From the September 1998 issue of Entrepreneur

Let's face it: The stock market is on everyone's mind. From cocktail parties to barber shops, around coffee machines and on the Internet, people are looking for more than just facts. Whether you're a devotee of talk radio or prefer your news straight from the bull's mouth, what you don't know can hurt you. There's information galore out there. The problem becomes interpretation, although it's sometimes couched in terms only a financial analyst can understand. So what are you going to do?

For many investors, the answers to their financial prayers come from a man known as the "Voice of Wall Street." Larry Wachtel, a senior vice president and market analyst at Prudential Securities Inc. for more than 30 years, has offered daily market commentary on both Prudential's internal radio system and all-news WINS radio in New York City. He is widely quoted on investment trends in publications ranging from The Wall Street Journal to The Christian Science Monitor, and he frequently provides market commentary on CNBC.

Wachtel's background is in journalism-he received a degree from New York's Long Island University-but he's best known for his serious financial analysis delivered in terms beginners can understand. He combines data from analysts, news wires and other sources and adds a bit of his trademark humor. He informs listeners in his patented "New Yawk" accent that "the rambling wreck from high tech" is at the root of all evil in a recent market pullback or suggests that investors "break out the punch bowl and celebrate the activities of 'El Toro,' the bull." He believes humor helps audiences understand and remember the information he provides. In light of the market's recent escapades-and with concern over the situation in Asia increasing investor nervousness-we talked with Wachtel to get some insight into the market and find out how investors can make the most of what's happening in the world of investing.

Q&A Part 1



Entrepreneur: The stock market has been on a roll for a long time. Do you think this bull magic will continue?

Larry Wachtel: I think it may slow down. Remember, we've been doing this since November of 1994. In the process, close to $8 trillion of value has been placed in equities in the United States. A so-called "bubble" or "mania" has taken place in terms of equities. At this point, we're at a valuation level that's the most extreme in history. That is, using the S&P 500 Index as your measuring stick, you're selling at approximately 26 times trailing and 23 times projected earnings. Those are the highest valuations in history, at least for the big blue-chip stocks.

It's hard for me to believe that if you annualize this year, which has gone up 16 percent in the first quarter, you come up to 60 percent. Since we're not going to do 60 percent, we have to progress at a slower rate. The Dow has sojourned above 9,000-this has been the fourth occasion [at press time]; it's been smacked back three times. I think this region-the 9,000 area-is going to be the trading range for a while.

Entrepreneur: Do you think there's some hope that the Dow will reach 10,000?

Wachtel: I think that it will occur over time. We are at such an extreme valuation that I would prefer to see the market grind away a little bit and prepare for the future because the higher you go without proper preparation, when the shake-out takes place, it's even more vicious.

Entrepreneur: The crisis in Asia has made the U.S. market fall in the past. Do you expect it to affect our market in the short or long term, or is it completely taken care of now?

Wachtel: When it first took place in 1997, the first order of business was to look at the banking system in several areas, particularly in Hong Kong. If those banks were having difficulty, that would have reverberated around the globe. But a combination of IMF funding and some rational thinking on the part of financial and political leaders has assuaged that particular problem. Then it was a matter of how much their slowdown was going to affect their economies and thereby affect their relationships with the United States. It turns out that about one-third of our foreign trade is done with Asia. On that margin, the crisis might be hurtful to some companies.

Asia needs another year; I don't think it's out of the woods by any means. I think Asia is still floundering, and there are areas, such as Indonesia, that are really in turmoil. So I wouldn't go rushing into Asia.
I think the impact of the Asian economic crisis on the U.S. economy will be felt for several quarters to come. In a perverse way, that will help, because the Asian problem has kept the Federal Reserve Bank from tightening money against a surging domestic economy.

My argument is that if it weren't for Asia, the Federal Reserve would have raised rates last November when our economy showed signs of improving significantly. Recognizing that Asia would affect our domestic economy sooner or later, they refrained. Moreover, if they had raised rates here, that would have weakened currencies in Asia and exacerbated the problems there.

Q&A Part 2



Entrepreneur: What sectors of the U.S. market do you like for the next few months?

Wachtel: The boom in the stock market has created excess buying power, and it's certainly being reflected in sales across the United States. I like computer stocks and some of the real estate investment trusts.
Now, in a market as elevated as this one is, to a certain degree, you should have defensive strategies. Real estate investment trusts, with their high yields and rather limited volatility, are one category.

Entrepreneur: What would you avoid?

Wachtel: I would avoid excess. For example, Internet stocks: I think for average investors, these are simply too volatile. Also, they should avoid stocks that have been involved in the recent tremendous price increases. I would also be leery of interest rate-sensitive stocks, like banks, because with this vigorous economy and the threat of the Federal Reserve tightening, I think these stocks have some vulnerability.

Entrepreneur: Some people are concerned that the market is going to come down fast. Do you think it will?

Wachtel: One-third of this year's trading sessions have seen the Dow move plus or minus 100 points, so right now you have to live with the fact that the market, namely the Dow Jones Industrial Average, is a wild and crazy thing. If it can fall 300 points in three days and rally 300 points in three days, then it's conceivable that it can fall 700 points in a short period of time.

I think people have realized these swings in the Dow are now the norm rather than the exception, and they tend to buy on these dips. So, sure, there could be shakeouts along the way. I think it's part of the game we play here. But the bull market will continue until fundamental factors make it end; namely, the profits dive in a recessionary environment or inflation suddenly gets out of control and interest rates rise, thereby creating an alternative to stocks. But if you talk about week-to-week swings in the Dow, welcome to the club-that's the way it's going to be.

Q&A Part 3

Entrepreneur: We've been talking about large-company stocks so far. Do you expect small- and medium-company stocks to rise?

Wachtel: They have. When people say the market has been all big caps, they're missing the fact that the Dow has been all big caps because it's a big-cap index. But there have been movements in midcap stocks; there have been movements in small-cap stocks. I have been on Wall Street many, many years. If you build a better mousetrap, Wall Street will find a way to your door. There have been great stories in small-cap mutual funds. So it's foolhardy to believe this is a big-cap market. There are 9,000 stocks out there, and if you find one that's exciting with an authentic growth story, you'll be rewarded.

Entrepreneur: You mentioned that if interest rates go up, people might move money out of markets into other things. Is this a good time to buy bonds?

Wachtel: I think it's marginal. I'm not a big fan of bonds. On one hand, given the vigor of the economy, it's hard for me to believe that bond yields are going to come down dramatically from the current low bond level of around 6 percent. On the other hand, given the modest inflation involved and the reluctance of the Federal Reserve to tighten, I doubt a long bond yield is going to rally up and hurt bonds. So you have the coupon and a fairly safe investment, but it certainly isn't a very dramatic investment.

Entrepreneur: Would you recommend that people stay with a good- quality U.S. corporate or government bond as opposed to high-yield or junk bonds?

Wachtel: They call them "junk bonds," and that's a residue of the past, but these are usually fairly decent companies that the rating services don't rate on a quality standard. You often get returns 200 basis points above treasuries. I would certainly not turn away from this so-called junk bond market. I think there are excellent yield opportunities. The junk bond people call it the "high-yield market," and it is a high-yield market. Only if you get into a recessionary environment can you make the case that high-yield bonds, or junk bonds, could be dangerous. But we're far from that.

Entrepreneur: Why would a recession make junk bonds dangerous?

Wachtel: Well, the reason they didn't get the high ratings from the rating services is that they have marginal balance sheets. If the economy falls away, those balance sheets would look worse. If the economy remains vigorous, however, there would be no problem investing there. These are economically vulnerable corporations; that's why the rating services don't rank them too high.

Entrepreneur: Do you think interest rates are going to stay put?

Wachtel: I think so. I see a very narrow range for rates. Maybe on the long bond yield down to 5.85 to 5.9, maximum 6.15 to 6.2 on the upside. I think the trading range will remain narrow, as it has been for most of the year.

Entrepreneur: A lot of people invest in mutual funds instead of buying individual stocks. Is that generally a good thing to do, or should people who have a certain amount of money look toward individual stocks?

Wachtel: The mutual fund technique is fine. There are 8,000 mutual funds. The problem is not appraising what you're after. There are all types of funds; you have to decide which ones suit you the best given your age, your conservative or aggressive nature and what you want in the future.

Of course, funds have professional managers. When you deal with individual stocks, there are so many surprises that come along on a corporate level. If you plan to invest time and energy to try to anticipate or adjust to those surprises, fine. But if you're buying individual stocks without a warm body helping you, surprises come along and suddenly you're down to 10 points.

The money manager in charge of each mutual fund has a staff to address those problems and avoid those surprises. Hypothetically, all investments look great, but in the real world where you actually put your money on the line and you get emotionally involved, it's not so easy.

Entrepreneur: It seems as though you can get all the information you need on the Web.

Wachtel: Before there was a Web, there was a library, you know. You could have gone to the library and gotten all the information you wanted, right? Maybe you can get the information more easily now, but you still have to assimilate it and decide what investment conclusions to draw. You can read an annual report and say "this is a great company" and not be aware of the potential danger in terms of competition or obsolescence.

What you really need is someone who has been doing this for a while. That's why the advice of individual brokers is so important. Here at Prudential, we spend approximately $70 million on research. And this has not just been thrown to the winds. It means I have someone I can turn to who can assimilate all this material and come to an investment conclusion and warn me if things are going sour.

Entrepreneur: Tell us a little bit about load vs. no-load funds. The chairman of the Securities and Exchange Commission has said that load funds aren't a good investment, yet many no-load funds are coming out with load fund alternatives. Which are better?

Wachtel: You know, you're talking here about commissions. You're not talking about investments. The most important things are the manager of the fund and whether or not his or her outlook correlates with what you're thinking. How has his or her track record been through the bad times as well as the good times? How have his or her investments resonated with your philosophy? You've got to identify with the performance and the manager, and then whether you pay a little more for the commission is immaterial as far as I'm concerned.

Entrepreneur: People often invest in index funds because they think the S&P 500 Index is the standard to beat. What's the upside or downside of investing in an index fund?

Wachtel: When you invest in the index, it's like betting on all the horses in a race, and it's worked for the last several years. The reason these funds can charge such low commissions and low loads is that they really don't have to have anyone monitoring these stocks. You simply buy the 30 stocks in the Dow or the 500 stocks in the S&P, and that's it. The day will come, however, when the market will turn down-and suddenly you'll be sitting there with all these particular market stocks, vulnerable to the overall market trend.