Three veteran investors - Russell F. Knapp, Seth Glickenhaus and S. Francis Nicholson - seasoned with a combined 192 years of investment management experience, believe today's stock market is overvalued, but only one suggests the market is in for a fall.
These three elder statesmen of the money management business have seen just about everything the market has to offer. All are still actively involved in the investment management business.
For Messrs. Knapp, 87; Glickenhaus, 82; and Nicholson, 96, investment management is still fun, and each plans to remain active in the business for many more years. Mr. Glickenhaus said he doesn't plan to retire until he reaches at least 125.
Mr. Glickenhaus is senior partner and chief investment officer at Glickenhaus & Co., New York. Mr. Knapp is chairman emeritus of Securities Corp. of Iowa, Cedar Rapids, and comes into his office daily. Mr. Nicholson officially retired as head of the trust investment department of Provident National Bank, Philadelphia, in 1965. But Mr. Nicholson, whose early studies formed the framework for much of today's low price-earnings investing, continues to serve on the investment committees of several Quaker organizations in the Philadelphia area and writes articles for financial journals.
Each of the three still maintains a full schedule. They share enthusiasm, determination and the belief that being advanced in years doesn't necessarily mean they must withdraw from the investment arena.
And each agrees that a diligent and disciplined approach to investing in stocks will pay off in the long run.
Passionate value investors
If there is a common theme among the three patriarchs, it is their nearly passionate belief in value investing and that it is better to get more for your money than less. All believe the stock market is still the best place to invest for the long term.
But there is no consensus among them as to the outlook for today's stock market.
"The bull market is alive and well," said Mr. Knapp, who in 1938 founded Securities Corp. of Iowa, parent of SCI Capital Management Inc. Mr. Knapp serves on the board and works part time as an investment adviser at SCI - that is, between tennis matches.
Mr. Knapp voices singular pride in being the oldest nationally ranked amateur tennis player in the nation by the U.S. Lawn Tennis Association. He plays regularly, often against opponents 20 years younger.
A renowned value investor and follower of Warren Buffett, Peter Lynch and Philip Carret (himself 99 years of age), Mr. Knapp said he will only buy "deeply discounted" stocks, although he said finding bargains in today's market is getting more difficult.
"You don't buy the stock market now, you buy individual stocks. You should reset your targets regularly and watch things carefully as you go along," he said. "I don't buy a stock that can't go up 25% in a year. I want a realizable potential goal of doubling in at least five years. The long-term outlook for stocks is probably good, but only buy what is deeply underpriced."
Benjamin Graham's autograph
The concept of identifying and buying underpriced stocks was impressed on Mr. Knapp during a 1950 session at the New York Institute of Finance, where value investing was taught using Benjamin Graham's seminal volume "The Intelligent Investor." Mr. Graham signed Mr. Knapp's copy.
"I got that fundamental orientation of seeking the 'margin of safety' from Benjamin Graham," said Mr. Knapp. "That's one reason we survived."
The "margin of safety" is the final chapter and the central concept in Mr. Graham's volume; it advises investors to determine the fair value of a stock and consider selling when the price increases to a level above fair value.
Recent volatility in the domestic stock market does not concern Mr. Knapp, who believes in holding a few issues for longer periods, like Mr. Buffett. "I'm not nervous (about market volatility); I'm not worried about the stocks that I own. Most of my net worth is in 10 to 12 stocks."
Some of Mr. Knapp's stocks include Merrill Lynch & Co., Forum Retirement Partners L.P. and, naturally, Buffett's company, Berkshire Hathaway Inc., which he calls "the best investment I ever made." Mr. Knapp said he bought shares of Berkshire Hathaway at $400 almost 14 years ago. The shares recently were priced around $33,500 each.
"I like to buy stocks which institutions aren't interested in, or only minimally," said Mr. Knapp.
As to prospects for a stock market correction, Mr. Knapp said it doesn't appear likely. "I am not looking for a super-deep correction anytime soon. If we have a correction I would hope I would have anticipated it and acted accordingly. But we aren't headed that way right now; I'm not looking to get clobbered."
Suspicious of market timers
Mr. Nicholson, a pioneer researcher in the field of value investing in the 1950s and 1960s, said he doesn't attempt to predict market movements or time the stock market, "and I am suspicious of people who do."
As might be expected from an early proponent of value investing, Mr. Nicholson said the market is overvalued with p/e ratios around 19 (based on trailing 12-month earnings), 35% above the 1928-1995 average. "My own preference is between 10 and 13 times," he said.
"The market has gone a little crazy. The trading numbers seem to be about the same as state lotteries and casinos," said Mr. Nicholson. He said, under these conditions, "it is hard to find bargains," and portfolio managers should consider adding fixed-income investments "until market p/es improve." But, he added, a market correction "isn't too important" for value investors "who normally like to hold their values indefinitely."
Mr. Nicholson, who claims to have coined the term "intrinsic value" before 1940, carved his name in the annals of investment management with his early studies showing that low p/e investing was less risky and more profitable over the long term than growth investing, which was counter to the conventional wisdom of the 1950s.
Updating his original research in 1968, Mr. Nicholson wrote: "Successful investment depends in large measure on the ability to determine the price ranges within which stocks may be advantageously bought or sold.... This attention to stock prices and price ratios may have a greater effect on investment performance than much of the effort devoted to fine distinctions concerning growth estimates or the determination of blue-chip qualifications."
While Mr. Nicholson's work formed the basis for much of today's value investing, he is not opposed to growth qualities in certain stocks, "as long as you don't have to pay too much for it. .*.*. When you go to the department store you want the best value; the same is true for the investment world."
Mr. Nicholson's early studies of low p/e stocks and value investing were cited in Benjamin Graham and David Dodd's classic tome on security analysis.
Too much turnover
Both Messrs. Knapp and Nicholson lament what they consider the excessive trading volume and turnover by money managers in stocks today.
"1962 was the first time 5 million shares sold in a single day, and recently there were 100 million shares sold. That's an enormous amount of trading and shows the extent that speculation has entered into the market," said Mr. Nicholson.
"Rapid trading results in 100% or more annual turnover in security holdings. Even at 50% ... the stockholder has no meaningful consciousness of being part owner of a business," he said.
Mr. Nicholson has some old-fashioned words of wisdom for stock market investors: "Successful investing does not require outperforming all other investors. It should call for a reasonable return from business productivity, some price advance to reflect retained earnings and offset inflation, and some reasonable further benefit from the effort to identify sound and promising businesses."
Only Seth Glickenhaus expects the stock market to take a turn for the worse.
A "market of stocks"
Mr. Glickenhaus, who still works a full schedule as chief investment officer at Glickenhaus & Co., with about $4 billion under management, said the "stock market is no longer a stock market but a market of stocks."
"We are in a contracting mode and I believe we are on the verge of a contraction in the stock market."
He said the federal government set the tone by adopting a policy of contraction, emphasizing lower deficits and lower government spending, which filters through the economy via corporate downsizing and cutbacks in hiring.
"The economy is being sustained by the credit card," said Mr. Glickenhaus, who has an opinion on many topics. "Consumer debt is at its highest level, or close to the peak. Late payments and defaults go up every month."
Meanwhile, said Mr. Glickenhaus, the market shows to no immediate signs of topping off.
"You still have money flowing into the market and companies are buying back their own stock; those two things are propelling the market," he said. "But the forward momentum of last year has been arrested. That wonderful ball game we have enjoyed is coming to an end."
Mr. Glickenhaus, a value investor who started his career with Salomon Brothers in 1934, is always searching for a cheap stock whose prospects appear to be brightening. But he also looks for good management.
"I like to see from the outset that they have a real interest in seeing the stock go up," he said, "There are many companies run by people who don't seem to give a damn about their stockholders, who would never dream of buying back stock, who don't raise their dividends, who are only interested in expanding their empire," he said.
Instead of wearing down after more than 60 years on Wall Street, Mr. Glickenhaus said he keeps getting more interested in his work and the work itself is still fun. But he agreed that finding good value in the current market is increasingly difficult.
Building an organization
He said when he first opened his firm in 1961, the investment process was a more personal effort on his part, but starting in the early 1970s he had to start building an organization to keep pace with developments in the investment management business.
In those early days the investment management process didn't require as much back office and support staff, he said, and most investment decisions were made by him. But by the 1970s he said he had to start paying more attention to managing the business as well as the money.
"I personally have become more of an organizational person as well as a money manager," he said. "In some sense I was happier earlier on, but I will admit I like the new way as well."
"In my approach, I always felt that with my natural ability, arithmetic sense, my sense of style, that I could outwit the markets.... In hindsight you always say, 'yes, I wouldn't have bought those stocks that lost money and bought more that worked out,'" he said.
For starting out, the opportunities are "just as good or better on a dollar basis today. (They) are not as good as they were in the 1920s, but from the '30s on they are just as good," said Mr. Glickenhaus.
Mr. Knapp had a different view.
"We had less than $5,000 capital and all we had was guts; you couldn't start with that today."
