CHICAGO (CNN/Money) -
Hoard cash. Short stocks. Revisit your "sell discipline." That's what some of Wall Street's most successful investors say they're doing to survive these dark times.
Speaking at the Morningstar Investment Conference being held this week in Chicago, manager Robert Rodriguez of the FPA Capital fund said he's holding 20 percent of assets in cash. Why such a conservative stance? He predicts that stocks will return at best 5 percent during the next few years, while money market funds will earn a solid 3 to 4 percent. Given the added risk in stocks, money markets are much more appealing.
Rodriguez, who also manages the bond fund FPA New Income, is not afraid to take advantage of weak markets to scoop up bargains -- he was buying, for example, when markets opened after Sept. 11. But he predicts there will be better bargains in the weeks and months to come.
"I'm not looking for the stock market to do much of anything till the end of the year," Rodriguez said. "We're getting into the darker stages of the bear market. People will be very shocked at how cheap stocks can become."
Playing the short side
Other investors are taking a more active approach, and benefiting from the carnage. Peter Trapp, managing director of Needham & Co., said his short-selling strategy has helped Needham Growth Fund in the past two years. The mid-cap growth fund, with $427 million in assets, earned 7.4 percent in 2000 and 12.1 percent last year, while many of its peers were in the red.
The fund can short up to 25 percent of its portfolio but is now about 17 percent on the short side in areas such as gaming, restaurants and some tech, he said. (He didn't offer any names.)
Trapp shorts a stock if he sees evidence of poor management, a sloppy board that looks more like a "school for scoundrels," or a business plan that doesn't work. In other cases, he may be long one stock and short another from the same sector.
"If the story doesn't work, we're not afraid to short a stock," Trapp said.
For his part, Bill Nygren, manager of Oakmark Fund and Oakmark Select, reminds investors to adopt a good sell discipline, and he wasn't the only manager to stress its importance, especially in a market where there are so many blowups.
But the secret of when to cut your losses is tricky -- and every manager does it differently.
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Nygren buys a stock when it is worth 60 percent of what he calculates to be its intrinsic value -- what he describes as the highest price an investor can pay and still make money. He sells when the stock hits 90 percent of its intrinsic value -- no ifs, ands or buts.
Trapp said he starts reevaluating a stock when it falls 15 to 20 percent below his purchase price. He keeps an eye out for management changes, or changes in accounting practices.
And Ralph Wanger, chief investment officer at Liberty Wanger Asset Management, advised people to add this step to the process when they buy a stock: When they record the stock into their portfolio, add a line that says something to the effect: "Why did I buy this stock?"
Then, if anything unusual happens in the movement of the stock, go back to why you bought it.
If the reason you bought is no longer true, dump the sucker.