Robert Olstein, whose Financial Alert Fund outperformed the Standard & Poor's 500 Index in eight of the past nine years, said he tries...

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Robert Olstein, whose Financial Alert Fund outperformed the Standard & Poor’s 500 Index in eight of the past nine years, said he tries to avoid money-losing investments by buying stocks that already have collapsed.

Olstein added to his stake in Tribune Co., the second-largest U.S. newspaper publisher, in January as the stock slid to a 2 ½-year low. The drop reflected a decline in advertising sales after the company admitted it had overstated circulation at its Newsday and Hoy newspapers in New York.

Shares of Interpublic Group, the fund’s biggest holding at the end of January and the world’s No. 3 advertising company, dropped 78 percent from an all-time high set in 1999. The company reported losses for the past seven quarters and discovered acquisition-related accounting errors this year.

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“We like to buy bad news because it produces the right price,” the money manager said in an interview from his office at Olstein & Associates in Purchase, N.Y.

“We look first at how much we can lose before we think of the upside.”

Olstein’s $2 billion fund has risen an annualized 16 percent a year since it was introduced in September 1995. The only year that he lagged the S&P 500 was 1998, when his 15 percent gain fell short of the index’s 29 percent advance.

The fund’s 10-year performance was the second-best among 78 “value” funds tracked by Bloomberg that invest in companies of any size. These funds focus on stocks that trade at a relatively low price compared to the value of their assets. The Allianz OCC Renaissance Fund, up 17 percent annually, was first.

Schilit’s view

During the past 12 months, the Financial Alert Fund slipped in the ranks because of a plunge in Merck’s share price. The fund is up 1.4 percent, through March 31, placing 198th of 226 similarly run funds.

Olstein and his associates go through hundreds of financial statements. They look for companies whose noncash expenses, such as costs for depreciation, mask improving earnings prospects. He buys shares trading at a discount of about 50 percent to free cash flow, or profit from operations minus capital expenditures.

His track record has attracted the likes of George Soros, the fund’s biggest investor. Michael Vachon, a spokesman for the billionaire financier, declined to comment on the investment.

“Olstein’s curiosity for digging deep into financial reports, and the skill he has for that, is clearly why he has been a successful money manager,” said Howard Schilit, chairman of the Center for Financial Research and Analysis, an accounting research firm in Rockville, Md. Schilit first met him when the manager began Olstein & Associates 10 years ago.

“Waste of time”

During the 1970s, Olstein gained prominence by writing the “Quality of Earnings Report” with Thornton O’Glove. The newsletter alerted fund managers to companies that were burnishing financial results with misleading accounting.

The newsletter at its peak had 120 subscribers who paid about $15,000 a year each, according to Olstein, who credits O’Glove with developing his intuition for spotting telltale details in regulatory filings and earnings reports.

O’Glove said that he “learned to be even more cynical” through the collaboration. “I used to spend some time talking to management, and Bob always said that was a waste of time.”

Olstein said the approach reflects a lesson he learned in 1969 after buying shares of Varo, a maker of night-vision equipment, and losing about $10,000. He missed some early signs in the company’s earnings reports that military-budget cutbacks would slow growth, and the stock fell more than 50 percent.

“I listened to what management was telling me rather than make a financial analysis,” he said.

Tribune’s outlook

The Financial Alert Fund’s 15 analysts and traders refuse to speak with executives. Employees of the firm are required to limit equity investments to the fund’s shares to align their interests with those of holders.

Olstein trawls for companies that may be understating their ability to grow. Tribune, the fund’s fourth-largest holding as of Jan. 31, may rise to about $58 during the next two years as depreciation and amortization expenses drop, increasing profit, he said.

The Chicago-based company’s stock closed Friday at $37.26. Expenses to reduce the value of assets such as television-station licenses trimmed net income by $233 million last year, according to U.S. Securities and Exchange Commission filings.

The figure may drop to about the $217 million the company spent on capital improvements, according to Olstein, whose Tribune stake equals 2.2 percent of the fund’s assets.

Interpublic, based in New York, also may report improving earnings by shedding money-losing businesses after a flurry of 273 acquisitions from 1998 to 2002 hurt profitability, Olstein said. His stake amounts to 2.8 percent of assets.

“Autopsy” process

Olstein sold his entire stake in Merck after the company withdrew its Vioxx painkiller on Sept. 30 because of a link to heart disease. Shares of the New Jersey-based drugmaker plunged 27 percent that day. He also re-examined SEC filings and newspaper reports to learn whether he missed any warning signals.

The review uncovered reports in late August that health insurers, including, Aetna, Kaiser Permanente and WellPoint Health Networks, were discouraging the use of Vioxx because of concerns about the drug’s cardiovascular risks.

“There was enough evidence on the table to say that we were too optimistic in valuing the Vioxx franchise,” he said. “It was right in my face. We autopsy every error we make to see if there is any message other than we got hit by a bomb.”