The right investment company

Nation's Business, Feb, 1985 by Sharon Reier

IF YOU ARE looking for a firm to help you invest your money, how do you make a choice among the multitudes? It is not easy, even for Maurice Schoenwald.

As an attorney listed in the telephone book of Florida's upscale Long Boat Key, where he lives in winter, Schoenwald receives about three cold calls a week from stockbrokers keen on snapping up his business. Says Schoenwald: "They ask: 'Have you heard of us?' I have a canned answer. I tell them that I know them quite well, but that I already have more brokers than I can shake a stick at, and they are wasting their time."

What Schoenwald does not tell them is that he not only has his own investments to care for, he also operates a small, three-year-old mutual fund called the New Alternatives Fund that specializes in alternative energy and conservation stocks. He needs precise information about start-up companies in energy technology and about large capitalization firms that are concentrating new efforts in areas like solar cells and energy-efficient engines.

Occasionally, Schoenwald finds himself discussing his fund's objectives with one of those eager phone callers. After all, most Wall Street firms and many regional brokerages provide first-rate research. "I tell them that if they find me a stock that fits, we may do some business," he says. "But when they call me back, they always want to sell me municipal bonds. They just expect lawyers to want munis."

It is unusual for an investor to be able to define his needs quite so specifically as Schoenwald can. However, with major Wall Street firms marketing to the masses as if they were selling tobacco, towels or toothpaste, investors must increasingly set their own course when navigating through stocks, bonds, municipals, convertibles, junk bonds, zero coupon bonds, commodities, options, tax shelters and insurance products.

Wall Street has been called "the financial supermarket." The Street is not particularly fond of the nomenclature.

Alan Altshuler, senior vice president of corporate development at Prudential Bache, says that "the idea of the one-stop shopping place for financial products is specious." In reality, he says, Prudential Bache and other major Wall Street firms offer "a broad range of financial products, with little expectation that a customer will come to us for all his needs."

But which firm should you pick, for which needs, out of some 4,000 investment companies, ranging from multithousand-employe wire houses to two-man money management firms drooling for your dollar?

Naturally, recommendations of friends and colleagues who have had investment successes will play a role. But even an investment adviser who wins a glowing seal of approval from a client may be unsuitable for another investor's need.

"The best way to approach a financial organization," says Louis Ehrenkrantz, head of research and a principal at the Wall Street firm of Reich & Company, is "to first realize what you want and then see if a particular firm can provide it. It is like ice cream. You have to know the flavor of the firm."

And there are enough flavors to put Howard Johnson's to shame. "You don't want to pay for vanilla when chocolate is what you like," Ehrenkrantz advises. "If you are geared to income and can't afford to lose a cent, then going to a high-powered research boutique on Wall Street means that you are clearly in the wrong place, even if their performance record is excellent."

EHRENKRANTZ notes that "an investment house can't be all things to all people. If a widow came to me and asked for absolute safety of principal, then I would tell her she should not give me her money." Customers should realize, he says, that "stock purchases are inherently risky. Capital appreciation means high risk. You come to me if you have a taste for that risk."

But at the Baltimore-based regional brokerage house of Legg Mason Wood Walker, Vice Chairman Jack Curley begs to differ. His firm, he says, sticks to "sensible, prudent, conservative investments." Says Curley: "We do not sell commodities at all, because we have seen that the typical investor in commodities eventually gets killed. And options are only 1-1/2 percent of our business, whereas at some investment firms they are as much as 14 percent."

What Legg Mason has preached and has instilled in its brokers, he says, "is our philosophy of the value approach to investing." By the value approach, Curley means the traditional Benjamin Graham school of low price-earnings investment. "Over a period of time, stocks in the lowest quintile of price-earnings ratios outperform all others," Curley explains. "A study of the five quintiles over a 24-year period shows that $10,000 put in the highest P-E quintile in the 1959 would have been worth $55,557 in 1983; in the second quintile the figure would have been $58,209, in the third $110,837, in the fourth $162,572 and in the last quintile $391,484."

By comparison, Curley points out, $10,000 put in the Dow Jones Industrial Average stocks would have risen only to $78,655 in the same period. Legg Mason's strategy is to pick stocks in the lowest quintile and then reconstitute that portfolio each year, sticking to the lowest quintile stocks.