Tisch's Bad Bet

By Daniel Kadlec

The stock market can make anyone look bad--even a billionaire investor like Laurence Tisch, who will step down as CEO of Loews Corp. by year's end. Shareholders may wish he had stepped down sooner, given his errant attempts to time the market over the past two years. Tisch, a contrarian, is smarter than most. After oil prices receded in the early '80s, his company bought oil tankers and drilling rigs at scrap-metal prices and later sold them for a tenfold gain. But he's lost big betting the company's cash against the Standard & Poor's 500, and its stock has suffered as a result.

Tisch's "short" positions in various individual stocks and the S&P 500 index produced losses of $918 million as the market rose in 1997. The losses mounted this year: $534 million in the first quarter and $134 million in the second quarter. Finally, in the mayhem of the third quarter, his bearish bets paid off with gains at Loews of $368 million. Being right--but too early--cost Tisch's company $1.2 billion. That should make your last 401(k) statement look a little better.

There are three lessons to learn from this tale:

--Market timing doesn't work. Selective plumping and pruning is one thing. I heartily advocate yearly or quarterly rebalancing of your portfolio: selling some of the asset class that has done best and buying more of the one that has lagged to maintain your desired mix of stocks, bonds and cash. I even endorse shifting among assets with part of your portfolio--no more than 20%--to try to take advantage of specific conditions every so often. Early this year I suggested tilting toward bonds because stocks were overvalued and lower interest rates seemed likely. Some wags would call that timing. I call it adjusting to the shifting balance of risk and opportunity. Besides, investing should be at least some fun, or you will lose interest.

But big market bets are for losers. You have to be right twice: getting out near the top and back in near the bottom. And even if you get it right, the payoff isn't that great. Between 1988 and 1997, if you had invested a set amount each year on the day the market peaked, you still would have made 18.2% a year. If you had picked the market's low point each year, you'd have made 20.2%. Being in the market--time, not timing--is what matters most.

--Recognize your mistakes. It's said that surgeons often make lousy investors because their work requires a supreme self-confidence that can hurt them in the markets. They'll hold a stock until they get even or go broke. That's a fatal attitude. When a stock has fallen, you've lost the money whether you sell or not. Take another look, and be ready to accept that you might have missed something the first time. That's what Tisch did. Last quarter Loews "reduced its exposure" to the stuff that produced the massive losses. Now is a good time to look at your losers. If you wouldn't buy them at this price, consider selling to lock in a tax savings before year's end.

--Contrary investing is an art. Big money can be made betting against the herd. But the herd often gathers considerable momentum. The art is in knowing when it's running out of steam. If, like Tisch, you're right but early, you may pay dearly. Instead, try value investing: hunt for solid stocks whose prices are low relative to their book value or expected earnings. Such stocks will probably rise, and if they fall, won't fall so far.

See time.com/personal for more on market timing. E-mail Dan at kadlec@time.com See him Tuesday on CNNfn, 12:40 p.m. E.T.