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Time for Conventional Wisdom?Alan S. Moore / L’Observateur / September 30, 1998The stock market remains volatile with cross currents of emerging market contagion, asset deflation, political theater and economic slowdown building a formidable “wall of worry” for investors. Theseconcerns have combined to produce uncertainty in what matters most to stocks-predictability of earnings.

Indeed, even the foundations of stalwart companies such as Gillette (G), Proctor and Gamble (PG), and Coca Cola (KO) who have delivered so well for so long have become shaky with the news of flat or slower earnings growth. Of course, conventional wisdom states that you buy these”franchise” companies on market declines, as they almost always deliver when stock prices recover. But we think investors should examine thefollowing assumptions before getting caught up in the pitfalls of conventional wisdom.

The powerful forces that began to propel stock prices higher in 1995- double-digit earnings growth, expanding valuation, declining interest rates, low inflation, investors allocating their assets to stocks-will likely moderate. These forces created tremendous momentum thatbenefited the largest companies in ways that caused their share prices to be much more highly valued than the vast majority of stocks. A period ofmoderation could well be the leveler that causes investors to be more selective and to seek value in stocks based on company fundamentals rather than the size of their market capitalizations.

Therefore, we believe stock returns going forward are likely to be more evenly distributed than they have been in the past four years, and that the best approach is to select stocks that provide the best combination of quality, value, and opportunity, well-known or not.

(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm.)

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