Forbes.com


Investing
Four Principles For Investing
James Clash, 04.22.03, 12:10 PM ET

Robert L. Rodriguez both races Porsches and manages money. He knows it is easy to slip into cliché drawing parallels between the two.

Both activities are largely a matter of common sense, he says. Ease off the throttle when approaching an oil slick. Lighten up on bonds when interest rates rise. Buy the best safety equipment. Buy the best stocks.

Nonetheless, Rodriguez runs his First Pacific Advisors' $600 million Capital Fund ( FPPTX) , which took first place on the Forbes Honor Roll last year, using four racetrack-inspired principles to control risk:

Be prepared. Before a race, Rodriguez often walks the track. "It not only helps map out a new environment in your mind, but you see subtle elevation changes and marks on the pavement that help with breaking and turn-in points," he says. Once he's done that and gets into the car, he gradually builds up to speed--and doesn't try to set a course record on his first lap.

Same with stock picking. With a recent portfolio turnover of just 23%, Rodriguez adds a few names per year to his fund of 35 stocks. He thoroughly researches a company before he will buy. Michaels Stores (nyse: MIK - news - people ), for example, came onto FPA's radar screen in 1992, but Rodriguez didn't buy until 1996 when Chief Executive R. Michael Rouleau, a seasoned retailer Rodriguez respects, was put in to turn the troubled arts-and-crafts chain around. Rodriguez has steadily added to his position since, and Michaels Stores is now FPA Capital's largest holding (see table below).

Hire only seasoned professionals. Rodriguez knows that on the track he is only as good as his equipment. A blown engine or flat tire could cost him the race--maybe even his life. As such, Rodriguez's crew chief, 44-year-old Galen Bieker, is a semi-pro racer and mechanic with more than two decades of motor sports experience.

Again, the same principle applies to investing. No FPA employee is allowed to manage money without at least ten years of business experience. "Everyone makes mistakes learning," Rodriguez reasons. "We prefer that you make them somewhere else. If you want to be a money manager by age 25, FPA is not the place for you."

Don't put too many eggs into one basket. Recently, Rodriguez and mechanic Bieker were on the track together testing cars. Rodriguez was in the Porsche GT-2, Bieker in the GT-3. Entering a corner the two nearly collided, and Rodriguez instantly realized the situation was a mistake. An accident would have put both of his main cars out. Since then, Rodriguez only allows one car on track at a time.

He likens the situation to the Internet bubble of the late 1990s. Having accumulated a massive 38% position in technology in 1997, he suddenly sounded the alarm when the sector became too pricey, and aggressively began winding down his stake when others were still buying. By March 2000, his stake had been cut in half. "We took criticism for it. My response was that anyone buying Internet stocks at that point was a speculation manager, not an investment manager."

Move on, and don't dwell on mistakes. Rodriguez says it is easy to get emotional about bungling the entrance to a corner or letting someone pass you during a race. You can't dwell on it, though. "If you do," he says, "you'll miss the next corner or drive such that someone else will pass you."

Rodriguez likens this to his investment in troubled Conseco (otc: CNCEQ - news - people ), where he became obsessed to the point that it distracted from running the rest of his fund. Finally, last August, he wrote off Conseco--at one point 3.8% of his fund--as a mistake (and admitted such in his annual report), and then was able to move on.



Michaels Stores (nyse: MIK - news - people ) 5.66%
Ross Stores (nasdaq: ROST - news - people ) 5.51%
Big Lots (nyse: BLI - news - people ) 4.37%
Avnet (nyse: AVT - news - people ) 4.34%
Patterson-UTI Energy (nasdaq: PTEN - news - people ) 3.95%
Reebok (nyse: RBK - news - people ) 3.89%
Hutchinson (nasdaq: HTCH - news - people ) 3.67%
Centex (nyse: CTX - news - people ) 3.67%
National-Oilwell (nyse: NOI - news - people ) 3.54%


James M. Clash's new Forbes book,"To the Limits: Pushing Yourself to the Edge--In Adventure and in Business," was just published by John Wiley & Sons and is available wherever books are sold.

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