SUNDAY, AUGUST 1, 2010 PERSONAL FINANCE
A top fund manager explains how he chooses investments
by Manuel Schiffres J
oel Tillinghast is arguably the least-celebrated superstar in the fund business. Fidelity Low-Priced Stock, which he has run since December 1989, is the
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third-best-performing fund over the past 20 years (with an annualized return through May 31 of 14 percent). The unusual fund, which mainly buys stocks that trade for less than $35, is No. 1 among diversified funds over that period. Because the reserved Tillinghast, 52, rarely gives interviews, the public doesn’t often get a chance to take his measure beyond the results of his $29 billion fund. We recently chatted at his office in Boston. Below is an edited version of the interview.
Given that your fund has some 30 percent of its assets overseas, is the turmoil in Europe affecting the way you
run it?
The biggest effect is on the European small-cap stocks the fund owns. We have, for
example, a Greek toy retailer called Jumbo. The problems in Greece have hit the stock and probably reduced traffic in Jumbo’s stores, even though they offer attractive value to their customers. We also own Next, a British clothing retailer.With the pound sterling weak and with a lot of Next’s apparel imported, there’s a profit-margin squeeze. It’s not a Next-specific problem. It’s a problem for any company that sells goods in sterling or the euro and pays for them in dollars because their costs, in local currency terms, go up. What makes a perfect stock for
you? A company that sells proprietary
products — or at least something that is better than what competitors offer —and has a good management team, a strong balance sheet with manageable debt and positive free cash flow, and some feature of the business, such as recurring purchases, that allows me to see a little bit into the future. For example, people are not going to stop buying chewing gum. They’re not going to
stop buying 80 percent of the stuff they buy at drugstores. Or perhaps the company has a backlog of business, something you might see at engineering and construction companies.
And where does price fit into the
equation? I want companies that are selling for less than their fair value. I want a low price-earnings ratio, low price-to-book value and low price to free cash flow. Take us through the analysis of a stock that you bought in the past year or so. I had already held, but added to my position in, Gildan Activewear. It’s a Canadian firm that sells T-shirts for screen printing. So say you want 1,000 shirts that say “Buy Fidelity Contrafund.” Gildan can produce the blanks that a screen printer buys. Gildan also produces other active wear, fleece items and socks. It has been gaining a lot of market share and clearly has been able to produce at lower costs than companies such as Fruit of the Loom, Russell and others.
About 15 months ago, while the economy was in recession, Gildan’s shipments of T-shirts fell something like 25 percent, an astronomical figure for what I think of as a relatively stable item, and the stock crumpled to about $6. I surmised that there was an incredible amount of destocking going on; screen printers were using up every T-shirt they had, but I thought the underlying demand for T-shirts couldn’t possibly be down that much and that consumers were continuing to buy them. The company had earned more than $1 a share for three consecutive years, had a strong balance sheet, had been consistently gaining market share and had grown very well over time by adding new products, such as socks. I didn’t think this company was about to fail. The stock, meanwhile, was selling for about five times Gildan’s previous peak earnings, which I thought it would easily exceed in a normal environment. The stock has recovered to about $28, and I have lightened up my position a little for
Umbrella policy repels lawsuits
by Kimberly Lankford
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TIM GRAJEK FOR THE WASHINGTON POST
valuation reasons. Your biggest holding at last
report was UnitedHealth Group. What’s the case? What President Obama and a lot of others want from health-care reform is extension of coverage. If you extend coverage, some health insurers will get an opportunity to cover more people, and that means an opportunity to increase revenues, although profit margins will not be very high. The big problem is how to pay for all of this. Costs are high, and they continue to rise above the general inflation rate, so there’s a need to control costs and to control fraud. I think managed care can serve a useful role in that. Yes, profit margins will be under pressure due to things like mandated loss ratios — a requirement to pay out a certain percentage of premium revenues to cover medical costs. But UnitedHealth is selling for less than ten times earnings and less than ten times free cash flow, and it has a decent balance sheet and the largest network of health-care providers in the country. What do you look for when you
meet executives? A good business strategy. Honest,
energetic people trying to do something better than the competition. A sane financial strategy. Can you tell dishonest
managements from honest ones? I’ve invested in enough failures
that I can’t claim that. The most flamboyant case was a CEO who came in with a Hawaiian shirt exposing his 60-year-old chest, which was covered with gold chains. Did you invest in his firm? I did not. What are some of the key lessons
you’ve learned over the years? Patience really helps — good things
take time to work out. It’s best to think through what could go wrong before you invest. Good managers produce good results. It’s a highly subjective part of the analysis, but you really do want to identify honest, energetic management. But not executives wearing
Hawaiian shirts. Not unless they’re selling them — and this guy wasn’t. —Kiplinger’s Personal Finance
Maybe it’s retraining that needs retooling Despite joblessness,
worker shortages persist in key fields
by James Ledbetter
Health-care reform or no health-care reform, we don’t have enough doctors in this country. A Harvard economist, writing in the New York Times Magazine, de- clared: “Today, the shortage of doctors in the United States is worse than at any time in the last fifty years. This is not to say that the total number of doctors has decreased; actually, the total is now higher than ever. I speak of the in- creased gap between our doctors and our to- tal population.” It’s an odd finding to contemplate — that at a time of massive unem- ployment, a critical, well-paying field such as medicine should go wanting for workers. Perhaps od- der still: The words cited above were written when the country was coming out of a recession and the economy was actually grow- ing. I’m not, however, referring to 2010, but to 1950. The shortage of doctors — and nurses, engineers and other pro- fessionals — is a persistent peren- nial of the American economy, which seems incongruous with high unemployment numbers. If we’ve had a shortage of doctors since 1950 or 1900 or whenever, then why don’t more unemployed people take up the stethoscope? These issues were hinted at in a recent Peter Goodman article in the New York Times on job re- training and an earlier article in USA Today. Both papers, though, overlooked some broader points that make the inadequacy more urgent — and more confounding. The basic problem: Some of the stubbornly high unemployment America faces today — 14.6 mil- lion officially unemployed, with millions more jobless who don’t meet the technical definition — is cyclical, meaning that hard times wiped out jobs that will presum- ably be restored when conditions improve. But much of it is also structural, so there is a dramatic mismatch between the kinds of jobs that millions of Americans have historically held and the kinds of jobs that we generate now and will generate in the future.
Liberals (and others) have tra- ditionally addressed this problem by advocating worker retraining. Not surprisingly, it is a corner- stone of the Obama administra- tion’s jobs policy. In 2009, the De- partment of Labor spent a little more than $4 billion on adult workplace training; about one- fifth of that came from the stimu- lus package. Millions of Amer- icans are undergoing such train- ing every year; those numbers are supplemented by state-run pro- grams such as Michigan’s “No Worker Left Behind.” And what are workers being re-
The Big Money is a financial news and analysis Web site from the Slate Group.
work.
So why doesn’t the training pro- duce its intended results? The Times grabbed the easy answer: “Because there are no jobs.” That might, indeed, be the major rea- son, but before endorsing it, con- sider that it contradicts many things that we think we know. Ac- cording to the U.S. Bureau of La- bor Statistics, the job category that will grow the most over the next decade is nursing; nearly 600,000 new registered nurse po- sitions will be created by 2018, in- creasing the size of the potential nursing workforce by 22 percent. Yet it is hard to see how Amer- ica will be able to fill those jobs, since apparently we can’t fill the nursing jobs we have now. Various health-care associations estimate that there are 135,000 nursing va- cancies today. Experts place the blame for this
shortage on the burdens created by the aging baby-boom genera- tion, but that is only part of the story. As indicated in the 1950 arti- cle, America has had a shortage of nurses for a half-century or more. At the same time, USA Today last month cited a “rare glut of nurses” as a reason that recent nursing grads can’t find work. Is it possible to have a shortage and a glut at the same time? I’m unable to locate a single ex-
planation for why worker training isn’t more effective, but here are some of the theories out there: The shortages aren’t real. When medical organizations
trained to do? It seems that a sig- nificant portion of the money is aligned with President Obama’s political goals, including “green jobs” and health-care indus- try jobs. But the Times article makes clear that current job retraining is inadequate, and hints that it may never really
speak of shortages, they are meas- uring current workforce levels against a theoretical number per capita. Just because health profes- sionals say they need more em- ployees doesn’t mean that the market has the capacity to sup- port them. This would explain why we appear to have both short- ages and gluts, and why retrained workers don’t always find posi- tions.
Unemployed people aren’t ca- pable enough to be retrained. With approximately 17 million people out of work, this is true for a fraction. Some conservative ob- servers have argued that nearly all unemployment can be blamed on personal shortcomings. This mis- anthropic theory may provide emotional satisfaction for some, but it’s clearly too unverifiable to have real analytical value. There’s a geography gap. Economists have noted that while capital and physical goods are eas- ily moved from stagnant to pro- ductive places, people are much less so. Americans relocate from town to town more readily than most nationalities. But in the
We have homeowners and auto insurance with $300,000 in liability coverage, but someone suggested that we get a $1 million personal-liability
umbrella policy. Why would we need this much coverage?
“As long as you can earn a livelihood, you should have an umbrella liability policy,” says Mitch Freedman, a certified public
accountant and personal financial specialist in Westlake Village, Calif. He recommends that everyone have at least a
$1 million umbrella policy to provide liability coverage beyond the limits of their auto- and homeowners-insurance policies — even if they have less than $1 million in assets. That’s because in the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. The policy can also pay for legal costs, which can quickly add up even if you win your case. It’s an inexpensive way to protect your finances from devastating lawsuits. Freedman recommends getting more than
$1 million in umbrella coverage if you earn more than $100,000 a year or have more than $1 million in assets. “Our clients get liability-insurance limits that are at least as much as their net worth,” he says. Daniel Morris, a CPA in San Jose, recommends at least a $2 million umbrella policy for most people, or a policy for $3 million to $5 million if you have rental property. The price varies by risk, but someone with one house and two cars would generally pay about $200 a year for the first $1 million in umbrella coverage and another $100 for the next $1 million, says Bill Howard, an independent insurance agent in Alexandria. Umbrella policies are inexpensive because they kick in only after you’ve exhausted your liability coverage under your auto or homeowners policy. Most insurers first require you to have $300,000 or $500,000 in liability coverage on your car and home.
If you’re looking for extra cash to afford the umbrella policy, Howard recommends raising your auto- and homeowners-insurance deductibles. You can use the premium savings to boost your coverage by hundreds of thousands — or millions — of dollars. —Kiplinger’s Personal Finance
More from Kiplinger Go to
www.kiplinger.com for more analysis.
KLMNO
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short term, it’s not easy for unem- ployed people to move to where jobs might be. There’s a gender gap. Ration-
ally, any well-paying job should be attractive to any needy worker. But reality is usually messier. As noted above, the nation has for decades suffered from a shortage of nurses. Maybe today plenty of young men are willing to enter nursing as a career. But do men in their 40s and 50s really want to put in the training to switch to a historically female job? And if gender issues keep otherwise qualified people from taking well- paying jobs, it may be a two-way street: Engineering, IT and soft- ware development are stubbornly male-dominated fields.
Our training is really lousy.
This seems like an obvious culprit, except that all the way down the line, the incentives appear intact. Governments and business lead- ers want unemployment to go down; community colleges want federal grants to provide work- place training; companies want skilled employees; and unem- ployed workers want jobs that pay
well. So the problem shouldn’t be an inability to teach skills. But maybe it is, and if so, that means that our decades-long reli- ance on worker retraining is mis- placed. And yet it seems irrespon- sible to give up on the idea of teaching adults new skills. Per-
GREGORY SMITH/ASSOCIATED PRESS
Worker shortages are perennial in the medical field, despite billions spent by federal and state governments to retrain the unemployed.
haps we need a thorough revamp- ing of what we are teaching. But who will retrain the retrainers? —The Big Money
Ledbetter is editor of The Big Money and of “The Great Depression: A Diary.”
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