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Ed Farrell, 60
Started investing: 1985.
Focus: Small-company stocks.
What stands out: Sticks to his discipline even when it's out of fashion.
His advice: Find easy-to-understand small businesses with predictable earnings and don't overpay.
Ed Farrell started investing by reading "every book I could get my hands on about the stock market." He even read about investing methods he found bizarre, such as the Elliott Wave Theory, to understand different approaches. Why? "The brightest people in the world are on Wall Street. You have to be knowledgeable to compete with them."
He finished his do-it-yourself prep course more than two decades ago. His conclusion: Specialize in bargain-priced stocks of small companies. Studies show that such stocks, over the long term, beat the market by a comfortable margin. Next he located a firm that specialized in value stocks, Clover Capital Management in Rochester, N.Y., not too far from his home in Binghamton. Since starting with Clover in 1985, he's worked mostly with Mike Jones, who also co-manages Constellation Clover Small Cap Value. Farrell, a real estate agent, used profits from his firm (which he's since sold) to start his small-company portfolio.
His record? Clover confirms that Farrell has earned 14.4% annualized over 21 years -- putting his net worth comfortably into seven figures.
Most of Farrell's best ideas have come not from Clover but from his own research. Listening to his wife, Jan, hasn't hurt, either. She clued him in to Talbots, the women's clothing chain, in the late 1990s. "She and a lot of her friends were shopping there," Farrell says. He looked at the numbers and scooped up the stock at about $29. He kept studying the numbers, and just before same-store sales dipped he was savvy enough to sell half his holdings at about $50 a share in 2001. Chico's FAS was an almost identical story. He bought the stock for less than $5, sold half his shares in the low $40s and still has the rest. The share price has fallen to less than $30. Knowing when to sell is tricky. "The hardest thing in investing is selling," says Farrell. "I look for signs that the party can't continue." By that he means that a stock has become too expensive based on its P/E or other measures.
Most important to Farrell: How much cash does a company have, and will earnings continue to grow? He tries not to chase fads, although staying out of that chase can be difficult. In the late '90s, he was earning 9% annually while tech stocks were zooming. "I was constantly tempted by AOL and JDS Uniphase and the like. But I stuck to the discipline." Doing so proved doubly helpful. Farrell sidestepped the tech wreck, then saw his previously neglected small-company stocks take off when investors changed focus. His best lesson: "Develop a good strategy and stick with it."
--Steven T. Goldberg
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