I Eat Bear

Where to from here?

Ok, I slammed the Fed pretty good in my last post, so in this post I am going to tell you how the Fed did investors a favor, and how to profit from it.

Well, first, let's ask the question if I have any right to give advice. It would seem that quite possibly I do. Despite managing a portfolio that is going up and down like a yoyo, over all, it is significantly beating the market. I was listed as 6th on today's current round standings, and my returns are almost doubling the highest player in strategy lab. Ok, blind, plain, dumb luck! Some of that may be true, but to be sure it has had some pitfalls along with those successes. To be near the top for a first time portfolio, is better than I had hoped for. Realistically, I could probably do better, but it could also be a self-defeating purpose. Still, my almost 18% return in 3 months, equates to about 75% or so in annual gains, which is nothing to sneeze at. Then again, a good three month return, is not the same as getting the full year results to match. That is much, much tougher. Then again, considering the Dow is still climbing out of a hole for the year, my results look pretty darned good!

The strategy lab open is a lot like going into the first turn of the Kentucky Derby. A lot of "out of the gate fast", and a mad dash to see who can come out a nose in front at the turn. But, the Derby, is a distance race, and so is the market.

When people talk about long term investing, rarely should they be talking about it for a single stock. Well, for a few years, Hansen Natural did really well, and is doing Ok today, but that is more of an exception than the rule. Too often I see people buy into stocks like GE, KO, and PEP, and hold them forever. I contend, that is a huge mistake, but I recently bought into GE also, and I have dwindling positions in KO and PEP. These companies are great, for an investor looking for an extremely slow growth with a limited amount of downside. They are usually going to make a profit, but it pales in returns to many, many others in stock price appreciation. Ok, at any time, GE could split into about seven stocks, all at higher prices than the current GE stock price. But, it has not done so recently, and it seems unlikely it will in the near future, but I do see pressure on them to provide more return to stockholders. I bought GE because it had an earnings miss, and the stock price dropped about 12%. That is a little excessive for such a stable company, so when the market stops being mad at GE, their stock price should recover nicely. I expect that to be fairly quickly, and a 10% pop up in a short term game like strategy lab, is too much to ignore. Or is it? Needless to say, I did not get a lot of it, For the very same reason that it is not a long term holding. Too many stocks will outperform it, in both the short and long terms. Then again, all market misses are not treated the same. Foster Wheeler (FWLT) had a fourth quarter earnings miss, and I see a much more prolonged recovery for that stock than I do for GE, despite Foster Wheeler having potential for more rapid earnings gains.

But, my point here is twofold. I could probably make up some ground in the strategy lab if I were to "load up" on my best performers, and "dump" the two thirds in smaller positions of other stocks. It is highly likely my better performers will continue to outperform. The lab is a game, and I would be perfectly justified to do just that to try to win the round. That would be a mistake, because I use the lab as a learning tool, and few learn much for very long by stacking the deck in their favor. I could lose some ability to predict which stocks might be about to do a good pop up for my own portfolio, by only playing a select few stocks.

And, my second point here, is once it is gone, it is gone. Whether it is an earnings miss, poor performance, hostile take-overs, or whatever, but when other things in the market are outperforming your stock, you are losing money. That is almost impossible to recover. I am down a tad over 3% from the lab leaders because of some errors I made early, and some unexpected poor results from a few stocks. That 3% is gone forever, and so is the earnings potential of that in continued growth. Over longer periods, I may make gains, but they will always be gains based on diminished results.

Yes, a long term investor, is one who stays in the market for a long time, but because he or she is doing a lot of short term things very well. 8-12% gains on stocks like GE may be good over time, but when you compare that to 40% gains in 3 months on stocks like Potash (POT), you are killing yourself in terms of gains to hold stocks like GE, KO, and PEP for long periods.
So, to say the very least, there is a "delicate balance" between being a "buy and hold" investor, and getting the best market returns. Yes, there is a point to being diversified, but only if your diversification is based on market beating results. It just does not make sense to be diversified by buying into stock losers, just to say you are well diversified. The same is true with under-performers.

But, that brings me back to my original point actually, and one I have made many times in my posts. It is very important to understand your investment goals, and to know the kind of investor you are.

Stocks like GE, KO, and PEP may be exactly what is needed for people, such as the elderly, seeking safe places to put money, at what should beat rates of bank interest.

For the younger, and more risk tolerant, I suggest stocks like (ABP) Abraxas Petroleum, and (CY) Cypress. ABP already has a great balance sheet, and is positioned well in a high growth natural gas industry, and long term growth is virtually assured. CY, is a good technology company, and has a majority interest in a solar technology company it spun off last year. But, you may have to buy into these now, and hold a while to reap whopping big gains later. Still, the price to buy into these is often more atune to the budgets of the younger people.

Meanwhile, look for oil services companies to do a booming business. That is where the fast money is to be made now. Companies like (SII) Smith International, (WFT) Weatherford, and (HAL) will make money because there is a cost to every oil rig, whether they strike oil or not.

Oil drillers will do well for the next couple of years too. You would almost have to have been living under a rock not to have heard of some of them, but look up (RIG), (DO), (PDE), (SLB), (ATW), and dozens of others. It is just hard to lose money there right now (but I manage that too on some days, hahaha), but do expect a seasonal pull back in a couple of months.

Raw materials is a good sector, but has had recent weakness in gold mining. Look for that to recover WITH the dollar, instead of being a hedge against the dollar. BHP is still one of my favorites there, but FCX, KGC, and others are good plays.

Agriculture is another good sector, for the elite in the sector only. There are the rumblings of a bubble, and that could make this sector a wild ride. I have so far been disappointed with some of the bigger names like DE and MON. They have been acting like a GE in stock price growth lately, and that is no compliment. But, the better of the fertilizer plays have been doing very well, with (POT) being by far one of the favorites.

Well, early on I promised to tell you the favor the FED did for us, and how YOU can benefit from it. Now would be the time for that. The Fed, and the media, instilled "market fear" into many investors, and it did two things. Yes, most painfully, it caused a huge drop in stock prices. It also scared many people out of the market, so that large sums of money are on the sidelines. Yes, even Jim Jubak, MSN's own MONEY advisor is advocating almost 40% cash on the sidelines. Well, when that cash starts coming into the market, stock prices will be forced higher. Now, my prediction is the majority of that cash will start to return when the Dow nears 13500, but it would not surprise me to see that some sooner. So, take advantage of some relatively cheap prices now, and buy, buy, buy. It is not a question of if the market will recover. It most certainly will. I think the worst of the short term pain is over. Not that we are out of the woods yet, by any means. But there may be more risk by not being invested, than by being invested at this point. Failure to take advantage of gains will cost you just as much, or more, than riding out some of the rough times I still see ahead. Then again, you must anticipate the market some too. Typically, there is a seasonal pull-back that could begin as early as a month from now. Since we have had so much bottom feeding already this year, the bottom may be in early this year. But, if I was to make my gamble, those of you holding cash, just waiting for October, well, by then you could easily be paying a premium on stock prices to what you could get them now for.

And my last piece of advice, is continue to look for stocks with P/E ratio's not higher than 15 for right now. There are still way to many bears in this market, to venture into anything much riskier.

So, for my performance in this race akin to the Kentucky Derby? Well, I went into the turn up with the leaders at a break neck pace. That pace is likely not sustainable, if the race is to be won. So, I will be gradually moving from oil (which I expect seasonal downturn in soon), and be increasing positions in industrials, technology, and yes, maybe even a small and limited exposure to financials. In terms of the market, that is just going into turn two. In terms of the strategy lab for this round, that is around turn four, and heading for the finish line, and my bed of roses?

Comments: View Comments |  Wednesday April 30, 2008