The stock market," said investment adviser Bob Torray, "is the only arena in which people operate in a fashion that is the complete reverse of the one they apply to everything else."
"If you double or triple the price of a stock," he continued, "it just makes people want to buy more. If you double the price of a Chevrolet, people don't buy three instead of two, or two instead of one. But they do with stocks."
Just why investors insist on chasing stocks that are climbing, Torray does not know. He's been watching it happen for 25 years, and he is still mystified. All the more so because he lives by a very different philosophy. It is:
"We buy the things that other people want to sell. And we sell the things they want to buy."
For Torray, the best time to buy is when the market or a company's stock is at its worst.
"It's a characteristic of the best investments," he said, "that they look fairly hopeless. [It is] generally when they have bottomed out, the trading has dried up, there's almost no reason you could think of that they ought to go up, and the opinion of them is uniformly negative."
Torray's devotion to buying stocks in the face of adversity affects many people. He is the president of Torray Clark & Co., a Bethesda firm that manages investments for pension funds, college endowments and charitable organizations. The 48 funds managed by Torray's firm total $2.5 billion.
Many other professional investors say that they, too, follow a "buy low, sell high" strategy, but Torray's version of it may be more intense than most.
Torray is critical of the approach he said is followed by 90 to 95 percent of the nation's professional investors.
"They are all looking," he said, "for companies where earnings per share are going to increase every year by some predetermined amount, companies that have strong balance sheets, high return on equity, good management.
"What you've got are tens of thousands of people focusing on the same universe of securities. Most of them have computers at their disposal, and they program the computers to come up with the names of companies that meet these criteria. Well, all the computers come up with the same names. And fundamentally the same people buy these things.
" . . . Because they all buy them, they push the price up, and you're paying a very high price for a rosy outlook. . . . If anything goes wrong with . . . earnings per share, which it routinely does, then the shares take a big nose-dive. . . .
"You see it all the time. It happened with Data General and Digital Equipment. These things can go down 15 to 20 points in one day, if something goes wrong. I've got a real problem with that kind of approach. I just don't think it makes any sense at all."
What does make sense to Torray is the idea of buying stocks when they are sliding downhill, and the faster the better. He loves to make his investments, he said, "when people are scared to death."
When panic breaks out on Wall Street, the phones on Torray's desk begin to ring. The big New York brokerage houses are calling because managers of large institutional funds are trying to unload their stocks. But to sell 100,000 or 500,000 shares, they have to find other institutional investors who have enough money to buy huge blocks of stock -- and are willing to buy in a falling market. The more the price of a stock falls, the more Torray will buy -- it is called averaging down.
"And then . . . you get the same shares going back up again," he said. "And we've had this experience so many times. The very same institutions . . . buy them back at a higher price."
While some investors might argue that chasing a falling stock can be more risky than chasing a rising stock, Torray disagrees.
"I think it only makes sense, really, to buy into sound businesses when other people don't like them and the share prices . . . are depressed. Almost everbody pays lip service to buy low, sell high. But this is not what they do. . . .
"If your buying is concentrated on issues that may have dropped 33 percent to 50 percent in the last year, a lot of the risk is gone. And then your job becomes one of assessing the viability of the business you're looking at. If you are dealing with a company that has a long history of operating earnings, a reasonable balance sheet, a significant equity relative to share price and it is not a buggy-whip sort of business, I think you have every reason to believe if you sit there long enough, things will turn."
Torray is quick to note that there have been many companies that have fallen on hard times and produced heavy, sometimes permanent, losses for shareholders.
Over the long run, however, Torray's philosophy seems to have benefited his clients. In the 13 years from 1972 to 1984, Torray said, four of his original funds produced a compound rate of return of 15.8 percent a year. For the same years, the Standard & Poor's 500 returned 8.7 percent compounded.
Computer Directions Advisors Inc., a Silver Spring research firm that measures equity fund performance quarter-to-quarter, reported Torray Clark's record as: a 19.5 percent annual compound return for five years, 1980-84 (S&P gain of 14.8 percent); a 23.6 percent annual return for three years, 1982-84 (S&P gain of 16.5 percent); and a 10 percent loss for 1984 (S&P gain of 6.2 percent).
Torray disagreed with the CDA figures, saying they failed to account for trading within each quarter and that, consequently, he had made less money and lost less money than CDA indicated. Instead, he said, his equity funds gained 18.07 percent in the five years, gained 18.98 percent in the three years and lost only 0.34 percent in 1984.
Torray's performance has been built on buying into gloom. When interest rates soared a few years ago and it looked like many savings and loans would close their doors, Torray was buying S&L stocks at rock-bottom prices. Torray said he never had any doubt the industry would come back.
Today, Torray feels the same way about the oil-service industry, in which his firm has invested heavily. Although oil-service stocks have long been in disfavor on Wall Street, Torray said, "I feel pretty confident that area will recover."
This is not to say that Torray has never had a losing stock or a losing year, although he said his losses have been relatively small. One $100 million fund, he noted, had 16 losses out of 300 investments in 13 years. As for losing years, Torray Clark lost 10 percent in 1973 and 6 percent in 1974, bad years in the market. But the funds continued to buy and made money in the following years, he said.
What of the market today?
"I like cash," he replied. "I'm personally very negative on the market. . . . The market today is no different than it was 18 to 20 months ago, except for that surge in January. . . . It hasn't paid to be in the market since, really, since the middle of '83. . . ."
What of predictions that the Dow Jones industrial average, the most widely watched stock market indicator, will move to 1,400 or 1,450 by the end of the year?
"We can't be buying stocks at 1,300 because someone says the market is going to 1,450," Torray said. "The time to buy . . . was 900 -- down to 750 -- and maybe get an average of 850 to 870 . . . and then start offloading as they move up and then wait. Sometimes the cycles can be quite long, and it could take you two years, three years, you don't know. But I think people making heavy commitments to stocks now are definitely in a dangerous area. . . ."