Pick your own large-cap stocks

by Stephen Butler

The late Muktananda was a swami in Emeryville back in the '70's who taught me some meditation techniques along with a mantra that went "oohm, neva, shevaya." Now, when the market drops more than 3 percent in a single day, I find that the chant elevates me to a level of peace and serenity.

So where would Muktananda invest, assuming he actually wanted to make money and beat inflation? What would be one of the more peaceful, serene investment choices in today's turbulent financial world? If you're thinking "money market funds", remember that I said we wanted to beat inflation and make money. Money markets are losers in that respect.

How about a collection of some of the largest companies in America? The Dow Jones average (just 30 huge companies) and the S&P 500 index (500 largest companies) offer trouble-free, low-cost approaches to investing in the American economy. With very little turnover and low expenses, mutual funds offering these stocks generate results over time that beat most of the comparatively expensive efforts to actively manage money.

To thrive on this investment, one just needs peace and quiet plus patience. For slightly more peace, the Dow Jones (thanks partly to its average 3 percent dividends) tends to lose less in market downturns than the 500 index --- off 20 percent versus 42 percent in the early 2000's. Ten-year average returns (including dividends) are 7 percent versus 4.3 percent.

Right now, the so-called smart money seems to be leaning toward huge U.S. companies that sell lots of product overseas. The companies of the 500 index generate more than 40 percent of their income from overseas sales. In registration right now, waiting to be released for sale to the public, are several new mutual funds that will invest only in the nation's largest companies --- so-called "mega-cap" funds. Bridgeway Blue-Chip 35 is a good example of an existing fund that invests in just 35 huge companies that include winners like Google, Berkshire Hathaway, Chevron, etc.

While the mutual fund industry offers what amount to large-company package deals, an individual investor can assemble a personal portfolio made up of some of these giant companies that have been cherry-picked for possibly better quality than a random selection. Anyone can adopt a buy-and-hold strategy with their own hand-picked companies and surprise themselves with results that will track amazingly close to, and possibly even exceed, the major indices. With no excess baggage of management fees, trading costs from turnover, or taxes on realized gains, the end result will often be better than that which a comparable fund would generate.

My friend Randy Manley of Lodestar Private Asset Management in Danville points out that some huge companies enjoy the privacy of a "moat." This is the term for companies that have patented products or so much brand recognition and cash that competitors can't hope to catch up. Manley's approach is to identify these companies and then wait for their stock prices to fall to a reasonable level that would make them attractive to buy (like right now for some.)

Morningstar and the American Association of Individual Investors are good places to start for finding stock screens that line up companies in order of their price/earnings ratios. The lower the stock price relative to earnings, the better the value.

Then, there's the "Dogs of the Dow" or the 10 companies of the Dow Jones Average (of 30 huge-company stocks) that pay out the largest share of dividends as a percent of their stock prices. Forbes, years ago, pointed out that these lower 10 companies tended to beat the Dow over time when factoring in those dividends as part of the rate of return.

Strange as it may seem, the U.S. stock market has been a major winner compared to almost all other foreign markets over the past six unfortunate months. A falling dollar creates strong overseas sales. With that wind at their backs, plus tons of accumulated cash, our corporate behemoths are suddenly the world's investment of choice.

Fortunately, large companies are not tricky to buy. Anyone screening for low P/E's or "Dog Dows" can take what amounts to a Home Depot approach and assemble a selection on their own. The process may save about 2 percent or more in annual management and trading costs. Otherwise, those costs can chew up almost half of the average dividend payout. If the stocks are held to perpetuity, they'll never even trigger any capital gains taxes. What could be more serene?

Considering the costs of our mutual funds, not to mention their taxes we're reminded of on April 15th, it may be time to "let bagwans be bagwans" for some of our mutual funds and strike out on our own.

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