A Lesson in Stock Market Prudence

Prudence can sometimes seem rather imprudent in a runaway stock bull market. At times, prudence feels like it's downright stupid. But it's not!

The career of famed value investor and fund manager Jean-Marie Eveillard provides insight into this. He exercised prudence when share prices were soaring and exercised prudence long enough to see his investments bear fruit.

During Mr. Eveillard's first decade at the helm of the First Eagle Global Fund (formerly known as the Sogen International Fund), it easily outdistanced every applicable benchmark. From the fund's inception in November 1986 through March 31, 1997, First Eagle Global Fund delivered a total return of 236%, compared to only 133% for the MSCI World Index.

At that point, Mr. Eveillard became nervous about the stock market. He was concerned that so many flimsy tech stocks were soaring for no good reason, and that compelling values were becoming almost impossible to find.

Eveillard responded to these conditions by raising the cash level in his fund and also raising his exposure to gold. As a result of his caution, his fund lagged far behind every relevant benchmark during the next three years as the stock market (led by tech stocks) moved into bubble territory.

Between March 1997 and March 2000, First Eagle Global posted a return of only 28%. This was barely one-third the 75% return of the MSCI World Index. This number looked even more pathetic alongside a Tripling of the NASDAQ index during that same time frame!

Eveillard was unflappable. He refused to embrace the tech stock mania being spouted by CNBC. He maintained the value-based investment process that he had always pursued. He stated at that time, "I would rather lose half of our shareholders than half of our shareholders' money."

Mr. Eveillard proved to be prescient because that it exactly what happened. Investors, mesmerized by tech stocks, left his fund in droves. He lost nearly half of the shareholders and the fund nearly closed.

But he did NOT lose half of his shareholders' money. It turned out that Mr. Eveillard's prudence was, in fact, prudent. Shareholders who stuck by him have been rewarded handsomely.

In the 10 years from March 31, 2000 to March 31, 2010, the S&P 500 index and the MSCI EAFE Index both produced a negative total return. Over the same timeframe, the First Eagle Global Fund has more than Tripled!

The bottom line for investors is that prudence sometimes seems imprudent. But it never is.