It’s hard to feel sorry for Warren Sapp…

As a defensive tackle at the University of Miami, he was a consensus All-American who won multiple awards. He was an NFL first-round draft pick in 1995. And during his professional career, he earned seven trips to the Pro Bowl and a Super Bowl ring in 2002.

These accomplishments brought financial rewards, as well. Sapp reportedly grossed $60 million playing football. And today he earns nearly $116,000 a month as a sports broadcaster for the NFL network. That’s why some were taken aback at his recent bankruptcy filing.

Yet bankruptcy documents show Sapp had a propensity to make poor investments – including an 18,000-square-foot Florida mansion – and spend liberally, including more than 240 pairs of athletic shoes (still in the boxes).

His situation is hardly unique, of course. Baltimore Colts quarterback Johnny Unitas filed for bankruptcy protection in 1991. In more recent years, so did NFL veteran quarterback Mark Brunell and New Orleans Saints running back Deuce McAllister.

Football players are hardly alone. Other celebrity bankruptcies include Willie Nelson, Mike Tyson, MC Hammer, Toni Braxton, Cyndi Lauper, Tom Petty, Kim Basinger, and Ed McMahon.

How could all these famous people – with all those millions – find themselves financially upside down, owing more than they own? The two culprits are almost always the same: overspending and poor investments. They can strike anyone, regardless of net worth… unless you take these basic precautions.

Let’s cover overspending first. Most people imagine that if they just had more money they could save a lot. But expenses have a strong propensity to rise to meet the income available. Today you’re probably earning much more than you did 10 or 20 years ago. But your expenses have probably risen faster than inflation and perhaps faster than your income.

Thomas Stanley, author of The Millionaire Next Door, has studied this phenomenon intensively. He found that the overwhelming majority of successful, high-net-worth individuals follow the same basic formula. They maximize their income, minimize their outgo, and religiously save and invest the difference.

No matter how high your income, it’s still possible – as Warren Sapp and others discovered – to overspend. If you can avoid their overconfidence or lack of self-control, you have won the primary battle.

Still, one major hurdle remains: managing your investments sensibly. This is a topic we discuss five days a week here at Investment U. But I can boil the fundamentals down to just three basic rules:

1. Diversify – Not just to reduce your risk but to maximize your chance of holding big winners.
2. Stick to quality – Buy high-quality stocks and bonds and forget about penny stocks, options and futures.
3. Gird yourself to take the long-term view – To avoid abandoning your strategy when the market gets bumpy, as it always does from time to time.

Can it really be this simple? Yes and no. You’ll notice that successful dieting is equally straightforward. Every day of your life, you either take in more calories than you burn or burn more calories than you take in. (Glance in the direction of your belt buckle to see your running total.)

Investing and dieting are not rocket science. But sticking to core principles – at the dinner table or in the market – is not always easy.

However, the rewards are great if you do. Because no one wants to be a “Sapp.”

Good Investing,

Alexander Green

investment, National Football League, NFL, Overspending, Warren Sapp

The market had a strong first quarter this year. The S&P 500 rallied 12% on the heels of an 11% gain in the fourth quarter of 2010. In fact, it has more than doubled from its bottom on March 9, 2009.

But lately the market has been wilting like last week’s roses, drooping in one session after another. Is the bull finally headed out to pasture?

Don’t count on it. While no one can forecast the short-term zigs and zags in the market, there are three good reasons to believe there’s still life in this bull:

1. History shows that pullbacks don’t generally follow a strong first quarter. The S&P 500 has soared 10% or more in the first quarter eight times since 1945. According to Standard & Poor’s, the market rose three-quarters of the time in the following quarter. And the one other time the market rose 10% or more in both the fourth and first quarters, stocks gained 5% the next quarter.
2. First quarter profits are likely to be another record. Don’t forget that corporate profits have hit all-time records in each of the last eight quarters. And – while the reporting season is just getting under way – this time isn’t likely to be any different. Yes, the gains will be more modest this time thanks in part to higher oil prices and tougher year-ago comparisons, but we’ll almost certainly see more all-time record profits for the first quarter and a few big surprises could send stocks higher again.
3. Investors are still afraid. That’s actually a good thing. As John Templeton declared, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” You talk to anyone lately who’s euphoric about the economy and the stock market? Me neither. And people aren’t investing their money that way, either. According to The Investment Company Institute, investors yanked $1.2 billion out of stock funds in February after taking out $423 million in January. History shows a near perfect correlation between equity fund redemptions and stock market performance. It’s when investors starting throwing cash at the market that you need to worry. And we’re a long way from that.

When you look at the fundamentals, it’s surprising just how negative the average investor is. After all, we’re enjoying low interest rates, low inflation, expanding markets overseas (especially in the developing world) and all-time record corporate profits.

What’s keeping most investors at bay, of course, is volatility. And not just lately. Investors have been clobbered by two massive bear markets in 12 years. The 2000 to 2003 bear market took stocks down 49%. It was the worst market since the Great Depression – until the 2007-2009 bear market showed up. That ripped 57% from the leading market index.

Last year, the S&P 500 fell 3% or more six times, and on one gut-wrenching day in August, 6.7%. That made microscopic money market yields look attractive.

Of course, volatility is the price of admission in the stock market. If equity accounts rose as smoothly as bank accounts, everyone would be fully invested. But they’re not. Not even close.

Paradoxically, that’s another reason stocks actually look pretty good here.

Good Investing,

Alexander Green

Behavioral finance, Bull Market, Business/Finance, Chief Investment Strategist, Finance, Financial markets, investment, Market trend, S&P 500, Short, Technical analysis, Volatility

At our 14th Annual Investment U Conference at the beautiful Grand Del Mar in San Diego last week, I discussed a number of attractive investment opportunities available right now.

But I also warned them about one of the worst investments you can make. Take a minute now to make sure you don’t have it in your portfolio right now.

As I mentioned in a recent Investment U column, we’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Three decades ago, Fed Chairman Paul Volcker pushed the prime rate up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. From that pinnacle, long-term yields have plummeted to 3.1% today. Bond prices have soared accordingly.

But the financial crisis is over and the economy is beginning to show a pulse. Higher inflation may be just around the curve. And as yields move up, bond prices move down. And perhaps way down.

Just about the worst thing you can own when interest rates are moving up is a leveraged bond fund. When a fund manager borrows short term at low rates in order to buy additional long-term fixed-income investments for his fund, it’s the equivalent of buying stocks on margin. It works fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders take a shellacking. If you’re not sure whether the bond funds you own are leveraged, don’t guess. Call the funds and ask.

And if you owned a leveraged closed-end fund, don’t even call. Just get out, especially if the fund is trading at a premium to its net asset value (NAV).

Recall that closed-end funds are not like Fidelity or Vanguard mutual funds. Like ETFs, they trade on an exchange and can be bought and sold throughout the day (not simply redeemed at the closing price like open-end mutual funds).

However, closed-end funds can see their prices fluctuate well above or below their net asset values (NAV). When a fund trades above its NAV, it is said to be trading at a premium. And when it trades below the NAV, it is trading at a discount.

There is no easier (or more obvious) buy or sell signal than to buy these funds when they trade at big discounts and sell them when they go to a premium.

If those premiums are huge – as many are in the fixed-income sector right now – they are ticking time bombs that you definitely don’t want in your portfolio. Here are just a few that are particularly dangerous right now:

And then there is the biggest stink bomb of them all: PIMCO High Income Fund (NYSE: PHK), currently trading at a 60.4% premium to its net asset value. Over 60%! That is completely nuts. These shareholders are clearly asleep – and overdue for a rude awakening.

Even if your closed-end funds aren’t on this list, don’t be complacent. Call your mutual fund and ask if the manager is using leverage. Or visit a free website like www.cefconnect.com and check out the relationship of your closed-end funds to their net asset values.

It may well be the most important three minutes you spend on your portfolio this year.

Good Investing,

Alexander Green

Bond, Business/Finance, Chairman, Chief Investment Strategist, Closed-end fund, Exchange-traded fund, Finance, Financial economics, Financial services, Funds, Futures contract, hedge fund, Interest rate, investment, Long-Term Capital Management, Mutual fund, Net asset value, Open-end fund, Paul Volcker, San Diego, US Federal Reserve

Momentum Investing Versus Bottom Fishing

(You won’t believe the difference it makes!)

 by Momentum Alert Research Team

Way too many investors love to “bottom fish.”

A bottom-fisher is an investor who looks for bargains among stocks whose prices have recently dropped dramatically. He believes that the price drop is temporary or is an overreaction to recent bad news and a recovery is soon to follow.

“It’s down so much, I can’t go wrong,” they say.

Unfortunately, much more often than not, there dead wrong…

What is certain is that when bottom fishing for stocks, you are rarely going to find a prize. Instead it’s likely to be a company facing some sort of issue that is going to take a long time to resolve itself.

Here’s what James O’Shaughnessy, author of What Works on Wall Street has to say about the strategy: “If you’re looking for a great way to underperform the market, look no further.”

In fact, you’d have made a fortune doing the opposite… investing in the top performing stocks – the best momentum stocks – over the preceding months.

And O’Shaughnessy can back up his statement.

O’Shaughnessy sliced and diced the stock market in his book, sizing up nearly every possible way to make money in stocks – usually going back over 80 years. And he found that buying what has fallen the most is one of the worst strategies.

O’Shaughnessy’s conclusion is: “Unless FINANCIAL RUIN is your goal, avoid the biggest losers.”

Looking back at eighty years of stock data, here’s what O’Shaughnessy found:

If you’d bought the top 10% of performers (the best momentum stocks) over the preceding six months for each time period he looked at, you’d have made more than half a billion dollars.

If you’d “bottom-fished” and bought the bottom 10% of performers over the previous six months you’d have made less than $293,000… about 0.05% as much.

Which would you prefer? More than $500 million… Or less than $300,000?

It’s All About Momentum

 His study shows that buying what was already “up” proved incredibly successful…

 “Over six-month and 12-month periods, winners generally continue to win and losers general continue to lose,” O’Shaughnessy writes.

And owning the most recent crop of momentum stocks (without taking on unnecessary risk) – allows you to do just that. It’s a common sense approach to investing that works in good markets, and in bear markets, too. It doesn’t depend on

what the market averages are doing. Or whether your fund manager is on or off his game.

Momentum stocks are, by definition, the fastest-growing companies – and the most rapidly moving stocks – in the market. There’s nothing mysterious about them. Quite simply, they lead virtually all other companies in terms of sales growth, operating margins, profitability and “relative strength.”

As O’Shaughnessy points out; the key to making money in a short time (and a fortune over the long-haul) is to invest in the best performing stocks over the preceding months.

So the next time you hear someone say his main strategy is to buy what has fallen a lot recently; realize this person has no idea what actually works.

What works is buying what was up, not down. Simply buying what was up over the previous six months turned $10,000 into over $500 million. Doing the opposite performed far worse than the stock market (with much more volatility, too).

Do what works… invest in momentum stocks. History shows you’ll be well-rewarded if you do.

Business/Finance, Finance, Financial markets, investment, Momentum, Shaughnessy, Short, Short selling, Stock market, USD

Why Stock Investing is Like Skiing
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 24, 2012: Issue #1716

Over President’s Day weekend, I took my family to Massanutten Ski Resort in the beautiful Virginia Mountains. (It’s not Telluride, but when you have an eight-year-old son who yells “Woo-Hoo!” all the way down the slopes, it really doesn’t matter.)

We had admittedly low expectations for skiing when we arrived. It’s been an unusually warm winter and the snowfall has been virtually nil. Yet the night before we skied, the snow dumped fast and furious on top of the base of artificial snow.

The next day we woke up to a winter wonderland. Everything was covered with snow. The sun was shining. And it ended up being a perfect day. I couldn’t help thinking this was a lot like the stock market.

Here’s what I mean…

As well as being the Chairman of Investment U, I’m also the Chief Investment Strategist for The Oxford Club – a private fellowship for investors trying to achieve and maintain financial independence.

And our club has won numerous industry awards for editorial excellence. (The independent Hulbert Financial Digest ranks us among the top-performing investment letters in the nation for 10-year performance.) Yet much of our success actually comes from being well positioned to take advantage of completely unexpected circumstances.

Right now, for instance, the nearly two dozen recommendations in our Oxford Trading Portfolio are up an average of 43%, even though our average holding period is just 188 days.

Our portfolio is beating the market by a wide margin for two primary reasons:

• The first is that we have a proven system for identifying great companies at attractive prices.

• The second is that we don’t try to time the market. So when it suddenly puts on an impressive rally, as it has over the last three months (tacking on more than 1,500 points), we’re set to enjoy the benefits.

I don’t have a crystal ball. And neither does anyone else. Three months ago, we couldn’t have told you that the market was about to power higher. And two weeks ago, when I made my reservations for a mountain villa at Massanutten, I couldn’t have known that the skies would suddenly open up. But in both cases, it did.

Of course, stocks might not have rallied and the snow might not have fallen. But at least we took a chance. Successful investing is about hedging your bets, taking intelligent risks and being prepared for whatever happens.

Folks who wait for that mythical day when the investment landscape looks perfect will regret it. Just as those who wait for ideal conditions before planning a ski trip will find the fares are higher, the lift lines are longer or, if they wait too long, the snow is already gone.

Market bears will counter that the conditions may look right today, but that can change quickly. I don’t disagree. But we’ve thought about that, too.

We own plenty of investments outside the stock market, so our performance isn’t based on equities alone. We abide by strict position-sizing rules to limit our risk. And we run a trailing stop behind all of our stocks, assuring ourselves that our profits don’t slip through our fingers.

It’s not a perfect system, but it works, delivering high returns during the good times and protecting capital during the bad ones.

It sure beats sitting at home… wondering if it will snow.

Good Investing,

Alexander Green

Business/Finance, Chairman of Investment, Chief Investment Strategist, Derivatives, Finance, Financial economics, financial ratios, Financial regulation, Futures contract, Hospitality/Recreation, investment, Mathematical finance, Oxford Club, President, Short, Short selling, Technical analysis, The Oxford Club, Virginia Mountains

Is it a Good Time to Invest in Stocks?
by Alexander Green, Investment U Chief Investment Strategist
Monday, February 20, 2012: Issue #1712

More than two thousand years ago, the Greek sage and philosopher Epictetus counseled, “It is impossible for anyone to begin to learn what he thinks he already knows.”

Nowhere is this truer than in the stock market. You need only ask the many thousands of investors who have sat out an historic rally – the market has doubled from its lows years ago – because they just knew stock prices were only going to go lower.

That mindset has proved to be an expensive one. Yet these individuals now face another test.

If they jump into stocks today, having already missed one enormous move, they risk being in for the next leg down. That would hurt. On the other hand, if they continue to sit on the sidelines – earning next to nothing in bonds or cash – the market may well power higher and leave them with an even more extreme choice in the weeks and months ahead.

What is the prudent investor to do?

They Rise and They Fall

The first is to understand the error of your ways. Every market timer believes that if he sits patiently on the sidelines, he will get a better opportunity to buy stocks at lower prices.

And they often do. Unfortunately, they generally get to feeling so good about missing the downdraft that they convince themselves that the market will keep falling.

And, again, if often does. Until, of course, it doesn’t.

As the market climbs, they begin to rationalize that this is just “a bear market rally” or “a dead-cat bounce.” Until it becomes obvious that the train left the station and they’re still standing on the platform.

Cash is Not King, but Stocks Might Be

Warren Buffett’s mentor Benjamin Graham once said that no investor should have more than 75% of his money in stocks or less than 25%.

That’s a good rule of thumb. Seventy-five percent keeps you from getting overly enthused when times are good. And twenty-five percent keeps you from throwing in the towel when times are bad.

But what do you do now if you’re one of those who has played it too cautious until now and are fed up with your negative real returns in Treasury bonds or cash?

First, stop justifying what you’ve done and get off the dime. Start committing money to high-quality stocks in a gradual way. After all, if you shift a big percentage of your portfolio into stocks right now, you could regret it. And if you remain in cash, you could regret that, too.

So hedge yourself. Start moving money into stocks at regular intervals, being sure to keep buying if the market dips so you get better entry prices.

An Easy Way to Start Investing

A conservative place to start would be the Vanguard High Dividend Yield ETF (NYSE: VYM). True, it currently yields just 2.9%, but that’s still 50% more than 10-year Treasuries are paying and 50 times as much as the average money market fund.

Even if stocks go nowhere over the next 10 years – highly unlikely given the decade we just had – you’d still be better off in this fund than in a bond or money market fund.

There are a ton of reasons to put off making this move from the state of the economy to the size of the deficit. But that’s just the kind of thinking that got you stuck on the sidelines.

Look at the bright side. Inflation and interest rates are low. We’ve had five straight months of declines in the jobless rate. The ECB has extended three-year, low-cost loans to European banks. The Greek parliament has voted to actually cut spending. And we’re in a period of all-time record corporate profits.

So cast off. As the great nineteenth-century theologian William Shedd pointed out, “A ship in harbor is safe, but that is not what ships are built for.”

Good Investing,

Alexander Green

Benjamin Graham, Bond, Business/Finance, Chief Investment Strategist, Dow Jones Industrial Average, Economics, Equity securities, Finance, Financial economics, Financial markets, investment, King, Market trend, Stock, Stock market

The Ultimate Alternative Investment?
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 10, 2012: Issue #1706

Last week I spoke at an investment conference at Rancho Santana, a charming resort community on the Pacific coast of Nicaragua, near the town of San Juan del Sur.

Set on more than two miles of coastline with rolling hills and dramatic cliffs, the reserve attracts expats, investors, surfers and nature lovers from all over the world. They like the idea of owning a piece of – or at least visiting – one of the most spectacular stretches of coastal land in the world.

Some are attracted because the property is so inexpensive. It’s hard to believe you can buy a stunning home site directly on the Pacific Ocean for less than $175,000.

And it’s not just the property that’s inexpensive. One evening 14 of us rode into town to have dinner at a favorite local restaurant, Yolanda’s. The proprietor served up heaping helpings of local lobster, fresh vegetables, black beans and rice, plantains and plenty of Corona beer. When I picked up the tab, I was shocked. The cost was less than $9 a person.

Some investors here are banking on increased foreign investment and commercial development. The International Monetary Fund estimates that Nicaragua’s economic growth hit 4% last year… and is on the verge of accelerating.

Exports jumped 23% last year. Tourism is up. MSN Money ranked Nicaragua at the top of their list of “Ten Exotic Retirement Spots for 2011,” telling readers “[Now] is the time to put this country at the top of your super-cheap overseas retirement list.” CNN Money calls it “the next Costa Rica.” Indeed, Rancho Santana is just 50 miles north of the Costa Rican border.

Good things are happening locally, too. A local business leader plans to invest $300 million next door in a world-class marina, golf and spa resort called Guacalito. Due to open in Spring 2013, it’s located just 30 minutes from Rancho Santana and is already bringing increased investment and improved infrastructure to the region. And an international airport is planned for the Tola area, located less than a half hour away.

Other investors are putting money to work here for privacy reasons. They want to diversify their portfolios beyond the prying hands of angry ex-spouses or potential litigants.

But for most, it’s the sheer beauty of the place. The New York Times points out that, “The beaches are among the finest in the Americas, and among the least developed.” Gaze out from atop one of the many bluffs on this 2,700-acre reserve and you’ll see what the coast of California looked like a hundred years ago, pristine and largely undeveloped.

Residential lots are selling quickly. Over 50 homes have been built and 24 more are under construction. It’s not hard to see why. The terrain is such that home sites can capture views of the ocean, the nearby valley and lovely sunsets. Labor costs are significantly lower here. And a master association and various sub-associations exist so that owners are assured that high and consistent standards of quality are maintained.

Is oceanfront property in Nicaragua the ultimate alternative investment? That’s for you to decide. But if you’d like to learn more, feel free to visit the website or, better yet, sign up for a property tour.

The cost is $500 per person ($600 per couple) and includes all transportation, breakfast and three nights in oceanfront accommodations at Rancho Santana. This is a great trip for those wanting to come down and investigate investment, second home or retirement opportunities. (Contact Bryan McMandon.)

In the interest of full disclosure, Rancho Santana is being developed, in part, by colleagues of mine at Agora Publishing. However, I am not compensated in any way (directly or indirectly) for any sales at the development. I just think it’s a beautiful place and an interesting investment.

And whether you decide to invest or not, I know you’d enjoy the experience.

Good Investing,

Alexander Green

Business/Finance, Economics, Funds, Hospitality/Recreation, investment, investor, Nicaragua, USD

by Alexander Green, Investment U Chief Investment Strategist
Monday, February 6, 2012: Issue #1702

What if you could reach total financial independence in just four minutes a day?

If that sounds unrealistic, stay tuned. Because in the weeks ahead, our panel of experts at Investment U is going to show you exactly how it’s done.  Best of all, it won’t cost you a dime. After all, this service is free.

It’s a shame, really, that the average person graduates from high school and still doesn’t truly understand compound interest, or adjustable-rate mortgages or what a 401(k) is. Far fewer still know how to navigate the world’s treacherous but lucrative financial markets.

Since financial literacy and advanced money management skills aren’t taught in school, many men and women follow a predictable path when it comes to investing.

First, realizing they don’t know enough to risk their saving without potentially making huge mistakes, they turn to a stockbroker, insurance agent or mutual fund salesman for advice.

Not good.  Many people in the financial industry are peddling advice that is pedestrian, self-serving, far too expensive or all three.  Expect to hear these folks tell you, for example, that full-load mutual funds, whole life insurance and high-cost variable annuities are the best things since night baseball.

After a few years, the typical customer realizes that he’s dealing not with a fiduciary but a salesman – and a primary reason he’s not doing well is that his broker is doing too well.

That’s when many investors make their next predictable move. They transfer their account to a discount broker like E-Trade or Charles Schwab.

And while a discounter is a whole lot cheaper than a full-service broker, it quickly becomes apparent that the customer isn’t a professional money manager himself and – truth be told – really doesn’t know that much about what he’s doing.

The typical discount customer ends up with a few winners and a few losers, but doesn’t know when to sell them or why. At the end of the year, he looks at his statement and sees he isn’t much closer to his financial goals – if, indeed, he ever took the time to set any.

This brings many investors (older, wiser and generally poorer) to the conclusion that they do need qualified help, just not from a salesman in a transaction-based relationship.

Eventually, hundreds of thousands of investors turn to Investment U, the free, Web-based source for men and women seeking to achieve and maintain total financial freedom.

Proven Principles Don’t Change

We do something virtually no one else does. Investment U provides daily commentary and analysis about today’s fast-moving financial markets, but always with the objective of tying our advice to timeless investment principles.

Economies expand and contract. Currencies rise and fall. Governments come and go. Markets zig and zag. But proven investment principles don’t change.

Yet the sad fact is that most investors have never learned them. They’re trying to ace Trigonometry without having mastered Algebra 1. Why don’t you have the crucial knowledge you need?  Because schools don’t teach it and telling the unvarnished truth isn’t conducive to selling high-priced financial products.

As Vanguard founder John Bogle likes to say, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

We don’t have conflicts like that here. We don’t charge commissions or fees. We don’t want to “capture your assets.”

Yes, Investment U offers premium services to subscribers. (We couldn’t support a free e-letter forever if we didn’t.) But there is never any obligation to buy and any purchase comes with a free-trial period and a money-back guarantee.

So stick with us. In the weeks ahead, we are going to reveal big dividend plays, high-yield bonds, undervalued currencies, ultra-cheap commodities, risk-reduction techniques, and proven strategies to prevent losses, protect gains and navigate today’s volatile investment environment.

Best of all, we’re going to do all this with a single goal in mind: To show you the shortest, most direct route to total financial independence.

The only commitment it requires from you is four minutes a day. That’s how long it takes the average reader to finish our daily column.

The service is free. But the knowledge is priceless.

Good Investing,

Alexander Green

Alexander Green, Business/Finance, Derivatives, Discounting, Finance, Financial economics, Funds, Futures contract, Institutional investors, insurance, investment, Investment U, Mutual fund, Risk-neutral measure, Short

Investing in Alternative Assets

by Alexander Green, Investment U Chief Investment Strategist
Friday, February 3, 2012: Issue #1701

Rarely have Americans faced a more challenging investment landscape.

Bonds yield next to nothing. Money markets pay literally nothing. Residential real estate is swamped in a flood of short sales and foreclosures. Gold – after climbing six-fold over the last 12 years – may have topped out. And stocks are gyrating madly.

Given all this, where does the prudent investor put his money to work?

That’s what I asked Rick Pfeifer, an Oxford Club Pillar One Advisor and Senior Portfolio Manager with Fund Advisors of America, a Maitland, Florida-based money management firm, in a recent interview:

Q: Rick, the typical investor is disgusted with the yields on bonds and cash and scared to death of the stock market. What are you saying to clients?

A: I’m telling them that now is an excellent time to take a portion of their portfolio and diversify into alternative assets: convertible bonds, preferred shares, foreign currencies, hedge positions, ultra-cheap commodities and so on.

Q: Okay, let’s take these one at a time. What are you buying now and why?

A: We recently launched a managed account for individual investors that we call The Global Hedge Portfolio. The idea is not to replace your traditional stock and bond portfolio, but to offer a complement to it. We’re seeking profits in investments that don’t move in lockstep with either the S&P 500 or Lehman’s Treasury Index.

Q: Give me a couple of “for-instances.”

A: Take the situation in the Eurozone, for example. We see European leaders and the European Central bank doing a whole lot of talking, but we don’t see genuine, concrete steps toward solving the huge fiscal problems in Southern Europe. Some might even argue that the reason they haven’t yet taken serious corrective steps is because their options are so limited. Italy, for example, is simply too big an economy to bail out, in my view. My co-strategist Greg Galloway and I forecast that the euro will fall to parity with the dollar within 12 months. So we are short the euro in our Global Hedge Portfolio.

Q: Can’t fault your thinking there. I’ve been saying much the same thing for months now. What else are you doing?

A: We’re investing in overlooked asset classes with plenty of upside potential. Take timber, for example. Over the long run, investments in timber have beaten stocks by about 4% annually – and with considerably less volatility. Plus, timber is uncorrelated to stocks, making it an excellent way to balance your portfolio. One timber trust we own is seeing revenue grow 23% annually. Operating margins top 24%. And we’re getting a 3.5% dividend yield, too.

Q: What else are you buying?

A: We’re finding bargains in certain international markets, particularly Asia and Latin America. Because domestic demand there is growing, these areas are largely immune to problems here at home and in the Eurozone. For example, we’re buying an Asian auto manufacturer that’s selling for just half of annual sales. It’s trading at a substantial discount to book and should easily triple its earnings this year. We’re also picking up undervalued oil assets in Brazil, high-yielding energy trusts in Canada, a high-quality wine maker in Chile and the world’s leading food company, denominated in Swiss francs.

Q: How about metals?

A: We’re not buying commodities directly. Instead, we’re buying metal producers that appear undervalued and have big dividends attached.

Q: What about gold?

A: I don’t know what gold is going to do and I don’t think anyone else knows, either. But some gold producers are selling at mouth-watering prices right now, even if gold goes nowhere. One of our favorites yields 10% right now. If gold takes off, great. But if it moves sideways for a while, a 10% yield makes it a comfortable wait.

Q: What if gold moves south?

A: We run trailing stops on our investment positions. That gives us unlimited upside potential with strictly limited downside risk.

Q: Anything else you really like?

A: Quite a few things, really. I’ll mention one. Residential real estate is a mess, not only in the United States but in many overseas markets, as well. But we’re finding real bargains in commercial real estate in select overseas markets. Of course, we’re not buying the buildings themselves. Our investments are totally liquid. And, in addition to potential share price appreciation here, some of the assets are currently yielding more than 7%.

Q: Good to know, Rick. And an excellent reminder that for investors who are willing to invest worldwide, there are always opportunities available somewhere. Thanks for sharing your thoughts with us today, Rick.

A: Any time. It’s my pleasure.

Good Investing,

Alexander Green

asset allocation, Business/Finance, Derivatives, Diversification, Finance, Financial economics, Financial markets, Futures contract, investment, Lehman XS Nim Co, Portfolio, Residential real estate, Rick Pfeifer, Short

Does Low Volatility Put Your Portfolio At Risk?

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 27, 2012: Issue #1695

The stock market gyrated so wildly in 2011 that many investors finally threw in the towel.

How else can we read the massive equity fund redemptions that occurred in the second half of last year?

But, apparently, the market has taken its anti-anxiety medication. After last year’s gut-wrenching swings, U.S. stocks have been surprisingly tranquil. For 13 straight days, the Dow has moved up or down less than 100 points.

This is good news for bullish traders and bad news for those who have been making money trading the VIX. Let me explain…

The VIX is the ticker symbol for the CBOE Market Volatility Index, a popular measure of volatility in S&P 500 index options. According to The Wall Street Journal, this so-called “fear gauge” has fallen 20% to levels unseen in six months.

Why? One reason is that the U.S. economy appears to be getting back on its feet. Despite all the pessimism in the Eurozone, U.S. corporations are busy reporting yet another quarter of all-time record profits. (Just how long will mom-and-pop investors ignore this salient point?)

The Dow is up almost 500 points for the month. Fund companies report that money is flowing back into equities again. Yet the calm makes some investors nervous. I hear many analysts crying out that the market is about to plunge again.

Deluded, Ignorant, or Both

Let’s start with the straightforward declaration that anyone who claims to know “what the market is going to do next” is, by definition, someone who is ignorant, deluded, or both. The market will rise or fall next week or next month based on next week’s or next month’s news. Yesterday’s news has already been discounted. (As Legg Mason’s Bill Miller likes to say, “If it’s in the papers, in the price.)

Moreover, there’s no historical evidence to show that a market pause generally precedes a correction. And the data go back pretty far.

For example, market analyst Mark Hulbert has loaded the Dow’s daily returns – all the way back to its creation in 1896 – into his statistical software. For each trade date since, he calculated the Dow’s trailing volatility and then looked to see if the stock market performed any different following periods of low volatility than it did at all other times.

The short answer? Nope. He came up empty. Perhaps that’s the reason for the old Wall Street saw: “Never sell a dull market short.”

There are two things to conclude here:

• The hair-raising volatility that made trading (going long) the VIX like taking a tootsie roll from a toddler is over, at least for now…
• The other important takeaway is that traders and investors have no historical reason to believe that the recent pause portends a market downturn ahead.

Sure, a spike in oil prices, a hedge fund blow-up or a nasty surprise from across the pond could change that in a nanosecond. But bolts out of the blue are just one of the many short-term hazards of trading and investing.

For now, the market is taking a breather. But that doesn’t mean it isn’t about to get a second wind.

Good Investing,

Alexander Green

Amex Volatility Index, Business/Finance, CBOE S&P 100 Volatility Index, chicago board options exchange, Derivatives, Dow 30, Dow Jones Industrial Average, Finance, Financial economics, Financial markets, investment, Mark Hulbert, Market trend, Mathematical finance, United States, VIX, Volatility