YOU ARE HERE: LAT HomeCollections


Letting a Laggard Stock Fund Go Isn't Easy--I Know

December 01, 1996|TOM PETRUNO

Warren Buffett has said that the best time to sell a stock is "never"--that is, assuming the investment does what you expected it to do, or better.

But even master investors like Buffett make mistakes. USAir Group was one of his--one he attempted to exit earlier this year after seven years of dismal performance.

This is a story about one of my mistakes, about a disappointing investment in which I have probably stayed too long, exhibiting what I thought was Buffett-like patience.

I am now, finally, considering selling, perhaps three years too late. I share this experience because many investors may be able to empathize with it, or with elements of it. Buying a stock or stock mutual fund is easy. Selling is far more difficult for most people, and it is the decision many have not yet faced (thanks to the long bull market) but will eventually. Even for long-term investors, there is a time to say goodbye.

For the Record
Los Angeles Times Sunday December 8, 1996 Home Edition Business Part D Page 4 Financial Desk 2 inches; 41 words Type of Material: Correction
Pennsylvania Mutual--Some readers apparently have confused a life insurance company known as Penn Mutual Life with Pennsylvania Mutual Fund, a stock fund that was the subject of the Market Beat column last Sunday. There is no connection between Penn Mutual Life and Pennsylvania Mutual Fund.

What's more, my experience reveals some of the peculiar risks of investing in stock mutual funds. For one, entrenched fund managers--those who call all the shots in a fund management company--usually don't fire themselves, regardless of their performance.

Second, you are always in danger of being victimized by your fellow shareholders, whose intentions you cannot know and whose actions may have little to do with the quality of the investments in the portfolio. This too is a lesson many fund investors have yet to learn but probably will.

The investment on trial here, as it were, is Pennsylvania Mutual Fund, a 34-year-old fund that once was an industry star. Under Chuck Royce, who has managed the fund since 1973 through his Quest Advisory Corp., Penn was for most of the 1980s one of the premier names among funds that focus on small-company stocks. (The name Pennsylvania, I should note, has nothing to do with the fund's investment focus.)

Penn was my first stock investment. The year was 1983, I was a relatively young 26, and the great bull market of the 1980s had just begun a few months earlier--although at the time, with the Dow Jones industrial average at 1,050, neither I nor most other investors had any inkling of how magnificent stocks' performance was about to become.

For me, the feeling was simply that I needed to begin to buy stocks as a diversification move. Bond and money market yields were extraordinarily high back then (and thus appealing), and everybody was still making great money in real estate. But I remember thinking in 1983 that stocks might again become the lucrative investment that my finance books said they were in the 1950s and 1960s, before the inflation surge of the 1970s and the devastating 1973-74 bear market horribly tarnished the market's image.

"You have to take the plunge sometime," I remember telling a co-worker in 1983. Precisely how I settled on Penn as my first equity investment I can't remember, but the concept of investing in small-company shares seemed to make sense (they had performed much better than blue chips from 1975 through 1981), and Penn had a sterling reputation.


In addition, as a financial journalist my options were limited: Owning individual stocks invited conflict of interest, because I could find myself in the awkward position of covering a company or industry in which I had a meaningful (to me) ownership stake. Mutual funds, on the other hand, were diversified and left decision-making regarding individual stocks in the hands of the fund manager. To this day, the funds remain my principal vehicle for equity investment. I buy and hold.

So in 1983, I wrote a check for $1,000 to Penn Mutual and dropped it in the mail.

I would add to my stake over the years (and buy numerous other funds as well). And for most of the 1980s I was quite happy with Penn's performance. Royce was a "value" investor, meaning that he hunted for stocks of underappreciated small companies--usually non-flashy, even downright boring firms in mundane industries.

The idea was to buy cheap, low-risk stocks that would pay off in the long run as the companies' earnings grew and more investors took notice.

From 1985 through 1990, Penn matched or beat the performance of the Russell 2,000 index, the best measure of the small-value-stock market, every year but one. For the 1980s decade as a whole, Penn gained 258%, versus 127% for the average small-stock fund. Royce's eye for true value seemed exceedingly sharp.

Not surprisingly, money began to pour into Penn. Between 1989 and 1992, the fund's assets doubled, to $1.1 billion. I felt a touch smug: Other investors were finally discovering Chuck Royce's talents, but I was there in 1983.

Los Angeles Times Articles