greatly increased. Forester says the firm will have more than $100 million in assets soon.

I had breakfast with Forester this morning. We talked about a lot of stuff, but he made one particularly counterintuitive point that I wanted to highlight. It’s timely, given that I’ve had such a focus on avoiding companies with debt problems recently.

Forester said this:

I think we might have too much quality in our portfolio. By that I mean that most of the companies we own have lots of cash or good balance sheets generally. That’s helped us a lot over the last few months. But I think going forward, it’s the lower quality companies that will perform better, at least in the shortterm. Those companies were hurt bad because of their debt issues. For a time, investors were afraid of this whole survival issue–who’s going to make it? As the credit market eases, those are the kinds of companies that will have a lot of losses to make up.

He didn’t mention any specific moves his company had made or was going to make. (It would probably be illegal or at least unethical for him to do that.)

But he did say that he thinks the kinds of stocks on the “edges” of quality will be the first to come back. And those would be cyclical stocks, like Boeing, FedEx, and 3M. That is, companies whose earnings can dramatically fluctuate depending on what stage of the economic cycle the country is in. Those companies, despite not having significant debt issues, were hurt because investors weren’t sure if their short-term earnings problems could cripple them as debt came due. As the concerns about financing debt ease, those companies start to look good again.

As a small investor without a lot of money to diversify in individual stocks, I’d still stick to companies with good balance sheets or to index funds. If there’s another hiccup in the credit markets, and a “low quality” company goes bankrupt, the pain of losing all your money in one stock would just be too great. In practice, I happen to stick to mutual funds, both because I think it’s the right thing to do for the amount of money I have and because I don’t want to have ethical issues with mentioning specific companies in things I write.

But even though mutual fund managers’ winning streaks tend to be shortlived, when the only guy to not lose money in 2008 makes a prediction, I’d pay attention. Over the next couple days (beginning Monday), I plan to talk about a few other things Forester brought up at our meeting.

I hope to see you back.

- Joe Light