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Wall Street Transcript Interviews with Manager Steve Selengut - Part 2 |
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Submitted by Steve Selengut
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TWST: And how would you expect the portfolios to perform in both up and down markets?
Mr. Selengut: In up and down markets, again, it's a matter of definition. We had what the world liked to call an up market, two-and-a-half to three years ago. It really wasn't at all if you look at meaningful (non index or average) numbers. There were twice as many losers as there were gainers on the New York Stock Exchange during that time period. The S & P increase was based on the movement of less than 15 stocks, and so on. But all the speculation, all the fever that Wall Street generated at the time, put people into very speculative positions and they just kept buying, and buying, and buying in these stocks that really didn't have any intrinsic value. Then the "pigs" got slaughtered, as they always do. Well, the value sector went down during that period of time and it was a down market for them. But starting in March of 2000 that sector of the market, the market that I invest in, went crazy.
My portfolios were up in value by 22% in 2000, supposedly one of the worst bear markets in history. This year, through the end of August, I didn't have one account that was down in value. And again, the media has dubbed 2001 as a continuation of a bad market. So, you know, it's a matter of definition. Wall Street likes to see indexes go up, and they manipulate them to make it happen; I like to see individual stocks go up, and that is a function of an investment strategy as opposed to a search for the holy grail!
TWST: How much of your research is generated internally versus externally?
Mr. Selengut: 100%. Research that is produced outside is self-serving sales propaganda. I've always thought that it is useless. There was an article recently in Vanity Fair, of all places; an expose' on analysts and their recommendations. A "must read"! I quoted in a book I wrote recently (looking for a publisher) in a section that addressed research and research analysts, the paid representatives of houses on the Street. Individual investors must learn that Conflicts of Interest are part of the Wall Street landscape. I think research is the rationalization of the speculator, and securities marketing managers know this all too well. "OK, here's something we're bringing public, now let's make up a story why the investor should buy it. Then we'll give our best retail brokers a trip to Hawaii for selling it." I don't look to research produced by any source.
What I look for again is just those basic fundamental numbers that tell me a company is profitable. And unless I see those ratings erode, I expect it to continue to be profitable, naturally, in what I'm interested in. I'm not interested in stories, particularly new issues. Now there's a real crapshoot! Research stories are not for investors you know, and most people aren't really investors at all. They're just speculators out there looking for a hit. It's treated the same way as a roulette wheel, a gambling casino. I don't approach the stock market that way at all. Too bad brokerage firms don't treat losers as well as the casinos do. After all, the businesses have become quite similar.
TWST: You had mentioned diversification, but what other means do you evaluate and control investment risk?
Mr. Selengut: An emphasis on quality in a selection process that includes strict diversification rules is the key risk control mechanism. Control is a management term, and I think you’ve used it properly. You can’t eliminate risk and still be investing, but you certainly must minimize it. The way you minimize it is with the three key elements I’ve mentioned. The first factor most people would mention is diversification, and I mean diversification by industry, by position size and age, and between Equity and Fixed Income securities. But a diversified portfolio of junk bonds is still junk, and a portfolio full of story stocks is just another hand of stud.
The absolute best way to minimize risk is to maintain the quality level of the portfolio. Finally, I also consider the generation of income by a security a factor in minimizing risk. And generally, I would say that’s it. I think the concept of trading equities, of taking profits, is a risk “minimizer” as well because what is risk after all? Eventually, most securities are going to go down in price, a) because they become overpriced because of various stories and then those expectations don’t pan out; or b) something happens that prompts Wall Street to say: “Oh, well, the retail stocks are all going to go down for this or that reason” and the whole group gets weak.
For whatever reason, real or contrived, stock prices do fluctuate. And if you are trading with a managed and disciplined approach that includes taking your profits “when you see the whites of their eyes”, that’s risk minimization. You don’t want to wind up holding something that’s overpriced. Take your profits and find something else to invest in that has not yet gone up in price.
TWST: How many issues are typically held in your portfolios?
Mr. Selengut: The largest portfolios, over a million dollars or so, and even a million just in the equity portion of a portfolio, would probably have a maximum of 40 different positions. The smaller portfolios probably would have 20 or less. It varies. But, generally, I would say, that it wouldn’t go beyond 40 at any time.
TWST: Do you have a sector and geographic allocation process, or is it specifically bottom-up companies?
Mr. Selengut: In the sense of the sector, the way I see the stock market working, it’s very much of a “group” market. If one sector gets weak, my buy list will probably contain many stocks in that sector. In other words, when the retailers are going down, I’ll wind up buying Wal-Mart, Home Depot, Lowe’s, and May Department Stores, among others; similar companies for different clients, with control of the overall allocation to the sector. Strong sectors, conversely, disappear from my portfolios as a result of profit taking. And then, all of a sudden, they (the retail sector) will get strong again and none of them will appear on my buy list until the next cycle. They may well be replaced on my list with drug companies, banks, insurers, etc. So, although I don’t actually make it a point to look at sectors, I do find myself looking at companies in the same sector because of what the market is doing.
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