Weighing Options With Robert Olstein

Any other stocks you want to talk about?

How about Marsh McLennan(MMC Quote)? That's the leading insurance company in the world. They got involved in a scandal where rates were rigged. They were fined and the stock fell sharply.

But we did not think the company was going to fall off the face of the earth. We thought they had earnings power and free cash flow power of $2 to $2.50 a share. We thought that the new leader was conservative. And we thought that Putnam, which was involved in the market-timing scandal, would right itself.

Where did you start buying this one? It's at $28.15 now, but Marsh has been stuck between $27 and $33 for almost two years.

Our average cost is $28.78 and we started buying it in October 2004. But I see what you are getting at, so let me give you the story of J.C. Penney(JCP Quote).

We started buying J.C. Penney at $20 a share in 2001 and we bought it all the way down to $9 a share. Now we are selling out of that position in the $60s. So we sat there for a few years with an average cost of $14 or $15 until it finally moved up.

There is pain while you are sitting there. But the whole philosophy of the fund is that if you buy something that has some negativity in it, then if you are wrong the downside is maybe 20%, because the negativity is already in there. However, the upside can be more than 50%.

On the topic of insurance and scandals, what's your opinion of AIG(AIG Quote)?

I originally thought AIG was too aggressive. They pushed the envelope. So I stayed away for a long time, but we own it now.

Almost all the sell-side analysts on Wall Street missed, or couldn't really understand, what was happening at AIG under Hank Greenberg. But they never seemed to dig deep enough to find the real story. Has Wall Street research improved at all?

It's gotten a lot better. I was a huge critic of Wall Street research in the late 1990's. Way before Spitzer took up the cause, I wrote a feature article on where analysts were going wrong. And they are still too much in the "now."

It's better because you see sell recommendations out there now and you never used to see that before. My biggest criticism today with sell-side analysts is that they are shortsighted. They are only worried about the next 90 days, as opposed to the next two to three years.

We don't read Wall Street research for their opinions. It's good for other things, like economic forecasts, but we do our own stock research.