A big portfolio manager shares his market 'laws'
There are three simple laws for successful portfolio management, says Frank Parrish Jr., portfolio manager of the Boston-based Puritan Fund Inc., a part of the Fidelity Group of mutual funds.
Over lunch at the Yale Club here last week, the money manager recited "Parrish's Laws," which seem quite appropriate, considering the state of the stock market. In fact, Mr. Parrish jokes that he wishes he followed them more often when picking stocks for the $700 million fund.
The first law has a familiar ring to it: Buy low, sell high. This may sound simple, Mr. Parrish says, but it isn't. Ask a portfolio manager, for example, if he looked at the "new high" list published each day in the Wall Street Journal. The chances are good that he has, and can reel off the names of his winners on the list. However, ask the manager if he lookedat the new-low list, and the odds are good that he hasn't.
Of course, the money manager points out that in a roaring bull market you take the risk of selling too soon. But he philosophizes that there is no such thing as an unhappy profit taker.
For another test of Parrish's first law, check to see if a portfolio manager has capital limits on stock purchases. For example, some money managers say they can't or won't buy a stock without the company's having a market value of at least $100 million. If you are buying a company at its lows, it may well be worth less than $100 million. In short, Mr. Parrish says, capital limits for portfolio management often ensure that you won't be buying the stock at the low price.
Parrish's second law can best be illustrated by the comic strip "B.C." One cave man says to the other: "We're going into the mushroom business. I'll grow them, pick them, market them, and keep the books." The other cave man says, "What will I do?" The first cave man replies, "Test them."
The moral to the story, says Mr. Parrish, is that "everyone wants you to take all the risk." He says that to avoid being the sole risk-taker, buy stocks in companies that have a major degree of management ownership. "The difference between those owned by management and now owned can be dramatic." For example, Loews Corporation has a high degree of management ownership, since Preston Robert Tisch, the chairman, owns about 25 percent of the company's stock. The same is true of Teledyne and Getty Oil.
"Management cares more if they have their own money on the line," Mr. Parrish maintains.
The final law, he says, is that the market is often afraid of the wrong things. For example, when the Organization of Petroleum Exporting Countries was formed in 1974, the consensus on Wall Street was that the cartel would not last.Now, he says, it's widely agreed OPEC greatly affects the way we live. Today, he adds, the market is again concerned about the wrong things. For example, he is being told by various economists that their man concern about the economy is that it will be too strong next year, which will be bad for inflation.
But Mr. Parrish is convinced that the economy is only strong on the surface. Next year the country could go through another slump, resulting in a "double dip" recession. This could lower earnings forecasts for 1981. If there is a second dip, he believes, it will affect a different part of the economy which so far has been immune to the downturn. Consumer durables, such as heavy appliances, vacation travel, and repair and modernization businesses could be affected adversely.
Mr. Parrish says there is a 40 percent chance of a double-dip recession, a 50 percent chance for a stagnant economy, and only a 10 percent chance for a sharp recovery and high inflation.
Using his three laws, Mr. Parrish has a total return (counting dividends reinvested and capital gains) of 17.percent so far this year. Since his fund's chief goal is income and growth, this is fairly high.
Investors remained on the defensive last week. The Dow Jones industrial average sank 12.54 points to 943.60. Although there was no specific news to account for the decline, analysts pointed to the uncertainties surrounding the election, the Middle East, and the future trend of interest rates as factors that kept investors off balance. Gold also slumped, to less than $625 an ounce, as investors began to speculate that the US hostages in Iran would be freed soon.
The railroads bucked the trend and were sharply higher last week as investors continued to buy them in anticipation of all the grain and coat that will move on them.