To find good investments, look at good businesses.
Such a plain, down-home philosophy could have taken mutual fund investors a long way over the past 20 years -- particularly if it steered them toward funds specializing in health care and financial stocks.
Suppose around the middle of 1985 you put half of your risk capital in a sector fund focusing on health care stocks and the other half in a financial services fund.
You knew you were taking some extra risk by going with sector funds instead of more broadly diversified portfolios. Sure enough, along came the credit crunch of 1990 that drove the shares of some big bank stocks lower than your shoe size. In 1992 and 1993, many health care stocks went into a similar swoon as the United States considered sweeping changes in health policy.
You didn't let these jolts rattle you. You held onto your fund shares, reasoning that medicine and money represented some of the best long-term investment propositions around.
By the middle of 2005, here's how you came out: According to Bloomberg data, a representative health care fund, the Fidelity Select Health Care Portfolio (FSPHX), brought you a 1,693 percent return over those 20 years, which works out to 15.5 percent a year compounded monthly. Its counterpart, the Fidelity Select Financial Services Portfolio (FIDSX), returned 1,192 percent, or 13.6 percent annualized.
Both funds handily beat the Standard & Poor's 500-stock index, which gained 912 percent, or 12.2 percent a year.
This assumes that you were smart enough to pick these particular types of funds from among many other sector funds that turned out to be also-rans. Who knew in 1985, for instance, that interest rates were going to continue in a long, dramatic decline that would enrich many a company in finance?
No, hardly anybody can predict interest rates. But you might have made your choice on simpler grounds -- that among the many businesses operating in the world economy, finance and health care occupied a better long-term position than most.
Health care is a front-and-center human need. Health care improvements don't satiate demand, they expand it. As life expectancies increase through advances in health care, the market for additional health care services promises to keep growing.
As for finance, it benefits from the immense power that capital possesses in an increasingly market-based world economy. The wealthier the world gets, the bigger and more complicated becomes the job of tending to the money.
These bullish arguments for the health and wealth businesses haven't worn out in the past 20 years. If you so choose, you could apply them today just as you did in 1985.
True, fresh obstacles loom large for both. The interest yield on 10-year Treasury notes cannot repeat in the next 20 years its decline from 14 percent in the early 1980s to about 4.25 percent now.
Those health care stalwarts, the big pharmaceutical companies, "face a set of challenges that will depress earnings for several years," said a recent appraisal from money manager U.S. Trust Co. in New York. These range from a paucity of promising new drugs to an unfriendly political climate.
Still, it's no great stretch to imagine bankers, brokers and insurance companies finding ample ways to prosper in a world that no longer features falling interest rates. And the world's people are unlikely to stand for anything that prevents the development of more and better drugs and other health care progress.
Along with the negatives in health care, said Kris Jenner, manager of the $1.4 billion T. Rowe Price Health Sciences Fund (PRHSX), there are big long-term positives. "These include the graying of America, the number of unmet diseases where good therapies don't exist, and the tremendous scientific advances that should ultimately lead to more efficacious and safer drugs," Jenner said in a T. Rowe Price newsletter.
"Those three factors, in conjunction with the tremendous desire to live longer and have a higher quality of life, are the foundation of my belief that health care will remain a strong growth opportunity in the future," Jenner concluded.