Thou shalt not speculate

If you are tempted to pick up some bargain stocks during this market downturn, you may want to think again about what you are buying.

Investors soured on high tech stocks last month and punished them to the tune of as much as 30 per cent drop for the Nasdaq. Can you spell volatility? Larry Sarbitt, noted money manager and captain of the new AIC American Focused fund, wants no part of this game.

"I didn't do a lot of buying," he says. "I didn't have to, I have no interest in high techs, and my own stocks kept going up." A lot of the stocks that corrected were stocks that he had no interest in. Larry manages money with a style similar to billionaire Warren Buffett's: buy large positions in quality companies with real businesses and hold on to them for the long time.

"It was a good start," he says. "A good correction would be welcome, especially in the companies we're looking for." Larry says there were not too many bargains to be had out there. For example, he would have loved to see Coca Cola, American Express or McDonald's stocks drop further so he could buy them at an attractive price. "These are great businesses, and we'd love to own them," he says, "but they're a little too expensive right now." Coca Cola is trading at 47 times earnings and Amex and McDonald's are trading at over 27 times earnings.

He did find some bargains, though, and they are still well-priced today. "Waste Management (WMI) is undesired by the market. They have made a lot of mistakes -- a ton of mistakes -- and are out of favour, but they are predominant in their market, we believe they will be around and growing over the next 10 years, so we're happy to see them unrecognized right now."

He also favours two huge and powerful franchises in the U.S., giant mortgage issuers Freddie Mac (FRE) and Fannie Mae (FNM). "These stocks are out of favour because of politics," he says. There is speculation that the giant mortgage houses will lose their special status with the U.S. government because of accumulation of power. "We think their charter will remain intact,"Larry says, "Their power is stronger now, not weaker. You can't go monkeying around with the charter."

"Our primary goal is protection of capital," he says, "and when we buy great stocks for cheap we are more protected." And the fact is that although most of the dot-coms and tech companies were punished in the correction, they are not the kinds of bargains that Larry believes make for a solid long-term portfolio. When many would be tempted to dip in the pool, Larry holds his ground. "The techs have no value at all," he says. "Eventually, realistic valuations will return to the market, sooner rather than later."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.