Beating the Street (19 page)

Throughout 1984, my top 10 positions remained more or less the same, as I stuck to the buy-and-hold strategy, as opposed to my earlier practice of frequent trading. One month, Ford would be number one, followed by Chrysler and then Volvo; another month, Volvo would be number one, followed by Chrysler and then Ford. I also maintained a large position in the Treasury bonds I'd bought in 1983, which continued to increase in value as interest rates declined.

At the climax of my adventure with the carmakers, there were five auto companies in my top 10, including the three regulars plus Subaru and Honda, and for a brief moment even General Motors made the list. As millions of Americans returned to the showrooms, even that mediocre operation was earning lots of money.

Speaking of money, another $1 billion had come into Magellan in 1984. It took me a while to get used to the extra zero on the buy and sell orders I sent to the trading desks. Also, my morning instructions to the traders took longer and longer to relate.

My decisions as to where to go on vacation were based primarily on time zones and the locations of phone booths. Austria was a good spot because it was late afternoon there before our markets opened, giving me the whole day to ski before I phoned the trading desk. My favorite ski place in the U.S. was Balsam's in Dixville Notch, New Hampshire, because it had a phone at the bottom of the lift. I'd ski down, dial the traders, get through a page or so of buys and sells, take the lift up, and contemplate my next move.

In my first five years I didn't travel much, but in the second five I was frequently on the road. Most of the trips were organized around investment seminars held in every region of the country. These were like cram courses in which I could hear from dozens of companies in two or three days.

Montgomery Securities had a conference in San Francisco in September. Hambrecht & Quist had one for smaller technology companies in May. Every April, there was a Robinson-Humphrey conference in Atlanta for companies from the Southeast. Dain, Bosworth had a similar gathering in Minneapolis for companies in the Midwest; Prescott, Ball, and Turben had one in the fall in Cleveland; Alex. Brown had one in Baltimore; and Adams, Harkness, & Hill had one in Boston in August. Howard Weil had two separate conferences in Louisiana, one for energy producers and another for energy service companies. There were theme conferences that dealt exclusively with biotech companies, restaurants, cable companies, and banks.

The investment seminar was the greatest laborsaving device for fund managers ever invented. With two or three presentations going on at once, it was always hard to decide which to attend. Sometimes Fidelity sent a delegation so we had a representative at each meeting. Once in a while, a story would be so good that I'd leave the room before the talk was over to call in a buy order from the lobby.

In my spare time, I'd rent a car or take a cab and drive off to visit companies that weren't involved in the conference, but whose headquarters were located in the area. I got to know cities not by their familiar landmarks, but by who in the
Fortune
500 had taken up a residence. My tourist attractions were MCI and Fannie Mae in Washington; Chevron and BankAmerica in San Francisco; Litton and Unocal in Los Angeles; Coca-Cola and Turner Broadcasting in Atlanta; TRW, National City Bank, and Eaton in Cleveland.

With the exception of John Templeton, I was the first domestic fund manager to invest heavily in foreign stocks. Templeton's fund was a global version of Magellan. Whereas I might have 10–20 percent of the money invested in foreign stocks, Templeton invested most of his money abroad.

My own global buying began in earnest in 1984. Nobody had devised a system to get reliable, up-to-the-minute quotes of companies traded on many of the foreign exchanges, so every night my traders had to call Stockholm, London, Toyko, and Paris to piece together the information I needed the following day. This ran up the phone bill, but it was worth it. By 1986, we had a foreign department.

With the pile of cash I now had to invest, I was almost forced to turn to foreign stocks, particularly in Europe. With a big fund, I needed to find big companies that would make big moves, and Europe has a higher percentage of big companies than we do. Most of these were not closely followed. The bad news was that foreign firms were not held to the same standards of reporting and accounting as U.S. firms, and therefore were mysterious and harder to analyze. The good news was that if you did your own homework, you'd occasionally come up with a Volvo.

My most successful research trip ever began in mid-September 1985, and ended three weeks and 23 companies later. This was far more exhausting—and useful—than an earlier jaunt I'd taken as a young Fidelity analyst in the fall of 1973, when I visited Dow Chemical plants and was wined and dined across the continent. What I learned then was that if you've seen one Dow Chemical plant you've seen them all.

This time around, I saw three companies in Boston on a Friday, then boarded a plane that same afternoon and arrived in Sweden on Saturday. Things got off to a bad start when the airline lost my luggage. It was Sabena, a stock I decided I was glad I didn't own.

Sweden is a formal country. In two days I was scheduled to meet several of its captains of industry, and I wondered how they'd react when I walked into their offices wearing the same corduroy pants, crumpled sport coat, and sneakers I'd worn in the plane. I began preparing for this cultural disaster as soon as I found out that (1) Sabena had no idea what happened to my suitcase and (2) all the stores in Stockholm were closed.

Resigning myself to the worst, I was picked up at the airport by Birgitta Drogell, the sister of friends of ours, the Sweetlands. I'd made arrangements to stay with her and her family in Sigtuna, a suburb of Stockholm. Miraculously, her Swedish husband, Ingemar, had my exact measurements, right down to the shoe size, and soon I was outfitted in a proper Swedish suit.

With my white hair and my light complexion, all it took was a native costume to convince everybody that I was Swedish. Whenever I walked out onto the street, people would ask me for directions—or at least I assume that's what they were asking. Since I don't speak Swedish, I couldn't be certain.

The luggage was never found, and I'm sure I looked the better for it. On Monday, dressed in my Swedish togs, I went to see the
CEO at Esselte, a company that sells office equipment, including those organizing trays that are found in desk drawers. I also saw ASEA, a high-quality conglomerate that is Sweden's answer to General Electric; and Alfa Laval, which is involved in a curious combination of enterprises—milking machines and biogenetics. That night, I studied for my next day's sessions at Electrolux, a vacuum cleaner and appliance giant whose president was Sweden's answer to Lee Iacocca; and Aga, which makes a profit out of thin air.

In theory, it seems senseless to be investing in a company that sells gases taken from the air, because these are not exactly rare commodities, but I learned from Aga that there is a great demand for oxygen in the steel industry and for nitrogen in the fast-food industry and only a few people have the machinery for mining the atmosphere. Since the raw materials cost zero, these few people (Aga included) are doing very well.

As soon as I'd finished with Aga, I drove over to Ericsson, a telephone equipment company similar to our Western Electric. In the afternoon, I saw Skandia, which sounds like a furniture outlet but actually is a huge insurance firm. George Noble of our Overseas Fund had put me on to Skandia, which nobody else seemed to be following.

With U.S. insurance companies, the rates go up months before the earnings start to show any improvement. These stocks are like cyclicals. If you buy them when the rates first begin to rise, you can make a lot of money. It's not uncommon for an insurance stock to double after a rate increase and double again on the higher earnings that result from the rate increase.

I assumed that this same pattern existed in Sweden. From what I was told, a rate increase already had been approved, which should have boosted the price of Skandia's stock, but it hadn't. Swedish investors ignored the good news that was sure to follow and focused only on the current earnings, which were lousy. This was a stock-picker's dream.

I rubbed my eyes and took a closer look at the company to see if there was something terrible there I was missing. Was there too much debt? Had Skandia invested half its assets in junk bonds or a Campeau real estate deal? Was the company insuring heart bypasses and breast implants, or other risky ventures that could have resulted in millions in unforeseen claims? The answer to all these questions was no. This was a conservative insurer that wrote simple property/
casualty policies and was guaranteed to double its earnings. The stock quadrupled in 18 months.

There was no time to take sauna baths or sail the fjords, because after visiting these seven companies in two days, I had to get to Volvo on the other side of the country. To prepare for the side trip, I sought out the lone Swedish financial analyst, who worked in a brokerage firm founded by one of the Carnegies. The descendants of this Carnegie have been freezing in obscurity in Scandinavia, while the luckier branch of the family got rich in America.

This lone analyst had never visited Volvo, the biggest company in the country and the Swedish equivalent to the entire U.S. auto sector, plus several other businesses thrown in. I made up for his oversight by driving to Göteborg with Carolyn, who by now had joined me on the trip.

In Göteborg, the Volvo people were so excited that an investor would bother to ask for an interview that I got to see the president, the executive vice-president, the head of the truck division, and the treasurer. After that, they gave me the grand tour of the plant.

Volvo was being squeezed by its unions, but that was a distant worry. In the short term, the stock price was $34 and the company had $34 per share in cash, so when you bought this stock you were getting the auto business, the assembly plants, and the many Volvo subsidiaries (food companies, drug companies, energy companies, etc.) for nothing. In the U.S., you might find a giveaway like this in a small company that's been overlooked by analysts, but you could search your whole life and never come across a General Electric or Philip Morris priced this low. That's the reason I'd gone to Europe.

Some people think there's a cultural bias in some foreign markets that causes the stocks there to be overvalued or undervalued forever. Until the recent drop in the Japanese market, we read a great deal about how the Japanese had an inbred tolerance for overpriced equities. Obviously, that wasn't the case. In Sweden, it seemed that investors were underestimating the worth of Volvo, Skandia, and many other firms, but I had no doubt that eventually the true value would become apparent, even to the unimpressed Swedes.

Carolyn and I left Göteborg and drove to Oslo, where I saw Norsk Data and Norsk Hydro. Norsk Data was the Hewlett-Packard of Norway, an exciting company in an exciting industry that had not yet lost its way. Norsk Hydro was an exciting company involved in
a variety of unexciting industries—hydroelectric power, magnesium, aluminum, and fertilizer plants. I saw it as a cyclical company and a great energy play at the same time. Its oil and gas fields had more than three times the reserve life of Texaco's reserves, or Exxon's, or the reserves of any other oil giant. Recently, the stock price fell by half, which makes Norsk Hydro a bargain once again.

As I was doing my research, Carolyn was busy playing the currency markets. European finance ministers from the Group of Seven had just readjusted the currency rates and the value of the dollar had dropped 10 percent overnight. The proprietor of a fur store in Oslo must have forgotten to read the newspapers, because the next morning he allowed Carolyn to pay for a fox coat with American Express Travelers Cheques—a 10 percent discount from the price a day earlier.

From Oslo, we took the train to Bergen, passing through beautiful farmland, climbing into the mountains and then down to this charming coastal town. There wasn't much time to take in this charm, because early the following morning we flew to Frankfurt, where I saw the directors of Deutsche Bank, Hoechst, and Dresdner. The next day we went to Düsseldorf, where I saw a German manufacturer, Klöckner-Humboldt-Deutz. I also saw Bayer, the former manufacturer of aspirin, and now a chemical and drug conglomerate.

In a train station somewhere, I handed two marks to a nice German fellow who had volunteered to help with our luggage, thinking he was a porter. He turned out to be a businessman, and I had embarrassed myself by responding to his noble gesture with a tip. With my nose stuck in the balance sheets, I missed some of the cultural nuances and most of the scenery, but I did notice that German men seem to call each other Doctor no matter what, and never their version of Sam or Joe.

We went down the Rhine, which flows from south to north, to reach Cologne, where I visited more companies, and from there we headed to Baden-Baden, where we rented another car just so I could take the wheel on the German autobahn. One of my goals in life besides kissing the Blarney stone was driving the autobahn. Both turned out to be equally terrifying experiences.

To kiss the Blarney stone, you wiggle on your back across what must be a 100-foot drop, and to drive the autobahn you might as well be entered in the Indianapolis 500. I was breezing along at more than 100 mph in my rented car with Carolyn taking a picture of the
speedometer to prove it, and then I got my courage up to pass the car in front of me. I moved out into the left lane and sped up to maybe 120, roughly 50 percent faster than I'd traveled in a car in my adult life. Everything was OK until I looked into the rearview mirror. This leads us to Peter's Principle #10:

Never look back when you're driving on the autobahn.

Three inches from my rear bumper and also going 120 mph was the front bumper of somebody else's Mercedes. The two of us were so close that I could see the cuticles on the other driver's fingernails. He had a good manicurist. I figured if I took my foot off the accelerator even for a second, he would be sitting in our front seat with the two of us, so I gritted my teeth and accelerated enough to pass the car to the right of me and escape into the so-called slow lane. There, I proceeded at a reasonable 100 mph.