FOOL ON THE HILL
Tomorrow's Not-So-Obvious Winners

Given this year's general market slide, investors may be wondering if they are cut out to be successful long-term. When thinking about what tomorrow's big winning stocks may be, it's useful to adopt the same approach as the most successful investors out there. Big investing wins come from areas that are not-so-obvious, and that's where investors today should be focusing their attention.

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By Brian Graney (TMF Panic)
November 29, 2000

Today's column will deal with the distinct worlds of the obvious and the not-so-obvious in investing. First, the obvious. Heading into the final month of the year, all of the major U.S. stock market indices are firmly in the red for the year -- representing the worst all-out drubbing for equities in the past half-dozen years. Of course, this information is not exactly "news." The tumult in the stock market has made headlines for months now and media tales of investor woes have become as commonplace as booing fans at a Washington Wizards home game.

Over the course of the past few months, more than a few investors have no doubt wondered privately -- and perhaps even publicly -- whether they indeed have what it takes to be a successful long-term investor. This type of investing query falls into the not-so-obvious category. Given the recent market experience, it's hard to determine if the whole of this year's losses owe more to past analytical misjudgements on the part of individual investors or a temporary fit from a bipolar Mr. Market. As always, time will tell. But either way, the full ramifications of this year's stock market stumble are yet to be seen. As Sartre once put it, "What is important is not what happens to us, but how we respond to what happens to us."

With that in mind, it may not be a bad idea for individual investors today to reflect upon the keys to successful long-term investing in the past. Most investors have at least heard of the long-run, market-beating track record of Berkshire Hathaway's (NYSE: BRK.A) Warren Buffett. Some may even be familiar with a few of Buffett's grand slam investments over the years. A few examples include his well-known purchases of Washington Post Co. (NYSE: WPO) in 1973, GEICO in 1976, Coca-Cola (NYSE: KO) in 1988-89, and Wells Fargo (NYSE: WFC) in 1990.

Buffett's track record is obvious enough and, with the glorious benefit of hindsight, the intelligence behind his purchases may even look plainly obvious, too. Of course a great franchise such as the Post was worth much, much more than the $100 million it was selling for in the market in the early '70s. Looking back, it seems a no-brainer that Coke was cheap at 15 times earnings, as it was in the late '80s when Buffett initially started piling into the stock. Anybody could have figured those two out, a hindsight-guided investor today might be tempted to conclude. How obvious!

What is not-so-obvious from a glance at Buffett's past successes is the amount of flack he took from the press and other investors at the time he made them. And that goes for all of the home run stocks listed above, not just one or two. The Washington Post in 1973 was unprofitable and was being managed by a widow with no business experience whatsoever. GEICO was on the verge of bankruptcy in the mid-'70s, and Coca-Cola was considered overpriced compared to a late-'80s market that was only trading at 11 times earnings. And let's not forget Wells Fargo, a leading West Coast real estate lender that in 1990 was in the awful throes of the California real estate crisis. All of these investments were questioned to some extent when they were made, and for some very good reasons.

What makes a fellow like Buffett such a great long-term investor? Some may say that it's simply a matter of the man's intelligence, although Buffett is far from the only incredibly smart person in the investing business. Others may suggest that Buffett just works harder at his trade than anyone else. But that conclusion appears to be somewhat suspect as well, judging from the long hours that even low-rung Wall Street professionals are known to put in week after week. There must be something else to it, something not-so-obvious.

In short, great investors set themselves apart by being emotionally different from everyone else. They buy when others are selling. They jump up and down excitedly when the market tanks and twiddle their thumbs when it rallies. They seem to do exactly the reverse of what an uninformed observer would expect them to do in a given investing situation.

And just to be clear, Buffett is not alone in acting this way. Peter Lynch made a killing by loading up on financial stocks in the early 1980s, when interest rates were in the double digits and many banks and other institutions were priced as if they were going out of business. More recently, John Neff was telling folks about the bargains to be had in homebuilding stocks when they were unloved just last year. Sure enough, there sit Pulte (NYSE: PHM), Toll Brothers (NYSE: TOL), and other home builders on the 52-week high list today.

At the present moment, it's unlikely that successful long-term investors are spending much time talking about the hit that the Nasdaq composite has taken this year. More likely than not, they're not talking about how much money they could have made if they had only invested their money in the year's high-flyers instead of the year's dogs. In fact, there's a very good chance that they are not even talking about the events of the past year at all. That's because these things are plainly obvious to everyone.

What really interests successful long-term investors today, as always, are the areas in the market where things are not-so-obvious. We're starting to see proof of this in the news. Is there value to be had in the beaten down telecom sector? Considering that Telephone & Data Systems (AMEX: TDS), a long-time favorite of successful investors such as Mario Gabelli, Wallace Weitz, and Ralph Wanger, bought a small Wisconsin-based telecom firm on Monday for 2.25 times its price in the over-the-counter market, there just might be.

Are there supernormal bargains among the companies dragged down by asbestos liability suits these days, such as Armstrong Holdings (NYSE: ACK) and Crown Cork & Seal (NYSE: CCK)? That's a frightful area, but both Buffett and Third Avenue Fund's Marty Whitman have been among the notable investors taking positions in asbestos-exposed USG Corp. (NYSE: USG) recently.

Tomorrow's home run stocks are never obvious. But rest assured, they are out there. Time and time again, successful investors have proven that it is the heavily beaten-down and currently unpopular stocks that turn into huge long-term winners. Even though it may be hard for some of today's shell-shocked investors to fathom given this year's market downturn, the stocks that will end up on the 52-week high list next year and in subsequent years are being purchased right now. In time, these winners will prove to be obvious in hindsight, too. But it is the successful long-term investor who chooses to focus on the not-so-obvious of today instead of the obvious of yesteryear.

One beaten-down industry that may contain a few not-so-obvious values, furniture retailing, is examined in the Motley Fool Research Industry Focus 2001 report. Check it out!