Vanilla Investing, Sweet Returns

Vanilla Investing, Sweet Returns

Money managers by Mark Gordon | Managing Editor

James Pappas' long-term strategy sometimes even pays off for him and his clients in the short-term.

James Pappas admits he's pure vanilla when it comes to running his one-man investment shop. But that doesn't mean he doesn't enjoy some hot fudge, whip cream and a cherry every now and then.

"My clients tend to be people that have already made their money and are looking to protect it," says Pappas, who runs James Pappas Investment Counsel from his Longboat Key home.

So by design, his investing approach is marked by patience, controlling losses and watching out for potholes along the way. The Pappas system is so stable, some of his quarterly client newsletter was featured in the Jan. 1 issue of Barron's magazine.

Still, the 40-year-veteran of the markets hits the jackpot every once in a while. Last year, for example, he sold shares of Sirius Satellite Radio for $7.50 a share after previously buying it at 65 cents a share; Pappas made a sizeable profit from selling shares in Sirius competitor XM Radio, too.

Profits like that are a sweet desert to the bland investing approach Pappas has been refining since 1988, when he opened his own firm after 20 years of working for other companies, including one-time stock broker giant Hayden, Stone & Co. in the late 1960s.

"Long-term strategy is what works for me," says Pappas, conceding that he might lose out on some clients looking to make more, quicker. "In a negative market, I tend to outperform. In a strong market, I tend to lag."

Even so, Pappas' equity accounts have beaten the Dow Jones Industrial Average six of the past seven years, missing only 2006 by a few points. In 2003 he was up 38%, compared to 25.32% for the DJIA. (See chart).

Replacing bonds

Pappas, a native of Long Island, N.Y., manages about $25 million in investments, ranging from individual accounts to IRA rollovers to small company pensions. His clients live mostly along the East Coast.

About 65% of Pappas' investments are in bonds, the staple of the conservative investor. And while that's worked well for essentially the entire life of the firm, Pappas predicts that segment of the market is on the verge of slowing considerably, primarily because of potential Fed interest rate hikes and the government's continuously growing budget deficit. "It's a dramatic change for me," Pappas says. "I don't want to participate in two-thirds of my portfolio."

His alternative will be to put more money in stocks, which he's betting will have a good year in 2007, parlaying off 2006's second-half gains. He has some favorite stocks and sectors - media companies, such as Time Warner, Viacom and Disney have done well for him - but he keeps all his options open, from the top large-cap stocks to tiny small caps.

"I look for opportunities in any types of stocks I can make money in," he says.

Other stocks Pappas likes include technology manufacturer Corning Inc., an S & P 500 company that, among other product lines, makes glass used for flat screen monitors and LCD televisions; Alberto-Culver, a personal care products company that's had 15 consecutive years of earnings growth; and VCA Antech Inc., a growing Los Angeles-based veterinary company that trades on the Nasdaq exchange under the symbol WOOF.

With so many options, Pappas' biggest challenge has been culling the best research from the vast array of sources. He reads many of the big-name financial papers, clipping small articles and charts he finds useful.

Review summary

Company. James Pappas Investment Counsel, Longboat Key

Business. Money, wealth management

Key. A conservative investing approach traditionally focused on bonds, although with predictions of a bond market slide, that will likely be changing in 2007.

James Pappas against the Dow

Longboat Key-based money manager James Pappas prefers a conservative strategy toward investing, one he says allows him to do well when the market is doing great, but even better when the market is slumping. The firm's equity accounts are normally built with about 67% stocks, 16% convertibles, 13% bonds and 4% cash.

Here's how Pappas' James Pappas Investment Counsel's equity accounts have fared against the Dow Jones Industrial Average this decade:

Year JPIC DJIA

2000 -0.47% -6.18%

2001 4.42% -7.10%

2002 -12.57% -16.76%

2003 38.09% 25.32%

2004 4.69% 3.14%

2005 1.36% -0.61%

2006 11% 16.31%

* The JPIC performance for 2006 is preliminary as of Jan. 10.

Source: James Pappas Investment Counsel