Making Money Alert
Sifting Through Correction Mode
06/24/2009
Save for today's market move, the recent action in equities has been lower. The bout of selling we've seen in stocks has taken the major averages down a notch, and investors now find themselves sifting through a market in correction mode. As I've said several times during the past few weeks, a correction off of the nearly 25% rise in stocks since early March shouldn't come as any surprise.
Today's Federal Reserve announcement that interest rates would remain unchanged didn't come as much of a surprise to Wall Street and, as a result, we didn't see much of a huge reaction from the equity or bond markets to the news.
Yes, the market is higher today, but the fact is that a correction after such a big run higher is not only expected, but essential to the health of the market going forward. Still, the recent volatility in equities just confirms the need to always have stop losses set on every position in your portfolio.
Now, if we take a look at the chart below of the S&P 500, we see a market that now is trading right at the 50-day (blue line) and 200-day (red line) moving averages.
Which way will stocks head next? Of course, nobody knows for certain, but I think we are likely to see the S&P 500 back above 950 before the end of the summer.
Right now, subscribers to my Successful Investing advisory service have several allocations to exchange-traded funds (ETFs) ready to take advantage of the next leg higher.
If you want to find out more about how to get your money positioned for the next surge, click here.
Now it's time for a special guest editorial from our friends at StreetAuthority. In her excellent piece, Editor Amy Calistri talks about the virtue of simplicity when it comes to managing your investments.
Why 1,471 Hedge Funds Failed Last Year
By Amy Calistri, Editor, StreetAuthority's Stock of the Month
Hedge funds failed en masse in 2008, when nearly 1,500 closed their doors. Many of these closures were due to the complexity of the funds themselves. When a bad market hit, they couldn't help but get caught in the downward spiral.
But what can investors learn? The best thing you can do for your portfolio is to keep it simple.
Keep it Simple
My phone is an old Nokia, about the size of a brick.
It doesn't take pictures, tell me the weather or connect to the Internet. That's the way I like it.
In a world that has grown increasingly complex, I feel like a throwback to a different era. I like things to be as simple as possible -- and that includes my investing.
The Damage Done by Complexity
Complexity can be crippling; nowhere is this more obvious than today's market.
For example, home mortgages were packaged and repackaged into mortgage-backed securities time and again, until even the banks that invested so heavily in them weren't sure just what they contained. The result was our government having to bail out the financials.
Meanwhile, complicated derivatives led to sky-high leverage around the investment community -- bringing hedge funds to their knees.
Is it any wonder that I like to keep things simple in my day-to-day life, but also my investment portfolio?
The Most Important Place to Keep it Simple -- Your Portfolio
Judging from the investment landscape, many investors equate complexity and secrecy with smart investing decisions. How else can you explain the rise of hedge funds over the past several years?
These funds have very little regulation, usually use complex derivatives and futures contracts and are generally tight-lipped about their investing decisions. In fact, in 2008 1,471 hedge funds shut down, according to Bloomberg. That is fully 15% of all the funds in the industry. In the first quarter of 2009, investors pulled $103 billion from hedge funds.
So much for outsmarting the market.
My investing style is just a little bit different. Like I said, I keep things simple.
In fact, you could sum it up in one sentence: "Find one stock a month that will beat the market."
The Straightforward Way to Healthy Returns
There are several reasons I like this "Keep it Simple" approach, and think all investors should follow it --
1. It allows investors to be experts on their holdings
You've heard the phrase "Jack of all trades, master of none." To me that describes a lot of investors. Portfolios with dozens -- even hundreds -- of securities run an extreme risk of having more than you can handle. But keeping a very focused portfolio allows any investor the time to go in-depth into a handful of select companies, making them experts on their operations.
2. It lets your winners work and cuts the losers
We all have at least a couple of stocks in our portfolios that we don't really like. But if you limit your portfolio size to just 10 or 12 holdings and use a "pig at the trough" game plan (if you add a new pick to an already full portfolio, you have to get rid of one current holding), you'll solve this problem.
As Warren Buffett says, "It's crazy to put money into your 20th choice rather than your 1st choice."
3. You can't beat the market if you are the market
A funny thing happens as you add more and more picks to your holdings -- your returns suffer. Experts will always tout the benefits of diversification. And I agree with them... but only if you want to track the market. I'm more interested in beating the market, especially considering the S&P was off -36% in the last year.
You can't beat the market if your portfolio is the market. If you want to beat the Street, you need to pick your very best investment ideas and use them to power your portfolio.
Investing Simple is Second Nature
The "Keep it Simple" approach is one that I've been practicing day in and day out for all my life. That's why it comes as second nature to my investing. It's also one of the reasons I was selected to head up StreetAuthority's Stock of the Month newsletter.
Each month, I choose only one pick that I think is poised to beat the market. I'm actually putting $50,000 of StreetAuthority's cash to work in these picks with my real-money portfolio.
In my June issue, I profile a stock that I think is right on target. Thanks to fear that a Democratic majority in Congress is going to restrict gun rights -- and as such the nation is seeing a boom in ammo sales. So much of a boom that there are shortages around the country. But this ammo company stock hasn't kept pace with its gun-producing peers -- despite announcing a 20% increase in earnings per share, still working 24 hours a day, seven days a week to get supply to market, and just paying its 330th consecutive dividend.
I think investors are going to catch their mistake and start piling into the stock -- but I plan to put my money there first.
Good Investing!
-- Amy Calistri
Editor, Stock of the Month
P.S. If you want to learn the name of my June "Stock of the Month," you can sign up and receive instant access. Go here to sign up for my June "Stock of the Month" now.
7 Dirty Little Secrets of Asset Management
If it looks like a duck, swims like a duck and quacks like a duck -- then it's probably a duck.
We've all heard this little common-sense gem, yet when it comes to investing, many people have a hard time telling the ducks from the swans. Nowhere is this case of mistaken identity more pronounced than when it comes to recognizing what most so-called "active" investment advisors are doing with their clients' money.
The way I see it, most investment advisors claiming to be "active" managers are just buy-and-hold sheep in Armani clothing.
What do I mean by this? Well, I explain it all in detail in my new special report, The 7 Dirty Little Secrets of Asset Management.
This report shows you why so many common investment strategies that purport to be active management are basically just different twists on the same old worn out -- and thanks to the recent bear market -- now thoroughly discredited investment philosophy.
If you want to find out if your portfolio is being put in jeopardy by buy-and-hold pretenders, click here.
ETF Talk: Profiting from PIMCO
Treasury bonds, traditionally viewed as a safe haven for investors, have become what I think may be the last, big bubble in the market. With the Obama administration offering nearly $2 trillion in Treasury bonds this year alone, combined with unprecedented market volatility, the ups and downs in the normally stable Treasury market have reflected understandable investor uncertainty. However, investors looking to play the Treasury market now have an important tool on their side: the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ), which invests in short-term, low-yield Treasury bonds.
Shrewd investors fled to the safety of the Treasury market in 2008 as the equities incurred their biggest decline in 80 years. The need for the deficit-running U.S. government to issue Treasury bonds looms large for at least the next couple of years. The federal government's expansive borrowing is destined to grow further as President Obama's economic stimulus package is estimated to cost more than $2 trillion in 2009 alone.
The surging Treasury debt could fuel inflation as the U.S. government boosts the money supply by printing additional dollars. The current low bond yields do not offer investors any protection from inflation. Even if the economy begins to recover by late 2009, watch for interest rates to climb and the price of Treasury bonds to drop.
This has created an opportunity for Pacific Investment Management Company (PIMCO), a blue-chip bond giant with nearly $800 billion under management. During the last couple of decades, the firm has become a household name in fixed-income investing. The new PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ) is an exchange-traded fund (ETF) that bears watching.
Click for larger image
This ETF will compete directly with iShares Barclays 1-3 Year Treasury Bond (SHY), a well-established bond ETF. As can be seen from the chart, PIMCO's TUZ has been outperforming SHY since the former's inception on June 2 this year.
PIMCO is a well-known name in fixed-income investing but you may want to hold off on buying Treasuries until the market stabilizes and the trading volume of TUZ rises. There is nothing wrong with keeping a high-cash position as the ramifications of the U.S. government's borrowing unfold in the months to come.
If you'd like to learn more about the Treasury market or if you have any questions about ETFs that you'd like me to answer in an upcoming ETF Talk feature, please click here.
The Mike Huckabee Interview 2
It's not often that you get to interview a former governor, former presidential candidate and radio and TV talk show host all at the same time, but that's just what I had the privilege of doing recently when I interviewed Mike Huckabee for my radio show.
Gov. Huckabee is a gracious gentleman who also is an extremely well-informed, well-spoken and, I must say, a very entertaining guest.
In our interview, we discussed such topics as the mounting U.S. debt and what it means for the economy going forward. We also discussed the current national zeitgeist toward bigger and more invasive government, and what, if anything, can be done about it. Of particular interest to California residents will be Huckabee's insights on the state's budget mess and, more importantly, how we can fix the current fiscal fiasco.
I highly recommend that you spend a little of your free time and listen to my interview with Mike Huckabee. Afterward, I think you'll agree it was time well spent.
To listen, click here.
Dead Language Wisdom
Ubi dubium, ibi libertas (Where doubt is, there is liberty)
There's nothing like a classic Latin quote to start the mental gears turning. In this profound quip, we realize that where there is the ability to question orthodoxy, there is freedom. I just wish the ruling elites in countries like Iran would brush up on their dead languages.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.