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David Winters: Stock Market Isn't Out of the Woods Yet

David Winters

While the stock market has continued to rally
against all expectations, and some bulls have come out href="">declaring the worst is over,
veteran value fund manager David Winters — who started the $950
million Wintergreen world stock fund four years ago after two decades working
with the legendary Michael Price at Mutual Series funds — says a
recovery is still a ways off. According to Winters, with key barometers like
retail sales and employment figures still in the dumps, it may take another
shot of stimulus before the U.S. economy gets healthy again. In the meantime,
he's set aside a good chunk of cash for the next sell-off. Winters,
whose Mutual Discovery Fund racked up 10 percent annual returns from 2000 until
he left in 2005, compared to a loss of 1 percent for the average world stock
fund, now is focused on identifying companies that will emerge from the crisis
stronger and more competitive than before. "We see the future of the
world's economic growth in the Far East," says Winters. "The
U.S. is a mature economy and the youngsters are in the Far East."

Here he discusses the market’s
recent activity, what you should do with your portfolio now, and why more
economic stimulus may be needed.

What do you think is behind the recent big rally in the stock market?

There was just a sense going into March that the world was
ending. People were so gloomy. When another big collapse didn’t
happen, they had some sense the world wasn’t falling off a cliff
anymore. There was a sense of confidence and relief and people starting to buy
stocks again. That said, I don’t think there has been any really good
news yet.

What did you make of
Monday’s 186-point drop in the Dow?

There was a sell-off in China and bad earnings news out of
Loews, the home improvement company. So much of the money today is on a hair
trigger, either good or bad, and so it’s not a straight rocket ship
upwards. People to a large extent are momentum creatures, so if the news is
good, they buy. And if the news is bad, they sell. In the long run you have to
stay focused on the underlying values of the companies.

You don’t see this market run as indicating the beginning of a

The world effectively had a financial stroke, so it’s
going to take some time for it to regain its health. The U.S. is going to
struggle for quite some time. There’s too much debt and people are
gun-shy for good reason. Businesses are still scared, consumers are scared. For
a true recovery, you have to begin to see unemployment trending up, not down.
You have to see retail sales improving. At the end of the day, we are a
consumer-based economy, and people have been shocked into not wanting to go to
the store.

So where does the market go from here?

We’ve had a huge rally and our view is that it
can’t go straight up — there will
probably be backing and filling on the way back to recovery. I don’t
know how long it will take, but markets have a tendency to be frustrating, and
we’ve had a big move, so there will likely be another big phase of
consolidation or sell-off before things continue.

href="">Market strategist James Paulsen thinks much
of the cash on the sidelines will eventually be put into the market and will keep
the rally going. What do you think?

There is a lot of money on the sidelines and people are
waiting and watching. But it’s hard to know what the trigger will be
for them to come back into the market. Often it’s a consensus where
people all kind of decide at once it’s time to pile into the pool. But
trying to predict that is very hard. There are signs of improvement, but the
idea that it’s going to come roaring back and be wonderful is a
little premature.

How should investors adjust their portfolios given the past few months?

It depends on what you’ve already done. If you
sold stocks in September and October because you couldn’t stand it,
you’ve probably missed out on this recent rally. My only advice is to
own quality companies, think globally, and invest for the long term. That’s
how people have gotten rich over the years. There are relatively few people I
know that have gotten rich trading the stock market. It’s very hard
with the 24-hour news channels out there, because they make people feel
compelled to do something. You can tweak your weightings and allocations, but
focus on owning businesses with improving economics and good management teams
at a good price.

As a value investor, are you still seeing some good buys out there even
after this rally?

The U.S. still has its nuggets of value here and there. A
lot of investors are not thinking like long-term investors. They’re
thinking about selling right now because we had a rally. Berkshire Hathaway ( href="">BRK-A) bounced up
recently, but it was almost $150,000 a share and now trades at $103,000.
Assuming the U.S. gets better at some point, could we see Berkshire go to its
old highs? Yes. Could we see it go down 5 percent? Sure. But you could make a
50 percent return if you’re patient. We’re also still
seeing companies outside the U.S. that are trading at big discounts to what
they should, or could, be worth. We really like Nestle ( href="">NSRGY), the Swiss food
company. Kids will continue to eat chocolate bars, and it’s going to
go up in price over time. They’re also in the pet business, and
people love pets more than they love their relatives. There’s a lot
of upside if you have a long time horizon.

Are there markets or industries you think will recover more quickly?

One theme is that we’re looking at companies
that produce what’s going to be consumed over the medium- to
long-term in the Far East. So we like Richemont ( href="">CFRUY), another Swiss
company that owns Cartier. It’s a great jewelry company, and we think
there will be a recovery in aggregate demand in the Far East. We also like
Jardine Matheson (JMHLY), a Hong
Kong-based conglomerate.

You have 14 percent of your fund’s portfolio in cash. Are you
preparing for another sell-off?

We don’t know what the market is going to do on
a daily basis, so we like to have cash so if securities do come under pressure,
we’re in a position to buy. It’s not unusual to have this
much cash; it was even higher a few months ago but we deployed it when the
markets were terrible. We like to be a buyer when others are sellers.

Are you concerned about inflation?

Despite the lack of pressure on prices right now, we’re
very concerned about inflation. If you look at how much money has been printed,
not only in the U.S. but throughout the Western world, it has historically
resulted in inflation. So we look at companies that have pricing power. For
example, tobacco companies like British American Tobacco ( href="">BTI); people will
continue to smoke, even if prices go higher. We also like Schindler Holdings ( href="">SHLRF), which is an
elevator and escalator company. They do maintenance and elevators and
escalators have to be maintained every year even if prices go up.

What could further delay an economic recovery in the U.S.?

The risk is that there’s some other shoe to drop:
some horrible financial news or a terrible international event. But it’s
hard to know. It may well be the government has to step back in because so much
of the recovery is long-dated in nature. It takes a while to build roads and a
lot of the other things they’re proposing. We don’t have an
economic crystal ball, so we try to focus on businesses that will do well even
if there are bumps along the way. And then have cash ready to be a buyer.

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