You might think if you sat down with one of the country's top investment experts, the first subject would be where to invest. Jeff Saut, however, has one word he wants to burn into investors' heads: risk.
"The most important thing that professional and individual investors need to think about is how to manage risk," Saut, the chief investment strategist for Raymond James Financial Services, says.
He was in Salt Lake City recently speaking to financial advisers from Raymond James and their clients at the Grand America Hotel. Before the event, he took some time to discuss some of his advice for people just getting involved in investing.
His advice has its roots in when his father made him read, at the age of 13, the 1949 classic book "The Intelligent Investor" by Benjamin Graham, who died in 1976. "And I've probably read it a dozen times since then," Saut says.
The last chapter of Graham's book was titled "Margin of Safety."
"Graham tells investors that 'The essence of portfolio management is the management of risks, not the management of returns,'" Saut says. "And he closes that thought by saying, 'All good portfolio management begins and ends with this premise.'"
Saut says his dad could put the idea more succinctly.
"He said, 'Son, if you manage for the downside and avoid the big loss, the upside will take care of itself,'" he says. "But this is really hard to do, not just for individual investors, but for most professional investors as well."
Saut spoke at a conference at Atlantis Paradise Island Resort in Nassau, Bahamas, to about 2,500 investors from around the world. He says he told the people that it wasn't an investment mistake to buy stock in Lucent, a telecommunications company, when shares were at $72. "The mistake," he told them, "was in not selling it at $60 or at $50, $40, $20, $10 or $5. I guarantee you that there is somebody in this audience that still owns Lucent even though it has been absorbed by Alcatel."
Sure enough, an 80-something-year-old man in the front row stood up, raised his hand and said, "Here I am."
When thinking about risk, Saut talks about the "uncle point," that point where losses become just too much and the investor wants to cry the proverbial "uncle."
"My uncle point is usually somewhere around 15 percent," he says. "I then take some kind of action. It doesn't mean I necessarily sell the position out, but there are ways to hedge positions where you manage the risk on the downside."
Everybody's uncle point may be different. Some people are more tolerant to losses. Other people can't take any losses.
But people just won't think about risks. "People tend to think because they are good and they go to Sunday School and teach Sunday School that everything is going to come out OK in the long run — and it just isn't like that in a lot of cases," he says. "Unless you get lucky and pick the right stock."
Saut knew one gentleman in Richmond, Va., who worked for Philip Morris on the cigarette-packaging assembly line. Every time the CEO or CFO bought a million or two million dollars' worth of Philip Morris stock, the employee would by as much as he could. By the time retired, he was worth tens of millions of dollars.
But if he had worked for Circuit City instead of Philip Morris and bought its stock, he would have eventually lost all his money.
This is why diversification is less risky.
Saut quotes the late investor and philanthropist John Templeton, "The only investors who shouldn't diversify are those who are right 100 percent of the time."
Saut says a lot of these people think they work for a good company. "So not only do they have their livelihood, their income, hooked to this company," he says, "but they have all of their investment dollars, outside of their real estate, tied to this same single company. So if this company falls on hard times, for whatever reason, not only do they lose their income, they lose their investment capital."
Ideas on investing
Saut says it is always a good idea to find a good financial adviser — someone who understands managing risk.
He also gives other ideas on investing.
For example, how to evaluate a company.
"The three most important things when evaluating a company are management, management, management," he says. "Good managers can take lousy assets and do wonderful things with it. And bad managers can take wonderful assets and do really bad things with them."
He says another good idea is to narrow the universe of stocks to choose from by whether they have consistently increased dividends every year.
Another trick would be to follow what really good investors, such as Warren Buffett, invest in.
"Another thing you can look at is what I would term owner-operators," he says. "If you look at companies over time, where the people that own the majority of the stock or a large portion of the stock and run the company, those companies tend to do better than management teams that own very little stock."
To look at company fundamentals, he says Yahoo Finance does a pretty good job for free.
Even though he is fond of examples that have $100,000 in them, Saut says people can start small. "You can buy one share of stock and put it into a dividend reinvestment program," he says. "You can buy certain mutual funds in an IRA for as little as $100 — most are $500 or $1,000, but you don't need a lot of money to start. The key is to start."