Quick Take: Declining stock prices aren’t bad news for all money managers. Take David Tice, for example. The Prudent Bear Fund (BEARX) that he oversees is designed to go up when the market is going down.
The $300-million fund sells stocks short. That is, it borrows shares, sells them at a high price, and buys them back more cheaply when they fall. Tice also buys put options: the right to sell a stock at a certain price in the future. Investors who own these pay a premium for the right, expecting that stock prices will fall. While Tice does take long positions, investors should realize that the fund has much more short exposure.
Through today, the fund has returned 55.2% this year, while the Standard & Poor’s 500 Index has lost 21.4%. Prudent Bear topped the index in each of the last two years as well, returning 7.4% in 2001 and 30.5% in 2000. The index lost 11.9% and 9.1%, respectively, in those years.
The Full Interview:
S&P: Given the nature of the fund, what was your reaction to the market’s surge yesterday?
TICE: That was a short-squeeze rally. There are intense rallies inside bear markets, and so it didn’t surprise me. It doesn’t change my view.
S&P: I take it you don’t think stocks are out of the woods yet?
TICE: Not at all. This has been a stock market and economic bubble, and a ramification of a stock market bubble that breaks is a bear market that will last a long period of time.
The market is still selling at 30 times earnings, and many Nasdaq stocks are still selling at seven times sales.
In addition, we have an economy that is dramatically over-leveraged on the consumer and on the business side. We’ve had a small recession and, unfortunately, we’re going to have a much worse recession.
S&P: Why will it worsen?
TICE: There’s over capacity throughout businesses and we have a falling dollar that we think is going to continue to fall.
S&P: Have we seen the last of the corporate accounting and governance scandals that have hurt stocks?
TICE: They’re going to be around for a long time. That’s consistent with our view that what we had was an environment where the most reckless, aggressive executives were promoted, and they pulled out all the stops to meet earnings per share expectations so that momentum stock investors could continue to buy their stocks.
S&P: What do you think the price-to-earnings ratio for the market should be?
TICE: Generally, about 15. That’s been the long-term average multiple of stocks over the last 100 years, or so.
S&P: Can you summarize how the fund works?
TICE: We were set up to make money in a down market. We primarily sell stocks short and we own put options.
We have a team of analysts that help us analyze balance sheets, income statements, cash flow statements, and real estate investment trust footnotes. We call competitors.
S&P: What size companies do you buy?
TICE: On long positions, we typically buy companies with market caps of under $300 million. On the short side, we’re all over the map.