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TAG | Short
Is This Bull Market Over?
by Alexander Green, Investment U Chief Investment Strategist
Monday, April 16, 2012: Issue #1752
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?
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:
- 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.
- 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.
- 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
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.
25
Why Stock Investing is Like Skiing
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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
14
World’s Most Contrarian Investment
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World’s Most Contrarian Investment
by Alexander Green, Investment U Chief Investment Strategist
Monday, February 13, 2012: Issue #1707
How do you identify great contrarian investment opportunities?
Two ways. First, rather than limiting yourself to your national borders, you seek out opportunities worldwide. Next, you insist on two essential factors: abject pessimism and extreme valuations. That’s exactly what we have in European stocks today.
Ask your friends and neighbors which stocks in Europe they’re buying right now and they’ll ask you to sit down so they can feel your forehead. After all, no one in his right mind would buy stocks in a region where socialist policies reign, economic growth is almost nonexistent and the currency – the euro – is coming apart at the seams, right?
Wrong. The fact that almost no one is enthusiastic about Europe right now – indeed, most see it as a ticking time bomb – tells you that sentiment is entirely negative.
How about valuations? Those are compelling, too. The benchmark MSCI Europe Index, for example, currently sells for just 9.8 times estimated 2012 earnings, versus an average of 17 times earnings over the past 25 years. Plus, the drop in prices has boosted the dividends on many of the well-known global companies based in Europe.
Lower Values, Higher Dividends…
In sum, you have low valuations, high dividends and extremely negative sentiment. Yet the vast majority of investors reading these words won’t plunk a dime in these markets. (And, if history is any guide, a year or two from now they’ll scratch their heads and say they just can’t fathom how European stocks could have rallied so strongly.)
Not that buying contrarian investments in this troubled region doesn’t present some risks. After all, the European Central Bank (ECB) is propping up troubled banks. Many Eurozone countries are teetering on the brink of recession. And there’s a decided lack of bold political leadership in the region.
But the good news is that all these factors are already well known and fully priced into European stocks. (That’s why they’re so darn cheap.) Meanwhile, the U.S. economy has stabilized – reducing a big risk to the global economy – and the ECB has at least addressed liquidity problems at the banks.
Plus, a weaker euro is actually boosting the earnings prospects for the many companies that export to other parts of the world where economic growth (and currencies) are stronger.
Prime examples are:
So how do you play this contrarian investment opportunity? One of the best ways is with a low-cost, Europe-focused ETF like the Vanguard MSCI Europe Fund (NYSE: VGK). It’s easily the least expensive ETF in the sector with annual expenses of just .14%.
Companies in the U.K. account for around 34% of VGK’s assets, while France, Germany and Switzerland make up approximately 40%. The fund holds more than 450 stocks, but a quarter of its $2.4-billion portfolio is in its top 10 holdings, which include Vodafone, Royal Dutch Shell and HSBC Holdings. You’ll earn a 4.4% dividend here.
If you want to benefit even more from a potential slingshot recovery in these markets, try the WisdomTree Europe SmallCap Dividend Fund (NYSE: DFE). It keeps a third of its assets in smaller British companies and the rest in small-cap stocks in the Eurozone.
Remember, when an equity market rallies, the small-cap issues generally outperform larger stocks. And your contrarian investment will get a whopping 5.8% dividend here.
So there you have it, two great ways to play one of the most compelling opportunities in the world right now. Of course, most investors simply cannot bring themselves to invest against the herd. That’s how they got stuck in internet stocks a decade ago and residential real estate five years ago.
It’s also why this is perhaps one of the best contrarian investment opportunities today.
Good Investing,
Alexander Green
7
The Best Investment You Can Make In Four Minutes
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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
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
21
Why Most of the Investment Advice You’ve Heard is Wrong
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Why Most of the Investment Advice You’ve Heard is Wrong
by Alexander Green, Investment U Chief Investment Strategist
Friday, January 20, 2012: Issue #1691
A conversation with a friend last week sounded numbingly familiar.
“I just can’t seem to win for losing in the stock market,” he confessed. “Five years ago, my broker had me fully invested in stocks and I took a drubbing. Then when things were bottoming out a couple years later, he talked me into making my portfolio more conservative. As a result, I didn’t get much of a pop on the rebound. Now he’s trying to get me to reshuffle again. But I’m too scared to do anything.”
Since he was a friend, I felt obliged to tell him the truth: He’s getting lousy investment advice. Not because his broker failed to outguess the market… but because he’s guessing at all. As if that wasn’t bad enough, there’s a good chance that the advice he’s getting is tainted by self-interest.
Here’s what I mean…
It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.
Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?
The same is true of market timing. It’s easy to look in the rearview mirror and see when you should have been in the market and when you should have been out. But when you look ahead, it is always a blank slate. No guru or trading system can change that.
Even if you could somehow divine what the stock market was going to do next – which you can’t – you still wouldn’t know which stocks would outperform and which ones would lag.
The only way to determine that is to look at business fundamentals. Companies that are doing all the right things – increasing sales, compounding earnings at high rates, growing market share, improving operating margins, paying down debt, buying back shares – will post superb returns, regardless of what the economy or stock market are doing. And those that are doing the opposite – experiencing flat or negative sales, lackluster earnings growth, small margins, high interest costs and diluting existing shareholders with new stock issues – will be laggards.
In short, stock market success is about analyzing businesses not investing in some self-styled expert’s macroeconomic forecast. Yet that’s exactly what the mass media and much of the investment advisory industry encourages people to do every day.
The media does it to attract viewers – and thus advertisers. The advisory industry does it sometimes out of ignorance but often just to justify its fees. This is especially true when you have a transaction-based relationship with an advisor where the more you trade the better he or she is compensated. Trust me. That doesn’t generate satisfactory long-term returns.
Every time you hear a pundit talk about “the new normal,” the rally just ahead or the prolonged economic slump we’re likely to endure, understand that you’re listening to opinions that are no more helpful than a weather forecast for three weeks from Sunday.
Both pieces of advice are worthless. But one is a lot more expensive – and harmful – than the other.
Good Investing,
Alexander Green
6
Why This Market Truism Just Isn’t True
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Why This Market Truism Just Isn’t True
by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657
In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…
I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.
Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.
Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.
My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.
“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …
For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.
If you don’t already own stocks, it’s tough to catch the train after it has left the station.
Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.
That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)
As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)
The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.
True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.
You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.
Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.
The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.
If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.
Good investing,
Alexander Green
25
The Best Trade You Can Make in November
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The Best Trade You Can Make in November
by Alexander Green, Investment U Chief Investment Strategist
Thursday, November 24, 2011: Issue #1650
In December 1996, I sold some shares of Best Buy (NYSE: BBY) to offset gains elsewhere in my portfolio.
I still consider it the most boneheaded investment move I ever made. A year later, the stock was up more than five-fold. A few years further on, it was up more than thirty-fold.
The worst part is that I didn’t dislike the business prospects for Best Buy at the time. Quite the contrary, in fact. I sold it only because I had substantial capital gains and was cleaning out my portfolio to offset them.
I don’t always do that any more. And you shouldn’t necessarily, either. Despite what your tax advisor may tell you, you should never sell an investment for tax reasons alone. Nor do you have to.
Here’s why…
The IRS allows you to offset realized gains with realized losses each calendar year. If you do, however, you must wait at least 30 days before buying the same shares back. (Otherwise you run afoul of the wash-sale rule.)
Offsetting gains at the end of the year is often a sensible move. Most stocks aren’t appreciably higher 30 days later. And if you still like them, you can buy them back then.
There is a risk, however, and it’s called the January effect. The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested early each year. Plus, there’s often a rebound from the tax-loss selling that goes on each December.
If a stock you own soars in January, there’s a natural reluctance to buy it back. The temptation is to wait until it comes back down. But what if it doesn’t? You’ve taken a limited loss but sold an investment with unlimited upside potential.
There’s a way around this problem, however. And you can take advantage of it – but only if you’re willing to move this week.
In late November each year, I look at my entire portfolio for any companies that are trading below my entry price but NOT near my trailing stops. If I still like a stock, I often make the decision to double down on it for 30 days.
Why? Because I can sell the original shares at the end of December for a tax loss. And if the stock rallies in January, it’s not a problem. After all, thanks to my purchase in November, I own the same number of shares as I bought originally.
What if you don’t have the cash to double down on your position? Use margin. Again, I’m recommending this only for a 30-day period. Your margin interest charge will be minimal.
The risk, of course, is that your shares will be worth less in late December and you will have a paper loss on the second purchase.
However, just the opposite may happen. Remember, the January effect is often preceded by the Santa Claus rally, the tendency of the stock market to do well in the second half of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.
(The Santa Claus rally is never certain, of course, and another reason why you should only add to those companies whose earnings prospects remain strong.)
Bear in mind, when selling for tax purposes, the IRS requires that you buy those identical shares AT LEAST 30 days before you sell the others. So if you want to use this strategy for 2011, you must act this week.
If we have the traditional mid-December to early February rally, you’ll thank me. And then perhaps again on April 15.
Good investing,
Alexander Green
Why the Sun is Setting on Gold
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, February 22, 2011
Six weeks ago, I wrote a column advising short-term speculators to sell their gold.
Since that time, the metal has drifted lower. But the brunt of the decline is likely still ahead.
As I’ve said before, gold is difficult to value under the best of circumstances. It pays no interest, has no earnings, provides no rent. What gold will be worth next week or next month is whatever buyers will pay for it at the time. And that, in technical terms, is a guess.
I’ve heard gold bugs make their case. Some are based on emotion. Others are based on political fantasies about the Federal Reserve turning us into the Weimar Republic circa 1923, or modern-day Zimbabwe.
What I rarely hear them talking about is pedestrian stuff like supply and demand…
When Buyers Become Sellers, Look Out Below
Billions of dollars have been spent building gold mines over the last few years, so it’s not inconceivable that supply could begin to outstrip demand.
Of course, demand itself is fickle.
In 2005, investors made up just 16% of total demand for gold. Today, it’s more than 40%. Gold ETFs have taken in more than $50 billion since 2004.
What will happen to the price of gold when these buyers become net sellers, as many will when it becomes clear that the party is over? Paulson & Co., a hedge fund, now holds more than $4 billion in the SPDR Gold Trust ETF (NYSE: GLD). I wouldn’t want to be standing in front of his eventual liquidation. And, like most hedge fund managers, Paulson is not a “buy-and-hold” investor.
Some bulls justify buying gold at these levels because it briefly traded at more than $800 an ounce in 1980. And they say if you simply adjust for inflation, gold should be trading at $2,300 today.
That’s weak. Here’s why…
Don’t Be Blinded by the Gold Light
Gold badly underperformed inflation – not to mention stocks, bonds, real estate and burying your money in a hole – for 20 years after 1980. Why is it suddenly destined to catch up now?
Or look at it another way: On August 25, 1999, gold traded at $252.55 an ounce. Adjusting for inflation, gold should be trading at $339.65 an ounce today.
Granted, my starting point is the 30-year-low. But then, a calculation based on the 1980 high is just as arbitrary.
It’s understandable that gold spiked during the 2007-2009 financial crisis. Gold is an excellent barometer of investor anxiety. But that crisis is over. The recession – defined as two straight quarters of negative GDP growth – ended in June 2009. And inflation is running at just 1.2%.
So why is gold still in the stratosphere?
What to Do With Your Gold Holdings Now
Yes, I know the price of food, gasoline, health care and college tuition are all going up much faster than the official inflation rate. But let’s also concede that the price of cars, computers, appliances, electronics, furniture and, not insignificantly, homes – the biggest asset most consumers will ever buy – is coming decidedly down.
Experienced investors know that after an asset has made a huge run, the little guy – forever a day late and a dollar short – starts clamoring for a piece of the action. At that point, the bloom is off the rose. It’s too late to buy and generally high time to sell.
Take my old neighbors, Sam and Brian. They lost their shirts in Internet stocks in 2000-2002. Now they’re stuck with huge negative equity in Florida condos that they bought pre-construction – a “no-brainer” in 2005.
So what are they doing with their rapidly vanishing capital today?
You guessed it. Now that gold is up five-fold in the last 10 years and three-fold in the last five years, they’re convinced that a big move lies just ahead.
Maybe. But what’s certain is that one lies just behind.
My advice? Keep your gold bullion and blue-chip mining stocks that you own as an inflation-hedge or part of your long-term asset allocation.
But if you’re counting on gold to dash higher, note that the last time investors bought into a gold mania it took more than 25 years for them to break even – not counting inflation.
As Mark Twain famously said, “History may not repeat itself. But it rhymes.”
Good investing,
Alexander Green
