(MONEY Magazine) – Welcome to our third session with the Ultimate Investment Club, MONEY's own version of the dinner-party game in which you select your ideal guests. We populate our club with the people we'd most like to invest with: top pros like Goldman Sachs' reigning bull, Abby Joseph Cohen; seasoned veterans like Fidelity's Peter Lynch; master portfolio builders like Legg Mason's William Miller and Essex Management's Joseph McNay; Silicon Valley visionaries Roger McNamee and Mary Meeker. All together, we've gathered 10 master investors, each with ideas to share. Join us.

THE GURU

ABBY JOSEPH COHEN Chief U.S. portfolio strategist, Goldman Sachs

She has one of the highest profiles--if not the highest profile--on Wall Street. But while her insights and intellect have brought Goldman Sachs' renowned equity strategist great fame and (presumably) fortune, there are some things that success can't bring. Consider the scene at a recent event where Cohen was the featured speaker. The man introducing her reeled off a string of glowing terms--every synonym for "guru" known to man--to describe Wall Street's reigning bull. The accolades were lovely, but what Cohen really needed was for someone to lower the microphone. "For a person of my stature," Cohen cracked, "I really ought to be taller."

To find out where Cohen sees investing opportunities today, MONEY visited the market visionary at her 47th-floor office in lower Manhattan, admiring not just the stupendous vistas but the personalized bowling shirt she'll wear to an upcoming tournament between the firm's research analysts and a group of traders. Who are the better bowlers? we ask. Cohen just smiles. "We have the trophy," she says. "We'll see what happens." Our bet's on Abby.

Q. This time last year you described yourself as "bullish, but not pounding the table." Where do you stand now?

A. We suggested to our clients in March that they reduce exposure to equities from 70% to 65% for a balanced portfolio. That's about where you'd be when you expect returns to be close to the historical trend. We're not bearish--we think the economy is in very, very good shape. But the stock market isn't as cheap as it was.

Q. You also changed the sector weightings in your model portfolio.

A. We're no longer overweight in technology. Last year we were saying that tech and telecom combined should be 35% of a portfolio, and the weighting on the S&P 500 for those sectors was 28%. By March, the S&P 500 weighting was 42%. We're still at 35%. While technology is a solid place to be invested, it's not the valuation opportunity it used to be.

Q. What sectors do you think represent good opportunities today?

A. Pharmacological and biotechnology stocks are, in many ways, the next area of great scientific development. U.S. companies are right at the top. I'd add that we expect this area to be somewhat volatile as discussion about Medicare and drug reimbursement heats up during the political campaign. Our analysts like Merck. It has some very promising new products, and many of its existing drugs are selling beyond consensus expectations.

Q. Are you a fan of financial services stocks?

A. Yes. While the Fed has been raising rates and may do so some more, most of the worst news is already reflected in stock prices.

The stocks of banks and other financial services companies are now among those with the lowest price/earnings ratios. Most sell at a notable discount to the average P/E of the S&P 500, despite solid fundamental performance.

We like Bank of America. It has tremendous cross-selling opportunities, is increasing its focus on online banking and is refocusing its international strategy. Our estimate of long-term growth is 14%; our earnings estimate for the next fiscal year puts its P/E at 9.6. Other financial services stocks we like are John Hancock Financial Services and consumer-finance company Household International.

Q. What other areas look promising?

A. One sector that we think has been left behind is real estate-related stocks. Real estate investment trusts (REITs) have suffered from benign neglect. They're not included in the S&P 500, so many portfolio managers don't have them in their benchmarks. One REIT we like is Equity Office Properties, the largest REIT in the U.S. It has great earnings visibility, geographic diversification and is an innovative company. It's positioning itself to capture revenue opportunities from companies, such as Coke, that want access to the employees of the tenants in their buildings. Our analysts also like Boston Properties.

In the energy sector, we like ExxonMobil, Dynegy and Schlumberger. ExxonMobil has a very high-quality management team and we like their capital discipline. The share price is not as levered to oil prices as some other energy companies'. Dynegy, once a relatively small natural gas liquids company, is merging with Illinova, an electric utility. It's one of the fastest-growing energy companies in the world. Schlumberger wants to be the leading technology-focused oil services company in the world and is taking a number of major steps in that direction.

Q. Any tech stocks that you like?

A. We like IBM. We see improvement in nearly all of its businesses. Our analyst thinks that IBM is ready to move from a period of recovery into a period more notable for sustainable growth and profitability.

Q. Should investors be concerned about the increased volatility in the stock market?

A. Today's volatility is normal. We now have a situation where people are paying about what they should be for stocks. So if there is a disappointment, people get ticked off. Investors have to keep in mind that if they've done the fundamental homework properly, things will ultimately come their way. They may not have gratification between now and next Tuesday, but it will happen. --S.W.

THE FUND WATCHER

DON PHILLIPS Chief executive officer, Morningstar Inc.

When I first entered Morningstar as a new employee in the early 1990s, the offices rambled through spare corners of several floors in a historic but somewhat ramshackle building. The company headquarters are now in a sleek high-rise on a bend in the Chicago river, and I waited for my appointment with CEO Don Phillips in a slick lobby that screamed "New Economy." If I didn't feel like reading the paper in a leather and steel Eames chair, I could hop onto a high-tech barstool at a computer terminal and surf Morningstar's website.

Phillips deserves much of the credit for the company's rise and reputation as the premier fund rating service. Hired as the firm's first fund analyst in 1986, he became a charismatic proselytizer for fund investing, as well as a worthy adversary of the fund industry on issues like expenses and truth in advertising. Today many investors think of Phillips when they think of funds. And Phillips is one of the few proponents of active management who can hold his own with index-fund crusader Jack Bogle (see page 84).

Q. Why shouldn't we all just buy index funds and be done with it?

A. Honestly, I'm not anti-indexing, I'm pro-indexing, but I'm also pro-active management. It gets down to a fundamental question: Are you buying a manager's abilities, or are you buying index-like exposure to an asset class? Certainly, index funds are a convenient way to build a diversified portfolio of different asset classes. But some managers can add value. And there are more great managers in the fund arena than ever before.

Q. What are the hallmarks of a great manager?

A. Passion is a lot of it. Bill Miller of Legg Mason Value is out to beat the S&P 500; that's a terrific attribute. The best managers develop an expertise, and take advantage of that insight in their stock picking. Michael Price [former manager of Mutual Shares] knows more about bankruptcy procedures than anyone. Marty Whitman of Third Avenue Value can dig into the accounting of distressed companies. The Janus managers don't just read a company's annual report, they grill competitors and suppliers. A concentrated fund like Bill Nygren's Oakmark Select has a lot of risk, but you are getting a distilled version of a great manager's best thinking.

Q. Where do you stand on that other great investing divide, growth vs. value?

A. Value-stock picking and growth investing are sort of competing religions. Philosophically, value investing may be easier to grasp because it involves shopping for bargains. The extreme version of growth investing, momentum investing, intrinsically makes no sense to me, because you're paying high prices for stocks because they're hot. But if you look at the extended success that an organization like PBHG has had with its momentum funds--even when they went down, they came roaring back--you realize that you can make money with that kind of strategy too.

Q. If you can weather the downturns.

A. That's right; go in with your eyes open, know the volatility that is involved and be prepared to hang on. Unfortunately, fund investors have a way of buying and selling at just the wrong times. One of the things I've seen over the years is that, while extreme funds may earn good long-term returns, their shareholders often don't make a whole lot of money because of bad timing. It just sickens me to see how fickle fund investors are.

Q. Besides bad timing, what's the biggest mistake fund investors make?

A. Most people I talk to today own good funds, Janus and Fidelity and Vanguard funds. The problem is that they're still assembling bad portfolios that aren't diversified to hold up in a variety of markets. I was just giving a talk in Phoenix, and a guy came up to talk about his portfolio, which consisted of three Janus large-cap growth funds.

Q. Give us a diversified portfolio of some of your favorite picks.

A. Every investor's situation is different, but I'd argue that you would probably want at a minimum something in the larger-cap value category, maybe Selected American Shares; a larger-cap growth fund like Brandywine, which also leans more to the midcap range; something smaller-cap--T. Rowe Price Small Cap Stock would fit nicely with those two; then an international fund, maybe Scudder International; and a bond fund--I'd go with Pimco Total Return. That combination would give you an awfully good, quick five-fund portfolio. --L.L.

THE MARKET BEATER

WILLIAM MILLER III Portfolio manager, Legg Mason Value Trust

If you ran across Bill Miller making the quick trip from Legg Mason's headquarters to Baltimore's Inner Harbor, you'd never guess that this calm, deliberate man chases storms for a living. Stock market storms, that is. Miller's talent is treading dispassionately into corporate maelstroms and seizing the investment opportunities created by the turmoil.

His success is unparalleled: Miller's stock choices for the $12 billion Legg Mason Value Trust bested Standard & Poor's 500-stock index nine years in a row. This year, though, his fund, up 1.1% as of Aug. 16, is underperforming both its large value peers (by 1.8 percentage points) and the S&P 500 (by 0.5 points). The 10-year crown hangs in the balance.

Miller remains unfazed. And he sees plenty of buying opportunities, even within the tech sector. "If you look at the average stock, it's selling not much more expensively than it did after the crash of 1987," Miller says. While the median price/earnings ratio is about 25% to 30% higher than after the 1987 crash, "we have a radically better environment than we had in '87," he says.

Miller's most controversial stock pick right now is probably Amazon.com. The company is at a financial inflection point, he says. "You'll see steady improvement in operating margins--which we think is the critical metric, not gross margin." What's Amazon worth? Now trading around $38, it could reach the mid-$60s, he says.

Another stock Miller likes is WorldCom. Granted, without the Sprint deal, the company doesn't have the national wireless presence it wanted. But "it has the global data business, which is growing very rapidly," says Miller. He wouldn't be surprised to see WorldCom's voice business spun out to shareholders, a step that might not goose the stock price, he notes, but would have the virtue of isolating the company's fast-growing businesses. The stock, trading around $35, is worth "mid-$60s to low $70s, easily."

This year, Miller has been exploiting price weakness to expand his stake in Gateway. The stock trades around 28 times earnings, has a 35% to 40% return on invested capital and is growing its bottom line at about 25% to 30% annually. It is also increasing its share of the consumer market and opening Gateway boutiques inside Office Depot stores. Miller thinks the stock, now hovering around $62, is worth about $100.

About $100 is also what Miller targets for that "quintessential Old Economy" stock, Eastman Kodak. Miller has bought into the company over the last three to four months. (It's now at $63.) "It's like IBM back in 1994, when everybody thought it would sink under the weight of the mainframe business and the stock was very cheap," he says. Kodak is successfully making the transition to the new world of digital imagery, Miller believes: "It still owns two-thirds of the conventional film market, is second in digital cameras and is in every part of the digital services market." He likes the company's strong return on capital, its new share buyback program and the fact that it is among the cheapest stocks of its market capitalization in the entire market, trading at about 10 times estimated 2000 earnings.

In the financial services area, Miller is still enthusiastic about Bank One, a pick of his last year. He concedes that he bought the stock too early. Bank One got slammed as problems in its credit-card division proved far deeper than expected, leading to the exit of the company's CEO. But Miller is a big fan of the new CEO, Jamie Dimon. "Dimon has a great record, he's smart, inspires tremendous loyalty, and he's only 42," he says. "This is one of the terrific long-term buys you can get." The stock, now around $34, could reach the mid-$50s, he says.

A more controversial financial services favorite is Fannie Mae, the government-sponsored company that buys and securitizes mortgages. Miller has owned it for most of the past 15 years. "It has one of the best growth records of any company in America, and is, along with Freddie Mac, an essential part of the mortgage market," he says. The stock has been hurt lately by competitors' opposition to Fannie Mae's efforts to broaden its reach into areas such as subprime mortgages. "Competitors say Fannie has an unfair advantage in its lower cost of capital," Miller says. "It's a political dance that will end. The chances of any substantial changes are very small." He thinks the $57 stock could rise to the mid-$80s.

Miller isn't big on health-care stocks in general, but he does see an opportunity in Aetna. Aetna will be distributing $35 a share to shareholders in the wake of selling its financial services business in July. Today, Aetna trades at around $58--which means that the market is valuing the remaining health business, the largest HMO in the country, at about $23. He thinks that Aetna's health business is worth roughly double that.

Miller's basic advice to investors: Try to extend your time horizon and maintain a balanced portfolio. "A broad investment approach hasn't provided the best investment return over the past several years, so people don't think that's a sensible idea anymore." But next time you're tempted by a high-flying Net stock, think about this: If you're looking for consistency, Miller points out, you can't beat the 24-year string of positive returns (until last year) generated by supermarket chain Albertson's, which now sells at 10 times earnings with a 15% return on capital. The only company that came close to its record (with 23 consecutive years of positive returns until '99) was blue-chip Coca-Cola. --S.W.

THE GLOBALIST

KATHERINE GARRETT-COX Head of American equities, Aberdeen Asset Management

London newspapers have named her "Queen of the City." In the old-school enclave of the City--London's equivalent to Wall Street--Katherine Garrett-Cox stands out. The personable 32-year-old is reaping accolades because her bullish conviction, coupled with astute stock picking, led the U.S. stock funds she managed for her former employer, Hill Samuel Asset Management, to beat the average for her fund-management peers in both the U.K. and the U.S. for five years running.

On Sept. 1, Garrett-Cox started the next leg of her wildly successful career at a new employer, Aberdeen Asset Management. There, she and her team took over the underperforming Aberdeen North America Trust and will launch a "global thematic fund" focusing on companies that are "global or moving that way," she says. Garrett-Cox figures it will be about 75% U.S. equities.

At first glance, specializing in U.S. stocks while operating out of London seems a disadvantage. According to Garrett-Cox, "the distance gives you perspective. We're not part of the herd." Also, she says, her team picks up information from colleagues that they probably wouldn't get if they weren't where they are. "For example, so many people were saying that Europe would do so well this year," she says. "Our analysts didn't see it. And then sales didn't come through." Recently, though, Cox has become more positive on Europe. "We think growth across the region is pretty robust," she says. "Inflation is not spiraling out of control, although the European Central Bank has indicated that they might get more nervous anywhere above 2%." European stocks she and her team like include pharmaceutical giant Aventis, the company formed by the Hoechst AG and Rhone-Poulenc S.A. merger. "This stock is defensive and offers good value," she says. Deutsche Bank AG is "making huge strides in investment banking and, compared to its American counterparts, it's pretty cheap."

Garrett-Cox remains bullish on the U.S. stock market and expects a fourth-quarter tech rally. A particular favorite: General Electric. Companies like GE, she says, combine the new economy with the old for maximum effect. "The cost efficiencies they are reaping as a result of Web enabling, if you will, are enormous." The fund manager also sees GE's global reach as a way to leverage a recovery in European markets. Garrett-Cox thinks a long-term growth rate of 16% to 17% is "reasonable" for GE. Her 12-month price target: $70-plus. GE now trades in the mid-$50s.

Garrett-Cox also likes Nortel Networks, the global manufacturer of telecom equipment. In the last quarter, "they reported optical revenues up 150% year over year," she says, and optical is now 35% of revenues and growing. "Most importantly for us, the company is raising growth guidance on earnings per share to 40% to 45% for this fiscal year, and 30% to 35% next year," she says. "They're winning contracts and they have very, very strong geographic positioning." The target price: In excess of $100, up from Nortel's recent $81.

Another high-profile tech stock that puts a gleam in Garrett-Cox's eyes is Intel. Earnings estimates are rising for Intel, she says, and "out of Europe I'm hearing that corporate buying is coming back. People forget that Intel's fourth quarter last year and this year's first quarter were weak because of year 2000 fears, so we'll see easy comparisons." Intel, which is trading around $68, could hit $90, she predicts.

A low-tech stock with global reach that Garrett-Cox finds promising is Colgate-Palmolive. "It has a very charismatic chairman who is on top of the business," she says. "Also, the company makes it their mission to build out in emerging markets--and that makes it a great opportunity." She thinks the stock, which trades around $54, could rise to $70 or so.

Along with many other market pros who think interest rates are nearing a peak, Garrett-Cox smiles on the financial services sector. She figures that Citigroup, which is already up more than 30% this year, at about $73, could gain another 15% to 20%. "It's truly global in its reach," she says. "It's one of the biggest banks in the Far East, so if you want to play the resurgence in the emerging markets, this is a way to do it."

Garrett-Cox puts her money where her mouth is, investing most of her net worth in her funds. "I sleep with my portfolio under my pillow every night," she says. "I've done well." --S.W.

THE INDEXER

JOHN C. BOGLE Founder, the Vanguard Group

Jack Bogle charms his fans with his crusty criticisms of the fund industry. He tells them what they want to hear--that they can beat the pros. And he's right. During the past 10 years, if you'd bought and held Vanguard 500 Index, you'd have outpaced 73% of U.S. stock funds.

Bogle is no longer Vanguard's senior chairman; when he turned 70 last year, his retirement became mandatory. He now heads the Bogle Financial Markets Research Center and is a regular on the keynote speaker circuit.

I mention to him that I read his recent Social Security speech. Could the fund industry manage the savings plans politicians have proposed? His response: "The retirement savings of American families are too important to be entrusted to the mutual fund industry!"

That's because fund costs, he says, are too high--which brings us to Bogle's favorite subject. "I've never seen a case where the lowest-cost quartile of funds in a group did not outperform the highest-cost quartile in the long run," he says. "Studies show, almost unequivocally: Do your fishing in a low-cost pond."

Costs are even more key to bond investing because fund returns tend to fall within a narrow range. "It's wrong, and I have no hesitancy in using that word, for people to offer a bond fund with a sales commission of 5% and an expense ratio of 1.25%, or even 0.75%."

Right now, Bogle finds high-quality corporate yields of 8% too tempting to pass up, when Treasuries give off around 6%. "You don't want to buy a single corporate bond, because there's a lot of risk," he says. "But when you can get a diversified portfolio at a higher yield than a Treasury, I would take that."

It's tough to disagree with Bogle; he's got the math on his side. But his stance on international investing does invite argument. Bogle contends that foreign diversification is of little value. "When markets fall apart, they go down all over," he says. "We saw this in 1998, we saw it from, say, March 20 to April 20 this year."

But what if, like Japan, the U.S. goes through an extended period when its stock market lags the rest of the world's?

"There is obviously a possibility I'm wrong," Bogle responds. "But if you want foreign diversification, don't do it with more than 20% of your equity exposure. And do it in index funds."

For Bogle, the ideal portfolio would combine Vanguard Total Stock Index and Vanguard Total Bond Market Index, with a splash of Vanguard Total International Stock Market Index if you must. "If index funds are boring and you want to exercise your initiative and wisdom," he says, "keep a funny money account. My only recommendation is, make it no more than 5% of your investments."

Let's say Bogle were to go crazy with some funny money--any active managers he'd bet on these days? "No." --L.L.

THE CHANGE ARTIST

JOSEPH MCNAY Chairman & chief investment officer, Essex Investment Management

Nineteen years ago, a bunch of graduates from Yale's class of 1954 set up a small fund, which they planned to give to the school on the 50th anniversary of their graduation. The group collected $390,000 and turned it over to Joe McNay, a Boston-based money manager and fellow Yalie. Over the next two decades, McNay displayed a spectacular knack for picking growth stocks--from Home Depot to Amazon.com to JDS Uniphase. The result? He's turned that $390,000 into $61 million.

At 66, McNay is one of the giants of growth investing. His firm, Essex Investment Management, runs $14 billion for clients like the Winthrop Rockefeller Foundation, Wellesley College and the Children's Defense Fund. He also managed Bill Clinton's nest egg for five years, despite the fact that he generally won't touch accounts worth less than $5 million. McNay can afford to be choosy. His growth equity portfolios averaged 30% a year for the past decade and 61% annually for the past three years. In '99 they were up 130%.

The secret, says McNay, is to "recognize change early, and capitalize on it." He was one of the first, for example, to see the huge promise of Internet stocks. Within weeks of Amazon's going public, McNay became its largest public shareholder, paying a split-adjusted average of less than $5 a share. Amazon, he explains, represented "a new concept in an old industry"--much like Home Depot and Costco, which he'd also owned in their infancies. "We're always looking for that kind of revolution."

Equally key, McNay knows when to take profits. He sold most of his Amazon shares for $70 to $100. (It's now in the high $30s.) Investing, he says, is "like a relay race, with the baton always being passed from one industry to the next." So he doesn't get overly wedded to any stock or sector.

These days he's been loading up on insurance stocks. Insurance companies have been boosting prices for the first time in four years, he says, and the trend should continue. McNay typically favors the most "dynamic" companies in a sector, not the cheap ones. So he's invested in leaders like Marsh & McLennan, an insurance broker, and American International Group, which is a dominant global player in reinsurance. He also likes Arthur J. Gallagher, a smaller outfit that should benefit from rising prices and may be acquired as the sector consolidates.

Another area where McNay sees a fundamental change taking place is energy. "The U.S. is dramatically short of natural gas," he says. Typically, supplies are replenished during the summer, he adds, but it hasn't happened this year: "That portends higher prices in the fall and winter."

McNay recommends explorers and producers like Anadarko Petroleum and Apache, which are "proven and well placed." He also likes Smith International and BJ Services, which help producers find and extract oil and gas. With profits soaring, energy stocks have already spiked up, and they're no longer especially cheap. But he sees plenty more upside: "It's going to be a long cycle."

As usual, McNay's biggest bets are in tech, which powered his dazzling returns in 1999. He owns some of the Nasdaq's priciest and most volatile stocks--Veritas Software, i2 Communications, Exodus Communications, BEA Systems and Broadcom. "We try to isolate the truly outstanding companies," he says.

One of his favorites is Ariba, which sells software used in business-to-business transactions over the Internet. It trades at 197 times this year's sales. McNay can stomach this mind-blowing valuation because the firm is "absolutely dominant" in a business with vast potential. Ariba is growing so explosively, he says, "it can hardly keep up with demand."

Meanwhile, McNay is moving aggressively into what he views as the next great growth area. He envisions the medical world undergoing "a major, broadbased revolution," driven by genomics. As he sees it, pharmaceutical and biotech companies will spend huge sums to develop treatments based on this newfound knowledge. That means they will buy masses of laboratory supplies--from chemicals to rodents.

McNay is investing in an array of suppliers, including PE Biosystems, which sells instruments for things like analyzing molecules. The company, he says, "unequivocally owns the equipment supply area." Another supplier he likes is Waters Corp., a specialty chemicals provider that's racked up 19 consecutive quarters of earnings growth averaging 25%.

And then there's Charles River Laboratories, which supplies mice, rats and miniature pigs used in drug research. Doesn't sound like a sexy growth story? Well, since going public in June, the stock has leaped 80%. --W.G.

THE TRUE BELIEVER

MARY MEEKER Managing director and analyst, Morgan Stanley

The past few months have been rough on Internet true believers like Morgan Stanley managing director and analyst Mary Meeker. Since March the Morgan Stanley Internet index--including Microsoft, AOL, Priceline, CNET, eBay and Yahoo, all stocks Meeker recommends--has plunged a horrifying 60%. Ninety-eight, '99...those were the days. Bliss it was then to be a tech investor, and to own Amazon .com--one of Meeker's favorite stocks--was very heaven.

But 2000 so far? Feh. "One thing you get used to as a technology analyst is that every three to five years you're going to have a bad year," Meeker admits. "It just comes with the territory."

Okay, so anybody can have a bad year. But is 2000 really just one of those blips--perfectly normal, not to worry--or is it the year investors finally woke up from the Internet dream, a vision that Meeker as much as anybody on Wall Street helped stoke?

Meeker is a celebrity, profiled at length not only in Barron's but also in the New Yorker. She's linked with several of the most successful stocks of the past few years. Late in 1993 she recommended AOL, which at the time was at about 50[cents] a share (split-adjusted). And she's been critical in bringing a number of important companies to market. In August 1995, for example, with Meeker's backing, Morgan Stanley took Netscape public--the first monster-money IPO of the Internet age.

Throughout she's been a believer in the Internet orthodoxy of spending money to build market share and brand loyalty and worrying about profits later. Most Internet businesses, she says, are "binary"--you're either No. 1 in your category or you're a loser. Her public image is somewhat binary too: Depending on how you regard the Internet, she's either a gutsy visionary or a mouthpiece for a bunch of overhyped concept stocks. That controversy may well be settled for good this year.

Take Amazon, for example. Until this spring, the stock defied gravity. But lately it has gotten hammered. Even a fan as big as Meeker scaled back her near-term earnings expectations for the company. She says that after spending on marketing and new warehouses, Amazon needs a huge Christmas 2000 to prove once and for all that it's for real.

"The company is going through the transition from supporting pretty strong sequential growth every quarter to becoming very fourth-quarter loaded, much more of a retail model," she says. "This Christmas, more people are going to shop at Amazon," she predicts, "and the old shoppers are going to buy more."

And if they don't? "That would be bad."

Meeker believes that Amazon may stumble in the short term--as AOL and Dell did before it. But, she adds, "I look at the company and I see 22 million to 24 million customers with 75% repeat purchasing. With the kind of brand loyalty it has and the underlying usage trends in place, it's almost a challenge not to turn that model into profit."

Meeker expects the current wave of consolidation in the Internet to continue. (Two stocks on her watch list, for instance, CNET and Ziff-Davis, recently got together.) As for the biggest Web-related merger, AOL's acquisition of Time Warner (MONEY's parent company), Meeker is upbeat on the deal but says AOL's stock has been weighed down by "a complexity discount"--meaning it will take a while for the merger to sort itself out and make sense to investors. She also says that AOL needs to improve its efforts to expand overseas.

Meeker does not issue price targets, and outside the stocks on her list she offers just one pick: "Cisco is one of those companies; people almost get bored by it. But boring can be good."

The market in general is in a period of transition, she says: "It's not uncommon to go through those phases. I think the fourth quarter will be a period when the leaders really put some points on the board and people will say, 'I do believe in eBay. I do believe in Yahoo. I'm in this for the long term.'"

And if they don't, of course, that would be bad. --P.C.

THE CONTRARIAN

ROBERT RODRIGUEZ President & chief investment officer, First Pacific Advisors

Bob Rodriguez is so down to earth, it's hard to imagine him in Los Angeles." So said a friend in the fund industry when I'd mentioned my visit to First Pacific Advisors. In fact, if you ignored the view of the Pacific, the offices would have seemed more like Lincoln, Neb. than West L.A. The decor is early Ethan Allen, and Rodriguez was comfortably clad in a plaid shirt, no tie, as he kicked back on a July afternoon.

But Rodriguez is no white-bread investor. He is a contrarian who avoids blue chips while digging for little-known companies selling at truly low prices--the kind most investors have ignored in the great growth run of the past few years. FPA Capital, the equity fund he manages, has topped the S&P 500 over the past 10 years and has one of the best long-term records among midcap value funds. (Unfortunately, it's closed to new investors. But some shareholders have sold while value funds have lagged, so there's a good chance the fund could reopen.)

And Rodriguez is a switch-hitter--his eclectic FPA New Income is one of the best bond funds around. It has never ended a year in the red--not even 1999, when the average intermediate-term bond fund lost 1% amid rising rates.

Q. How would you describe your strategy?

A. We've always tried to acquire market leaders in out-of-favor, even hated, industries. Amazingly, in three, four, five years, they come back. It requires a lot of patience.

Q. Can you give some examples?

A. We're now a very large owner of Fleetwood Enterprises--the manufactured-home and RV maker--which we purchased for around 85% of book value and six times earnings. Our average cost is around $17, so with the stock around $14, we're not looking too smart right now. But we're in this over a long cycle, and there is sizable demand for low-cost manufactured housing.

Then there's Centex, the largest U.S. home builder. We bought at about five times earnings and less than book value. The home-building operation is wonderfully profitable, but it's getting hit on its financing operation. Yet even in a worst-case scenario, such as a severe recession, we'd figure a fair valuation in the high 20s. We've already made a little bit of money in Centex, probably about 20% to 25%, but we don't expect it to be huge for a couple of years.

Q. You wrote in your latest report that you'd attended the DLJ Internet conference, and I thought, what's a hard-core value guy like Rodriguez doing there?

A. Well, you always have to be a little bit out of the box. I was buying tech stocks 14 years ago, back when value managers were very proud that they didn't own technology.

Q. Any tech picks at today's prices?

A. There's Hutchinson Technology, which developed a new suspension for disk drives. With today's data speed and density, suspension assembly has evolved from a piece of sheet metal to a complex system. We weren't sure Hutchinson would be the future winner, but it was already the dominant provider. It turns out, Hutchinson's latest technology is the choice of virtually all the major storage companies out here. They are patent-protected. Cash exceeds debt on the balance sheet; the stock's around $14 or $15 and the company has $10 a share in cash. From this level, it would not surprise me if the stock doubled or quadrupled over the next three or four years.

And we're sticking with Arrow Electronics and Avnet, both distributors of electronic components and computer products. I call this poor man's technology, a way to get backdoor participation in technology, at better prices.

Q. You also play tech via high-yield bonds and convertibles in the New Income fund.

A. We were recently buying the bonds of Hutchinson Technology. These are bonds with a maturity in 2005 and a 6% coupon, but the price was so low, we got a 20% yield.

Q. Given the opportunities in the bond market, if you were running an asset-allocation fund, how much would you put in stocks?

A. The stock market overall is richly priced, but we're in a two-tier market, and we're still finding values down at 1984 levels. That said, when you can buy government agency securities with yields of 7.5% to 8%, those returns are going to be very, very competitive with equity returns. I think the differential between bonds and stocks will be far narrower than it's been over the past five years. So I wouldn't have the traditional tilt toward stocks. I would have maybe 40% in equities, 40% in fixed income and 20% in cash, which I would use to take advantage of values in the high-yield and stock markets. --l.l.

THE LEGEND

PETER LYNCH Vice chairman, Fidelity Management & Research

Peter Lynch is, of course, the man who made a lot of money for a lot of people while running Fidelity's Magellan Fund and a living exception to the Efficient Market Hypothesis dear to the hearts of index investors--that it is impossible for any human to beat the market consistently. (Readers under the age of 35 may recognize him more readily as that guy with the weird hair in the Fidelity ads.)

He is also, like much of the Boston Irish establishment of which he is now a leader, a graduate of Boston College, a Jesuit school where they still teach classical stuff like logic, rhetoric and metaphysics. BC is the kind of place that has turned lots of middle- and working-class kids into rich doctors, lawyers and mutual fund managers. Hard work and pulling yourself up by your bookstraps is the ethos. And as Lynch, now Fidelity's vice chairman, orates from the cramped office he occupies in his semiretirement--the kind of shabbily genteel place that only an extremely wealthy man could stand--you can almost hear Father Brendan pacing in front of the blackboard, scolding you for your lack of intellectual rigor and discipline. Except that Lynch's subject is not Aristotle or Thomas Aquinas; it is investment.

In the well-rehearsed Lynch catechism (he may be the most frequently interviewed stock picker in history), there are three primary articles of faith.

Article the first: Corporate profits--and nothing else--drive the stock market. "I think people are missing what makes stocks go up," he says. "They pay way too much attention to the big things: a Democratic or a Republican president, what's happening in Japan, what inflation's going to be. I'd love to know when there's going to be a recession...but it's irrelevant."

Article the second: Good companies make good stocks, no matter what the rest of the market is doing. "Bethlehem Steel has been a terrible stock over the past 30 years because its earnings have been terrible," Lynch explains. "McDonald's has had great earnings. If the stock market were still at 1000, you would nevertheless have done very well with McDonald's or Johnson & Johnson or Home Depot."

Article the third: Retail investors need not be financial geniuses, but they must work hard. Those who do--by studying industries and reading balance sheets--will prosper. Those who invest blindly or speculate--and there are a lot of you out there--will be cast into the lake of fire. In fact, Peter Lynch is not altogether happy with Joe and Jane Retail Investor. You buy companies you don't understand, throw your money too late into hot sectors, and even when you do grab a winner you're likely to sell too soon. "There are people who've got 30 stocks and they're spending two hours a day on the phone trading them," he says. "That is a huge mistake. You're going to get the same result you'd get at a casino, except there's going to be more paperwork."

Lynch admits that the bull market of the past several years is pretty anomalous. For one thing, it's oddly bifurcated, with megacap companies like Microsoft and Oracle rising incredibly, while the small and merely big have languished. And historic ratios between prices and earnings have failed to hold--for the time being, anyway. "We've had a lot more P than E over the past five years," Lynch complains. "I think the stock market is up 150% over the past six years, and corporate profits are up 50%. That can't last."

So turn off CNBC, close your E-Trade account and throw away your copy of Dow 36,000. But what, you cry, should I buy? How can I be cleansed of my investment sins?

Lynch will not talk about individual stocks, but he will pick a few favorite sectors. Generally, he advises, start by looking for what he calls "punished" stocks, those of fundamentally sound, profitable companies that have taken a few hard knocks. Lynch admits that the economy has been so good it's tough to find struggling industries ripe for a turnaround. But he says there are some.

Look for issues trading at what he calls a "recession P/E," like 5 or 6. There may be companies that fit that description, he says, in the property and casualty insurance business. Another perennial favorite of Lynch's: small savings and loans. There are, he says, plenty of well-run S&Ls out there whose stocks are cheap. "There are hundreds of them, hundreds of them, and they're juicy," he says. "A very good ratio for a bank is 7% equity to assets [that is, loans]. Some of these guys have 12, 18, 20, 26." (Since Lynch wouldn't name names, we found a few: Union Community Bancorp, American Financial Holdings, First SecurityFed Financial and Timberland Bancorp.)

It would be tempting to shrug off Lynch's sermon were it not for his stellar record at Magellan. His "study hard and buy what you know" spiel does make investing sound a whole lot simpler than it really is--sort of like Joe DiMaggio explaining hitting by saying just keep your eye on the ball and your swing level. It's good advice, of course. It's just doing it that is so damn difficult.

But to hear Peter Lynch tell it, hard work is what investing is all about. He says, "If you look at 10 companies, you'll probably find one that is mispriced; if you look at a 100, you'll find 10. The person who turns over the most rocks wins." --P.C.

THE TECH WIZARD

ROGER MCNAMEE General partner, Integral Capital and Silver Lake Partners

Roger McNamee has been a successful tech investor ever since he started managing money for T. Rowe Price in 1988, when he and partner John Powell began running its Science & Technology fund. In his three years there, assets ballooned thirteenfold. In 1991, he and Powell moved to Silicon Valley. There they founded Integral Capital, a limited partnership that invests in private and publicly traded companies and whose investors include Silicon Valley's pre-eminent venture-capital firm, Kleiner Perkins Caufield & Byers.

Last year, McNamee raised money to start a fund that would leverage his network of contacts and knowledge of the tech world. Silver Lake Partners, as it's called, has invested in undervalued top-tier tech companies such as disk-drive maker Seagate and networking concern Cabletron Systems.

What's the 44-year-old venture capitalist/tech investor/rock guitarist's secret? An uncanny ability to distill profound and longstanding trends from random points of data.

In the warp-speed world of high technology, identifying major trends requires discipline and focus--two particularly helpful habits of mind in times of enormous stock market volatility. Even better, trends last a long time. "You think of tech companies as coming and going," McNamee says," but technology cycles are not short. They tend to last 20 years."

In the late '80s he bet that distributed computing--that is, a PC on every desk--would pervade the corporate world. His roster of holdings included Intel and Microsoft. In the '90s, McNamee invested in companies that offered connectivity and interactivity. He was an early and longtime investor in Cisco, Oracle and Yahoo, great representatives of each trend, and all great stock picks.

Now, as he's whizzing along Silicon Valley's Sand Hill Road, better known as VC Boulevard, McNamee is excitedly talking about two major themes that will color his investments for years to come: the move toward real-time access to information and the elimination of bottlenecks that continually pop up along data and telecom networks. These two ideas sprang from his realization that his earlier themes of connectivity and interactivity had matured to the point that they created new problems for businesses to solve. Today enough people are connected to the Internet, use mobile devices and, to a greater degree, like to interact electronically, that older technologies can be replaced.

One of those old technologies is batch-mode computing, "which is how computers have worked for the past 50 years," McNamee notes. In batch mode, large computers collect reams of data, then run daily, monthly or quarterly reports. Batch mode still works brilliantly for certain applications, like accounting and human-resources management. But the software applications that are truly exciting today, says McNamee, are those based on real-time communications. Just look at the evolution of the way you get stock quotes. They used to come from a newspaper that printed yesterday's closing price. Today you can log on to the Internet and get nearly real-time quotes.

Now apply this concept to the many facets of e-commerce. "These new applications will allow companies to communicate with suppliers and customers in real time, so that entire supply chains and demand chains are in constant touch with one another," explains McNamee. This creates efficiencies that benefit both buyers and sellers. For instance, look at the sizzling-hot optical networking industry, which has been beset by a shortage of components. "There really hasn't been a parts shortage," McNamee pronounces flatly and goes on to explain why. "The supply chain usually has five to six layers, and some inventory is kept at each level. If inventory sits in the wrong place, you get waste and higher cost. So if you can simultaneously communicate a forecast change to all your suppliers, people along the way don't need to hold as much inventory. Meanwhile, less capital will be tied up in inventory, so they can either have higher profits or sell at lower prices. Both of which are good things."

Software companies such as Agile, Inktomi, Akamai, Epiphany, Calico and Pivotal have built real-time communications into their products. And a wide-ranging group of companies fits McNamee's real-time theory: AOL with its instant-messaging technology; eBay, which has automated the weekend flea market; Healtheon, which is trying to do the same to medical records; and many more that are set to go public.

McNamee's second theme is investing in companies that specialize in removing the bottlenecks that constantly spring up in communications networks. "The Internet isn't one network, it's the sum of every telephone company and every private network and every computer attached to them. All those points of connection are choke points. There are millions," he says.

But once you fix a bottleneck in, say, a network's transcontinental transmission lines, the constriction doesn't disappear. It just moves to another place--say, the point of access. Who fixes it? Cisco does, and so do Sycamore, Juniper, Redback, Foundry, Copper Mountain and Extreme, to name a few. Extreme and Copper Mountain, McNamee says, are two "value plays" in the sector.

"As an investor, I always ask the questions, Is this company benefiting from the transition to real-time computing? Is it eliminating a bottleneck? If it doesn't fit either trend, we keep moving," says McNamee. "I'd rather give up the potential for immediate profits in other hot sectors and focus on the two biggest things going on." --P.G.