A money maven’s formula for investing in perilous times

Updated: May 24, 2011 1:00 PM UTC

The best ideas are the simple ones, and investing expert Joe Rosenberg has a few great ones on how to deal with today's tough markets.

The investment world seems to be getting stranger -- and more perilous -- with every passing day for us retirees or almost-retirees who don’t happen to be rich professional investors. What are we supposed to do with our money in a world in which short-term savings yield virtually nothing; Treasury securities’ yields are absurdly low; gold, commodities, currencies, and stock markets all swing wildly; much of the world financial system feels hinky; inflation may be rearing its ugly head; and the U.S. dollar has been getting clobbered?

Just thinking about all those investment elements made my head hurt. So for answers I sought counsel from one of Wall Street’s leading money mavens: Joe Rosenberg, chief investment strategist of the Loews conglomerate and a friend of long standing. Rosenberg showed me a whole different way to think about the subject. Rather than messing with commodities and currencies, which he says “aren’t games an individual investor should get involved in,” he suggested I buy stocks of some large-capitalization U.S. multinational companies. Specifically, companies that meet his criteria of being financially sound, showing rising profits, and selling inexpensively relative to profits and free cash flow. (Free cash flow, for those who skipped Finance 101, consists of profits plus noncash items less capital expenditures.)

Rosenberg’s screening criteria are below, but not his list of stocks; this is a “how to think” article, not a stock-picking piece, though I use a couple of his choices as illustrations later in this column. No banks are on the list, because outsiders can’t tell what lurks in their loan portfolios. (Before we proceed: I agreed to say that Rosenberg has nothing to gain personally or professionally from being quoted because he doesn’t manage money for the public outside of his employment. Consider it said.)

Some of Rosenberg’s criteria -- such as free cash flow yield, which is a firm’s free cash flow divided by its enterprise value (the market value of its stock, plus its net debt) -- are complex and difficult for nonprofessionals to calculate. But the underlying idea is simple, as good ideas typically are. It’s this: Steadily rising profits offer some protection against inflation. Doing business in local currencies in foreign countries reduces your exposure to the U.S. dollar. Finally, owning stocks of large, growing, soundly capitalized companies generating surplus cash and selling at reasonable prices gives you a chance to make real money in the future. Large-cap stocks have been out of favor relative to small- and medium-cap stocks, which as a class have been trading at near-record levels. Someday that will change.

Buying stocks that make the screen isn’t a one-size-fits-all answer to investment questions -- nothing is. But it’s a helpful way of thinking for us nonprofessionals.

Rosenberg uses free cash flow yield to compare bonds with stocks. For example, a five-year Treasury security currently yields a paltry 1.8%, while Microsoft (msft), Cisco (csco), IBM (ibm), and Kohl’s (kss) had free cash yields of 13.4%, 12.9%, 6.6%, and 6%, respectively, when the list was run. “This doesn’t mean that you should go out tomorrow and sell all your bonds and buy stocks,” Rosenberg says, because markets can take years to turn, and some stocks on his list won’t do well. One reason Microsoft and Cisco make the list is that questions about their strategy have held down their prices. But it’s hard to believe stocks like these four won’t return more than 1.8% annually over five years.

Many investors assume that the dollar is sure to continue its descent. Rosenberg’s not so sure. “The dollar has been going down, but that doesn’t mean it’s going to continue going down,” he says. He attributes much of the decline to the Federal Reserve trying to boost exports and reduce imports by cheapening the dollar. “Germany has a strong currency and is doing very well in manufacturing,” he says. “If a weak currency made you competitive, Zimbabwe would be a manufacturing powerhouse.”

Rosenberg isn’t always right, of course, but he’s really smart about markets. When he offers advice, I listen. You should too.