Many investors believe that you must endure the occasional severe loss in bear markets and corrections to reap stocks’ long-term rewards. “Not necessarily,” says top manager Mark Oelschlager, CFA, whose fund fell just 2% in 2022, versus an 18% drop for the S&P 500.

Oelschlager uses an all-weather approach that allows him to post relatively good results in all kinds of investing environments, including three bear markets, seven corrections, a decade of irrational exuberance and both near-zero and soaring inflation rates. The coming years are likely to bring more uncertainty than in the past, so it’s critical to use a strategy that lets you stay invested in stocks long-term while balancing capital preservation with risk-taking. While Oelschlager’s short-term performance may lag that of the S&P 500 in roaring bull-market rallies, he more than makes up for it over time.

Bottom Line Personal spoke to ­Oelschlager to find out his secrets for good performance in up and down markets, as well as the stocks he favors now…

Finding All-Weather Winners

I have been watching the market since I was a kid. My father was the investment manager for the Firestone Tire & Rubber pension plan. When I was in college, he’d send me stock reports to ­critique. Here’s the approach that has served me best…

I don’t obsess about growth versus value. Many investors think they must choose between growth and value and sit out the inevitable lull when one falls out of favor. But I think it’s wise to be open to slow-growing and fast-growing companies, depending on the quality of the businesses and prices you’re paying. Criteria I look for: Very high-quality businesses that can grow operations at a decent rate consistently over long ­periods …sustainable advantages that prevent competitors from taking market share…strong free cash flow, which gives companies flexibility to expand their business without going into long-term debt or to return the cash to shareholders as dividends and stock buybacks. Four high-quality stocks I own now…

Alphabet (GOOG) has been my largest holding for years. Its lineup of web properties such as Google Search, YouTube and the Chrome web browser have made it the world’s largest digital-advertising franchise, raking in nearly 30% of all global digital-ad spending last year. Alphabet sold off significant portions of its shares in several companies earlier this year amid fears that Microsoft’s Bing search engine would disrupt Google’s dominance by incorporating chatbot artificial intelligence (AI) software. But I think we are in the first inning of AI, and Alphabet is well-positioned to become a leader. Recent share price: $130.69.*

Huntington Ingalls Industries (HII). The naval defense contractor is one of two major shipbuilders that the US Navy is depending on for aircraft carriers and nuclear submarines as it embarks on a multiyear plan to modernize its fleet. Weapons manufacturers offer steady cash flows, long-term projects with predictable profits and the ability to pass on higher costs to the government in inflationary periods. Huntington Ingalls has a five-year $47 billion backlog of projects and landed a $2.4 billion contract for the construction of a next-generation amphibious assault ship. Recent yield: 2.27%. Recent share price: $218.55.

Prestige Consumer Healthcare (PBH) owns and distributes over-the-counter health-care and household-cleaning products, including Efferdent denture care, Luden’s cough lozenges and Comet cleanser. Management acquires and revitalizes overlooked brands from big consumer-­products companies. But as a small-cap stock, it often is ignored by big institutional investors. Recent yield: 1.27%. Recent share price: $60.23.

Valero Energy Corp. (VLO) is one of the largest independent refiners in the US, processing crude oil into transportation fuels, asphalt and petrochemical products. Unlike oil exploration-and-production companies, Valero can prosper whether oil prices are high or low. Over the last seven years, the company has averaged $3.5 billion in annual free cash flow. It also owns 12 ethanol plants and one of the world’s largest renewable-energy operations. Recent yield: 3.12%. Recent share price: $133.12.

I look at my portfolio regularly and ask myself, Should I be adding or reducing risk? I try to buy and hold stocks for many years, but I do adjust my portfolio in response to what’s going on with US markets, the economy and investor sentiment. When the optimism level in the stock market is high, I usually take some risk out of the portfolio. When fear is more prevalent, I like to add risk. 

Where I stand now: For the most part, risk off. The stock market rallied strongly in the first quarter of 2023 in anticipation that the Fed would cut interest rates later this year. Then it fell, and then rallied again in the second quarter. I think investors are being too optimistic and complacent. Considering that the effects of the rate-hike cycle haven’t fully kicked in and inflation is still elevated, more trouble may lie ahead.

How I reduce risk in my portfolio: I increase my allocation to defensive areas of the market. Recently, I had one-third of my fund’s assets in health care. That sector didn’t have a big run-up earlier this year, so valuations still look reasonable. Health care has done well in recessionary environments because it is full of companies with low debt, strong cash flows and strong consumer demand regardless of whether the economy stumbles or not. Oftentimes it is difficult to find stocks that are defensive and attractive, in which case I may let the cash position build. With short-term instruments now yielding 4% to 5%, it’s not a bad place to hide.

I take what the stock market gives me. Basketball legend LeBron James likes to say, “I take what the defense gives me.”  I do the same thing in investing, looking for opportunities that market dynamics are creating. After I decide whether to add or reduce risk and identify appropriate sectors, I figure out which stocks offer the best attributes for the level of risk I’m willing to take on. The most common situation that leads to our buying a stock is when a company is out of favor for what we believe are short-term reasons. This is probably our greatest source of alpha, meaning outperformance, with so much of the market overly focused on the here and now. It isn’t always easy to differentiate short-term problems from more fundamental ones, but experience helps. Two stocks I’ve added to recently…

Bristol Myers Squibb (BMY), the world’s seventh-largest pharmaceutical company by sales, is a leader in oncology and immunology drugs, two of the industry’s fastest-growing therapeutic areas. Its stock has come under pressure due to the loss of patent protection on Revlimid, which treats multiple myeloma. But I think the company can continue to generate solid earnings and billions of dollars in free cash flow each year thanks to newly approved drugs with blockbuster potential such as Opdualag for skin cancer and Zeposia for relapsed multiple sclerosis and ulcerative colitis. Bristol Myers also has a drug pipeline with more than 50 clinical compounds in development and several dozen ongoing clinical trials. Recent yield: 3.67%. Recent share price: $62.08.

McKesson (MCK). The drug distributor delivers more than 300,000 drugs, diagnostic equipment, surgical instruments and diabetes supplies to health-care providers and pharmacies. Along with a few other companies, it dominates the medical distribution industry. McKesson extended its partnership with CVS Health to distribute pharmaceuticals through mail order and retail locations until mid-2027. It is shifting focus to its highest growth areas—oncology and biopharma services, acquiring Rx Savings Solutions, a platform that helps users lower prescription costs. Recent yield: 0.51%. Recent share price: $423.30.

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