Nationally known investment authority William E. Donoghue was meeting with subscribers of his money market newsletter in Boston on Oct. 19 and hadn't heard that the stock market had plunged a record 508 points until several television news crews rushed into the room and pressed him to provide an instant analysis.
The 45-year-old mutual fund guru, a resident of Corona del Mar since July, repeated the same advice he had been offering for months: Investors need to diversify, but they should not abandon stocks altogether.
Donoghue publishes a money market fund newsletter for institutional investors and a mutual fund newsletter for individual investors. He has written five best-selling financial books, speaks at dozens of investment seminars annually and appears weekly on the Financial News Network as mutual fund commentator. In his spare time, Donoghue collects fine wines and is writing a book on the subject.
As the stock market continued to careen last week, Times Staff Writer John Tighe caught up with Donoghue in San Francisco as he prepared to speak before a group of corporate pension fund managers. In a freewheeling interview, Donoghue assessed the damage caused by the stock market collapse and offered his advice on post-crash investment strategies.
Question: This market has been the most volatile in history, yet you're recommending stock market mutual funds?
Answer: Absolutely. If I were a long-term, informed investor I would have to look at today's prices of stocks and say, "These aren't bad."
If you liked stocks two months ago, you gotta love 'em at 65 cents on the dollar.
Q: But what if the market's collapse continues?
A: This has been a correction. So at some point, the market will be correct--meaning it will be correctly priced. We just had the fastest bear market in history.
At this point we're approaching a bottom. If we don't buy stocks, the rest of the world will. The prices of U.S. stocks have got to be bargains now or very soon.
One would have to look at the prices of stocks and say that from here, the major trend is likely to be up. But it's going to be volatile. It's going to be a very difficult market to invest in.
If the market were to go up 300 points, people would sell. They wouldn't stay in. They wouldn't say, this is a trend. What we're going to have is a lot of volatility. But I think the trend will be gradually up.
Q: How can anyone know that the market has bottomed?
A: Well I don't think that anyone will know exactly when it has bottomed.
When someone gets out at the top or anywhere near there, they are rarely satisfied with their timing, so no one will be satisfied with their timing in getting in at the bottom of this market.
This market is not going to rebound dramatically in a very short time. It's going to move up slowly and be extremely volatile. A new investor should learn from that, look to where the trends are and where the best performing no-load stock funds are, and get into them.
An investor who cannot deal with that risk should probably sit on the sidelines in a money market mutual fund.
Q: If it's so scary, why would anyone want to be in the stock market?
A: Because if the trend is up, that's where you want to be. You want to be earning long-term capital gains. For the conservative investor, it might be wise to buy in the next couple of days and then take a two-month vacation. Don't even watch it for a while.
Q: Meanwhile, what's going to happen to the economy?
A: A lot of people who didn't even lose money in the markets are scared today. They're demoralized; their confidence has been bruised. I don't expect this to be a very exciting Christmas for retailers.
I don't expect people to be enthusiastically buying cars over the next year or so. They're not buying cars right now. They weren't buying cars last month. And I wouldn't think that companies would be planning major expansions.
Q: What's going to happen to small companies, particularly in Orange County?
A: I think the smaller companies are going to have a rougher time. Certainly as money goes back into this market, it's going into blue chips.
I would not be real optimistic about retailers. We don't have a lot of heavy capital goods industries in Orange County, with the exception of the computer industry, and who knows what's going to happen there.
You realize that what has happened in the past two weeks is that all the gains that have come since the first of the year have been eliminated. We're back to where we were a year ago. We have a weaker economy. We have higher interest rates. We have bruised consumer confidence. And we have a volatile market.
Q: Could those things take us into a recession?
A: They run a very high risk of pushing us into a recession . . . a 40% or 50% probability.
Q: But you don't see any reason to run for cover?
A: I don't think this is time to have your gardener be your banker--to bury your money in your backyard. This is a time to look at the fact that interest rates are slowly rising.