Accenting the Potential Positives

www.newsday.com February 16, 2003 Let's play "What If." What if Saddam Hussein cedes power in Iraq without a war? What if the Israel-based intelligence and rumor site Debkafile (debka.com) tells us that Osama bin Laden is confirmed dead or in custody, and then two days later Fox, CNBC, MSNBC and CNN interrupt their programming to breathlessly report the same thing? What if the Commerce Department stuns Wall Street by posting surprisingly strong consumer spending figures? What if Venezuela straightens up and oil prices fall? What if the Bush administration starts pushing an eye-popping reduction - maybe even an elimination - of the payroll tax? Can you imagine the impact any of these unexpected events, or a combination thereof, would have on the Dow and the S&P? It's nice to think so. But as far as Hersh Cohen's concerned, now's the time to embrace the future, for when it comes to investing, ignoring potential positives can be almost as bad as ignoring the negatives. "I'm looking to put money to work," Cohen told me recently. "If you look, there's plenty of opportunities." This is no idle chitchat from an casual online investor. For as co-manager of the $4.1-billion Smith Barney Appreciation fund (part of Citigroup traded SHAPX), and another $2 billion in private accounts and institutional funds, Cohen's thoughts and feelings move markets. In terms of relative bear market performance, he's one of the best in the business, beating S&P 500 since he took over SHAPX in 1979 even after factoring in the maximum load. (The fee when you buy into the fund now stands at 5 percent of assets.) And during that last three years, he's landed in the top 3 percent of large-cap core fund managers. Yet Cohen - who runs the fund with Scott Glasser - recently told me he's not satisfied with his track record. That's because in real terms, he's lost money, posting annualized losses of 15.70 percent during one year and 6.8 percent through three years. "My priority is not losing money," he said. "Personally, I don't feel very happy about it." In donning the hair shirt, Cohen said he underestimated the force of the accounting scandals on fragile investor psychology, manifested in July's selling spree, which saw a record monthly outflow from equity mutal funds of $52.6 billion, according to the Investment Company Institute. So it's with a strong sense of resolve that Cohen says he's looking aggressively for openings in a market that's even thornier than the legendary thickets that ensnared stock pickers in 1962, 1974 and 1987. While others give in to gloom and despair, Cohen sees the market hitting bottom and ratcheting higher. Exactly when this starts happening, he doesn't know. But he says conditions are ripe for a rebound. Americans are still benefiting from the lowest interest rates in decades, a boom in refinancing, stalwart consumer spending and strong fiscal and monetary stimulus. And perhaps most significantly, no one seems to be discounting the possibility of good news. "The easiest thing to do in the near term is almost always the wrong thing," Cohen said, noting that the hard thing now is to step up and allocate money to equities. As such, Cohen is less inclined at this point to sell stocks or sit on the sidelines than to buy stocks for long-term appreciation. He's scouting for good companies - industry dominant, strong balance sheets, dividends, sane management - whose stocks have been unfairly sucked down into today's angst-ridden morass. While this market has left few places to hide, there are some places to run. "If your time horizon is two to six months or a year, you shouldn't be in stocks. But if you ask someone who's been in blue chips over the last 20 years whether the market is a good place to put your money, I think the answer would have to be 'yes.' " Long before the rest of the market figured out 3M Co. makes duct tape, the St. Paul-based behemoth was one of Cohen's largest holdings. "Over the next five years, 3M will be one of the best stocks to own," he said. "I'm high on their profitability and management." Like Warren Buffett, Cohen - with his staid, low-risk approach - was not in vogue back in the late 1990s, when clients were suing brokers for getting them only 9 percent on their money. Today Cohen - a native Midwesterner who lives in Port Washington - looks good. He owns a big block of Buffett's Berkshire Hathaway stock, along with other insurers, including St. Paul Corp. and Chubb. Kimberly Clark and EnCana Corp., the Canadian oil and gas concern, are other favored positions. On the other hand, Cohen is not sanguine on AOL Time Warner, saying he's hanging on to his battered shares, but not adding positions to new accounts. "AOL has become a very controversial company," he said, adding, "I don't like controversial companies." SHAPX also holds a large block of SBC stock, and Cohen said it would be ill-advised for SBC to pursue a deal with DirectTV because it would not enhance SBC's profitability over the long term. Moreover, Cohen, whose fund holds about 1.8million shares of Cablevision Systems Corp., said it would be a bad move for the Bethpage-based company to buy DirectTV. Cablevision "made a lot of mistakes" and as a result is facing enough of a challenge selling assets to raise cash without taking on a new acquisition, he said. "What do I think about Cablevision getting into a deal with Hughes GM?" Cohen said. "Unbelievable!"