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Usually, you have a choice when it comes to finding a winning strategy for investing in stocks. This year, though, winners are few and far between.
Of all the U.S. stock funds that Morningstar tracks, just one broadly diversified fund has managed to eke out a positive return so far in 2008. The Forester Value Fund (FVALX) has made all the right moves this year.
How did Forester Value and its manager, Thomas Forester, do it? The strategies the fund used could come in handy in your own investing as well.
Moving with trends
Like most value funds, Forester suffered in 2007, as exposure to financials brought losses of around 5%. Yet rather than doubling down, as many value funds did, Forester got out and sought better stocks in other sectors. That strategy paid off, as many who tried to catch falling knives in Citigroup (NYSE: C ) and Merrill Lynch (NYSE: MER ) found that they were way too early.
Now the fund owns a group of solid, stable companies that include McDonald's (NYSE: MCD ) , Heinz (NYSE: HNZ ) , and Johnson & Johnson (NYSE: JNJ ) . While those shares are down so far this year, they haven't lost nearly as much as many other stocks.
More importantly, unlike most funds, Forester hedged its bets with put options. It's that dedication to preserving capital -- despite the additional costs of maintaining portfolio insurance through options -- that explains how the fund is up over 2% this year, compared to losses of 30%-35% for the S&P 500 and the typical value fund.
Capitalizing on the panic
In addition, Forester wasn't afraid to make changes to its typical investing strategy to respond to extraordinary circumstances. Like most funds, Forester tends to hold on to positions for a while. But recently, during the panic, the fund has been making more aggressive bets.
For instance, in July, Forester reportedly bought shares of Bank of America (NYSE: BAC ) , but then sold them a couple of weeks later for an 80% profit. He's also picked up shares of other promising companies at their lows, such as UnitedHealth Group (NYSE: UNH ) , expecting a rebound.
Should you do this at home?
So what lessons can you take from Forester's experience? I think it essentially boils down to four points:
- Top funds make big bets. Forester rarely lands in the middle of the pack. It led its category in 2002 and 2004, while finishing near the bottom in 2003 and 2006. Overall, that's added up to a stellar long-term track record -- but its returns haven't looked much like those of its peers.
- Lower risk is good. Note, though, that the fund's best years generally correspond to bad years for the market. For instance, the fund had small gains in 2001 and 2002 -- much better than the losses most stocks had during the bear market.
- Changing strategies is hard. It's always tempting to try to adapt your investing methods to take advantage of new markets. Too often, though, the adaptations you make end up being backward-looking -- and prove to be huge mistakes when the investing climate changes once again.
- Adapting to new opportunities is smart. Just because adopting a new strategy is hard doesn't mean you shouldn't do it. If you can identify flaws in your investments earlier than most, you have a huge competitive advantage: Use it.
Most importantly, keep in mind that if you only learn about top-performing funds like Forester Value after they've enjoyed huge run-ups, you often miss the best time to invest. At this time last year, Forester was underperforming its peers and looked like just one of the pack. Only now, after the big drop in stocks, has Forester's strategy proven itself.
This year, Forester found the winning strategy for the stock market. Given how Forester is jumping on the opportunities the market is giving investors right now, the odds are good that the fund will find ways to succeed in the years to come.
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