What the Best Money Managers Are Doing Now

The stock market is tanking, the government is intervening, financial and political uncertainty abounds, and respected money managers -- as a result of redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim.

But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective.

For example ...
Third Avenue's Marty Whitman revealed in his Aug. 11 letter that he recently purchased $1.5 million worth of Third Avenue Value (TAVFX) shares and noted that he's "especially enthusiastic" about the fund's prospects. And he continued be so in this quarter's letter, where he called the current market the "opportunity of a lifetime" for unleveraged, value-focused, buy-to-hold investors. The fund also added to core positions in POSCO (NYSE: PKX) and Nabors Industries (NYSE: NBR).

Bruce Berkowitz of Fairholme (FAIRX) said in a recent interview that "the values today are exceptional." The fund is buying shares of dirt cheap health-care stocks such as Pfizer (NYSE: PFE).

And then there's Southeastern Asset Management's Mason Hawkins. He wrote in his most recent letter that because of the downturn, his value fund now "holds the highest quality businesses in Southeastern's history." That's a list that includes Walgreen (NYSE: WAG), Dell (Nasdaq: DELL), and Yum! Brands (NYSE: YUM).

Yes, the best money managers are buying.

Now, then ...
Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it.

But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that:

• Will be in business 10 years from now.
• Will be bigger 10 years from now.
• Will generate significant amounts of cash in each of the next 10 years.

Take a company like Nike, for example. With $2.8 billion in cash and just $625 million in total debt, it's in no danger of becoming insolvent. And with consumers worldwide stressed by nearly unprecedented food and energy costs, the company is still solidly profitable. While this holiday season will probably be tough, holiday seasons 2009 through 2018 will probably be healthier. Yet at 12 times earnings, the stock looks cheap, and given the announcement that the company will be buying back $5 billion worth of stock, it seems that Nike management agrees.

The question to ask yourself is not how a company will hold up in the fourth quarter of 2008 -- it's how it will hold up over the next decade. If it has a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe it will hold up quite well.

That's the easy money
If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Andrew Ross Sorkin wrote in a recent New York Times column, "[I]t is hard to find good research on small companies. All the focus has moved to large companies, where the big money is sloshing around."

That is why small caps are the best stocks to profit from the drop -- and why, while I'm happy to reveal some of my best large-cap ideas to you right now, I'm keeping my best small-cap ideas for our Motley Fool Hidden Gems subscribers.

If you'd like to see what they are, you can join Hidden Gems free for 30 days -- you'll see all of our research and recommendations, along with our best bets for new money now. Click here for more information -- there's no obligation to subscribe.

This article was first published on Aug. 22, 2008. It has been updated.

Tim Hanson owns no shares of any company mentioned. The Motley Fool owns shares of Pfizer. Dell and Pfizer are Motley Fool Inside Value recommendations. Pfizer and POSCO are Income Investor choices. Fairholme and Third Avenue Value are Champion Funds selections. The Motley Fool owns shares of Pfizer and has a disclosure policy.