Market Advisory Features

NATIONALISM AND GLOBALIZATION

By Fidel V. Ramos President of the Philippines

Who needs the nation-state? We all do - to reconcile the priorities of global markets with social cohesion and sound ecosystems
--------------------------------------------------------------------------------
EVEN IN AN AGE of globalization, the often-reported death of the nation-state (like that of Mark Twain) is an exaggeration. For four hundred years, the nation-state has been the focus of communal loyalty and individual identity. Nationalism in its various expressions has been the most compelling political force of this century and it is likely to remain so in the next. It was nationalism that destroyed the colonial system, and bent even Communism to its purposes. In our time there is no greater moral and emotional objectification of ordinary people's primordial attachment to family, clan and community than the nation.
The Japanese business strategist Kenichi Ohmae asks: "If the Cold War is over and money flows around the world beyond the reach of governments, who, indeed, needs the nation-state?" The short answer is that we all do. The nation-state will continue to be needed - if only to mitigate the downside of globalization (such as the devastating effect of short-term capital flows on East Asia). Because nationalism is focused on a specific place or community, it is the perfect counterpoise to the universality that globalization represents. I expect nationalism to adapt to this new age simply by cultivating a larger sense of national self-interest.

Nor has globalization removed the need for strong and efficient states, particularly in the new countries. The spread of market values in all areas of life is breaking up the family, destroying traditional cultures, and provoking the rise of sometimes radical and fanatic localisms. No authority can deal with these disturbances more efficiently than the nation-state.


REDEFINING PHILIPPINE NATIONALISM

What future do I see for the nation-state? It will have to adapt to changing circumstances, and share power with other political actors, both smaller and bigger than itself. I can see its sublimation in larger entities such as the European Union or ASEAN, but I do not see the nation-state withering away. In fact the age of globalization will need effective states more than ever before - to reconcile the priorities of global markets with humankind's need for social cohesion, and for development that protects the earth's ecosystems.

In the Philippines today, we are redefining nationalism to enable us to look at the world in a new way. Introspective during the colonial and postwar periods, our nationalism is being turned into one of self-confidence. Through market-opening reforms, we have begun to break up the old order which had stifled the spirit of enterprise and penalized export industries. We now realize the need to align our economy with that of the world. And despite the currency crisis, we are determined to embrace the global system even more closely.

Filipino nationalism was the first to emerge in colonial East Asia. The Centennial we celebrate this month is that of Asia's first free republic - proclaimed by Filipino revolutionists against Spanish authority in a small town outside Manila on June 12, 1898. In the new countries, nationalism is commonly the sense of community nurtured by shared suffering under colonial rule. We Filipinos became a community because of this common historical memory. In the words of the 19th-century French philosopher Ernest Renan, we are "a people which has suffered together."

Before the political persecutions of 1872, we were just a collection of Indios, mestizos and Creoles and the archipelago we inhabited was just a place-name. But after the execution by strangulation of the martyr-priests Gomez, Burgos and Zamora in February of that year, no further repressions could prevent the Filipino nation from being born. Jose Rizal is called - correctly - "the first Filipino." He was the first to conceive of all the peoples of the archipelago as one grand union transcending tribe, ethnicity, religion, language, culture - ang sambayanang Pilipino, "one Filipino nation." Rizal and his generation of heroes gave our 7,107 islands, scattered on the South China Sea between Taiwan and Borneo, the sense of being one.

Twentieth-century Filipino nationalism has been shaped by the overpowering presence of the Americans. In pursuit of its "manifest destiny," the United States had succeeded Spain as our colonial ruler after the Filipino-American War of 1899. Fear, resentment and admiration of the United States - coupled with a recognition of our utter helplessness and even dependence on it - produced self-doubt and turned Filipino nationalism inward.

Like its counterparts in Latin America, it became a nationalism of weakness, crippled by the lack of a firm national identity. Economically, this nationalism came to express itself in autarky and "Filipino First." And, as in Latin America, the closed economy perpetuated itself long after it had outlived its usefulness. By multiplying the opportunities for rent-seeking from the economic benefits that government was in a position to bestow, the closed economy reinforced the traditional patronage system.

Until now, the tenets of this nationalism of weakness dominated political discourse in the newspapers and in our country's academic communities. They are also enshrined in the 1987 Constitution. For instance, the charter still reserves even book-publishing as a prerogative of nationals. And in early 1997 the Supreme Court overturned a public bidding which had awarded the Manila Hotel to a Malaysian corporation, in favor of its Filipino rival.


DEALING WITH THE CURRENCY TURMOIL

Despite setbacks like this, my government has tried to redefine Filipino nationalism - to make it responsive to the new technologies and ideologies reshaping the globe. Thus we have begun to dismantle the cartels and monopolies that dominated the closed economy; to open our home markets to competition; and to lift the dead weight of an intrusive bureaucracy from the back of business people. These initial reforms enabled us to exit from 35 years of International Monetary Fund supervision in March - despite the currency turmoil which has buffeted East Asia since July last year.

For a year now, the region has been experiencing - painfully - the speed with which the new digital technologies can move portfolio investments out of (as well as into) any region. This demonstration of the downside of globalization triggered a currency crisis that has not abated even now. In the market frenzy to get where the action was, even the world's most sophisticated fund managers had overlooked the faultlines of the East Asian "economic miracle." And in the panic that followed the floating of the baht in Thailand, they scrambled out of every East Asian country without discriminating between financial markets.

We in the Philippines have not escaped the contagion, but we have avoided its worst consequences. The peso has not fared as badly as some of the ASEAN currencies. Our stock market has been doing better than its counterparts. And while interest rates rose and our industries felt the financial squeeze, we experienced no wholesale closure of corporations and banks.

East Asia's currency crisis will obviously deter other developing countries from moving rapidily to open their financial systems to migratory capital. It can even set off a political backlash against free trade and capital flows. But in the Philippines we have chosen to respond positively to this episode of currency volatility. We have taken to heart the lesson it taught - that global interdependence is a fact of life (since no country can isolate itself from the spread of the new technologies) and that global markets punish policy mistakes severely. In dealing with the currency crisis we have also been helped by the openness of national society. That public policy is made so publicly - and then subjected to sharp popular scrutiny - results in a transparency of governance which inhibits the kind of crony capitalism that had flourished under strongman rule.

While there can be no doubt the crisis will soon end, I believe its resolution will be slower than its onslaught was. The pace of recovery will vary from country to country. And the first to recover will be those countries which impose transparency in the conduct of business, allow the market system to function freely, and generally depoliticize the economy. There can be no backtracking from reforms that foster competition, efficiency and productivity.

But the currency turmoil - a crisis unlike anything the world economy has ever experienced - cannot be solved simply by each country putting its house in order. Because all countries are now linked irrevocably, and not just by trade but tidal flows of capital, the international monetary system must itself carry out some reforms. A new monetary order must be laid down. The physicians of the world economy must heal themselves.


HOW THE STATE SUPPORTS GLOBALIZATION

The multilateral institutions should develop quick-response mechanisms - to contain a local financial crisis before its contagion spreads - and new policy frameworks to replace the conventional policy tools that have failed to work. In fact the International Monetary Fund's formula for stabilizing an economy - tight-money policy - might have unwittingly worsened Thailand's problem by accelerating the rate of corporate and banking failures. And in Indonesia, the raising of fuel prices required by the IMF triggered the Jakarta riots that forced President Suharto to step down.

Perhaps it is time the Asian Development Bank - whose traditional role has been to support IMF-World Bank initiatives - defined its programs to suit its Asian constituency more closely. Industrial countries themselves must take a more active part in bailout programs. After all, globalization means everybody having an interest in everyone else's continuing economic health. Fund managers should also begin to care for the social consequences of their investments in developing countries, where political systems are still so fragile that economic crisis can break them.

There is obviously also a need for more transparency in economic information. Governments should agree to provide accurate and current data on their basic indicators and those that reflect the health of their banking sectors. Finally, the crisis has also dramatized the need for more liberalization and deregulation of economies. No mechanism can allocate resources as efficiently as the market does. Nor is there any mechanism as effective in fostering investment discipline and in rewarding creativity, intelligence and hard work.

But there are many things the market cannot do. It cannot supply in equitable manner the public "goods" such as primary health care, basic education and protection from crime which must be provided for every citizen. It cannot ensure that producers stop to consider the social costs of the technologies they use. Throughout history the uninhibited pursuit of self-interest has resulted in social inequities and political instability. Now these side-effects of the market system are being worsened by the reach and velocity of the technologies that have created the global economy.

Meanwhile the global market is also obliterating the specificities of local cultures. Note how both China and India are trying to resist (in the end perhaps vainly) the inroads of the fast-food icons of the dominant Western culture. In both these great countries - virtual civilizations by themselves - nationalism could still turn virulent, if their economies should experience a severe downturn or if their claims to great-power status become frustrated.

Seeking refuge from intrusive forces beyond their comprehension and control, ordinary people everywhere are turning to familiar, protective communities - whether ethnic, religious or ideological - for solace and support. In the Philippines, personalist Christian churches are attracting large followings. But the community of the nation still is the most easily available refuge to ordinary people seeking some transcendent meaning for their lives. Only the state can restrain the rise of the market culture. Thus effective government is more than ever necessary - to shore up the face-to-face communications on which neighborliness depends; to organize economic growth that is in keeping with the carrying capacity of the environment; and to nurture a capitalism that cares for those whom development leaves behind.


BUILDING THE GLOBAL ARCHITECTURE

The concern often expressed over the state's loss of autonomy and authority to the global economy is, I think, overstated. Governments still can do a great deal to prevent their monetary policies from being constrained by the scale and international nature of the market. They still have a positive function - that of providing the rule of law needed to enforce market transactions and of helping mobilize the nation's resources for competitiveness in the global economy. The challenge for the state in our time is to seize the opportunities that globalization presents, while minimizing the nation's vulnerability to its risks. Its first task is to strengthen the nation's economic structures - to enable them to contain volatile flows of migratory capital and to withstand unstable growth.

For all these reasons, I do not see the nation-state withering away. I can see its sublimation in larger entities like the European Union - into which the French, the Germans, the Italians and the British have subsumed their nationalisms (not always successfully), in their need to end their civil wars and to counteract American and Russian influence. Southeast Asia's own venture into ASEAN originates from a similar impulse. Like the European Community, ASEAN was built not out of some grand design but step by step and bit by bit - by its member-countries working together on practical programs of common usefulness that have accustomed them, over 30 years, to habits of transnational cooperation.

This is probably how the architecture of the world will be constructed - in the same mundane manner - by the functionally distinct components of the nation-state linking up with their foreign counterparts in a web of networks that will eventually constitute a veritable transgovernmental order. Already these cross-border networks of both government and non-government organizations are well established. We have regional and global networks of parliamentarians, jurists, finance and trade ministers, police officers, chiefs of staff, intelligence services and so forth.

The network of East Asian central bankers did a great deal to mitigate the effects of the currency turmoil. And even now our finance ministers and central bankers are consulting to enhance the regional surveillance system in order to enable Asian leaders to spot future financial problems before they reach a critical stage. Eventually regional networks like these can be extended and enlarged until they form a framework for global regulation of currencies, capital movements, trade, and conservation of the environment that works to stabilize the world economy and harnesses it to humankind's needs.

All the complex interconnections that come under the heading of "globalization" create instability and stress. But they also create conditions that will allow human societies to become better. The increasing permeability of formal national borders does not mean the nation-state should abdicate its historical role. Indeed the new conditions of dynamism demand a higher degree of competence on the part of government. In the middle of epochal changes, the nation-state must build social harmony, create prosperity and protect the vulnerable. Our appreciation of the value of the national community will continue to evolve. But people will increasingly view nationalism through the prism of the economic freedom and the quality of political rule it brings about.

( back )

What to do when a stock "blows up"
by Michael Brush

It's every high-flying tech stock owner's nightmare. One day you own a hot growth company whose business plan and product lineup hold great promise. The next day your stock has lost half its value and ripped a hole in your portfolio. In Wall Street parlance, your stock has "blown up."

There may be lots of causes, but if you invest heavily in growth stocks, the likely culprit will be missed earnings expectations. And as Wall Street moves into earnings reporting season now, expect to see more stocks blow up.

Watch out for the shrapnel.

Shareholders of Shiva Corp. (NASDAQ: SHVA), a company that produces devices offering remote access to computer networks, learned this the hard way Wednesday, when their shares lost about 50% of their value. Just after the closing bell Tuesday, the company announced it would miss earnings estimates by a long shot because of weaker U.S. sales, delays in orders from IBM, and a sales growth lull caused by a transition to a new product line.

In a market where stocks get pummeled for coming in a few cents below Wall Street's expectations, Shiva said it would be short big time -- estimating it would report between five and seven cents a share in earnings for the last quarter, compared to expectations of 21 cents a share.

The stock plummeted from a close of around $34 Tuesday to about $18, leaving shareholders -- not to mention value investors looking for good bargains -- asking a common earnings-season question: What do I do now?

To find out, we turned to the pros, who have lived through the experience hundreds of times. For them, the game plan to follow when a stock blows up is often easy. Almost too easy. Why? Most professional portfolio managers have a rigid set of criteria they follow in owning a stock. Once a stock no longer has the desired characteristics, out it goes.

"We have a very clear sell discipline," says Bill Wykle, a portfolio manager with the Capital Small Cap Growth fund, which gained 31% last year. "We are earnings per share driven. When we have an earnings shortfall, if the company came up short because of a revenue shortfall, that is a definite sell. If it is a one-time charge, then we keep it. The only place where there is a gray area is if they missed by a penny or two."

This strict set of rules, in a sense, makes it easier for growth managers. So does the breadth of their holdings. With a hundred or so stocks in a portfolio, they can afford to jettison one quickly without thinking that much about it, since most of the other stocks are producing returns and serve as a cushion. In fact, that is exactly why they own a large number of stocks -- and why you should, too.

But many individual investors may not have the $75,000 or so it takes to get good equity diversification. When one of their stocks blows up they may be more tempted to hang on for a recovery, since it was one of just a small handful. Should they? Here's what the pros say about making that decision.

First, of course, you should closely analyze the news that led to the earnings surprise. "You have to assess how comfortable you are with what the company is saying," says James "Chip" Roberts, the co-portfolio manager of the Oberweis Emerging Growth fund, which was up 23.2% last year. "A lot depends on how familiar you are with the product line and how believable it is that it is a one time situation."

But when you analyze the news, don't be lulled by confident statements by senior managers that things are not as bad as they seem. Sure, they are under a strict legal requirement to tell the truth when publicly discussing news that could affect their company's share price. But a healthy does of skepticism is important. They may simply not know that more problems are on the way.

"I am a little cautious in looking at what management has to say," says Shannon Vanderhooft, a quantitative investor whose NI Growth Fund returned 11.3% since inception last May 31 until the end of 1996. "It is important to hear the company's explanation. But it is also important to hear an independent analysis. You want some corroboration that they are not living in a fantasy world."

After a disaster, Wykle expects results, not words. "My response is always: 'show me.' If they do, I'll be willing to take a look at the stock later in the year. In the meantime, I can find some other companies that are not having problems."

Look at analysts' earnings estimate revisions after the announcement. "If the analysts say the stock is fundamentally off, we try to be patient and see if the stock gains momentum," says Roberts.

Don't be tempted to think that just because a stock is down, it is a buying opportunity. Wall Street analysts have statistical evidence to back up what they call the "cockroach theory," which states that if you've seen one, there are more to follow. "Usually one earnings surprise is followed by another in the same direction," says Vanderhooft. "But there are exceptions."

If you do move into a fallen angel as a value play, don't expect it to bounce back right away. Usually a growth stock will take an initial big hit right after bad news is announced, because growth investors like Wykle get right out of a stock that no longer matches their criteria. But there is still likely to be lots of additional selling pressure from fund managers who want to wait to assess how bad the news really is.

Roberts, for example, will often close out half his position in a stock right away when bad news first hits. If the story continues to look bad or gets worse, he will try to sell the rest of the shares over the next two or three weeks. Other managers may just take a while to figure out how bad things really are. If no good news comes along in the weeks after the initial carnage, these managers are still in the market looking to ease out of their positions. That probably won't cause another big drop in value. Instead, it will keep downward pressure on the stock, even as new investors looking for a bargain come in.

Have a plan and stick with it. Even though you may be a small investor, you too should have an investing plan that you stick with, some managers say. "Retail investors should know why they bought the stock," says Wykle. "If it is not what they bought because of a change has occurred, they should take their lumps and move on."

Selling may also make sense because it frees up money for better investments, or because you will be able to use the capital gains loss for tax purposes.

"Nobody likes to take a loss, especially a large loss. But for the retail investor who is doing some tax management that is always a viable option," says Vanderhooft. "Typically a stock that has gone down so much isn't going to improve dramatically, so basically it is dead money. You can sell the stock and put the money into a more productive investment."

( back )

Submerging Markets Resurface
By Pierre Belec

NEW YORK (Reuters) - What a difference a year or two makes. Investors are running back to Asia not long after the stock markets of their dreams turned into a nightmare.

Nothing has changed fundamentally in the ailing Asia countries. Most economies, including powerhouse Japan, are still stuck in recession. But what's different is that global investors sense that things will quickly improve in the troubled spots and they see a break in the clouds in Japan, Hong Kong, South Korea, Singapore, Philippines, Brazil and perhaps Thailand.

Asia sank deep into a trough of despondency in the summer of 1997. The contagion boomeranged to Russia, stunning Brazil and other emerging countries with soaring interest rates and crashing currencies. Hong Kong and South Korea, two of the most streetwise countries in the Pac Rim, were able to pull themselves faster out of the rough. Their stock markets have rallied to pre-1997 crisis levels after crumbling 70 percent to 90 percent in U.S. dollar terms as foreign money fled the region.

``Foreign money has gone back into emerging markets and to Japan in part because the U.S. and European stocks are perceived as being pretty expensive after their great run-up,'' said Eric Ritter, an analyst who specializes in Asian markets for Driehouse Capital Management, a Chicago-based firm with total assets of nearly $1.1 billion. ``As a result, investors are starting to look at emerging markets as having the potential to surprise on the upside,'' he said.

The markets began to rebound in the last quarter of 1998, when the Federal Reserve got the global ball rolling by chopping down interest rates three times. The cuts, which were aimed at injecting new confidence in financial markets, triggered a worldwide response as other central banks also trimmed their rates to make money more available.

The recovery has been impressive. Morgan Stanley Dean Witter's Emerging Markets Free Index was up 12 percent in the first quarter, after jumping 17 percent in the final quarter of 1998. It was the best consecutive quarterly performance for the index since the second half of 1993.

Stock mutual funds also have done well. Funds that invest in Japanese stocks were up a strong 15.8 percent in the first quarter and Pacific region funds rose nearly 9 percent. Investors are betting that there is not much downside risk for Asian markets because of the likelihood that interest rates will continue to fall after nearly two years of choking increases.

Also helping the ``light at the end of the tunnel'' saga is a belief that most of the negative news has already been discounted. Indeed, optimism seems to have replaced gloom. Brazil has sold some $2 billion of bonds just three months after the country devalued its currency, the real, and domestic interest rates soared as inflation climbed. South Korea also sold $1 billion of bonds. ``What's positive is the long-term investors such as the bond buyers are willing to put money back in Korea and Brazil,'' Ritter said.

There's more good news for investors. Corporate Japan is biting the bullet and reshaping its money-losing companies into global competitors. Sony Corp. (NYSE:SNE - news), the monster consumer products giant, announced that it was chopping its work force by 17,000, or 10 percent, and shutting 15 of its 70 plants around the world. ``Cost-cutting on this scale by a profitable company in Japan is unprecedented,'' according to Nicholas Edwards, portfolio manager for Warburg Pincus Japan Growth Fund. ``It sends a powerful message to the rest of the country -- lifetime employment is dead.''

Japanese companies are also opening up to deals. Realizing that it could not compete in the global tire market, Sumitomo Rubber has agreed to be acquired by Akron, Ohio-based Goodyear Tire & Rubber Co., the world's largest tire maker.The future looks good for global investors. ``The challenge is to pick the winners and avoid the losers,'' Edwards said. ``But it will be a more rational competitive environment and I'm extremely bullish.''

Many investors view emerging markets as the place that offers the best values. Stocks in emerging markets have price-to-earnings ratios of only 15 to 20, while U.S. stocks are at a record 25 to 30.

The enthusiasm is also being shared by Asian investors. They are again buying stocks after stuffing their money in bank accounts or mattresses during the crisis years. The Asians are convinced that the global healing has taken place. But more important, there's a belief that the healing will eventually lead to an economic recovery. ``Right now, liquidity is driving up these stocks rather than earnings, which have not turned around,'' Ritter said. ''It's just a case of people wanting to take the bet that lower interest rates, and changes in internal economic policies, will do the trick.''

What could go wrong? Most experts believe that China, which continues to enjoy solid economic growth, could be the potential risk factor in Asia. China's currency, the renminbi, is one of the last potential devaluations in the region, and a cheapening of its units to keep its exports competitive could touch off another round of economically damaging devaluations in the Pac Rim.

As a result of cheap currencies in the region, the Chinese have seen their exports drop. In the first two months of the year, exports are down 8 percent, while competing countries such as Malaysia and the Philippines are seeing gains of more than 20 percent. ``China won't keep its currency peg at the same level forever, and they may be waiting for the Asian economies to stabilize before they devalue,'' Ritter said.

(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com)

( back )

Currency Crises and the Rewriting of History

By Steve H. Hanke

SOMEDAY Treasury Secretary Robert Rubin just may come through on his threats to resign. The Clinton Administration would probably like to install his deputy, Lawrence Summers, as successor. To make this scheme work, the Administration has to paint both Rubin and Summers as saviors of the world financial system. And so Washington is busy rewriting history.

Rubin and Summers have concocted a tale about the financial crises that have racked Asia, Russia and Brazil, and prestigious elements of the media have fallen for it. The New York Times published a four-part series of this revisionist financial history during the week of Feb. 14.

Here is the story line: No one forecast the Asian crisis. And after currency chaos engulfed Asia, no one anticipated that the contagion would spread to Russia and then to Brazil. Rubin and Summers came to the rescue with an endorsement of International Monetary Fund moves to devalue currencies and impose austerity. The story ends with a chapter asserting how much worse the crises would have been were it not for Rubin, Summers and Alan Greenspan. Time magazine's cover story of Feb. 15 went so far as to dub these three amigos "The Committee to Save the World." Balderdash! Plenty of people could see that a Third World currency crisis would spread.
Robert Rubin has concocted a tale about the currency crises, and prestigious elements of the media have fallen for it.

Starting with my column of Aug. 11, 1997, I have written 14 FORBES articles and participated in two FORBES Q and A interviews in which I explained the Asian financial crisis and how it would spread like a prairie fire to Russia and Brazil. My Oct. 20, 1997 column concluded that Brazil's fatally flawed currency setup would be defended at all cost until the October 1998 presidential elections, after which the real would fall apart. My Mar. 9, 1998 piece anticipated that Russia would virtually run out of foreign reserves by the end of June and that the ruble would collapse not long after. We will never know with scientific certainty about the effect the Rubin-Summers therapeutics had on the crises. However, the IMF admitted in a January report, "IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment," that mistakes were made. P.G. Wodehouse's character Ukridge comes closer to my own assessment of the probability that IMF-style therapy could be successful: "about as much chance as a one-armed blind man in a dark room trying to shove a pound of melted butter into a wild cat's left ear with a red-hot needle." And what about the Rubin-Summers claim that they have been serving up free-market solutions? Their free-market vision is a central bank that produces a national currency. If only central bankers would follow the advice emanating from the wags in Washington, they could produce sound money that would rid the world of the volatile hot-money flows that have plagued the emerging markets for the past two years.

Like the rest of the Rubin-Summers spin, their embrace of free-market economics rings hollow. Friedrich von Hayek was a true free-market economist. In his 1976 book, Choice in Currency: A Way to Stop Inflation, this Nobelist concluded that the discretionary monetary policies followed by central banks were a type of central planning with the same disadvantages as, say, the central planning of agricultural production. Hayek favored a competitive currency regime in which private parties would be free to use any currencies they wished, whether they were issued by government-owned central banks or private banks. Not everyone is listening to Rubin and Summers. In January President Carlos Menem suggested that Argentina dump its central bank and stop issuing pesos while making all other currencies legal tender in Argentina. Such a competitive currency regime would eliminate currency risk, reduce interest rates and stimulate economic growth. Let's hope Menem succeeds and that others follow his lead. That would make the world less safe for central planners but safer for the rest of us.

Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins
University in Baltimore.

( back )

STOCK PICKS OF THE SOMEWHAT RICH & FAMOUS
Six celebrities reveal how they've won--and lost--big.
LAWRENCE A. ARMOUR
REPORTER ASSOCIATE SHEREE R. CURRY

Magic Johnson and Sam Donaldson weren't talking. Neither were Bill Cosby and Jeffrey Katzenberg. And who could blame them? We were looking for stock-picking advice from smart, rich celebrities, and if they were not eager to unburden themselves--well, you could imagine lots or reasons they wouldn't want millions of people knowing what they're long and what they're short. Maybe it's embarrassing; maybe they've been in T-bills for the whole bull market. Or maybe their secret is even darker. "I'm no dope," said Tom Seaver, a baseball Hall of Famer I occasionally play squash with. "I've got professionals managing my money." Hmm. Maybe they don't pick stocks at all. Bill Gates, Martha Stewart, Henry Kissinger--they all would have loved to chat, but their spokes-types said they were just too darn busy.

That's when it hit us. The game here is to outsmart the masses, and in an era when every American above drinking age seems to be in the market, no-fooling unconventional wisdom is harder to find every day. What ever made us think we'd get it from A-list celebrities? If Tom Hanks likes a stock, you can be sure that one way or another, plenty of people know it. So after dialing six digits of Schwarzenegger's number, I put back the phone. I'm smarter than that. It was time to get off the hard-trodden track of top celebrities. Way off.


Now if stock picking is the new national pastime...it's time to call George Steinbrenner, owner of the New York Yankees, whom I'd met at a press conference. George's American Ship Building filed for Chapter 11 in 1993, and I doubt he'd know Graham from Dodd, but he knew enough to invest $19.5 million in Cone, bring Doc and Darryl back from purgatory, and turn the helm over to Joe Torre. The New York Yankees are champions of the world, for heaven's sake, and George is the guy who got them there.

"I'm actually quasi-cautious when it comes to investing," he confided, "so I go for things that are fun and exciting." And close to home. Coca-Cola, the official soft drink of 25 of the 28 Major League Baseball teams, including the Yankees, is one of his favorites, and every investor knows why. Two others: Disney, another hit, which owns the California Angels baseball team, and Time Warner, owner of both FORTUNE's publisher and the Atlanta Braves, silver medalist in the 1996 World Series.

George's portfolio also contains Exxon and Royal Dutch Petroleum, stocks his dad and granddad always said were bedrocks of the economy and that have been solid winners this year. He's tossed in a few wild cards of his own, including Agnico-Eagle Mines (a loser in 1996) and some penny gold stocks.


Dr. Joyce Brothers not only is listed in the Manhattan phone book but even picks up the phone when you call. In case you've forgotten, she rocketed to fame in 1955 when she won top prize on TV's The $64,000 Question for her boxing know-how. These days she provides guidance to the multitudes via a syndicated newspaper column, a daily radio talk show, a monthly column in Good Housekeeping, books, TV shows, and cameo appearances in movies with Whoopi Goldberg.

"I've been on the air in one form or another every day since 1958, so I know the TV business," she says, and that's what drove her early investing. Smart approach. Recognizing that big advertisers wouldn't be able to make station-by-station buys, she started buying stock in broadcasting groups. "Before I knew what happened, Cap Cities bought ABC, which was then taken over by Disney. Rupert Murdoch bought a bunch of Metromedia stations. CBS got taken over by Westinghouse, and NBC--I actually had RCA stock--was bought by General Electric. Everything I owned got gobbled up."

At handsome premiums, of course. So what are you into these days? "Genentech. I did a story when it first came out called 'Designer Genes.' After the show I went to my boss and said, 'Look, I've talked to these people and seen what they're up to, and I'm going to go out and buy all the Genentech I can. This is the future.' I still have all my Genentech, and I'll never get rid of it. Actually, with my luck, someone will probably come along and gobble it up one day."

Robin Leach, a guy I frequently run into at Knicks games, wrote the book (all right, the show) on the rich and famous. When I asked him what excited him, he launched into a story about a tall blonde he had just bumped into in Macy's. When I said I meant stocks, he apologized and got down to business: "I'm a longtime investor in World Fuel Services. It's a unique company in that nobody does what it does, and to me that speaks of opportunity." World Fuel has three divisions, Robin explained: one that supplies nonmajor airlines with fuel, another that sells marine fuel, and a third that recycles.

"I figure anyone who can recycle leftover oil has got to be some sort of genius, so I went to an investors' meeting and met management. Sure enough, they turned out to be bright guys who didn't mind my asking stupid questions, so I bought stock, and it's had a long period of growth. Nothing exciting. No razzmatazz. No Hollywood stars at the opening of a recycling dump. But I think I've found one of tomorrow's blue chips." And there's plenty of razzmatazz in the performance--up 27% this year.

Joe Flom feels the same about AutoImmune. "When you take in food, you're ingesting a foreign protein, but for some reason the body doesn't fight it," he explains. "If AutoImmune can figure out why, they should be able to develop drugs that will stop arthritis, multiple sclerosis, and similar diseases from happening. But it's like any biotech. Could be a home run. Could be an infield fly."

Flom, a partner at Skadden Arps Slate Meagher & Flom, gave me a huge amount of help on one of the first tough stories I ever wrote. (Not through altruism. His client was the subject of the piece.) A top M&A lawyer, Joe's also a savvy investor. Most of his money is managed by professionals, but he dabbles in biotechs with stories. "I own Algos Pharmaceuticals, which makes drugs that make other drugs more efficacious, and Cytogen, which has developed a delivery system that brings drugs directly to the site of a disease. Cytogen's a good story, but I didn't really get excited about it until I heard Harvard owned 15%."

Earl Graves Jr., a graduate of the Harvard B-school, wanted to be an investment banker at one point. He got over that soon enough and went to work for Black Enterprise, where his dad, Earl Graves Sr., is CEO. One of his jobs is to manage the family portfolio, and Butch, as he's called, has done what looks like a pretty fair job.

He's long the obligatory basics: IBM, AT&T, Disney, General Electric, Chrysler, and PepsiCo. He's heavy in technology, with Cisco, Oracle, America Online, and Bay Networks, and he's particularly excited about Microsoft, a stock the family has owned for years: "If home computers ever take off like VCRs, the growth opportunities will be outrageous." Butch, 34, also likes OpenVision Technologies, a software development company he spotted when it was profiled by Black Enterprise. It went public in May at $15 and is now at $9. Says Butch: "I'm a long-term investor."

I've never had a face-to-face with Nicholas Negroponte (few people apparently have), but we have a lively E-mail relationship, and I consider him a friend. Head of MIT's fabled Media Laboratory, author of Being Digital, and a founder of Wired magazine, he is also a partner in Applied Technology, a venture capital firm that funds and nurtures promising companies.

Information Storage Devices, one that went public at $15 in 1995, now trades around $6. "The company makes analog chips that can store a minute of speech at extremely low cost and without the need for power," says Nicholas. "It currently has about $6 a share of cash, which means the market is valuing it at essentially zero."

When I asked Negroponte what happened to the IPO slated this year for Wired, he replied: "Wall Street priced it too high at the start, too low at the end. So we canceled it." Does a thread run through his investments? "Yes, a suicidal streak. The risk is always huge."

That's an approach that works great when it works. And while it may not have made Negroponte megabucks, these six midrange celebrities on the whole look to have done quite well. None claims to possess investing secrets, and nobody credits having received hot tips. All of which tends to confirm a couple of things we always suspected: There are no secrets, and those who have something worth saying are never too busy to say it.

( back )

Three Reasons To Jettison A Stock
Pathfinder

Ask yourself: Would you still buy this stock at this price? By now you may be persuaded that it's time to consider pruning the most vulnerable stocks from your portfolio. But which ones are they? Tough question. No one rings a bell when a stock crosses the invisible line from bargain to bloated. Parting with the issues that have made you money--or, for that matter, finally pulling the plug on your mistakes--is one of the most difficult decisions an investor must make. That's why professional stock pickers stick to fairly strict rules for cashing in winners and unloading losers. Rules help take the emotions out of the sell decision and eliminate the inertia that can make an investor linger too long in the stock. You'll find the top pros' most useful selling guidelines outlined below.

But first, a couple of caveats. Selling a winner may trigger capital-gains taxes unless your stocks are stashed in a tax- deferred account or you are in a very low tax bracket. The prospect of having to cut Uncle Sam in on as much as 28% of your profits is a good reason not to be too quick to trade your shares. But it shouldn't keep you from ditching a stock in serious danger of stumbling. After all, a taxed capital gain is better than no gain at all.

A second, more insidious concern is that you may sell too soon. Unfortunately, that could well happen: Most selling strategies are designed to get you out of the stock before the peak. So prepare yourself for the possibility that the stock you just unloaded will continue to soar. Rather than kicking yourself for being too timid, remind yourself that you have preserved profits that you can put into other investments with more promising long-term outlooks.

There are three basic reasons for jettisoning a stock. The most obvious is when the company stumbles badly because of product problems or management errors. You should also consider selling when the reason you bought a stock is no longer valid: The anticipated turnaround didn't happen, the expected contract never materialized, the announced merger fell apart.

The third sell signal is the toughest to recognize--even though it's the one that has been flashing most often in today's robust market. It's when the shares of a healthy company become fully valued. The definition of "fully valued" varies, however, depending on whether the stock you own is a growth stock, a value pick or a dividend play.