Value lessons from Robert Olstein

During the late 1990s, he pointed the finger at technology companies as some of the biggest transgressors. Accounting mumbo-jumbo, coupled with the sector's astronomical valuations at the time, went against the grain of a man with a near-religious devotion to buying at bargain levels.

Unlike Berkshire Hathaway which is a listed company, Bob Olstein's expertise can be accessed by US residents direct into his mutual fund, Olstein Financial Alert Fund and by offshore investors through an offshore version. The proof of his cautious and determinedly Value based approach can be seen in the results he has achieved during both the boom and the bust years.

The current high volatility generally and recent memory of fingers, hands and even arms burned by the technology burn-out are deterring many investors from returning to the market. Even Olstein says that his investments may not pay off for a while and may fall even further before they go up. But to Olstein, like all committed value investors, the worth of Value is crucial 'Eventually, stock prices should reflect the inherent value of a business. My job is to be right, not to know when to be right.'

To Olstein being right means finding companies with excess cash flow that are selling at inexpensive levels. 'Cash flow is the oil that lubricates the corporate engine,' he observes. 'With a lot of it, companies can do good things, like buy back shares, raise dividends, invest in themselves, make acquisitions or position themselves as acquisition targets.'

Companies with healthy cash flow span the range from value to growth, from small to large. 'The fund cuts across all categories—growth, cyclical, small and large,' he says. 'We don't discriminate.'
Olstein also decries the seeming unwillingness among investors to care about how much they were paying for growth. 'There is a difference,' he warns, 'between a great company and a great investment.'

Olstien spent his early working years as an instructor at Hofstra University with a master's degree in accounting, he co-created a newsletter in the 1970s dedicated to alerting institutional investors to the potential hidden debt in earnings reports. In 1995, he founded the Olstein Financial Alert Fund.

During his 33-year career, he's seen investment attitudes and fashions come and go culminating with the biotechnology-stock bubble of the 1990s and the technobabble peaks and troughs of the late 1990s. This latter period tested his mettle more than any of the preceding fads. His warnings, with several others, including Warren Buffets fell on deaf ears.

Stocks of companies with indeterminate business plans and no earnings continued to soar. 'I began thinking that it was time to hang up my shoes, and that I just didn't have a clue about what was going on,' he says. Even he became almost swept along with the wave and sold short a few Internet stocks, thinking they couldn't possibly go up any more, but of course they did, for a while.

However, staying out of the market's trendiest sector didn't translate into dreary performance. In 1999, the fund posted a 35% return. The gain came as ever in his fundamental belief in intrinsic value, this time in a basic commodity; after the Asian crisis in 1998 oil-drilling stocks were not in favour with the market, at the time, oil was selling at $10 a barrel, drillers were scaling down operations, and investors were looking at new more dynamic markets.

Olstein recognized the signs, his reasoning forsaw that when demand picked up excess inventories would diminish, and so prices would pick up, and demand for rigs would follow. So he bought drilling companies with sound balance sheets, low debt and good cash flow that would be able to ride out the storm. He sold the stocks in 2000 at a substantial gain, this amongst other similar strategies helped the fund to a 13% return for the year.

Olstein admits that, despite such success stories, betting on companies that others shun has its risks. 'About one out of every three stocks in the fund doesn't work out, which means they break even or lose some money. But only one out of 100 are absolute disasters, and that's what keeps us out of big trouble.' His record to date, including his impressive performance since the turn of the century, should make Bob Olstien a manager to watch.