From time to time, I drop in on Bob Torray, a money manager who invests $1.1 billion in pension fund money for corporations, labor unions and state and local governments. A visit with Torray, I have found, is a useful reality check, a helpful antidote to the usual, lemming-like opinions that saturate the investment world.
Often, in the past, especially when stocks were booming, I have found Torray to be pessimistic about the market and unhappy with the signs of excessive speculation. Now, with the market slumping badly, Torray is optimistic and has a long list of stocks he wants to buy. He has even asked clients for more cash so he can take advantage of current prices.
Torray is a 53-year-old market veteran with strong, no-nonsense views about the behavior of investors. Because of his views, shaped over a 30-year career, he often finds himself selling when others are buying and buying when others are selling.
As a result, Torray, head of Robert E. Torray & Co. Inc., of Bethesda, is often called a contrarian. It is not a label he likes. Contrarians, he says, are folks who simply do the opposite of what everybody is doing -- just to be contrary.
Torray said that while he may, indeed, move against the tide, it is only because he sees things differently than many of his colleagues.
For example, take the case of MNC Financial of Baltimore, whose stock has slid dramatically in recent months.
MNC Financial Inc., the parent of Maryland National Bank, American Security Bank and Equitable Bank, was once a powerhouse in local banking circles. But it has been battered by the now-familiar chain of events in which a collapsing commercial real estate market has caused builders to default on their loans and, in turn, produced huge losses for the bank.
As might have been predicted, the unending stream of bad news frightened many individuals and institutions that owned MNC's 85.5 million shares and set off waves of selling.
"There appears to be an institutional selling panic in these bank stocks," Torray observed.
In the panic, MNC shares, which sold for $22.13 on Jan. 1, recently fell as low as $3.88, a drop of 82.5 percent.
Enter Bob Torray.
He began buying MNC shares at about $8 or $9 and at last count, he owned 538,800 shares at an average price of $8.11.
Why, you may ask, would Torray be buying MNC stock when everybody else is selling?
The basic answer is that Torray believes in buying stocks when they are extremely depressed and selling them when they begin to rise. Torray seems happiest when a stock is so battered and so shrouded in gloom that all the buyers have disappeared and trading has dried up.
If Torray thinks a company is fundamentally sound and not in danger of collapsing, he will buy its stock and wait. If and when the stock recovers, Torray will be one of the few investors with a large supply of shares that he can sell into rising demand.
"Buying things that are depressed is the most certain way of getting a reasonable result with a fairly low risk," Torray said.
Until last summer, Torray kept about 50 percent of his money in cash investments. But as the market dropped, Torray began to buy. He bought not only MNC but also about 20 other bank stocks, investing about $70 million. His purchases included Chase Manhattan Corp., Chemical Banking Corp. and Bank of Boston Corp.
Torray also has invested about $45 million in media stocks, which have dropped sharply in recent months. He bought shares in Dow Jones & Co. (the Wall Street Journal), the New York Times Co., Affiliated Publications Inc. (the Boston Globe), Gannett Co. (USA Today), and others.
Speaking of the media stocks, Torray said, "My sense is that when the clouds part and the environment brightens, this is one of the first groups of securities that the institutional investors will want to get into."
Knowing when to buy is difficult.
"Precisely at the time when things generally make sense as an investment is exactly the time when the decision is the toughest," he said.
Torray is quick to admit that his strategy has its risks. The primary risk, of course, is that the price of an even badly depressed stock can drop further. As in the case of MNC, his average cost was $8.11 a share, yet the stock closed Friday at $4.50.
"I'm repeatedly astounded at how far down things can go -- from a price at which your initial analysis suggests you're buying a bargain," he said.
The second risk is that a stock might not come back at all if the company goes under.
In fact, Torray still smarts from the experience of the mid-1980s when he applied his investment theories to the energy area -- investing a big chunk of his money in depressed energy stocks.
In time, many of the energy stocks came back but it was a rough trip. Several of the small companies went under and the episode hurt his performance, cost him clients and generated unfavorable publicity.
In 1986, Torray's total portfolio -- stock and bonds and other investments -- lost 3.35 percent while the Standard & Poor's 500 stock average was rising 18.7 percent.
Torray is philosophical about his mistakes.
"I don't think you ever learn anything when everything you do goes right. Unfortunately, the learning process is derived on someone else's money."
Overall, since he started his business in 1972, Torray's total portfolio has shown an annualized gain of 13.2 percent, compared to 10.5 percent for the Standard & Poor's 500.
As for his current strategy, Torray says, "My feeling is that the next year is going to be rough. What we're trying to do here -- whether it is right or wrong -- is to accumulate an inventory that will pay off in 1993, 1994 and 1995. I don't hold out too much hope for a reversal of these trends at the present time. ..."
His objective, he said, is not to lose more than 10 percent this year and not more than five percent next year while continuing to invest in the dozens of stocks on his good-value list. The stocks on that list, he said, have dropped an average of 67 percent from their highs of the past five years.
Obviously, patience is one of the prerequisites of Torray's strategy -- patience not only on his part but on the part of his clients. Among those clients are Rockwell International Corp., American Electric Power Co., Martin Marietta Corp., Amalgamated Transit Union, Fairfax County and the American Association of Retired Persons.
Indeed, patience can be a powerful tool. For unless there is some economic doomsday ahead, history tells us that markets and share prices inevitably rebound.
However, Torray believes, the market climate could worsen before it gets better. After the 1987 market crash, Torray noted, the big blue chip stocks recovered and, until recently, did fairly well, while serving as a safe haven for U.S. institutional investors, including U.S. mutual funds, and foreign investors.
By comparison, smaller stocks have fared much worse, he said.
What Torray fears, he said, is "the potential for big-name stocks to catch up with the depressed level of the little ones."
This could happen, he theorizes, if a deep recession were to squeeze Americans hard enough to make them withdraw their mutual fund investments. That could force the funds to sell their blue-chip stocks and that could sink the market even more.
A student of falling markets, Torray finds it fascinating to compare prices today with the prices that stocks registered after the October 1987 market crash.
As recently as Sept. 30, the S&P 500 was 36 percent above the low set after the 1987 crash.
But that was not the whole story, especially when one looks at the 95 industry groups that make up the S&P 500.
Twenty-one groups, including hotels, computers, leisure products, office equipment and, of course, financial companies, were below their 1987 post-crash prices.
Another dozen industries, including chemicals, insurance, health care and autos, were 1 percent to 10 percent above their post-crash lows. So, 34 of the 95 groups clearly were underwater or close to it.
For Bob Torray, that list was a clear road map to where he could find the bargain stocks he likes so well.