The Intelligent Investor

“This is a strategy that challenges your patience beyond belief. It can drive you and your customers nuts,” he acknowledges. “But I never second-guess myself. I invest this way for myself. It gives me goose pimples to see how these things correlate over time. There’s a leap of faith, I agree, but there’s a leap of faith on somebody’s growth estimates, too. Of the various risks you have to assume, these are the kinds of risks I feel more comfortable with.”

Elwood joined what was until recently known as RBC Dain Rauscher in 1998 after working 18 years as a stockbroker with Prudential. He got his career start at two smaller brokerages. Today, Elwood continues to describe himself by an old term: “the customer’s man.”

Peter Wendell, who served as Elwood’s manager for three years, calls him an “old-time broker” who does independent research, both quantitatively and qualitatively.

“In my book, he does it the right way,” observes Wendell. “He really cares about what he’s trying to do for his accounts and I think he’s quite successful at it. He’s extremely diligent and he never compromises his values. To me, that’s the mark of a good broker.”

Elwood typically loads between 25 and 35 stocks in a portfolio, with an average holding period of two to three years. When he screens a stock, he focuses on 10-year price-to-sales, price-to-book value and price-to-cash flow ratios. “It’s all part of the fundamental analysis,” he says. Day to day “wiggles and jiggles” don’t mean much to Elwood. More important is what company management is doing to return its stock price to a value proposition.

“The pressure of a down cycle on management to return their company’s assets to more normalized returns becomes very great. On the other side of the equation, after a lengthy period of growth the pressures to keep it going tend to cause mistakes, sometimes outright fraud,” according to Elwood. “The pressures of a down cycle tend to lead to conditions to refurbish the assets, and then the assets find a way to get in sync with markets. Sometimes, the degree of the downturn equals the degree of the upturn. And out of a 25-to-35 stock universe, there’s always something that’s starting to do better sooner than you think and there’s always one that stays down longer than you’d like. Frankly, I would rather take that risk than take the risk of someone’s growth estimate falling short.”

Some years ago, a mutual fund manager told Elwood he was nothing but a cigar-butt investor after a long conversation about contrarian investing.

“The way he talked, he sounded like I should be ashamed of it,” says Elwood. “But if there’s a good Havana lying on the street with three or four good smokes left, you pick it up. To me, it’s that simple.”

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Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at [email protected].