3 Strategies for Long-Term Investors

12/07/2011 7:00 am EST

Focus: FUNDS

Robert Auer

Founder, SBAuer Funds, LLC

In Part Two of our interview with Bob Auer, the manager of the Auer Growth Fund (AUERX) shares an underappreciated mid-cap pick, as well as his suggestions for individual investors to maximize their returns over the long haul.

(Part One of this interview ran on Tuesday.)

Kate Stalter: Just a couple more questions for you today, Bob. The names that you’ve mentioned here are mid-caps and I’m sure people don’t know the story behind them that you’ve just shared with us.

Any, smaller, lesser-known names that people might want to take a look at?

Bob Auer: We have a lot of small companies. I’ll give you one that’s very interesting. It’s called Darling, like your honey—Darling Industries (DAR).

This is still a mid-cap stock, but nobody’s probably heard of it, and what they do is they go to restaurants and they collect their grease from their fryers, and they recycle it. Then sometimes, they are able to recycle it into fuel, like for trucks.

Sometimes, they are able to re-purify it and use it for other things. They’re not going to resell it to McDonald’s (MCD), but there’s other uses, maybe to make Fritos or something.

But it’s a huge business, and they are the market leader. Anytime you go out to eat, who’s picking up that grease? They can’t just dump it down the drain.

It’s a very profitable business, and all of a sudden, their growth is starting to explode. Part of it is they are able to charge more. They don’t have a lot of competition, and this stock is only trading at ten times earnings, around $14.

Kate Stalter: It is certainly a glamorous-sounding industry.

Bob Auer: Not very glamorous, but a needed industry, and the stock hasn’t done much.

I’m disappointed that the stock hasn’t done more for us. But year-to-date as we speak, it’s up about 7%, but the stock has been as high as $19.50 back in June, and it’s had this pullback to $14 and it’s a newer stock in our portfolio.

Full disclosure, we bought it a couple weeks ago at about $15.

Kate Stalter: I want to just wrap up today with your suggestions for individual investors: How they should be handling the market volatility? What they should be doing at this point?

Bob Auer: I’ll give three suggestions very quickly. One, as far as the volatility, I think that there are a lot of people that are longer-term investors by their time frame of what they could afford to take.

For example, a 50-year-old man who is still working, not planning to retire for another 15 years, and so they are micro-managing their investments, and so they are trying to have every single thing not lose money, and this is always making money.

If you put your whole portfolio in something that is just all making money, when things turn, then it is all going to probably lose money together, and so to have some things in your portfolio that aren’t doing well, but that make long-term sense.

Right now, I would say the stock market looks like it’s not doing well. So people have probably cut their allocations to just general US stock investing in favor of maybe Treasuries or bonds, which, to me, don’t look very compelling.

So the first thing is: If you do have a long-term time horizon, invest like you have a long-term time horizon and don’t get so worried about well, you went down 10% in one quarter on your whole portfolio, because you have time to make it up.

The second thing that I would—by the way, I was a financial advisor for 21 years at Morgan Stanley (MS), so this is that side coming out, when I see people making mistakes—the second thing is, don’t be so swayed by ratings.

I don’t want to knock the rating services, but it’s been pretty well academically documented that if all you did was chase everything that’s a five-star best rated, you are probably going to underperform the market. So it’s a very backward-looking way.

I’m not saying that there aren’t good five-star funds. By the way, our fund is just a one-star fund, and I would tell you whether it’s a five-star fund or a one-star fund, do your own research on it.

But had our fund been out in ’07 after the track record we had, we probably would have been a five-star right before we were going to start to do poorly. And the best fund that you could have bought at the end of 2007? From ’97 to ’07, that was five-star, top 1%. It is now a two-star fund.

And it’s probably worth taking a look at, because his strategy hasn’t been working, but if things kind of start to change back, his discipline could come back in favor. That’s why they continually underperform the market. They’re always chasing the hot dot.

And then the third thing I’ll add to that is that even the best strategy—so I’ll pick on Warren Buffett—obviously, he’s been a very successful investor; he’s like the second-wealthiest person in the United States, I believe, and that came from investing. So even the best strategy has its down periods and multi-year down periods.

So, if you’re in a good strategy—let’s say you like Warren Buffett and you’re in his fund or his stock, Berkshire Hathaway (BRK.A)—and he has a bad year, don’t abandon it. That’s usually what people do, and so they are constantly underperforming the market.

So, those are my three things: One, have a longer time horizon. If you really do have that luxury, invest like that.

Two, don’t always chase the hot dot; kind of use your own thinking. Don’t just go on the rating services.

Three, if you’re in a good strategy, give it a market cycle. Don’t get out the first hint of trouble; so a market cycle is usually five to six years.

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