Transcript: Olstein's Way!

This is a partial transcript from "Your World with Neil Cavuto," December 16, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Well, he may not be a shock jock, but his returns are certainly shocking — in only the best way. The Olstein Financial Alert Fund averaging a 16 percent return for investors over the last 10 years, far better than the S&P 500.

So, what will keep Bob Olstein on top for the next decade. He is here for tips he says everyone should know, whether you're in that fund or not.

Good to see you, sir.

First off, what do we got to do?

ROBERT OLSTEIN, CHAIRMAN, OLSTEIN & ASSOCIATES: Mr. Cavuto, you are going to have to watch what you do.

They're going to get single-digit returns going forward. It's going to follow corporate earnings. People are going to have to get realistic about growth rates. You got Cisco still talking about 10 and 15 percent growth rates. Not going to happen.

You buy companies, excess cash flow. It's going to be a stock-pickers' market. You are going to have to value companies.

CAVUTO: So, why do you say be leery of what the Street is giving you, the research the Street...

OLSTEIN: Well, because the Street is too in the moment. Research has improved dramatically since 2000.

But they are always in the moment, buy, sell, wait for the next quarter. They missed the quarter by a penny. This has nothing to do with long-term values. That game is over, worrying about quarterly numbers. Worry about valuation of companies. There's too many analysts still going buy, hold, sell in the immediate moment.

CAVUTO: In the meantime, we are not over our scandals. More coming, huh?

OLSTEIN: Well, you have got to watch accounting at all times.

CAVUTO: Yes.

OLSTEIN: I mean, we are, right now, at the highest quality of earnings I have seen in the last 37 years.

You got huge cash flows, huge amount of cash. But you can never let your guard down. You have to look at balance sheets. You got to look at early warning signs. Companies are always trying to put their best foot forward.

I just was talking to you about the National Bureau of Economic Research study. They interview management, and they find out they would hold back discretionary expenditures that are important to the company, that...

CAVUTO: So, they are still playing games?

OLSTEIN: They're always going to play games.

CAVUTO: But you also say go with activist stock-pickers. What does that mean?

OLSTEIN: Well, basically, we are going to start an activist fund, which is going to be a satellite of our existing fund.

We believe there is a lot of managements out there where you are not holding their feet to the fire. Basically, when I wrote McDonald's two years ago and tell them to stop cannibalizing their restaurants, I basically am going to write Cisco, and stop talking about 10 and 15 percent growth rates. You are hurting the stock by talking like that.

So, basically, you are going to have go out there and talk to management, let them know, they work for me. I don't work for them.

CAVUTO: What about this whole bubble talk, that we have got more to come? What do you think of that?

OLSTEIN: Bubble? I don't think we have a bubble.

CAVUTO: How about new bubbles to watch out for?

OLSTEIN: Well, you always got to watch out for bubbles.

CAVUTO: Where are they most likely?

OLSTEIN: Most likely in the Internet-related stocks that...

CAVUTO: Still?

OLSTEIN: Oh, sure. You're going to have, you know, unrealistic expectations about where things are going to go.

But there are not a lot of bubbles out there. The market is 5 percent undervalued here.

CAVUTO: Yes. But you also say, for people who just want to play it safe and invest in index funds or funds that mirror the market, the S&P, the Dow, Nasdaq, what have you, avoid it. Why?

OLSTEIN: You know, the index funds, that's zero return for six years. They talk about their low fees, but they deserve low fees.

CAVUTO: Nasdaq is up, what, 6.5, 7 percent this year?

OLSTEIN: Yes.

CAVUTO: If I had an index doing that, I would be happy.

OLSTEIN: But the S&P index is up 4 or 5 percent. Why would you be happy? You got to go out there...

CAVUTO: Well, what are you up this year?

OLSTEIN: We are up only 4 percent. We are not happy either.

CAVUTO: To be fair, over time, you have averaged a 16 percent return.

OLSTEIN: Right.

CAVUTO: But a lot of people look at that and say, you know, I mean, it's a safe way to play the market. You are saying no.

OLSTEIN: You got the professors from Princeton and from Yale, all of these wise men, telling you to be average.

Why don't they teach the Princeton kids and Yale kids to be average? Why don't we want the 500 managers that have beat the S&P by a wide margin? It's the investor's job to find these people.

CAVUTO: All right.

OLSTEIN: Don't seek to be average.

CAVUTO: Robert, always a pleasure.

OLSTEIN: My pleasure, Neil.

CAVUTO: Thank you, my friend, Bob Olstein.

You can catch more of this brainiac. And he really is one of the smartest people I know on the Street, which maybe says I should keep better company. I don't know.

(LAUGHTER)

CAVUTO: Anyway, he is going to be, Saturday, on "Bulls & Bears," part of that powerful "Cost of Freedom" business block, kicks off 10:00 a.m. Eastern time.

And he always tells you where he stands, which I like, you know, good or bad.

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