There's been the takeover of Fannie Mae and Freddie Mac, the disappearance of Lehman Brothers, Bear Stearns, Washington Mutual and Wachovia, the TARP rescue plan (which itself has changed shape many times since being passed) and now the potential bailout of the Detroit automakers. Oh, and did we mention hedge fund redemptions and failures, and now commercial real estate problems?!?
And the market, of course, has reacted. With most indexes sinking to fresh multi-year lows this week, and more famous financial names (Citigroup under 6!) getting decapitated.
I had a nice Cabot Wealth Advisory lined up for today ... but given the environment, I've decided to hold that off until next week (which you can read after devouring some turkey). Today, I want to ramble off a list of observations, advice and suggestions for you to consider. As always, comments and questions are welcome by email or our blog, http://www.iconoclast-investor.com.
Here we go ...
1. "This time is different" have been, and will always be, the four most dangerous words for investors. That was true in March 2000, when companies with no revenues were valued at $3 or $4 billion before collapsing 99% during the next couple of years. And it's true right now, when the market is suffering its worst year in decades, and numerous financial stocks are in the single digits.
Right now, the market's in the grips of massive pessimism, and worst-case scenario thinking. I offer no promises that the bear market is going to end tomorrow or next week. But I can promise you that there will be another bull market, because the economy will come back from this mess, and profits will grow after taking a hit next year.
And that bull market will be extremely powerful! In the year following the 10 biggest bear markets ever, the Dow has risen an average of 44%. Leading stocks will do far better. So if you're one of those people I've been hearing from (you know who you are) telling me there won't be another bull market for five years, keep your head out of the sand. There WILL be great profits to come. It's just a matter of waiting it out through this bear market.
2. If you're still heavily invested right now in a bunch of broken stocks and sectors, here's my advice: start selling. I wouldn't sell everything right now, however, you must break free of the psychological trap that affects us all ... the trap that "I can't sell because my loss is too big." Your goal is to make and keep as much money as possible. But that doesn't mean you have to make it in the stocks you currently own.
If it were me, and I owned, say, 10 horrible stocks right now, I'd probably sell two of them here--maybe the ones with the biggest losses, or conversely, the ones (if any) that have bounced well off their lows. Or I might sell one-third of five different stocks. Either way, I would take some action; I would be active instead of reactive.
Then I would look to piece out of the remaining stocks on bounces. If we get a day or two of rally next week (Thanksgiving week is usually good for the market ... though this market has been anything but usual), I might sell another stock, or chunks of another three. There's no magic formula for knowing how much to sell, but the point to gradually get out of your losers, and eventually, when the next bull market (or, heck, even a two- or three-month bear market rally) arrives, you can buy new leaders.
I just want to repeat--you should stop thinking about how much money you had, because there's nothing you can do about it. Instead, realize what you have today, and do your best to keep what you have, and build on that figure in the weeks and months ahead.
3. If you're mostly in cash today, but held on way too long on the downside, take this time to study up on market timing. Learn to read charts (there are many good free sites online), and learn about trend following. I believe, when we look back on 2008, one of the themes to come out of it will be the "revenge of trend following." People look at me like I'm a dummy when I talk about a trend (as opposed to boldly predicting where the market will be in six months), but it keeps me on the right side of the major trend, which is why I've avoided most of this mayhem.
4. As for the auto bailout ... none of the options are great. My personal opinion is that Detroit should enter Chapter 11 (i.e., re-organization), however, Uncle Sam should then back up much of the debt and back the creditors. That will leave the companies themselves able to re-organize and re-tool. Part of that will come from negotiating with the unions, but part will also come from cutting back (as the airlines have done) the number of models and lines of cars and trucks they produce.
Right now, $25 billion will do nothing but give the companies a lifeline, which will likely be chewed through as the economy worsens (yes, the economy is sure to worsen, even if the stock market does not). We definitely shouldn't let these firms simply fail. But re-organization is more important than the exact price tag--without it, we're just kicking the ball down the road.
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5. I'm getting a lot of questions about shorting. My best advice: Focus on stocks that have clearly topped out, were big winners during the prior few years, and have not already fallen 80%. Apple (AAPL) is certainly a contender; earnings growth is decelerating sharply, and really, the stock only broke down in early September. AAPL has actually held up well during the past few weeks, but if it rallies up to 105-115, and the market is still in a downtrend, it might be worth taking a shot on the short side. Just be sure to cut your loss short!
Another short idea is First Solar (FSLR), the #1 glamour stock in the #1 glamour sector of the last part of the bull market. It's already kissed its 50-day moving average once, but another rally back toward 140-150 would be tempting.
6. Stocks and sectors showing good relative strength at this point: Biotechs remain a place to look. While many have taken shots, most are well above their October lows and are worth watching. Cubist (CBST), written here many times, is in relatively good shape, as is Myriad (MYGN), along with bigger medicals like Celgene (CELG).
Education stocks are also in position to do well. Strayer (STRA), Apollo (APOL) and DeVry (DV) are three that are acting well.
Also discount retail, like Wal-Mart (WMT), McDonalds (MCD) and Family Dollar Stores (FDO) are holding up well. I would note, however, that none of these retailers have exciting growth.
7. Also, on a positive note, the broad market (believe it or not) is actually not as weak as it was when stocks crashed in early October. That's right--even though the major indexes are at new lows, fewer stocks are "participating" in the downmove. On October 10, for instance, a whopping 2,901 stocks on the NYSE hit new lows; this Thursday, the figure was "only" 1,894. It's similar on the Nasdaq--more than 1,600 new lows in October, and 1,158 this Thursday.
That doesn't mean the market's going to stop going down. However, this is a characteristic seen at ALL major market bottoms in history. It's a first sign that the selling pressures are easing up. I know that sounds odd, but it's something to keep your eye on.
8. Last but not least, I want to take a few paragraphs to write about something that's near and dear to my heart: The fact that anyone--whether you're highly educated or still in high school, whether you went to college or not, whether you're a 12-hour-a-day blue collar worker or a highly-paid executive--can learn to make consistent money in the stock market.
When I started investing, I had no idea what I was doing. I listened to the people on TV, read some magazines, came up with ideas and bought some shares. And I lost money! When my stock turned for the worse, I held on for months, believing the "long-term" was sound and it would come back eventually. Wrong.
Eventually, I got tired of twisting in the wind, and taking everyone else's advice, and went about searching for what actually works in the stock market. I learned that valuation was not the cause of good performance among growth stocks, but the result of great performance. I learned that sales and earnings growth, profit margins and the potential for further growth were what counts. And I learned that you CAN time the market--not perfectly, but enough to avoid the devastating bear phases, while being on board the profitable bull phases.
I write this not to brag; I make as many mistakes as anyone! But I make small mistakes, and try to be right big. (As Jesse Livermore said, "Your goal isn't to be right. Your goal is to make big money when you're right.")
Most of all, I learned through much trial and error how to do well in the stock market. Yes, there are potholes, but overall, it's definitely possible to not only beat the market, but to handily outperform the indexes year in and year out.
My message is this: No matter how your portfolio has performed during the past year, no matter how difficult you feel the stock market is, no matter how frustrated you might be ... you can learn to be a great investor. I'm here to help, of course, providing advice not only of what to buy and sell, but why you should be buying and selling it. But you need to believe that you can make great money in stocks--I know it's true, because I've done it!
So there's my advice on how to get yourself back on track ... or how to stay on track if you're already there. I'll be back with some more commentary and ideas next week.
All the best,
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