Taking stock

Entrepreneur, Sept, 1998 by Lorayne Fiorillo

Entrepreneur: Would you recommend that people stay with a good-quality U.S. corporate or government bond as opposed to high-yield or junk bonds?

Wachtel: They call them "junk bonds," and that's a residue of the past, but these are usually fairly decent companies that the rating services don't rate on a quality standard. You often get returns 200 basis points above treasuries. I would certainly not turn away from this so-called junk bond market. I think there are excellent yield opportunities. The junk bond people call it the "high-yield market," and it is a high-yield market. Only if you get into a recessionary environment can you make the case that high-yield bonds, or junk bonds, could be dangerous. But we're far from that.

Entrepreneur: Why would a recession make junk bonds dangerous?

Wachtel: Well, the reason they didn't get the high ratings from the rating services is that they have marginal balance sheets. If the economy falls away, those balance sheets would look worse. If the economy remains vigorous, however, there would be no problem investing there. These are economically vulnerable corporations; that's why the rating services don't rank them too high.

Entrepreneur: Do you think interest rates are going to stay put?

Wachtel: I think so. I see a very narrow range for rates. Maybe on the long bond yield down to 5.85 to 5.9, maximum 6.15 to 6.2 on the upside. I think the trading range will remain narrow, as it has been for most of the year.

Entrepreneur: A lot of people invest in mutual funds instead of buying individual stocks. Is that generally a good thing to do, or should people who have a certain amount of money look toward individual stocks?

Wachtel: The mutual fund technique is fine. There are 8,000 mutual funds. The problem is not appraising what you're after. There are all types of funds; you have to decide which ones suit you the best given your age, your conservative or aggressive nature and what you want in the future.

Of course, funds have professional managers. When you deal with individual stocks, there are so many surprises that come along on a corporate level. If you plan to invest time and energy to try to anticipate or adjust to those surprises, fine. But if you're buying individual stocks without a warm body helping you, surprises come along and suddenly you're down to 10 points.

The money manager in charge of each mutual fund has a staff to address those problems and avoid those surprises. Hypothetically, all investments look great, but in the real world where you actually put your money on the line and you get emotionally involved, it's not so easy.

Entrepreneur: It seems as though you can get all the information you need on the Web.

Wachtel: Before there was a Web, there was a library, you know. You could have gone to the library and gotten all the information you wanted, right? Maybe you can get the information more easily now, but you still have to assimilate it and decide what investment conclusions to draw. You can read an annual report and say "this is a great company" and not be aware of the potential danger in terms of competition or obsolescence.