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Conservative Concentration
New Market Fund
Interview with: Stephen Goddard

Author: Dave Jennings
Last Update: , :
For a change, there is a manager who invests in the past, and not the future. Steve Goddard gets nervous when valuations become very forward-looking and loves Warren Buffett's business strong enough to put 1/4 of his fund's money into Berkshire Hathaway.

New Market Fund

A: We liked Cisco. If you look at the entire technology industry, there are only a handful of stocks that are going to be around five years from now, one being Dell, Microsoft, IBM, and Intel. Once you get below that, there's not too many names out there that you can say with any type of confidence that they'll be around five years from now.

Q: Do you want John Chambers to pay dividends one day?

A: They're sitting on a hoard of cash. I don't want to see them overpay for acquisitions. I'm not picking on Cisco; I'm just saying in general that Corporate America hasn't had a good track record of using shareholder money wisely to acquire other companies. They've either overpaid or had poor timing. With the big tax law, you're going to see far more pressure for companies to distribute their capital back to the shareholders versus retaining the capital. You'll see payouts increase. You'll have more special dividends. That will be healthy for the market because it will take away a lot of the speculation and accounting gimmickry. A lot more of your returns will come from dividends versus appreciation, which is the way it used to be back in the 1940s and 1950s where people purchased stock simply for yield and not for appreciation.

Q: That was true for that era.

A: Stocks used to yield more than the bond market did, which is where we're getting to today. With bonds trading at 3.75%, and 3.3%, you can find stocks all day long that pay a higher income stream than Treasuries do. Back in the 1940s and 1950s, stock had to pay up more than the bond market because they were considered a riskier investment. They had to pay a higher yield back then. It seems like that's where we're going today. We're slowly going back in that direction where stocks are paying out more yield to attract investors.

Q: Obviously you like to concentrate in the financial services industry with so many companies in the portfolio.

A: Yes. Financial services is probably 20 some percent of the S&P 500. My sense is we're going to see a lot more consolidation going on, not only in the financial services industry, but all the industries, because there is way too much capacity in virtually every industry out there. You just don't have enough top line growth for many of these companies to stay independent.

Q: I agree. What worries me about not enough consolidation already is it is not due to the companies but the Wall Street investment bankers that cook up financing deals to keep them alive.

A: One problem with the low interest rate environment is you're keeping the marginal players alive longer than they should. I still think there's going to be a lot of pressure from the outside shareholders for companies to consolidate. In virtually every industry there are two or three strong players and there's six or seven weaker players looking for a marriage. I'm surprised there hasn't been more activity up to now. The reason why the economy is weak is not that demand has fallen off so dramatically, there's been way too much supply put on the market in the last five years.

Q: We're suffering now after five years of easy money by the Fed. It took away the punch bowl for a while. Now it has reverted back to the prior policy. Maybe it should have done nothing.

A: I'm a believer in Milton Friedman's philosophy to do away with the Fed. We don't need it. Just have a stable policy that says have 1 or 2% growth throughout and just leave it there.

Q: The better players in that environment will capture most of the GDP.

A: I think it better to just leave the market alone. Let rates fall where they're supposed to fall. Same goes for currency. I'm much more a believer in letting the market correct itself versus tinkering around with the tax system, monetary policy or fiscal policy.

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