Words of Wisdom from Kenneth Fisher

Stocks to Survive On
Ken Fisher (10.02.08)

Though I walk through the valley of the shadow of death I fear no evil. Seems that almost everyone else does, though. Most investors need their investments to last them a long, long time, yet they're acting like the next few months are everything. The shadow of death is an illusion. In the long term equities always do well. They will now, too, even if they fall further first.

My firm has 25,000 high-net-worth clients. A typical account would be that of a couple aged 65 and 60 who need their money to last the rest of their lives, 25 to 35 years. They have a long time to go, and they accomplish nothing by getting in and out of the market from fear now. Yet such folks are so overloaded by the doom and gloom they hear around them that many must be re-reminded of their primary purpose and long-term needs.

If you have a time horizon that long, even a 9% minicrash, such as we had on Sept. 29, is something you can take in stride. Over long periods equities have always done well compared with other liquid alternatives. Even if you have a shorter time horizon, such as a decade, you know that stocks are more likely than not to recover from a market decline.

I hear 60-year-olds say nonsense like, "I won't be able to retire because of the market's downturn." That's ridiculous. History has seen many similar bear markets. Yet folks have kept retiring. The next bull market more than makes up for what we lost in the last decline. The average bull market, of which there have been ten since World War II, takes stock up 150% before the cycle turns. The average 12-month rebound from the bottom is 36%. No, I don't know where the bottom is. I just know that stocks don't go down and stay down.

We can argue about where stocks are headed, and there are always two sides to the argument. But put that aside. Think longer. Unless you are in your late 80s and were an adult as World War II ended, stocks are cheaper, adjusted for tax rates and interest rates, than they've been at any time in your adult life. That's a simply stunning statement looking forward. You're walking forward. Stop myopically looking at your feet and focus on the horizon. Just buy great franchises at cheap prices now and be patient. Here are some long-horizon stocks I like now.

Looking past all the immediate hysteria, focusing several years ahead, it's hard for me to see cheaper oil. Hence simple, strong holdings like Norway's StatoilHydro (24, STO) seem logical. As a vertically integrated oil and gas firm with $220 a share of proven reserves, this $89 billion (in revenue) business will keep growing steadily. It sells for ten times likely earnings in 2009 and one times revenue. It offers a 3.75% dividend yield.

The world believes McCain or Obama, and Congress, will beat up on the drug stocks. Hence they sell like nongrowth stocks. I suspect that, as happened when the Clintons were terrorizing the health care industry, the antipharma movement will generate more rhetoric than action. How can Congress curb drug companies without hurting the baby boomers who need their products?

You don't need Viagra to get excited about Pfizer. It's the world's largest drug producer, with such blockbusters as Lipitor for cholesterol, Celebrex for arthritis and Lyrica for epilepsy. As these come off patent, Pfizer will be drawing new revenue from Sutent for cancer and Chantix to help smokers stop. Pfizer sells at less than ten times likely 2009 earnings, with a 7% dividend yield.

Another buy is Bank of America. Built on acquisition and consolidation, Bank of America is the world's largest consumer bank. It has used the credit meltdown to make smart and cheap acquisitions of Countrywide, to make it the largest mortgage lender, and now of Merrill Lynch, to give it the largest securities distribution force. Having made fewer mistakes than its peers, it's marvelously positioned looking a few years out, yet it sells at ten times next year's earnings, with a 7.6% dividend yield.

Celanese, though much smaller, is a globally diversified second-tier chemical company. Its chemicals are used to make industrial colorants, paints, adhesives and complex polymers for most basic industries. It's not exciting, but it's fundamental and cheap. Its markets won't go away. If you buy now at 70% of revenue and six times 2008 earnings, you've got to win a few years out.

Carpetmaker Mohawk Industries has seen its stock sink for four years because of the collapse in housing. But the much larger nonresidential construction market should pick up the slack. It sells at 60% of revenue and 15 times depressed current earnings.