????By 2 o'clock last Wednesday, Tom Forester was feeling like a hero. The investor, the only stock mutual fund manager to make money in 2008, had just spent almost $10 million over 24 hours buying stocks. The Dow Jones Industrial Average was showing big gains since its low that day. Then, in an instant, the index plunged 350 points and finished deep in the red. "And we're thinking, uh oh," says Forester, whose Forester Value fund (FVALX) is beating 98% of rivals this year.
????To understand how bizarre last week was not just for ordinary folk but even the planet's smartest investors, Forester's story is illustrative. He's not a day trader like many on Wall Street. He's a laid back Midwesterner who lives outside Chicago. He drives to work everyday in a 2006 Acura S.U.V. that he bought two years ago with 39,000 miles on it. He tends to buy stocks in quality companies that he can hold for a long time. Still, the stock market's wild swings last week left even Forester confused, shaken, and utterly exhausted.
Monday: Dow -5.6%
????Forester, 52, arrived at his office Monday expecting few aftershocks from Standard & Poor's downgrade of U.S. debt. "I didn't think it would be that big of a deal," he says. And for a while he was right. Stocks recovered a little soon after the open. "Then I was real wrong," he says. The Dow Jones Industrial Index finished Monday down 5.6%, its worst decline since the financial crisis.
????Forester has long believed the U.S. is at a crossroads. His investor letters are filled with worry over rising debts in America and Europe. He's questioned how much the Fed has accomplished with quantitative easing. With Congress gridlocked and interest rates already at zero, he also wonders whether government can do anything for the U.S. economy if it hits the skids.
????Since May, Forester has stockpiled cash and purchased index puts in his $160 million fund -- both moves that protect the fund during market declines -- because of his rising worries. The moves have been right so far. As of Friday, the fund had gained 0.5% in 2011 (compared to the S&P's 5.5% slump) to beat all but 13 of 1,115 fund rivals, says Morningstar.
????But after Monday's bloodbath, Forester was looking at the index puts and thinking, "Wow, I wish I had a lot more of these things."
Tuesday: Dow +4%
????He slept horribly Monday. On Tuesday he drove his usual 10 minutes into work listening to CNBC on satellite radio. Stock futures indicated that the market was coming back. He felt a little relief. But when stocks collapsed after a Fed announcement later that afternoon, he was paralyzed.
????"Is it 1987, when everything comes back over time, or is it 2008, when it's just the beginning?" Forester was thinking. He thought back to a rumor earlier in the week that the big French bank Société Générale was going under. "That is 2008-esque," he says.
????For all his worries, Forester had a nagging feeling Tuesday that he needed to act. He was turning bullish. Stocks were down 20% from their highs during 2011 and the U.S. economic news hadn't changed too much. He starting reducing the index puts and buying more shares of the companies in his fund. After a big afternoon run-up, Forester thought everything might be back on track. Both the Dow Jones Industrial Average and S&P 500 index had gained nearly 5% on the day.
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