Harold J. Bowen III is not ashamed to say that he follows the generally boring, plain-vanilla approach of legendary investors such as Warren Buffett. It’s just that Bowen, known as Jay, does it better than nearly all other big investors—so well that, similar to Buffett’s moniker of the Oracle of Omaha, Bowen often is referred to as the Oracle of Tampa because he has managed the $1.9 billion Tampa Firefighters and Police Officers Pension Fund since the late 1990s. Over the past 20 years, the fund has achieved phenomenal results—an annualized return of 10.1% through December 31, 2013. That has put it in the top 1% of all public pension plans with more than $1 billion in assets—outperforming such giants as the $288 billion California Public Employees’ Retirement System (Calpers) and the Standard & Poor’s 500 stock index. Much of what Bowen does to keep the fund on a steady and profitable path can help small investors, too…
In overseeing the pension fund, I need to be very risk-averse but, at the same time, pursue long-term growth. My approach… Avoid tricky strategies. The fund does not pursue more speculative strategies such as investing in hedge funds and private equity, shorting stocks (betting on price drops) or buying options and futures. Many institutional investors have turned to these types of sophisticated investment techniques to help boost returns, but they can backfire. Instead, I use an old-school, buy-and-hold mix of stocks and bonds. I invest in about 70 high-quality medium- and large-cap stocks and replace only about 10% of them each year. The companies all have strong businesses, growing their earnings year after year, and solid balance sheets. This may sound dull, but the steady, stable quality of these holdings allows me to stay, for the most part, fully invested in both bull and bear markets, so I don’t have to engage in tricky market timing.
Maintain an allocation of about 65% stocks/35% bonds. Stocks are meant to drive long-term capital gains in the portfolio. On the fixed-income side, high-quality corporate bonds (rated A or higher) along with Treasury securities are held to maturity, then the proceeds are reinvested in new bonds to provide stability and consistent yield. Establish an extremely long-term horizon. I think in terms of 20-year periods, which means that I rarely make moves based on short-term emotions. Because of this, I find it easy to ride out bumpy periods, and most important, I focus on finding the best businesses to own instead of trying to gauge what’s going to happen to a stock in the next quarter or the next year. I have owned many stocks for decades.
I have approximately 70% of my portfolio invested in stocks now, because even with the market at near-record levels, certain good companies still look more attractive than bonds and cash. I always ask an initial question to help me narrow the universe of potential stocks to choose from… Is the company tapping into an emerging long-term economic and/or industrial trend? I particularly like businesses that are benefiting from a trend in surprising ways that most investors overlook or aren’t immediately aware of. For example, domestic gas and oil production is soaring, thanks to hydraulic fracturing, or fracking, from underground shale rock. This is great for companies that provide services to the energy industry such as railroad transport and high-tech drilling equipment. Other trends I’m capitalizing on : The global need for clean water…the rise of genetically modified agriculture, which allows farmers to vastly increase their crop productivity…the demand for greater energy efficiency in both industrial and consumer markets…and the burgeoning economic power of the developing world. Once I have identified favorable long-term trends, I typically ask the following questions before I buy a stock or add to one that I already own… Does the company have great management? I look for executives who create ongoing competitive advantages in their companies to help fend off competitors and keep growing earnings. I also pay attention to a financial metric called “return on equity” (ROE), which tells me not just that the company can make money from the existing business but that it also efficiently employs profits to make more money for the shareholders. (A company’s ROE should be well above the historical 13.6% average for S&P 500 companies.) Does the company offer a rising dividend and buybacks of its shares? Price appreciation in a stock is more exciting than dividend growth, but from December 1926 to December 2012, one-third of the S&P 500’s monthly total returns have come from dividend income. Is the stock currently out of favor with investors and attractively priced? Buying high-quality companies whose stock is selling at a discount due to some temporary setback provides you with the potential for significant capital appreciation long term.
These fit one or more of my criteria… BHP Billiton Ltd. (BHP) is the world’s largest publicly traded mining conglomerate, producing everything from oil and gas to nickel, copper and coal. Its stock price has floundered—recently it was about 35% below its five-year high—because commodities have been weak, global growth tepid and inflation low. But the company is extremely well-positioned to exploit improving economic growth and higher inflation. Recent share price: $66.78. Canadian National Railway (CNI). Railroads have proved to be a cheap and efficient way to transport commodities such as oil. No competitor can match Canadian National’s tracks, which run from the East Coast to the West Coast and down through Chicago to the Gulf of Mexico. Recent share price: $62.60. E I du Pont de Nemours & Company (DD) still is seen as a chemical company, but it also is one of the world’s largest providers of genetically modified seeds. Its agriculture business now makes up about one-third of the company’s operating profit.Recent share price: $68.30. Honeywell International (HON) is capitalizing on the world’s need for energy efficiency and safety with services ranging from nuclear waste remediation at Japan’s Fukushima Daiichi nuclear power plant to smart home thermostats for consumers. The company has paid a stock dividend every year since 1887. Recent share price: $93.77. Pentair Ltd. (PNR) is a major player in the global market for water-filtration and pressure equipment, with users ranging from pool owners to the food-and-beverage industry to wastewater plants. Recent share price: $75.18. 3M (MMM). The creator of Scotch Tape and Post-it Notes actually is a diversified industrial firm dedicated to technologies that shake up industries. Recent discoveries include a new kind of film coating designed to make colors brighter on flat-panel TVs and tablet computers…and new finishes that provide better protection for smartphones from scratches and dings. Recent share price: $143.36.
