Tom Forester, 2008's No. 1 Stock Picker

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Tom Forester, of Forester Value Fund

Last year one U.S.-stock mutual fund made money. One. Out of thousands. TIME's Barbara Kiviat spoke with Tom Forester, who steered the $62 million Forester Value Fund to a category-besting 0.4% return, about a very difficult year and what lies ahead. (See pictures of the Top 10 scared traders.)

Well, how did you do it?
It felt like it was four years' worth of work. There was so much volatility. We changed the stocks around a lot throughout the year. In July, when the banks were cratering, we bought Bank of America at 18 [dollars a share], and it jumped right back up to the 30s, and we sold it there. That's not something you usually do within a month's time. Last year was really opportunistic. In a month's time you went from cheap to fairly valued — and in many cases back down to cheap.

You've been known to hold large cash positions when there's nothing you want to buy. How much did that help?
Throughout the year, cash varied from maybe 5% to almost 30%. It was a way of trying to protect the portfolio on the downside. We were fortunate to get a lot of the moves right. We were in cash at the top. When the market went down, we lost a lot less [the S&P 500 lost 37% in 2008]. I hate times like this, quite frankly. I hate losing money, so I really look at downside risk.

So where are you investing now?
We were in defensive stocks all last year, and that's still the bulk of our portfolio. Johnson & Johnson, Kraft, Pfizer, Microsoft — a lot of stocks that have great positioning in the market, really strong balance sheets to weather problems, stable top line. Those sorts of stocks have stability in down markets, though that stability hurts you when things start taking off. Around the edges now, in October and November, we started adding some more aggressive names, like some of the oil guys which bounced real hard. We bought Anadarko. We bought Valero. We put about 10% of the portfolio in those types of names. Eventually we'll have 40 or 50%, but where the consumer is going needs to play out before we get more aggressive. (See the worst business deals of 2008.)

Where do you think the consumer is going?
Over the past few years, savings [as a percentage of disposable income] was flat. Now we're up to about 3%. Historically, savings has been in the 6% to 8% range, and I expect that's where we're going to get back up to. I'm really excited to see the next number come out because that's going to tell me a lot about what's going on. If we're back up in the 6 to 8% range, then that actually makes me optimistic. Once things stabilize, we can start growing again.

How do you look at financials going forward?
It's difficult. We avoided much of this mess, and we've tried to limit our exposure to the banks. We've dipped our toe in the water a few times now. USBancorp, I think, will be a survivor and will thrive. But we've got quarters of difficulty. The hardest part of this is figuring out when people will start looking beyond the near-term. We've tried to take small steps into the riskier stuff. We ended up buying Bank of America again, since that worked out so well for us last year, but a smaller piece. The round-trip hasn't worked well, and we've lost some, but at these prices, if the thing survives, you could easily see a six-times return.

What about the market more generally?
I'm a valuation guy. I look at P/Es and things like that to tell me where the market is. As you get near the bottom of these things, that tends to be where valuations are attractive. I'd move away from the staples and pharma and into the more cyclical names. I'm looking forward to doing that. We've been looking for an opening, and we hope to get it in the next six months. But if I'm wrong, then maybe it will be the six months after that.

Where do you think the Dow will be at the end of 2009?
It wouldn't surprise me to see it up 5% or 10%. It kind of depends on the steps the government takes. We've got to keep the financial system liquid. It's gotten into people's heads just how serious this is, so I think they'll do what they need to.

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