During the 1970s, Olstein gained prominence by writing the "Quality of Earnings Report" with Thornton L. O'glove. The twice-monthly newsletter alerted fund managers to companies that were burnishing financial results with misleading accounting.
The newsletter at its peak had 120 subscribers that paid about $15,000 a year each, according to Olstein, who credits O'glove with developing his intuition for spotting telltale details in regulatory filings and earnings reports.
O'glove, 73, said he "learned to be even more cynical" through the collaboration. "I used to spend some time talking to management, and Bob always said that was a waste of time."
Olstein said the approach reflects a lesson he learned in 1969 after buying shares of Varo Inc., a maker of night-vision equipment, and losing about $10,000. He missed some early signs in the company's earnings reports that military budget cutbacks would slow growth, and the stock fell more than 50 percent.
"I listened to what management was telling me rather than make a financial analysis," he said.
The Financial Alert Fund's 15 analysts and traders do not speak with executives. Employees of the firm are required to limit equity investments to the fund's shares to align their interests with those of holders.
Olstein trawls for companies that may be understating their ability to grow. Tribune, the fund's fourth-largest holding as of Jan. 31, may rise to about $58 during the next two years as depreciation and amortization expenses drop, increasing profit, he said. Shares of the Chicago-based company closed at $38.87 on Friday, down 65 cents.
Expenses to reduce the value of assets such as television-station licenses trimmed profit by $233 million last year, according to U.S. Securities and Exchange Commission filings. The figure may eventually drop to about the $217 million the company spent on capital improvements, according to Olstein, whose Tribune stake is 2.2 percent of the fund's assets.
Interpublic, based in New York, may also report improving earnings by shedding money-losing businesses after a flurry of 273 acquisitions from 1998 to 2002 hurt profitability, Olstein said. His stake amounts to 2.8 percent of assets. The stock may rise to about $20 from $13.12 as of Friday's close, he said.
Olstein sold his entire stake in Merck after the company withdrew its Vioxx painkiller on Sept. 30 because of a link to heart disease. Shares of the Whitehouse Station, N.J., drugmaker plunged 27 percent that day. He also reexamined SEC filings and newspaper reports to learn whether he missed any warning signals.
The review uncovered reports in late August that health insurers, including Aetna Inc., Kaiser Permanente and WellPoint Inc., were discouraging the use of Vioxx because of concerns about the drug's cardiovascular risks.
"There was enough evidence on the table to say that we were too optimistic in valuing the Vioxx franchise," he said. "It was right in my face. We autopsy every error we make to see if there is any message other than we got hit by a bomb."