Over the next few weeks, the financial pages will be full of bullish and bearish stories on the stock market's prospects for the coming year. And all they'll do is make you more confused than you are right now. Rather than add to that confusion with a bunch of contrary views from a number of leading stock market experts, I've decided to solicit the thinking of just one man: David H. Baker, 46, president of the $102 million 44 Wall Street Fund.
My choice is the mutual fund industry's Superman, Batman and $6 Million Man all wrapped up into one. During its 10 years of existence, 44 Wall Street Fund has racked up the third best performance of all mutual funds (up 322 percent). Over the past five years, it's been No. 1 (up 753 percent). And as of about a week ago, the fund was up a sizzling 71 percent thus far in '79, vs. about a 12 percent advance for the standard & Poor's index of 500 stocks. So our whiz surely deserves a full airing.
Baker's current investment strategy for '80: Buy stocks now!
The bulls, of course, would readily agree. They'll tell you equities are dirt cheap (based on book values, price-earnings multiples and the costs of replacing assets). They'll remind you that stocks have lagged badly behind the gains in alternative investments (such as gold, real estate, art and antiques). And they'll also point to the institutional billions on the sidelines (both here and abroad) that could be committed quickly to equities once the uncertainties are resolved.
The bears, on the other hand, will argue that those lofty interest rates are likely to remain high for quite a while. They'll point to widespread uncertainty over the severity of the widely predicted '80 recession to the prospects of continuing high inflation and to the high cost of buying stocks on margin (equities purchased for 50 percent cash.) They'll also warn you of the enormous margin debt (more than $12 billion on the Big Board alone). And, of course, there's the turmoil in the Mideast (notably the Iranian crisis and the question of how many more oil price boosts the world will face over the coming year).
With such opposing bullish and bearish forces at work, how can anyone not be confused about he equity market? I know that I am.
Baker's not. His fund is 95 percent invested and on the way to 100. But then again, Baker is nearly always fully invested unless he's fearful of a disaster.
His philosophy is simple enough: You put your money on stocks you think will outperform the market over a period of time. In Baker's case, these are essentially emerging growth companies with roughly $100 million in market capitalization and annual growth rates in earnings of about 20 percent. You confine your holdings to between about 20 and 25 stocks, constantly monitor them (at the same time shopping around for stocks that might be even better) and you ride out the storms if you think you're right.
Baker, though, isn't looking for any major market storm in '80. He sees the market trading in a narrow 800 to 900 range (in the Dow Jones industrials) earlier in the year, essentially awaiting a clue as to how adverse the drop will be in corporate profits in '80. Baker's view -- and the principal reason for his willingness to become 100 percent invested -- is that the profit falloff won't be sizable, maybe between 5 percent and 10 percent for the entire year. At the very worst, he sees perhaps between a 15 percent and 20 percent decline in corporate profits in just one quarter.
"You don't have much excess in the economy in terms of inventories, plant capacity or capital spending," he said. "And therefore, I can't see any severe economic downturn."
Baker believes that once this fact is recognized, "You'll see a market breakout on the upside." He looks for the Dow industrial average to top 1,000 by the end of the third quarter.
But what about inflation?
Baker's scenario calls for only a moderate decline in inflation (and therefore a continuing high level of long-term interest rates). But the fund manager insists that corporations have adjusted to the inflationary environment by controlling costs and boosting prices when need be. "Just look at what corporations are reporting; their profits are sure as heck not going to hell," he said.
Let's say an investor buys Baker's optimism. Where do you put your money?
Technology is Baker's top choice, although he's cut back this sector from about 50 percent of the portfolio to about 30 percent because of the coming business slowdown and the run-up in the group. His favorites: Spectraphysics, Kolmorgen, Computervision and Sensormatic Electronics.
Oil exploration is Baker's second largest holding (20 percent). And here the fund focuses on just two companies: American Quasar and McMoran Oil & Gas.
Baker is putting an increased amount of his assets (15 percent) in the hospital mangagement area. The emphasis is on three companies: National Medical Care, Lifemark and National Medical Enterprises. The fund recently boosted its positions in all three stocks.
Other favorites are service (A.C. Nielsen and IMS Iinternational), broadcasting (LIN Broadcasting), insurance (American International Reinsurance Group) and consumer (Lowe's Cos., Modern Merchandising and Triangle Pacific).
Well now you know how one of the investment superstars is playing the '80 stock market. If you're like me -- the impressionable type -- a word of warning before rushing out and buying some of Baker's favorites. Those stocks, by the nature of the smaller capitalizations and the exuberant expectations of the hot-money players (meaning there's no room for disappointments), are far more volatile than your average equity.
For example, during the wicked market drops in 1973 and 1974, the 44 Wall Street Fund got slaughtered. It lost 50 percent of its assets each year out. It also went into a nosedive again during the October 1978 market break when, in a matter of a couple of months, the fund was off roughly 50 percent. And in the past October break, the fund plummeted another 20 percent. So obviously the 44 Wall Street Fund is not for the faint-hearted in treacherous market periods.
Baker practically acknowledges it. "We do have periods of concern, and the fund does get hurt badly at times," he admitted. "But if you're confident of the fundamentals -- and you're right -- it will show through eventually. And our performance tells you that. But there are some miserable times . . ."