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By Jason Stipp | 07-12-2012 04:30 PM

Will Fundamental Investing Make a Comeback?

As economic woes continue to make headlines, investors should tune out the macro noise and understand that good companies perform better in difficult times, says Sanibel Captiva's Pat Dorsey.

Note: Pat Dorsey is the former director of equity research at Morningstar. He is now the president of Sanibel Captiva Investment Advisers.

Jason Stipp: I am Jason Stipp for Morningstar. Risk-on, risk-off. The macro headlines seem to be driving the markets up and down on a daily basis, understandably frustrating bottom-up investors. So what should investors do about these trends, how long will they last, and will fundamental investing make a comeback? Here with me to offer his take is Pat Dorsey, the president of Sanibel Captiva Investment Advisers.

Pat, thanks for being here.

Pat Dorsey: Always happy to be here, Jason.

Stipp: You do read risk-on, risk-off. You do see the headlines out of Europe. The markets move in response to European Central Bank meetings. They move another way when [Federal Reserve chairman Ben] Bernanke says that he is thinking about quantitative easing. And [they move] another way when the other governors said, "No, no, we don't want to do quantitative easing." As a fundamental bottom-up stock-picker, you've made your bets, and you see your stock prices swinging around. How do you keep from being frustrated and throwing your hands up and just saying macro is the new rule of the market?

Dorsey: Turn off the TV. That will be thing one. I have been in this business 15 years. I've never had a TV in my office, so that would be one. Just filtering out that noise I think really does help a lot. Keeping an eye on corporate earnings and cash flows as opposed to daily headlines, and just taking a step back and looking at the big picture. I mean think about right now, we're sitting here in July. We've had lots of ups and downs: a fabulous first quarter, and a May that lots of people would like to forget. And every day was frustrating with these different announcements. The S&P is up 9.5% so far this year. That's not so bad.

Stipp: One thing, though, is that we do know that in Europe, in the eurozone, those problems are not short-term problems; they are going to take a long time to fix. So, then my question is if I have to be patient as a fundamental investor given a lot of this loud noise that we're hearing, how long? Are we going to be stuck with some of this risk-on, risk-off for a while? Is it going to be with us here?

Dorsey: Is the question actually "Make the pain go away, Pat?" Calgon, take me away. Again you're getting paid to be patient there. The European indexes overall are yielding 3.5%-4.0%, I want to say, depending on kind of which way you look at it, about 9 times earnings. So, if I'm paying 9 times earnings and get 4% yield, will I wait? I can wait a little while. I mean I can get paid to be patient, and good companies do better in bad times. I remember vividly talking to a very intelligent money manager who manages mainly kind of European or non-U.S. smaller companies, midsize companies, and he said, "Pat, good companies love it during tough times because they find the competition. They step on their neck, and they grind them into the dirt." And I said, "Well, that's not a very pleasant image, Peter, but it's true." Good businesses take share during tough times, and you can also go back to the old quote from Shelby Davis, founder of the Davis Funds that you make all your money in bear markets, you just don't know it at the time.

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