Is It Time To Let Go?

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TIME: Would you have said that 15 years ago: Don't buy individual stocks?

PILGRIM: Probably not, but that's more a reflection of my experience than that anything's changed. It's very hard to pick stocks, because companies' fortunes are constantly changing. How many stocks does it take to diversify that away? You might as well index.

MCKISSACK: I still think there's room for the hobbyist investor.

BLAYNEY: What's important is a sell discipline. When you would no longer buy a stock, you should sell it. People aren't good at that.

BARON: We own stocks 10 or 12 years. We're investing in companies that I think are going to double in four or five years, then double again, then double again. When do we sell? When we believe the stock won't double in four or five years--usually when we see their competitive advantages diminish.

MCKISSACK: When we initiate positions, we set a price target. We're willing to hold stocks for many years. But our price targets are always moving, based on changing fundamentals, and we'll sell when they reach those targets. That's consistent with the buy-and-hold strategy, which doesn't mean hold your entire life but enough years to allow the opportunity to evolve.

TIME: Are corporate failure rates rising?

PILGRIM: Certainly, at this point in the cycle, yes. As a secular matter, in the technology area it seems like it's getting more difficult for a company of any sort, size or shape to maintain an advantage for long.

TIME: Ron, as a buy-and-hold guy, do you even look at tech?

BARON: No.

TIME: Eric?

MCKISSACK: Almost not at all.

TIME: O.K., so if you find a small company that's growing, buy it and hold. But when people talk about buying a few stocks and throwing them in a drawer, they're thinking about GE and IBM, blue chips that have proved themselves. And yet those are precisely the firms that may be most at risk: from technology, from litigation from things like asbestos and other challenges.

SAUTER: I think you should buy and hold, but not just the blue chips. Be diversified. There's a great argument for buying and holding the entire market forever, and that's really the argument for indexing.

TIME: But in a down market, like now, indexing doesn't work, does it?

SAUTER: By definition, if the market's going down, the index fund will go down with it, so with an actively managed fund you have a chance of a positive return. But it's an unlikely event.

BARON: With the tremendous growth in index funds, it's easier for active managers to outperform. Indexing homogenizes. The good companies and bad companies get the same P/E ratio. The investor who sees things that others don't has an opportunity, because everything is being valued the same way.

TIME: How should we go about buying and holding?

BLAYNEY: We believe in creating a core part of the portfolio using index funds and using exchange-traded funds and some actively managed funds around the edges. We've used the Dodge & Cox funds on the value side; we've used Hartford Capital Appreciation on the growth side; we've used Baron Asset on the small-growing-into-midcap side.

TIME: When do you jettison an active manager?

BLAYNEY: We consider it a red flag when we see a change in the management, and we don't look kindly on style drift. If we're buying a manager, we want him to operate in his zone.

TIME: Give us a few names we can buy and hold.

BARON: One is ChoicePoint, a database company. They know more about Americans than anyone. All the insurance companies give them data about you as a driver, a homeowner. When you want to switch your policy from State Farm to Geico, Geico has to know that you haven't just killed 10 people with your car crashing into a bus, so they pull this database, and ChoicePoint charges them. We've owned it for three years, but I've recently bought more. No. 2, Apollo Education. We've been investors for four years. Apollo is in adult education, and its core business is in teaching adults one course at a time instead of a whole curriculum. Enrollment has been growing 15% a year. We also like Polo Ralph Lauren. People view it as an apparel company, but we think of it as a branded lifestyle company. They're selling at the lower multiple of an apparel company.

PILGRIM: Here are five technology picks, on the hunch that many things will get better: Documentum, JDA Software, Mercury Interactive, QLogic and Microchip Technology. They're the dominant factor in everything they do. They're the quality in a busted-up sector. Away from tech, we like Bed Bath & Beyond. It has lots of years to grow. Starbucks--they're going to open three or four times as many stores over the next decade.

MCKISSACK: A stock like MBNA, the credit card issuer, we've owned for a long time. It's growing from what was a midcap company into the larger-cap space. It has demonstrated 20%-a-year growth and, with its credit review and issuance process, it has an above-average customer in terms of income and payment history. We've also been very successful with SunGard Data Systems and continue to see that as a good long-term opportunity. It provides specialized software into the financial-services market and recently bought Comdisco to make it a larger player in that area. Comdisco was one of the companies to help businesses get back up quickly following 9/11. In the consumer area we like Clorox. It owns Kingsford charcoal and Hidden Valley, interesting and sustainable franchises. It's not growing at a rapid rate, but it is a very sustainable franchise, and we think that it's an industry that will consolidate over time, though that's not why we own the stock.