Royce on Long-Term Possibilities, More Bank Closures, and Margin of Safety

Chuck Royce, chief investment officer of The Royce Funds, tells that he sees “tremendous” possibilities in the stock market over the next three to five years, and says that America will make it through the current financial crisis and have a “wonderful” future.

“I think that we are a major — we can’t forget this — we’re a major world power,” Royce told Steve Forbes. “And although the dollar has definitely had its issues over the last 10 years, I think the dollar will continue to be a major currency, even if it declines. That it’s reserve currency status will not change for a long time. That we have the smartest, most clever kind of corporate response, innovation capabilities of any country and that we will have a wonderful future as we come out of the economic recovery, as we come out of the economic sort of bottom here, trough.”

Royce says there hasn’t been “a single zone of safety” in the stock market — other than cash — of late, but he expects things will change faster than many believe. “We definitely believe that out there, three years, five years, a sort of reasonable horizon, there’s tremendous, 100%, 200%, possibilities,” he said. “In our micro-cap funds, I’m currently rating our stocks in the fund that, ‘Could they triple? Could they just double?’ And I’m doing the triage between them.”

Royce also says the biggest lesson he’s learned from the financial crisis is the importance of the “margin of safety” concept that Benjamin Graham popularized, and says that businesses can’t forget their long-term planning while dealing with the short-term fallout from the crisis. “If you’re a good company with a great balance sheet, you should be using that moment to take advantage of the moment, to squash your competitors, to take market share, to eat the other guy,” he said. “[But] I’m not seeing that yet; in the classic recession, the larger companies should buy smaller companies. But that’s come to a complete standstill.”

Another of Royce’s predictions; bank closings. “I would say no matter what else goes on over the next five years, a number of banks will decline,” he said. “Some of them in just perfectly normal ways and some because they no longer are viable. So that process will go on a long time. And I think it’s almost separate from the subprime issue. It’s just that we have too many banks. We’ve encouraged too many banks. We made it too easy to be a bank. Most countries don’t have anywhere near the number of banks we do.”

Finally, asked what his advice is for individual investors who’ve had their nerves frayed because of the recent crash, Royce has two suggestions: turn off CNBC, and use dollar-cost averaging, which his firm does.”It’s a very time-tested technique,” he said of dollar-cost averaging.