5 Lessons from the Morningstar Conference

The biggest names in the mutual fund business, convening for the annual Morningstar Investment Conference in Chicago, discussed everything from the hottest new exchange-traded funds to how to keep a lid on trading costs. As for the big picture, the experts offered some conclusions that investors may find comforting. Here are some key takes from the conference, which ended May 29.

1. The road ahead is uncharted and guaranteed to be bumpy.

There is no consensus on whether the stock market's gains since March 9 mark the start of a new bull market or merely represent a bear-market rally. Most fund managers are too sensible to hazard a guess.

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But there is consensus that major obstacles remain as the U.S. economy finds its footing on an altered global landscape. The deleveraging of U.S. households has barely begun, and U.S. consumers won't return to their spendthrift ways with their former gusto. Commercial real estate could be the next shoe to drop. How severely issuance of massive amounts of new Treasury bonds will affect interest rates and the dollar is a powerful wildcard.

2. But the road doesn't have to be smooth for you to make money.

Chris Davis, co-manager of Selected American Shares (symbol SLASX), a member of the Kiplinger 25, captured this point succinctly in his keynote speech: Although it took 25 years for the Dow Jones industrial average to rescale its 1929 peak, anyone who plowed $10,000 a year into the index over those 26 calendar years would have turned his $260,000 investment into $1.7 million, by 1954. That's an annualized return of 13%, thanks to the magic of dividends (which aren't accounted for in the how-long-did-it-take-the-Dow-to-return-to-

its-peak exercise), compounding and dollar-cost averaging.

3. You need to own high-quality companies.

Stocks of the riskiest companies have rallied the most since March 9. That fits the mold of past market turns. But the best opportunities longer term are in resilient, high-quality companies that can navigate the tricky environment.

Even Tom Marsico, one of the more bullish managers to speak at the conference, is focusing on quality. The top holdings in his Marsico Focus fund (MFOCX) are McDonald's (symbol MCD), Visa (V) and Wal-Mart Stores (WMT).

The best opportunities lie in "industry leaders with pricing power," says Davis. "Peter Lynch [former star manager of Fidelity Magellan] said you get once a decade to buy the stalwarts at ten or 12 times earnings, and we're in that period now." He points to Johnson & Johnson (JNJ) as the type of business investors should be stocking up on.

4. The old rules of buy-and-hold investing still apply.

"Buy and hold is never dead," says John Bogle, the legendary founder of Vanguard. His reasoning? Humble arithmetic. "Financial services cost us some $600 billion a year -- that's out of the pockets of investors." Trading and market timing are simply too expensive to justify.

Davis tackled the same point another way. He pointed out that over the past 20 years stocks returned 8% annualized. But if you'd missed out on the 30 best days your annualized return drops below 1%. Miss the best 90 days and you're in the hole to the tune of 8% a year. The stakes, if you get it wrong, are simply too high.

5. Growth will come from abroad. Don't miss it.

"Wayne Gretzky said skate to where the puck's going, not to where it's been," said David Winters, manager of the Wintergreen fund (WGRNX). "We don't think the puck's going to be in the U.S."

Bill Gross, manager of Pimco Total Return (PTTAX) and its near clone, Harbor Bond (HABDX), a member of the Kiplinger 25, wholeheartedly agrees. He advises investors to "look to the BICs," referring to Brazil, India and China (investors apparently are feeling less sanguine about opportunities in Russia, which had been lumped with the others to form the BRIC nations). In those countries, he says, "consumers account for a very small portion of the economy," and there's plenty of room for consumption to grow.

This is not to say you should up and buy the next "BIC" ETF that hits the market. "We don't think about it as 'How can you invest in China,' but as 'What can we sell to China?'" Winters says. Among his favorites are two companies based in Switzerland: elevator and escalator maker Schindler Group and Richemont, a maker of luxury products, including jewelry, watches and owner of the prestigious Cartier brand. Says Winters: "Men will continue to love women, and women will continue to love diamonds."