08 Sep 2009 Torray Fund - Q2 Report ( Portfolio )
When stocks recover from a crash, speculative issues often perform best, and last quarter’s rally proved no exception. In fact, it may have been a record-setter in that regard. Shares priced under $5 out-ran stocks trading above $50 by 91%. Those of companies losing money or breaking even beat profitable ones by 24%, and, belying the notion investors crave income, stocks paying dividends trailed those that didn’t. These are truly extraordinary statistics.

As we write, these trends have reversed, with higher-quality stocks taking the lead. There are signs the economy and financial system are stabilizing, and reported earnings, so far, have been running ahead of expectations. All of this is encouraging. While one can never know the future, we think there’s more room for optimism now than at any time since the financial crisis began. In saying this, we’re talking longer term, not just a few months or quarters.

In response to the tremendous beating they’ve taken, desperate investors are looking for cures in what we see as all the wrong places. Stocks of the best companies have been sold and the proceeds put into money market funds, CDs, savings accounts and bonds. Huge sums have also moved to overseas markets, especially those in lesser-developed countries. Sooner or later, we believe this money is bound to end up back where it started, but probably not until stock prices are much higher. We’ve seen it happen too many times to think otherwise.

Despite our economy’s ups and downs, and the market’s unpredictable erratic gyrations, patient long-term holders of stocks have fared very well. In fact, stocks are the only widely available option that has directly tracked America’s prosperity. Fixed income options have run far behind. Yet, as noted, people have been buying them anyway, largely in response to punishing losses they fear may only get worse. Ironically, at the top in October 2007, they were doing just the opposite. The national savings rate was negative, and investors chased stocks, many at twice today’s levels, often on margin. They also bid up houses and commodities. This is the only business we can think of where the customer goes into a frenzy over a rising price. Think about it. Who would reject a new car at $10,000 only to buy two at $30,000? But, that’s what people tend to do when it comes to investing.

Unfortunately, in the present circumstance, we think investors sitting on 2% CDs and five and ten-year government bonds yielding 2 1/2% - 3 1/2% are once again heading for disappointment. Taxes aside, long experience suggests these choices, net of inflation, will return little or nothing. Beyond that, it’s even more foolish to be selling quality stocks after they’ve dropped 30% - 50% to buy speculative ones just because they’re going up.