Dear Dagen: How Full Is Your Glass?

The economy looks fundamentally sound. Wait a minute. Maybe it doesn't.

The market is rebounding. Wait a minute. Maybe it isn't.

In the past several weeks the Dow Jones Industrial Average fell to nearly a four-year low, rallied back almost 15% in four days and then started to sell off again.

Should you be optimistic? Pessimistic? Or just plain nauseated?

Three market professionals -- two fund managers and one strategist -- were kind enough to reveal how they feel about this market. The message: You will make money in stocks, provided you can just wait three to five years.

A Market Agnostic Believes in AOL

Bruce Veaco, one of the five managers on the Clipper fund, should feel absolutely giddy about the stock market these days.

The Clipper fund is up 2.3% over the past 12 months, making it one of the top large-cap value funds in country and beating the S&P 500 by more than 28 percentage points. Veaco and his cohorts have built an impressive record by focusing on finding undervalued stocks rather than predicting which way the market will blow.

"I am optimistic about the investments we're making for the next three to five years," says Veaco from Clipper's offices in Beverly Hills, Calif. "I am agnostic on the direction of the economy and the market."

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Instead, Clipper's managers are simply looking for dominant companies whose stocks are selling at discounts of at least 30% to their underlying value. The market's selloff in July -- the Dow was down 5.5% -- created a number of bargains they simply couldn't resist.

The managers are known for hoarding cash if they can't find attractive stocks to buy. At the end of June, the fund's cash stake was over 30%. At the end of July, it was down to 15%. "July provided quite a bit of opportunity," says Veaco.

That's an understatement. Clipper's skippers were dabbling in the pharmaceutical sector and nibbling in the brokerage arena. They also added a position in beleaguered media giant AOL Time Warner(AOL Quote - Cramer on AOL - Stock Picks).

"We always admired the Time Warner assets at AOL Time Warner," Veaco says. "We valued the company at about 20 bucks a share even when the sell side had a much higher price target on the stock."

But the company's well-documented problems -- from a merger that was flawed from the get-go to management turmoil to the expanding accounting probes -- created a buying opportunity. The stock is down 43% since the beginning of May.

"At $12 a share, you weren't paying anything for AOL," he adds. "Below $10 a share [where the stock traded in late July], it was too compelling to ignore."

Veaco conceded that AOL Time Warner has to fix that sweeping array of problems and that it's difficult to get your arms around the AOL division's actual worth. The company needs to "articulate a clear strategy for its goals and direction, resolve the investigations into its accounting and simplify the corporate structure, particularly at Time Warner Entertainment."

"I took the company's 10-K home one evening and decided to figure out the structure. I had to draw a flow chart. I think I stayed up until 4 in the morning."

Questioning the Economic Recovery

Chris Hyzy, head of investment policy for international private clients at Merrill Lynch, is both positive and negative about the market. It just depends on whether he's talking to a long-term investor or one with an investment horizon of just a few months.

"For the long-term investor, there are very positive signs," Hyzy says. Massive mutual-fund outflows during June and July are one indication that sentiment has bottomed. "Anecdotally, we're starting to see very large pension funds recommit to equities," he adds.

But that optimism only reigns if you've got three to five years to invest. If you're looking out just 18 months, the outlook isn't so sunny. "We're starting to question the economic recovery. We really need to see evidence that capital spending is going to pick up. And concerns over credit quality may pop up months from now," says Hyzy.

"There are a couple of clouds out there."

But if you can just wait a few years, you're bound to see brighter days.

As Long as Congress Doesn't Screw It Up...

Ron Muhlenkamp says he cannot predict where the market is going, but he does know to find good companies at cheap prices. His fund is down 20% this year and performed in the bottom 4% of its category for the past month, according to Morningstar. But its 10-year record ranks in the top 23% of all mid-cap value funds.

"I have no idea what the market does in the next two months. But I never do," Muhlenkamp says. "But I think the economy is expanding at a fairly modest rate."

Muhlenkamp thinks consumers will either continue to spend money, or, if they don't, interest rates will go lower, they'll refinance their mortgages again, and that will spur spending. With that assumption, he's been adding to existing positions in his fund in areas such as auto parts and housing.

"A lot of people gave up on the markets in the last two months. That could have an overflow to economy. But the bigger risk is that Congress will overdo things. Unless we see Congress really screw it up, we think the economy will expand."