Growing Rich - Arabictrader.com

KIRK KAZANJIAN
YIELDING TO THE BOND DEBATE
Keeping risk to a minimum is just as important to Robert Stovall.
He does this by sticking with highly liquid, dividend-paying companies.
“I don’t like stocks whose prices scoot up and down like a roller
shade,” he says. “That scares me.” As a result, this timid investor stays
with the best and usually the biggest in whatever industry he’s investing
in. “For example, in the computer-manufacturing area, there are
two large companies, Applied Materials and KLA-Tencor, and a much
smaller one called Brook’s Automation,” he observes. “The performance
of Applied and KLA-Tencor is volatile enough. But look at
Brook’s Automation. This stock had a price range of $9 to $41 in the
preceding 52 weeks. This kind of performance makes me and my older
clients nervous. While the upside of Brook’s might be greater, and I
emphasize the word might, I can explain the volatility of KLA-Tencor
and Applied Materials to them better than I can the violent price
swings of Brook’s.”
As an added risk buffer, Stovall pads his portfolios with bonds.
These instruments are more stable, provide reliable income, and also
have a bit of appreciation potential. “I further use convertible securities,
which many people avoid,” he says. “Still, I frequently outperform
both the S&P 500 and the Dow 30, which is pretty good in my business.
Granted, it’s rare for me to come out number one or two in any
stock picking contest, because I do want to keep risk under control.
However, to use a baseball analogy, my goal is to get on base a lot.
I’d rather have a good batting average than hit a lot of home runs.
That’s how you survive in this business.”
Papp, on the other hand, doesn’t think much of bonds. Although
he owns a few Treasuries in his personal portfolio, he’s clearly a man
of the stock market. Papp views bonds as inferior investments that
are expensive compared to stocks. “As we speak, you are being forced
to pay 16.5 times earnings for a five-year Treasury,” he concludes.
“I get that number by taking the price of a bond ($1,000) and dividing
it by the amount of interest it pays each year ($64). I’d rather pay 20
times earnings for a stock. I know that historically the return on stocks
has been approximately four times the return on bonds. Bonds to me
are appropriate only as a short-term parking place.”
While some investors feel bonds are a “safer” investment, Papp
turns to yet another baseball analogy to show why he disagrees. “If
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