Stalking Wall Street's Winners

I have a confession to make: I don't often come up with my own stock ideas. I'm not ashamed to admit that, either. Why should I be? There are more than 9,000 stocks traded on the public markets. There's simply no way for me to understand them all. Nor could I ever read enough to fully digest all the micro- and macroeconomic forces that create buying opportunities around the globe. I've neither the smarts nor the time.

Welcome to the wonderful world of mutual funds
Which is one of the reasons I've come to really appreciate mutual funds. I'm dead serious. Throughout my investing education I've borrowed myriad strategies from investing legends. From Peter Lynch: Buy what you know. From Benjamin Graham: Act like an owner and buy with a margin of safety. From Warren Buffett: Understand the businesses you're buying and stay within a circle of competence. From Joel Greenblatt: Special situations can be very special. From Philip Fisher: Dig up as much scuttlebutt on your investments as you can. The list goes on.

Doesn't it strike you that each of these folks was (or is) a professional money manager? I was hanging in Fooldom for years before becoming a regular contributor. During that time, I frequently gave funds the hairy eyeball. I was rightfully skeptical, in my view. I'm still skeptical, but fellow Fool Shannon Zimmerman, our chief analyst for Motley Fool Champion Funds, has taught me that great funds actually exist. Great funds run by great managers, who also happen to be really great stock pickers. Guys from whom I can steal a few choice selections.

I guess you could say Shannon has helped me unleash my inner stalker. A stalker of stock ideas, that is.

Meet Charlie Dreifus
One great thing about the Champion Funds service is that Shannon regularly interviews top fund managers. I like this feature so much that I'm going to share it with you. Herewith are three key investing insights from Charlie Dreifus, the first manager Shannon interviewed for the newsletter and whose fund -- Royce Special Equity (FUND: RYSEX  ) -- has become so popular that it's closed to new investors. (Bummer.) Check out the key statistics, provided by our Champ Funds team and Morningstar (Nasdaq: MORN  ) :

ROYCESPECIALEQUITY

Ticker:

RYSEX

Manager Tenure:

7.4 yrs.

Type:

Small-Cap Value

Fund Inception:

May 1998

Expense Ratio:

1.15%

Annualized Performance*

1-Year:

3.01%

3-Year:

13.76%

5-Year:

17.92%

10-year:

N/A

Since Inception:

10.15%

*Through Sept. 30, 2005.

Not bad, eh? I'd say so. Dreifus, according to Shannon, gravitates toward small caps on sale and combines the teachings of Buffett and Graham in his stock-picking approach. Among his fund's largest holdings as of Sept. 30 were Banta (NYSE: BN  ) , Borders Group (NYSE: BGP  ) , Lubrizol (NYSE: LZ  ) , Bio-Rad Labs (AMEX: BIO  ) , and Lancaster Colony (Nasdaq: LANC  ) .

Three things you should know
There's no way to reprint the entire interview here, so I've cherry-picked the big tips that Dreifus passed along to Shannon in their interview. They are:

1. Don't lose money. Yeah, I know, this sounds as obvious as beer hats at a monster truck rally, but the point, according to Dreifus, is that it's much harder to win back losses than it is to protect gains: "Graham's imprint was this thing of belts and suspenders, margin of safety, and don't lose money, don't lose money, don't lose money. History has shown that I, too, can lose money, but I do that very grudgingly."

Indeed, it should be noted that Dreifus' emphasis on total returns and margin of safety kept Royce Special Equity in the black during the last bear market. From March 2000 through December 2002, the fund delivered a total return of 76.2% while its average category rival gained 24.86% and the S&P 500 lost 33.03%.

2. Businesses with high insider ownership are usually good for your portfolio. "When a family's net worth resides in a business, they are less prone to give it away in terms of stock options or other things that negate their own financial interest. And then they tend to have smaller floats, which causes them to be less interesting, perhaps, to others," Dreifus said.

Ask yourself which of Royce Special Equity's top five holdings you've actually heard of before now. Take Bio-Rad Labs, for example, a manufacturer and distributor of life science research products and clinical diagnostics. More than 30% of the company's shares -- which have tripled since 2000 -- are owned by insiders.

3. Be a cheapskate. Like the rest of us, Dreifus wants to work the angles in his investing. He's searching for deals so good that he'd go into hock to get them. Seriously. Said Dreifus:

What I'm looking for is absolute value, as a buyer of the entire business would. I'm looking for such a price that if I bought the whole company and borrowed the money, I would have a positive carry. And if I can buy things that are below their economic value, which is what I call it, and if I've done my homework right, which I don't always do, the risk should be small.

Don't kid yourself -- Dreifus is right waaaay more than he's wrong. And even when he's wrong he doesn't take on much risk. Four of the five top holdings for Royce Special Equity trade at a discount to the overall market on a price-to-earnings basis.

Steal some ideas for your own portfolio
What now, you ask? Well, you could take a risk-free trial to Champion Funds and get the rest of the interview and access to all 32 buy reports. I'd encourage that because I like the service and believe it delivers an extraordinary value.

But you can also be an expert stock stalker without Shannon's help. Just check the business section of the newspaper tomorrow and find the funds with strong three- or five-year performances. Then write down their ticker symbols and head over to Yahoo! Finance. Once there, click on "holdings" and -- voila! -- you'll see who's holding what. Dig a little deeper using Google and SEC filings and you may find nuggets of gold that will enrich your portfolio for years.

Either way, the point remains: You don't have to do all the work yourself when it comes to picking good stocks. Experts are available to help, and often will do so for free. I can't think of anything more Foolish than that. Can you?

Fool contributor Tim Beyers is still a stock jock, but he didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 497827, ~/Articles/ArticleHandler.aspx, 12/19/2014 2:21:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement