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Investment advice on a cold morning in Columbus

When the markets go down, the less you do the better, says this U.S. advisory — except maybe to buy more shares of the stocks you like.

The simpler the story, the deeper the truth contained in it. We’re not sure if we came across that somewhere in the works of a renowned philosopher. If not, we’ll take credit for it. You can quote us if you want.

This story stems from the big story we’ve all been following: the sharp downturns in the market that kicked the year off so dismally.

People really do panic. They really do believe if they don’t do anything, they will lose everything. When, in fact, the opposite is more likely to be true, as at least one investor tells us.

Our short and simple story comes from The Bowser Report. The editor and publisher, Mr. Max Bowser, hands out an annual award to the Investor of the Year. In Mr. Bowser’s world, this is not some Wall Street wizard, but a Main Street standby, an individual investor who enjoys the cut and thrust of making a small cap portfolio work.

The 2005 winner, Mr. Dean Shelato sat down one cold January morning in Columbus, Ohio and wrote a note to go along with his annual subscription check. It was 5° F (-15 here) and the financial news was bad.

“Should I be moving my money?”

These headlines blared across Mr. Shelato’s computer screen:

Stocks significantly selling off.
Europe markets take on water.
China markets near full-scale correction.
“Another Horrible Day” in world markets.
Wall Street braces for more volatility.

Mr. Shelato had been joined for dinner the night before with his 27-year-old son, who works in a call center for a big insurance company that manages 401(k) accounts (retirement saving plans) for a number of small companies. The conversation went something like this.

“Dad, you would not believe how busy we are. We are flooded with calls from 401(k) participants who are truly in a panic and asking: ‘What is the safest financial instrument you have so I can move money out of stocks, so I do not lose any money’.”

The son was worried on his own account. “Dad, I have my own money in an index fund based on my age. Should I be moving my money into something more safe?”

His father laughed and replied: “You have time on your side. Do not do anything. You can never time the markets. It will all come roaring back. Heck, it’s an election year. It might come back sooner than you think.”

This, adds Mr. Shelato, is the advice he has received over the years from this advisory.

The moral of the story couldn’t be simpler. Never act in haste. Always act on your own terms, not the market’s.

Mr. Bowser adds rather dramatically that unless you think the free-market system is about to be overthrown, and that stocks will cease to have any value, there is no reason not to stick to your investment plan.

Good for individual investors

Mr. Bowser’s reaction to the turmoil in the markets is hardly one of despair. “Surprise! Surprise! Stock markets do have downturns that can morph into bear markets.”

Not only is there no reason to panic, there is every reason to be optimistic … if you don’t trade stocks for a living.

“In our 32 years at the helm of this battleship,” says the editor, “we have endured many down markets. Invariably, they have been good for individual investors who are not traders, while at the same time many professional money mangers who mostly avoid microcaps flounder around desperately trying to find any sort of equity that will make their record look good.”

Mr. Bowser leaves no doubt that this is a buying opportunity in his books. He has a Featured Company of the Month in each issue of his Report. He normally purchases 400 shares of each one (but only one week after he has announced it to his subscribers, allowing them first dibs on the stock).

Beginning with the January Company of the Month, he has stepped that up to 1,000 shares, and will continue to do so each month. We’ll profile his top pick for February in a while.

The January entry, by the way, was Metropolitan Health Networks (AMEX-MDF), a company that operates two health service businesses in Florida. One is a health maintenance organization, while the other arranges care for one of America’s largest health insurance firms, Humana Inc. (NYSE-HUM).

Metropolitan’s shares have stayed pretty much on a level trend for the past month, and are currently trading at $2.32.

Sticking to it

To further illustrate his contention that bad markets can be good for individual investors who buy and hold microcap stocks, Mr. Bowser refers back to the recession year of 1991.

That was the year before “It’s the economy, stupid” became a rallying cry for the Bill Clinton campaign, he notes. Some claimed that the economy had not been in worse shape since the Depression.

Listing his own Companies of the Month throughout that troubled year, Mr. Bowser is able to demonstrate that almost all were winners. (Without elaborating the editor’s strategy in full, it should be noted that he has a set Selling Plan that is triggered after stocks have been held for a certain period.) Five of the twelve stocks were bought or merged. The largest gain was a doozy — from $2.63 to $57.25.

A few stocks had only small gains, but none lost money. Thus even the most turbulent market should not be a scary place for those who have an investment plan and are willing to stick to it, even when it involves very small stocks.

That, at any rate, is Mr. Bowser’s story and he is sticking to it. And he gets a thumbs-up from Columbus.

Software for tool and die makers

We can be sure, then, that Mr. Bowser will be buying 1,000 shares of the following company. Cimatron Ltd. (NASDQ-CIMT) is an Israeli-based firm that makes software for mold, tool and die makers. And it is February’s Company of the Month.

This company offers both Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) for use in the automotive, medical, consumer plastics, electronics and other industries.

The software can communicate with most other CAD/CAM systems run on home computers or engineering workstations. “The CAD/CAM concept has been a boon,” says the editor, “in that it permits the creation of various design effects, sometimes including 3D. And it is cost effective for manufacturers in creating new fabrication methods and in finding defects in old ones.”

The company has a thriving marketing strategy which includes downloadable product demonstrations on the Internet. Cimatron’s products are used by 8,500 customers in 35 countries: 61 per cent are in Europe, 16 per cent in North America, 11 per cent in Asia and 10 per cent in Israel.

Like many other manufacturers, mold, die and tool makers are moving to the Orient to take advantage of lower labour costs. Cimatron is not falling behind: it held its annual global conference in Beijing last fall.

Volatility should be no problem

Cimatron is also growing by acquisition. Last summer it added two firms in the industry, one from South Korea and one from Italy. Last month, it scored an even bigger coup, buying Gibbs and Associates of Moorepark, California, developer of software for programming CNC (computer numerical control) machine tools. The founder, Mr. Bill Gibbs, will stay on to manage the company.

Without this acquisition, organic growth was due to push annual revenue beyond $25 million. With it, yearly sales should exceed $40 million. This will put it among the top vendors in Computer Aided Manufacturing.

The company has 192 full-time employees, fully a quarter of whom are in research and development. The balance sheet is sound, with $17 of assets for every $12 of liabilities, and a bank loan of only $444,000.

The stock is volatile. The 69 per cent of shares held by insiders last summer, plus the holdings of two institutions and the 1,500,000 now held by Mr. Gibbs, leave a rather small float for the general public. The shares opened at $3.44 today.

According to this advisory, volatility should not be a problem for those who are willing to insert the stock into their portfolios and let it grow.

It is a relatively balmy 28° F in Columbus this morning, but we reckon the story hasn’t changed. Don’t panic, stick to your plan and all will be well.