The Bargai N

You might think that in our endlessly networked world, it would be a cinch to build and buy a list of stocks that meet Graham's criteria for bargains (p. 169). Although the Internet is a help, you'll still have to do much of the work by hand.

Grab a copy of today's Wall Street Journal, turn to the "Money & Investing" section, and take a look at the NYSE and NASDAQ Score-cards to find the day's lists of stocks that have hit new lows for the past year-a quick and easy way to search for companies that might pass Graham's net-working-capital tests. (Online, try http://quote. morningstar.com/highlow.html?msection=HighLow.)

To see whether a stock is selling for less than the value of net working capital (what Graham's followers call "net nets"), download or request the most recent quarterly or annual report from the company's website or from the EDGAR database at www.sec.gov. From the company's current assets, subtract its total liabilities, including any preferred stock and long-term debt. (Or consult your local public library's copy of the Value Line Investment Survey, saving yourself a costly annual subscription. Each issue carries a list of "Bargain Basement Stocks" that come close to Graham's definition.) Most of these stocks lately have been in bombed-out areas like high-tech and telecommunications.

As of October 31, 2002, for instance, Comverse Technology had $2.4 billion in current assets and $1.0 billion in total liabilities, giving it $1.4 billion in net working capital. With fewer than 190 million shares of stock, and a stock price under $8 per share, Comverse had a total market capitalization of just under $1.4 billion. With the stock priced at no more than the value of Comverse's cash and inventories, the company's ongoing business was essentially selling for nothing. As Graham knew, you can still lose money on a stock like Comverse-which is why you should buy them only if you can find a couple dozen at a time and hold them patiently. But on the very rare occasions when Mr. Market generates that many true bargains, you're all but certain to make money.

WHAT'S YOUR FOREIGN POLICY?

Investing in foreign stocks may not be mandatory for the intelligent investor, but it is definitely advisable. Why? Let's try a little thought experiment. It's the end of 1989, and you're Japanese. Here are the facts:

• Over the past 10 years, your stock market has gained an annual average of 21.2%, well ahead of the 17.5% annual gains in the United States.

• Japanese companies are buying up everything in the United States from the Pebble Beach golf course to Rockefeller Center; meanwhile, American firms like Drexel Burnham Lambert, Financial Corp. of America, and Texaco are going bankrupt.

• The U.S. high-tech industry is dying. Japan's is booming.

In 1989, in the land of the rising sun, you can only conclude that investing outside of Japan is the dumbest idea since sushi vending machines. Naturally, you put all your money in Japanese stocks.

The result? Over the next decade, you lose roughly two-thirds of your money.

The lesson? It's not that you should never invest in foreign markets like Japan; it's that the Japanese should never have kept all their money at home. And neither should you. If you live in the United States, work in the United States, and get paid in U.S. dollars, you are already making a multilayered bet on the U.S. economy. To be prudent, you should put some of your investment portfolio elsewhere—simply because no one, anywhere, can ever know what the future will bring at home or abroad. Putting up to a third of your stock money in mutual funds that hold foreign stocks (including those in emerging markets) helps insure against the risk that our own backyard may not always be the best place in the world to invest.

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