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Jeff Saut Presents: Invest With the Best?!


See you at Minyans in the Mountains!


Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

"Finding the best person or the best organization to invest your money is one of the most important financial decisions you'll ever make. It's also one of the toughest. The right manager for someone else may not be the right manager for you, nor can you reasonably expect to find many objective, or even reliable, sources to help you narrow your choices. You will be bombarded with figures, charts, and statistics that seek to sell you on each adviser's services . . . the sad fact is that too often you cannot even believe what has been presented to you."
. . . Claude N. Rosenberg, Jr.

My firm has been a "fan" of the astute Mr. Rosenberg ever since hearing him speak back in the 1970s. Many will remember him as the founder of the San Francisco-based money management firm that used to bear his name, Rosenberg Capital Management, before changing its moniker to RCM Capital Management. Others will remember him as the author of numerous books on financial matters, one of which was Investing with the Best, which holds the above quote and deals with the daunting task of selecting an investment manager. Given the plethora of investment managers, each with their own investment philosophy and style, picking a manager is difficult. That's why many individuals' selection processes consist of nothing more than looking at a portfolio manager's track record for the past few years. We think such a simplistic approach is a huge mistake.

Apparently, Jeremy Grantham, who captains the money management firm Grantham, Mayo, Van Otterloo & Co. (GMO), agrees. To reprise some of his thoughts: "Ninety percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment style (i.e., growth, value, foreign vs. domestic, etc.). Since opportunities by style regress, past performance tends to be negatively correlated with future relative performance. Therefore, managers are often harder to pick than stocks. Clients have to choose between fact (past performance) and the conflicting marketing claims of various managers. As sensible businessmen, clients usually feel they have to go with the past facts. They therefore rotate into previously strong styles, which regress [to the mean], dooming most active clients to failure."

This is where Raymond James' Asset Management Services (AMS), as well as our Mutual Fund Research Department, can help! As unbiased intermediaries, these departments are committed to aiding clients in the hiring of an investment manager that most closely aligns the manager/mutual fund with the client's views on the various markets, as well as their risk tolerance. To this point, we recently ran a screen of investment managers, and mutual funds, that share our views on the equity markets and consequently should invest according to those views. Readers of our strategy reports should know that we were pretty negative on equities from the Dow Theory "sell signal" of September 1999 into the bottom following the horrid events of September 11, 2001. Since then, we have proffered more of a trading range strategy for the S&P 500, a view we still hold. Since 4Q '01, we have also suggested that a secular bull market was afoot in "stuff" (energy, timber, cement, fertilizer, agriculture, water, base/precious-metals, etc.) and that small/midcapitalization stocks were the place to be heavily invested.

Yet, range-bound was the "call" for the major market indices like the S&P 500, which is why we have adamantly avoided index funds for the past seven years. However, we would argue that a range-bound stock market isn't all that bad. Indeed, legendary investor Peter Lynch "inked" a pretty amazing track record of 25% per annum in the range-bound market of 1976-1982 where the DJIA was trapped between roughly 800 and 1000. Clearly, a trading range environment requires a different mindset than the "bull run" type of environment that existed between 1982 and 2000. To successfully operate in a trading range environment, participants should likely focus on smaller, more nimble, investment managers who can be more proactive and have the mindset of avoiding the big loss.

Consistent with that thinking, we believe the following money managers possess the skill sets necessary to navigate the type of investment environment we envision going forward:

We also like mutual funds that can play both sides of the equity markets and accordingly have been recommending the following long/short mutual funds:

For the more conventional investor, we like the following mutual funds:

With these thoughts in mind, we conclude these comments with another quote from Claude Rosenberg:

"Investing has changed and quite substantially. A vicious circle exists. Volatility, risk and a plethora of confusing inputs are breeding nervousness; nervousness is breeding further confusion; and the combination of nervousness and confusion is breeding client and manager actions that are potentially destructive. For you to succeed, you need to make your way through the investment jungle with experienced professionals."

The call for this week: We have taken a different track with this morning's letter because our "phone calls," for the past few weeks, have decidedly centered on the question: "Hey Jeff, my clients didn't buy in mid-June, or in mid-October 2005, as you suggested. Problematically, they want to buy NOW that the markets are 'up' and their investment 'juices' are again flowing. So, what can we buy?!" To answer that question, we have given you a number of money manager, and mutual fund recommendations in this morning's letter, which we believe can navigate the investment waters that we envision for the foreseeable future. As for trading accounts, we think you saw the FOMC's emotional "price peak" last Friday, on the stagflationary employment-numbers, which lifted the S&P 500 into the prescribed 1290–1298 trading-zone that we have targeted. Whether that "emotional price-peak" can be exceeded by a higher nominal "price peak" is suspect, in our opinion, and consequently we don't think the current "trading-game is worth the candle!" Unfortunately, our guess is that the equity markets have now worked themselves into a lose/lose position. And yes, we still like Intermec (IN), in the RFID space, despite its 20% rally last week. Also of note has been our shift from suggesting the overweighting of the small/mid-cap complexes for the past four years to overweighting the large-caps (not mega-caps) at year-end 2005. Said strategy has played recently, for while the large-cap indices have broken-out above their respective early-July "reaction highs," the smaller-cap indices have not. We continue to invest, and trade, accordingly . . .

PS – Consistent with our mantra of, "When the going gets tough, the tough go on the road," I am off to deliver a keynote address at the annual "Minyans in the Mountains" conference.

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