Taking stock

Entrepreneur, Sept, 1998 by Lorayne Fiorillo

Entrepreneur: What sectors of the U.S. market do you like for the next few months?

Wachtel: The boom in the stock market has created excess buying power, and it's certainly being reflected in sales across the United States. I like computer stocks and some of the real estate investment trusts.

Now, in a market as elevated as this one is, to a certain degree, you should have defensive strategies. Real estate investment trusts, with their high yields and rather limited volatility, are one category.

Entrepreneur: What would you avoid?

Wachtel: I would avoid excess. For example, Internet stocks: I think for average investors, these are simply too volatile. Also, they should avoid stocks that have been involved in the recent tremendous price increases. I would also be leery of interest rate-sensitive stocks, like banks, because with this vigorous economy and the threat of the Federal Reserve tightening, I think these stocks have some vulnerability.

Entrepreneur: Some people are concerned that the market is going to come down fast. Do you think it will?

Wachtel: One-third of this year's trading sessions have seen the Dow move plus or minus 100 points, so right now you have to live with the fact that the market, namely the Dow Jones Industrial Average, is a wild and crazy thing. If it can fall 300 points in three days and rally 300 points in three days, then it's conceivable that it can fall 700 points in a short period of time.

I think people have realized these swings in the Dow are now the norm rather than the exception, and they tend to buy on these dips. So, sure, there could be shakeouts along the way. I think it's part of the game we play here. But the bull market will continue until fundamental factors make it end; namely, the profits dive in a recessionary environment or inflation suddenly gets out of control and interest rates rise, thereby creating an alternative to stocks. But if you talk about week-to-week swings in the Dow, welcome to the club - that's the way it's going to be.

Entrepreneur: We've been talking about large-company stocks so far. Do you expect small- and medium-company stocks to rise?

Wachtel: They have. When people say the market has been all big caps, they're missing the fact that the Dow has been all big caps because it's a big-cap index. But there have been movements in midcap stocks; there have been movements in small-cap stocks. I have been on Wall Street many, many years. If you build a better mousetrap, Wall Street will find a way to your door. There have been great stories in small-cap mutual funds. So it's foolhardy to believe this is a big-cap market. There are 9,000 stocks out there, and if you find one that's exciting with an authentic growth story, you'll be rewarded.

Entrepreneur: You mentioned that if interest rates go up, people might move money out of markets into other things. Is this a good time to buy bonds?

Wachtel: I think it's marginal. I'm not a big fan of bonds. On one hand, given the vigor of the economy, it's hard for me to believe that bond yields are going to come down dramatically from the current low bond level of around 6 percent. On the other hand, given the modest inflation involved and the reluctance of the Federal Reserve to tighten, I doubt a long bond yield is going to rally up and hurt bonds. So you have the coupon and a fairly safe investment, but it certainly isn't a very dramatic investment.