10 Questions With Eaton Vance Large-Cap Value Skipper Michael Mach

I'll give you a few examples: First, Elan(ELN Quote), the pharmaceuticals company. In January, we sold Elan at $33, suffering a 10% loss. It was a disappointment, but we avoided a disaster. Today, Elan is selling at $1.25. It's down 96%.

In January, we owned El Paso(EP Quote). We sold it at $38, a 10% drop below cost. The stock is now $7.

In July, we sold TXU, the Texas utility. We got out of that at $43.82. Today, less than three months later, it's trading at $11.24.

Our sell discipline removes the emotion. That discipline of admitting you're wrong, saying let's save the money and get out early -- that's really been a big contributor to our success with Large-Cap Value products here at Eaton Vance.

3. How did things get so bad and where do you think we are headed from here?

This bubble clearly was driven first by opportunity -- there were some wonderful opportunities in new technologies. I also think there's a tremendous amount of productivity, a free enterprise system, the Cold War dividends -- the fact that not so much money had to be spent on defense. All those things really pushed the economy and stock markets to high levels in the late '90s. In that bubble mentality, some people were doing extraordinarily well, and those who were simply doing well probably felt compelled to stretch a little bit. Risk was a good thing.

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Back at that time, [then-Securities and Exchange Commission Chairman] Arthur Levitt was going before Congress, saying we need more money to enforce accounting rules. And the response in Congress was, "Things are OK. Those outdated accounting rules don't really apply to this new era and new business models." Of course, that's where we were at the end of 1999.

Think about the comments coming out of the media: "We're entering a brave new era. There may never be another recession. These visionary entrepreneurs are creating wonderful opportunities for wealth creation and eliminating the necessity of future recessions."

When you look back at January 2000, Nasdaq was at about 4100 on its way to nearly 5100. People were calling their broker saying, "I can't stand it anymore. Just get me in." And John Templeton had that old saying that the time to sell is when others are aggressively buying. And, in hindsight, boy, January 2000 would've been a great time to sell. The emotion of the time said, "Risk is good -- let's do anything to make the big bucks." And if that meant compromising on some accounting rules or stretching your balance sheet to levels that normally wouldn't be prudent, people were willing to violate all those rules.