The Fab Five of Investing

Bob Froehlich Hartford Investor April 1, 2011

I love this time of year. The NCAA men's basketball tournament, of which The Hartford is a proud sponsor, is now in full swing. This tournament has evolved into one of the greatest basketball events, and one of the top collegiate sporting events in this country.

It's fun to think back to games you went to, and teams that you rooted for over the years. While I don't consider myself a Michigan fan, to this day, I still marvel at the University of Michigan's Fab Five. In the 1991-92 basketball season, the University of Michigan arguably had one of the best high school recruiting classes of all time. Five freshmen became the starting five players on that team-hence the name, Fab Five. The players were Chris Webber, the center, Juwan Howard and Ray Jackson at forward, and Jimmy King and Jalen Rose at guard. I guess what most impressed me about this is that I remember when freshmen were not even eligible to play varsity sports. You had to wait until your sophomore year to play on the varsity team. That rule changed back in 1972, the year I entered college, and I was so excited because I had dreams and aspirations of playing varsity baseball at the University of Dayton as a freshman. While a couple of knee surgeries meant that my dreams didn't come true, my admiration for freshmen who made the varsity team stayed with me forever.

So, from my perspective, I found it amazing that freshmen would even make a varsity team, let alone be starters. Add this to the fact that there are only five starters on a basketball team, and that all the Fab Five were freshmen-are you kidding me? That's a once-in-a-lifetime happening that we may never see the likes of again-ever.

And, it wasn't the fact that these five freshmen were the starters that caught everyone's attention, it was the fact that these five freshmen advanced all the way through the NCAA tournament to the championship game, only to lose that game to Duke. The next year, when the Fab Five were sophomores, they did it again by advancing all the way to the championship game-this time losing to North Carolina in the 1993 title game. I don't believe that this will ever happen again-five freshmen leading their team to the championship game, and then repeating that feat the next year, as sophomores.

No group has ever been more deserving of the tag line, the "Fab Five." As an investment guy, this really got me thinking. Is there maybe a fab five of investing out there somewhere? Well, believe it or not, I've found my own fab five. So, let's dim the lights, and crank up the pep band as I introduce my fab five of investing.

At center on my team, instead of Chris Webber, I have mergers and acquisitions. Just as the center is the cornerstone to any basketball team, so too is my center the cornerstone to my investment team. This merger and acquisition story just keeps getting better and better. LVMH is purchasing high-end jeweler, Bulgari. Cumulus, the number two radio station owner, just bought Citadel Broadcasting (the number three company) in a $2.4 billion cash and stock deal. Finally, Berkshire Hathaway is buying Lubrizol for $9 billion. As coach, I couldn't be happier with my center position.

At one of the forward positions on my team, instead of Juwan Howard, I have Saudi Arabia's "Day of Rage." As an eternal optimist, very little, if anything, actually worries me. However, the "Day of Rage," with its planned day of anti-government protests and demonstrations, scared me to death. That doesn't mean that I think the events in Egypt and Libya are unimportant, and do not matter, because they do. But, in my opinion, the most important country, and a linchpin for the region, is Saudi Arabia. When I first got word of this "Day of Rage," I feared the worst. If the military stepped in with a heavy hand, the price of oil could spike to $150 a barrel, and we'd find ourselves facing a global recession. Well, thankfully, the "Day of Rage" in Saudi Arabia was actually very calm.

At the other forward position on my investment team, I have the state of Wisconsin. The Wisconsin governor's signing of the so-called union bill limiting some collective bargaining for some public-sector employees in that state was a game changer. This event was a clear signal that the state of Wisconsin, as well as the entire country, may be on a more conservative fiscal path. While many thought this would never happen, it did. It's a little like my forward stepping out to hit a big, three-point shot. What happened in Wisconsin could well be the shot heard 'round the world.

At one guard position, I have China. On a basketball team, one of your guards needs to be explosive. The same is true for your investment team-one of your guards needs to be explosive. Can you think of anything more explosive in the investment world than China? I don't even know where to begin. China just overtook the United States as the world's top manufacturer, which may be a good start. Or, I could talk about China's plans to build 10 million units of government-subsidized housing in 2011. If that's not explosive enough for you, consider this: Air China and Hong Kong Airlines are buying $10 billion worth of planes from Boeing Corporation. Now that's what I call an explosive guard position.

At my other guard position, I have Germany. On any good basketball team, your other guard needs to be your steady, sure kind of player. On my investment team, that's Germany. Talk about steady as you go. In the third quarter of 2010, unit labor costs for the Eurozone were 112.1; for Germany, unit labor costs were 103.2. This dramatic improvement in German labor cost and competitiveness is a little like your steady guard hitting 10 out of 10 free throws. Germany's Purchasing Managers Index (PMI) soared to 62.6% in February. Remember, anything above 50% is considered great. By the way, that 62.6% level is the highest in the past decade. And that's not all. Anecdotally, Siemens Energy, a leading German company, just received a $1 billion contract from Saudi Arabia to supply components for a power plant. While I'll never be able to prove this, I'm willing to bet that my "Fab Five of Investing" (Mergers & Acquisitions, "Day of Rage," Wisconsin, China, and Germany) wouldn't simply make it to the championship game, they'd win the championship game!

What better way to close a commentary that references college basketball than with a couple of quotes from the greatest college basketball coach ever, John Wooden, the "Wizard of Westwood," former coach of the UCLA Bruins, and winner of a remarkable 10 national championships? While coach Wooden has many remarkable quotes, here are two of my favorites-I couldn't pick just one: "If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes." That is so true, isn't it? His second quote, however, has actual words to live by: "You can't let praise or criticism get to you. It's a weakness to get caught up in either one."

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