Making money in this market? Here's how
The manager of this year's top stock mutual fund -- and only one that's up in 2008 -- explains how to do well in a bear market. Hint: He bought yesterday.
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| Even though stocks have plummeted this year, the Forester Value fund has stayed above water by sticking with shares of steady, large companies and making opportunistic bets after market plunges. |
NEW YORK (CNNMoney.com) -- How bad is this bear market? Out of thousands of offerings, only one mutual fund focusing on U.S. stocks is up this year. You read that right - one!
The Forester Value fund (FVALX), which invests primarily in large, blue-chip companies, is up 7.4% year-to-date. according to Morningstar. The average U.S. stock mutual fund is down 28.5%.
I spoke with Forester Value manager Tom Forester this morning to find out how's he been able to avoid the market bloodbath and what he's doing now.
And guess what? He was buying yesterday while the global markets were in full-blown Armageddon mode.
"I bought a lot yesterday. I'm just about back to being fully invested," he said. "When you see panic selling, it's usually a pretty decent time to buy."
Forester said he had been raising cash throughout August and that he has been using it to take advantage of big market routs in the past few weeks. The fund is still relatively small though, with about $33 million in assets.
"When you have nosedives like this and since our fund is still in positive territory you feel more confident when you're buying shares," he said.
What has he been buying? Forester said that he's finally starting to find some values in financials, which he had largely avoided earlier this year.
"I saw this crisis happening a few years ago and it surprised me that it took so long to find its way into stock prices. So I stayed away from many firms with mortgage exposure," he said.
But with bank and insurance stocks getting crushed in the past month, Forester said that it's time to sift through the rubble and find quality companies that should emerge from this crisis as survivors.
As such, Forester said he added to positions yesterday in insurers Allstate (ALL, Fortune 500) and Travelers (TRV, Fortune 500) as well as regional bank US Bancorp (USB, Fortune 500).
Tellingly, Allstate and U.S. Bancorp, which is also a top holding of Warren Buffett's, both fell less than 1% yesterday despite the market's carnage. And shares of Travelers actually went up.
He said he's also considering buying shares of beaten-down investment bank Morgan Stanley (MS, Fortune 500) and insurer Hartford Financial Services (HIG, Fortune 500) - but he's not ready to invest in them just yet.
Stock and bond markets have not fared well since the passage of the $700 billion bailout plan last week. But Forester is optimistic.
"From the sounds of the bailout, this will take care of a lot of the trouble," Forester said. "You never know where the bottom is but I do think this bailout helps tremendously."
Forester concedes that there still are plenty of problems. He said many banks still have troubles, housing prices could fall another 20% and the holiday-shopping season could be a bust as consumers pull back.
But there are ways to stay invested in stocks and make money despite such a gloomy scenario. Many of Forester's top holdings are so-called consumer-staples firms, food and household products companies that are less likely to suffer big declines in sales and profits in a poor economy.
Two of his largest investments are in H.J. Heinz (HNZ, Fortune 500), whose stock is up 10% year-to-date, and Kraft (KFT, Fortune 500), which is flat this year.
He also said that he bought shares of Wal-Mart (WMT, Fortune 500) and McDonald's (MCD, Fortune 500) earlier this year because he felt that they could benefit as more cash-strapped consumers look to cut costs.
"If consumers are getting pinched, they're likely to trade down. Instead of going to Chili's they may go to McDonald's and instead of shopping at Nordstrom they may shop at Wal-Mart," he said.
Those calls have helped his fund's performance. Shares of McDonald's are flat this year and Wal-Mart's stock is up nearly 25%.
But Forester isn't just playing defense. He said he's also been taking a look at three hard-hit sectors for bargains: tech, media and healthcare.
Microsoft is a relatively new position in the fund and Forester said it's now a top-five holding. He likes the fact that Microsoft (MSFT, Fortune 500) has a lot of cash, recently announced a $40 billion stock buyback program, increased its dividend and trades at a reasonable valuation.
"In times like this, Microsoft should be a really steady stock," he said.
And even though Forester is aware that many experts are sounding the death knell for the traditional media industry, he recently bought a new position in television and radio broadcaster CBS (CBS, Fortune 500).
Forester said he was attracted to the stock's 8.4% dividend yield, steady cash flow and bargain-basement valuation of just 7 times 2009 earnings estimates.
He added that he thinks sales and earnings for media companies will eventually bounce back along with the broader economy, despite continued competitive threats from the Web.
"Yes, traditional media has been losing share to the Internet. But a lot of media stocks used to sell at huge premiums to the market," he said. "Now, even though you could say there's not much growth, so much bad news is priced in that CBS looks like a pretty safe stock."
In the healthcare area, Forester said he recently bought managed-care firm UnitedHealth (UNH, Fortune 500). That stock has plunged more than 60% this year but Forester bought it when it was trading in the low $20s. He said he's actually sitting on a small profit - on paper - in the investment so far.
"I'm trying to find stocks that sell at really good discounts. Some got beat up more than they should have," he said.
At the end of the day, Forester said he thinks the most important thing for any investor to do is to stay calm and be ready for big market swings in either direction.
That's served him well. Since the fund's inception in 1999, it's had an average annualized return of 5.6%, outperforming the S&P 500 as well as other large value funds.
"There are always going to be big rallies and declines in markets. You have to be prepared for them," he said.
And the key is to take advantage of situations when people's fear cause them to do illogical things.
In fact, Forester said that despite all the talk about how this market meltdown will cause investors and companies to never make the same mistakes again, history shows that's just not true. There eventually will be another bubble.
"People are still people. We're emotional beings. When you get rid of the emotions we'll get rid of the mistakes. In other words, we'll never get rid of them," he said.
"But that's what makes my investment strategy possible. I buy things when they are beat up due to emotional extremes. I'm glad we're human." 
