Stock picks from the experts

Jeremy, you've written that stocks will get cheaper.

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JEREMY GRANTHAM: If you look back at 1982 and 1974, the market was much cheaper than it is today. In '74 it was about 40% cheaper, and in '82 it was about 60% cheaper. Look at the bad times we had in '74 and '82, and I think several of us would conclude that this time is likely to be as bad - possibly worse. Bubbles like this always overcorrect.

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How bad will you feel if you put in your cash reserves and the market continues to go down? You're going to feel awful. And how will you feel if you don't buy in the cheapest market for 20 years and it runs away and leaves you? Horrible. You have to step your way through so that the regret, which is going to be huge anyway, is about neutral.

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Bob, some years ago you said that the price of oil and energy in general was going to go way up, which obviously it did. Now that it's down again, where do you stand?

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RODRIGUEZ: This recent collapse is very temporary. We've been waiting for prices to come down, and we finally started buying Oct. 8. We put in approximately 25% of our cash between Oct. 8 and Oct. 23, and of that, about 70% has been into energy.

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GRANTHAM: What we've found is that high-quality stocks aren't dependable in an ordinary bear market - not even in a severe bear market. High quality is really dependable only when economic fundamentals start to collapse. If there's fear running through the system that there'll be a severe recession, the great recession, or a mild depression, quality is dynamite. Quality was brilliant between 1929 and 1932. You did not want to own the low price-to-book stocks, because half of them went bust. You wanted to go down in Coca-Cola. Overpriced Coca-Cola lost only 75% of its money.

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Are those high-quality names worth buying today?

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GRANTHAM: Absolutely. They're still the cheapest part of the market. And I don't do individual companies, but the five classic positions - and the biggest in the fund - are Coca-Cola (KO, $44), Procter & Gamble (PG, $60), Microsoft (MSFT, $19), Wal-Mart (WMT, $53), and Johnson & Johnson (JNJ, $55). These guys' profit margins did not inflate materially.

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The rest of the market, particularly the junk, went to legendary highs. These guys barely moved in comparison. Consequently their earnings didn't go up as much: People thought they were has-beens, and their stocks languished in the great rally. As a result, they came into this time period, when you really need them, the cheapest they've ever been on a relative basis. Now they're extremely cheap on an absolute basis as well.

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GRANTHAM: The most difficult decision we've had to make in a long time was when we started our quality fund four years ago - the question was whether banks could ever be considered high quality. All the quants in the shop were saying, "What do you mean? They've got high, stable returns."

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But all the historians were saying, "Yeah, but every 15 or 20 years, the market takes half of them out and shoots them. That doesn't happen to the Coca-Colas." So in the end we decided that no banks could ever be high quality.

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