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69

ADRs are listed on the New York Stock Exchange and most have detailed financial information available in English.

The mechanics are simple because a large number of foreign stocks, funds, and other financial instruments are actively traded here. Foreign stocks can make good sense, because they sometimes trade at lower values, using contrarian indicators, than do domestic companies in the same industry. Unilever, for example, the giant Dutch-based consumer products company, is nearly the same size as Procter & Gamble. The company has a lower P/E and a higher yield than the American consumer products companies, although the growth rates are similar. Other foreign companies that present better value than their American coun-1 8 can be found by looking through the Value Line Investment Survey or the S&P stock report sheets.

You might use these stocks, as I do, to find better values in a particular industry than are available domestically, or else to produce a diversified portfolio both by country and by industry. Such giants as Royal Dutch, Sony, Nestle N.V., and Philips are all traded here, most on the NYSE. Using ADRs, you can structure a well-diversified foreign portfolio. By coincidence, many of these large, well-established ADRs pass the contrarian criteria easily. But remember, the currency risk doesnt disappear. If the dollar spikes up against the currency the stock was issued in, the price will drop, and vice-versa.

There are a number of conservative ways, then, to approach markets abroad. The first is to buy an index fund, or a close substitute, that represents the weighted value of stocks outside the U.S. If I were to buy a foreign fund, this would be my preference, because currendy there are no contrarian funds with acceptable records in these markets.

The second is to buy large foreign companies that have ADRs trading here and that fit in with a contrarian strategy, as was described. The latter is something I have done often with the portfolios I manage, with good success.

A third altemative that sometimes proves quite lucrative is to buy closed-end funds that invest in major countries with good outlooks and political stability, when these funds are unpopular.

The first mle of investing abroad is identical to the first mle of investing at home: buy em when theyre cheap, not when everybody is on the bandwagon and the media hype is in full swing. With hot initial public offerings (IPOs) and concept stocks at home, we know that after a euphoric price mn-up there is an inevitable hangover.

If you buy a country fund, you should, of course, look for the same contrarian characteristics. Four examples of country funds that have been cheap in recent years:



When to Sell?

Regardless of the strategy you use, one of your most difficult decisions is when to sell. There are almost as many answers to the problem as there are investors, but even among professionals, few religiously follow their own sell mles. Psychological forces dislocate most sell decisions, often disastrously. I have seen many a money manager set stringent sell targets, and did so myself in my earlier years. But as the

* The expense ratio of a fund is the annual charges the fund takes, including management fees. This comes right out of the investors pockets. These ratios average 1.20% for the industry and can run as high as 2% to 3% a year. The lower the expense ratio for a comparable fund the more favorable it is to the investor.

The Germany Fund traded at more than double its net asset value at the peak of "Europe 1992" enthusiasm in 1991. Since then, the stock has declined to a discount of 17% by late 1997.

The Spain Fund, at the height of the investor euphoria in 1989, traded at almost triple its net asset value. In late 1997, it traded at a discount of nearly 14%.

Scudder New Europe traded at a 20% discount in late 1997.

Vanguard Intemational Equity Index European is a no-load index fund. Its expense ratio of 30 basis points is only one-sixth that of most funds investing in Europe.*

One final word of waming on foreign closed-end funds: dont buy countries considered to have great prospects, which trade at a premium to their net asset value. The average closed-end fund normally trades at a 10% discount or more to the underlying asset value of its portfolio. Be wary of a premium; it probably wont last. When a country or sector fund gets "hot," as the Spain Fund did in 1989, enthusiastic folks pushed it to an enormous premium, as we saw, before it slid back to a discount. Investors caught in such a swing from premium to discount lost as much as 50% of their assets, after underwriting fees. This can occur with little or no movement in the underlying foreign stock market itself. This is another segment of the new-issues game that puts big bucks into the underwriters pockets at the expense of the investor.

Next well tum to one of the toughest questions that must be addressed using contrarian-or for that matter any other-strategy. When should you sell?



Stock moved rapidly toward the pre-set price, more and more good news usually accompanied its rise.

If the stock was originally purchased at $20 with the sell target at $40, and it shot through $40, the manager would often bump the sell price higher. Forty would become $50, $50 would be stretched to $60. This frequendy resulted in the manager taking "the round trip": riding a stock all the way up, only to ride it all the way down again.

Given what we know, it seems that the safest approach, once again, is to rely on mechanical guideUnes, which filter out much of the emotional content of the decision. The general rule I use is this, which Ill call Rule 21:

RULE 21

Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.

For example, assume we are using the low P/E strategy and the market P/E is 22. If one of our stocks, (say PNC Bank), bought at a P/E of 10, went up to 22, we would sell it and replace it with another low P/E stock.*

The first guideline then is simple: Pick a sell point when you buy a stock. If it reaches that point, grit your teeth, brace yourself, and get rid of it. You probably will be unhappy because the issue often will go higher. But why be greedy? Youve made a good gain, and thats what the game is all about. (The only exception is when you have an almost sure takeover situation.)

Picking a sell point, however, doesnt necessarily mean selling a stock just because it has gone up. If you are a low price-to-book value (P/BV) player, for example, you may find that even after a stock has risen 8 1 it still sells at a below-market P/BV because its book value has continued to go up. Often, stocks remain at low P/BVs for years, despite doubling or even tripling in price, because book value has also doubled or tripled, keeping the P/BV ratio low. The same is true for low price-to-earnings, price-to-cash flow, or high dividend yields.

Another question is how long should you hold a stock that has not worked out. Investors all too often fall in love with their holdings. I have

* Naturally, as prices change over time, the weightings of stocks in the portfolio will differ. When stocks are sold, the effort should be made to bring the weightings more into balance with one another.



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