Dividend Stocks And Share Buybacks Provide Long Term Investment Out Performance Relative To Market Index: An Exclusive Wall Street Transcript Interview With David R. Fried Of Fried Asset Management
December 5, 2011 - The Wall Street Transcript has just published Investing Strategies Report offering a timely review of the Asset Management sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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David R. Fried, a Cornell University graduate, is President and Chief Executive Officer of Fried Asset Management, Inc. In 1989, his company was listed in Inc. magazine's annual "Inc. 500" list of the 500 fastest-growing private companies. Mr. Fried also is the Editor and Publisher of The Buyback Letter, an investment newsletter devoted to finding opportunities among companies that repurchase their stock.
Mr. Fried has been a guest on Bloomberg Television and CNBC's "The Money Club," as well as "Squawk Box" and "Market Wrap" with Bill Bresnan in New York City. He also has been profiled in The New York Times, the Los Angeles Times, USA Today, Barron's, Bottom Line/Personal, Kiplinger's Personal Finance, Forbes, Fortune, Businessweek and numerous other publications. He was listed as one of "50 Great Investors" in Fortune's Investors Guide 2004. In 2008, he helped found First Commons Bank of Newton, Mass.
TWST: Please introduce us to Fried Asset Management and the products and services you offer.
Mr. Fried: We've been offering separate managed accounts since 1998 at Fried Asset Management. Our primary focus is companies that buy back their stocks - that makes up our universe. They have to have a net year-over-year decrease of shares outstanding to be eligible for purchase for our client accounts.
TWST: Please tell us more about the firm and your background.
Mr. Fried: We started out writing a newsletter in the 1990s, writing about companies that bought back their stock. We entered the asset management business later in that decade. Since then, we have an audited track record, and we've basically tripled the returns of the S&P and Dow without having any increased risk. We don't use leverage, derivatives or options, so it's plain, vanilla investing.
TWST: You pursue two strategies, one on the stocks that buy back their own shares and the other is dividend-paying stocks. Please tell us about that second one.
Mr. Fried: For income, with interest rates being so low today, we started a dividend portfolio. It's simply buying companies that pay outsized dividends and seem to have good businesses as well. We've done pretty well with that over time as well. We also have an audited track record there that has returned 133% since inception through the end of last year versus a return of about 40% for the S&P.
TWST: Would you tell us why those two areas of the market became your focus as an adviser?
Mr. Fried: The buyback focus sprang organically. When we started the newsletter in the 1990s, nobody was covering this niche. It's based on some longstanding academic research that companies that are value stocks that buy back stocks outperform the market. The income strategy started differently. You may recall in the late 1990s, when nobody wanted an income stock and everybody was willing to pay 50, 100 or 200 times earnings for a tech stock - maybe even 50, 100, 200 times projected earnings. Well, the flip side of that coin was that there were REITs that were selling with yields of 10%, 12%, 14%, but nobody wanted them. There was no problem with them. So we started it at that time because it just seemed like a sensible thing to do.
TWST: What is it about this philosophy you believe gives you an edge over the competition?
Mr. Fried: The styles are statistically based, so they take the emotion out. We're screening for stocks that meet certain criteria. We are holding them while they meet that criteria, and when they don't meet the criteria anymore, we sell them and buy a company that does. That takes a lot of the day-to-day judgment and emotions out of your investing, and over time, that helps to generate returns.
TWST: How have the two models performed over the past 24 months or so?
Mr. Fried: In 2010, both portfolios outperformed by about 1% to 2%. So far this year, both are underperforming the benchmarks, by about 2% to 4%.
TWST: Do they have a tendency to work better in certain types of markets or in environments?
Mr. Fried: Historically, we've captured about 100% to 110% of the upside, and about 70%, 75% of the downside in most markets. It's not necessarily market specific.
TWST: Would you give us a broad-brush explanation of what's in the firm's Buyback Composite right now?
Mr. Fried: The biggest sector right now are retailers. We have retailers of various stripes, from traditional retailers - clothing retailers like Big Lots (BIG) and Limited Stores (LTD) - to coffee retailer Tim Hortons (THI), which is growing a lot.
TWST: Is there a reason why that sector is buying back a lot of shares?
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