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At a moment when the U.S. auto industry is poised on the brink of bankruptcy, investors can learn a lesson from an era when Detroit was the industrial epicenter of the world.
Back when Grandpa was building the post-World War II world, investing was very different than it is now, at least for most people. Foreign stocks and small domestic companies were curiosities. Investors put their faith in things they could see and touch, including the first fruits of capitalism's tree: interest and dividends.
The opening years of the 21st century are looking more and more like the middle years of the 20th, in terms of where the most reliable investments can be found. Of the 137 mutual funds that were launched before 1958 and still exist -- just 0.52% of those around today -- the overwhelming majority fall into one of two groups: growth and income, and balanced.
And guess what: Over the past 15 years, these two types of mutual funds have delivered better performance than nearly all their rivals. That's been especially true in the past year. By focusing on an investment's cash flow, evidenced by interest on bonds and dividends on stocks, investors have gotten the highest total returns as well.
If you are like most people, however, your portfolio gives short shrift to these mainstays. Today's rage is broad diversification into fund categories that didn't exist in Grandpa's day, such as commodities and commercial real estate, or those exotic foreign and small-capitalization groups. But if the current bear market has taught us anything, it is that "diversification" is a fun-house mirror in which everything ends up looking the same -- and everything looks ugly lately.
Take a tip from a (rather youthful) grandpa, me: Investing the old-fashioned way is the approach most likely to help you rebuild your shattered portfolio quickly. As another grandpa, "Deep Throat," so aptly told journalist Bob Woodward in "All the President's Men": Follow the money.
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Happier investing days
I've chosen 1958 as my grandpa year because, by definition, grandparents are two generations older than us, and a generation is about 25 years. And it's an apt date; 1958 was an epochal year for the United States and the West.In 1958, the night sky was still dark enough in your backyard that you could see Sputnik satellites whizzing by overhead.
The Russians had shot the world's first artificial satellite into space Oct. 4, 1957, and rocketry became the world's obsession. Schoolchildren like me were suddenly inundated with classes in math and science. You could buy the materials (including chemicals) needed to fuel and fly model rockets at any pharmacy, and my friends and I did. It wasn't for nothing that President Kennedy vowed to put an American on the moon before the end of the 1960s: This was the space race.
Our parents and grandparents, meanwhile, could play the space race in the stock market, investing in IBM (IBM, news, msgs), Honeywell International (HON, news, msgs) and other cutting-edge companies. Among the mutual funds available in 1958 were zippy portfolios such as Putnam Investors (PINVX), Fidelity Fund (FFIDX) and T. Rowe Price Growth Stock (PRGFX).
But growth investors, who pay less heed to dividends than the rival value camp, were in the minority in that era. Value, best represented by Benjamin Graham, dominated the investment arena, just as far more grandpas drove Oldsmobiles than MGs. Indeed, while growth investors such as Peter Lynch have since come and gone, the only hyper-successful investor of the 1950s who is still around is Warren Buffett, Graham's best-known employee.
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Of course, a lot of grandpas in that era were also "investing" in Treasury bills tucked into files for the kids, coins stashed in boxes under the bed or passbook savings accounts. Those investments are about as good today as they were then. Suffice to say, I'd rather emulate Grandpa Buffett.
And what does Buffett own now? Companies that throw off cash by the bushel. His company, Berkshire Hathaway (BRK.B, news, msgs), doesn't pay a dividend, but only because Buffett can invest his immense cash flow better than his shareholders could. When he is the shareholder, he demands cash; his first investment in a company is typically preferred stock that pays a fat dividend while he waits to convert it into common shares.
Continued: The go-go days got us good
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