Argentina and YPF: 17 Stocks to Sell Immediately

Ever wonder what happens when greed meets stupidity in the stock market? For a profound example, take a look at the recent free fall in Argentina’s largest oil and gas company, YPF (NYSE: YPF).

The country’s President Cristina Kirchner recently took a watershed step in expanding the state’s grip on the economy, saying she will send a bill to Congress to nationalize the firm.

Predictably, shares of YPF – and other Argentine stocks – gapped down on the news.

Kirchner declared that this historic move must be made because the petroleum industry is of “national public interest.” Of course, what industry isn’t? Banking? Telecommunications? Manufacturing? Agriculture?

Kirchner insists that YPF’s low production is forcing the country to spend heavily on imported energy at a time when it is experiencing a scarcity of dollars due to capital flight. And why is Argentina hemorrhaging capital? Because of boneheaded moves like this one.

YPF’s majority shareholder, Spanish energy group Repsol, is not taking this theft lying down. The Madrid government has threatened swift retaliation. And Spain’s Prime Minister Mariano Rajoy stated the obvious when he said the Spanish company’s controlling stake in YPF – which Repsol was planning to sell to China’s Sinopec – was being expropriated “without any justification.”

Given that most successful developing nations are privatizing industries rather than nationalizing them – and given that investment capital always flows where it is treated best (and conversely flees those countries where it is treated badly) – why would Kirchner do this?

One answer is stupidity. The other is hubris.

There is absolutely no reason to think that a bunch of politicians and bureaucrats – or their appointees – could run YPF better than Repsol, one of the world’s leading energy groups. (Just as there is no reason to think the U.S. government can do a better job than private equity groups of backing speculative solar companies like Solyndra.)

And if Argentina is willing to nationalize its leading oil company, which company (or companies) is next? Here’s a potential hit list, 17 Argentine companies that trade on the NYSE or Nasdaq. If you’re holding any of them, sell them immediately.

The tragic part of this power grab – which has undeniable populist appeal in some quarters – is that it will only undermine investor confidence and do lasting damage to the Argentine currency, the Argentine economy and, ultimately, middle-class Argentinians.

This move is not just greedy. It’s profoundly dim. But then, Ronald Reagan said it best:

“The best minds cannot be found in government. If they could, the private sector would hire them away.”

Good Investing,

Alexander Green

Is This Bull Market Over?

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

Bond Funds: The Worst Investment You Can Possibly Make

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

Share Buybacks: A Buy Signal You Can’t Ignore

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…

But you shouldn’t overlook another excellent indicator: share buybacks.

According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.

Is this a good thing? Absolutely…

Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxable dividends.

So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.

Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)

But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.

More Buybacks Ahead

Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise, or cash flow decreases, a repurchase program may never get completed.

The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.

But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips (NYSE: COP).

Having Your Cake and Eating it, Too…

Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree…

But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.

Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).

These are the kind of companies that should handily outperform the market in the months ahead.

Good Investing,

Alexander Green

The U.S. Aging Crisis: A Threat to Stock Market Prices?

The U.S. Aging Crisis: A Threat to Stock Market Prices?
by Alexander Green, Investment U Chief Investment Strategist
Friday, March 9, 2012: Issue #1726

Robert Arnott claims that the U.S. aging crisis is a threat to future stock market prices. But do the numbers add up?

There’s a new scaremonger in town. And his name is Robert D. Arnott, a portfolio manager, asset-manager executive and Chairman of Research Affiliates in Newport Beach, California.

Mr. Arnott has a simple thesis. Over the next 10 years, the ratio of retirees to active workers will balloon. Retirees, of course, must eventually sell their stocks to support themselves. But there will be fewer young investors around to buy them. Ergo, returns on stocks over the next 10 to 20 years will be anemic.

If this sounds simplistic, congratulations. You probably have a brain and at least a modicum of common sense. This type of “stock market analysis” is really no analysis at all. More to the point, it doesn’t work. Just ask failed economic futurist Harry Dent, whom I’ve written about before.

While it’s inevitable that there will be 10 new senior citizens for each new working-age citizen over the next decade, that in itself doesn’t portend paltry equity returns.

For starters, let’s look at what’s happening to the world population as a whole. There are currently seven billion human beings living on the planet. At the current growth rate, that total is likely to hit eight billion within a decade.

Now, if you believe that investors in China, India, Brazil and other countries will have no interest in buying companies like Procter & Gamble (NYSE: PG), ExxonMobil (NYSE: XOM), or Coca-Cola (NYSE: KO) in the future, no matter how inexpensively they’re priced, I guess you might put some credence in Mr. Arnott’s thesis.

But that’s highly unlikely. Citizens of capitalist countries are getting wealthier and better educated all the time. And the world is becoming more integrated. Would you really have a problem buying shares of Toyota (NYSE: TM), British Petroleum (NYSE: BP) or Nestle (OTC: NSRGY.PK) if they were bargains?

Of course not, regardless of the demographic trends in Japan, Britain, or Switzerland.

Mr. Arnott doesn’t just miss the big picture about the future, however. He also misinterprets the past. In a recent Wall Street Journal interview, for example, he talks about the collapse of Japan’s stock market over the last 23 years and blames it on the country’s aging population.

I have a better explanation. When the Nikkei 225, Japan’s leading stock market benchmark, climbed to nearly 40,000 in 1989, it was a bubble of epic proportions. Many stocks traded at more than 100 times earnings. And real estate was even more absurd. Just the 1.32 square miles that encompassed the Imperial Palace in Tokyo were valued at more than all the real estate in California combined.

Now that’s nuts. Crazier still were the Japanese banks that loaned money against these wildly inflated property values. This led to a protracted banking crisis that Japan’s political class refused to clean up.

To imagine that the two deflationary decades that followed this mania were the result of an aging population is like blaming this year’s warm winter on your aching big toe. Yet Arnott insists we should hunker down since “[Japan’s] demography is 10 years ahead of ours.”

Want to know what will really determine stock prices in the future? Earnings. I challenge you to look back through history and find even one publicly traded company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.

Perhaps our aging retirees will buy less in the future and contribute less to U.S. corporate profits. But there are billions of consumers around the world hungering for homes, computers, cars, phones, health insurance, credit cards, pharmaceuticals and golf clubs. They’re likely to be an engine of world economic growth – and rising U.S. corporate profits – for decades to come.

Don’t let anyone scare you otherwise.

Good Investing,

Alexander Green

Investing in Bonds: Three Steps to Smarter Bond Investing

Investing in Bonds: Three Steps to Smarter Bond Investing
by Alexander Green, Investment U Chief Investment Strategist
Monday, March 5, 2012: Issue #1722

At our Oxford Club Chairman’s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.

We’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.

It isn’t just unlikely that today’s bond buyers will see annual double-digit returns going forward, it’s mathematically impossible. And yet I sense that many fixed-income investors don’t understand this.

It’s not unusual to meet an investor who has plunked money in a bond fund because “its long-term track record is excellent.” They don’t seem to realize that it’s also irrelevant. Never has the old saw, “Past returns are no guarantee of future results,” been more apropos.

This doesn’t mean you should avoid bonds altogether, of course. But if you’re going to buy bonds, now more than ever you need to be smart about it. Here’s what you should do:

1. Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up – as they will eventually – your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.
2. Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it’s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.
3. Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you’re holding junk bonds, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders will take a shellacking. Consider yourself forewarned.

Some fixed-income investors tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its intention to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.

Inflation could tick up. The Fed could raise rates and/or quit buying long-term Treasuries. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.

Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what’s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.

Good Investing,

Alexander Green

Let the Insiders Hand You an “Unfair Advantage”

by Insider Alert Research Team

 Everyone in the stock market is looking for the ‘magic signal.’ That single factor that indicates an unequivocal BUY with guaranteed profits ahead.

The honest truth is there is no magic signal. You won’t find one by drawing lines on a chart. You won’t find one with a mathematical formula. And you certainly won’t find one by using the ratings of the big brokerage houses.

The financial markets are probably the most-competitive field of endeavor on the planet. There is a lot of brainpower and financial muscle trying to “win.”

You need to look at the market differently to beat it.

One of the best predictors of wealth creation is ownership by the people in charge. Hardly anyone focuses on ownership.

It’s a simple thing, yet nearly all the financial world’s eyes focus on everything but this. By following the signals of the ‘people in the know,’ you dramatically increase your chances of making a profit.

That’s why we follow insider buying.

The Inside Track

The fact of the matter is there are always people who know more about a company than you can glean from months of reading financial statements and industry reports. People with more knowledge than the most highly paid and qualified professional analysts. Individuals who are privy to a treasure trove of information that is not even available to the public.

So, who are these guys?

As you may have already guessed, these “enlightened ones” are the corporate officers and board members that head up every single company. And if you like, you can make the exact same moves that they do.

Admittedly, there are all kinds of investment strategies. People put their faith and funds into strategies like “Dogs of the Dow,” seasonal investing, index investing, or simply, buy and hold.

But we have found that insider buying (when properly interpreted) is the most powerful predictor of investment success.

Research shows that sound companies with widespread insider buying tend to outperform the market by a substantial margin. In fact, a comprehensive study at the University of Michigan revealed that stocks with insider buying generally triple the performance of the market over the next six months.

Follow The Leader

Some of the most successful investors of our era attribute part of their success to following this signal.

Legendary fund manager Peter Lynch believes there is no better tipoff to the probable success of a stock. George Soros, one of the most successful hedge fund managers ever, has used the strategy to help earn returns of 36% annually… (at that rate, money doubles every two years).

Warren Buffett, too, is a big believer in what he calls “the biblical standard” (quoting Matthew 6:21: “For where your treasure is, there will your heart be also”).

Buffett’s own Berkshire Hathaway is stacked with insiders who own significant amounts of stock. (At one point, several years ago, Buffett wrote in his annual shareholder letter that every director of Berkshire Hathaway was a member of a family owning at least $4 million in stock. None of them acquired shares with options or grants). By the way… Berkshire Hathaway shares have delivered a compound annual growth rate of 15% since 1990.

And our own Alexander Green, the Investment Director of The Oxford Club, has used this technique with great success in his Insider Alert.

You can do the same in the stock market by limiting yourself only to companies that exhibit one of the chief characteristics of wealth creation: significant ownership by the people in charge.

Following insider buying is one of the investment world’s crown jewels – certainly the purest and simplest way to make money in the stock market. When insiders are piling their money into their own companies it’s because they believe the company is poised for a huge gain in profits.

And usually… they’re dead on.

Profile of an Illegal Insider Trader: Garrett Bauer

by Insider Alert Research Team

Whether done the right way (a.k.a. the legal way) or the wrong way (i.e. the illegal way), insider trading can be quite lucrative.

When done the wrong way, it can also be quite detrimental, ending in embarrassing investigations, steep fines and significant jail time. Hardly the way a well-educated, hard-working corporate man or woman wants to go.

Take it from Garrett Bauer, a former independent day trader on Wall Street, who worked for RBC, JAG Trading and Lighthouse Financial in the past. He also made at least $32 million of personal profit off of insider trading. The illegal kind.

That money paid for a piece of real estate in Boca Raton worth $875,000 and another $6.65 million, 6,700 square foot penthouse in Manhattan’s Upper East Side. Business Insider reported last year:

“The penthouse is beyond luxurious. There are ten rooms, including a living room with 35-foot floor-to-ceiling windows, a kitchen with state of the art appliances, and a gigantic master suite. And don’t forget about the 1,320 square foot private roof deck.”

Judging by those posh results, his insider knowledge served him well. As evidenced by his pending March sentencing, however, it didn’t serve him well enough.

While the trades were extremely lucrative, they were also performed based on specialized knowledge. That in and of itself isn’t illegal, but it becomes so when investors don’t fill out the proper forms in the proper process. And Bauer deliberately did not follow the legislated procedure, knowing full well that his actions were illegal.

In his own words, on March 21, 2011, Bauer was recorded saying: “I mean, the fact is we did something wrong. So it is not like we are being convicted of doing nothing. We did something wrong here.”

And he admitted as much in a court of law nine months later, when he entered a guilty plea to the charges of insider trading, money laundering and obstruction of justice.

At the time, the prosecution recommended a prison sentence of nine to 11 years, in addition to the money and property federal authorities permanently seized. And historically speaking, Bauer doesn’t have very good chances of the judge knocking that down to something less severe.

Invited to speak at Yale by the school’s College Investment Group as a deterrent to future white collar crime, he duly warned the gathered students that judges have a tendency to rule harshly on such cases. Their purpose: to discourage further bad behavior on the part of other well-connected businessmen and women.

Though insider trading cases perhaps get the most coverage, according to the FBI database, “White-collar crimes are categorized by deceit, concealment, or violation of trust and are not dependent on the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure a personal or business advantage.”

The database also states that “The number of agents investigating corporate and other securities, commodities, and investment fraud cases has increased 47 percent, from 177 in 2001 to more than 250 today. Since 2007, there have been more than 1,700 pending corporate, securities, commodities, and investment fraud cases, an increase of 37 percent since 2001.”

So apparently judicial attempts at stemming the tide by implementing harsh sentences doesn’t work nearly as well as they’d like it to. Not that it’s their fault.

While Garrett Bauer now fully recognizes that “there are catastrophic consequences” to insider trading, he also points out how “practically everybody thinks it’s not going to happen to them.”

Doubtlessly, many people do get away with their white collar schemes. And Bauer could have been one of them, considering how he started illegal insider trading back in 1994 and continued his criminal career until 2011.

That’s a sizable stretch of time to fly under the radar. Though admittedly, it probably would have gone a lot easier for him if he hadn’t been quite so good at hiding his activities…

It All Started with Matthew Kluger

When authorities arrested Garrett Bauer, they also took 50-year-old Matthew Kluger into custody, charging him with insider trading as well.

At the time, Kluger was a senior associate for Wilson Sonsini Goodrich & Rosati, where he worked on mergers and acquisitions (M&A). But before that, he had a varied career, filled with different educational pursuits and occupational focuses. In an April 6, 2011 piece, the Business Insider detailed:

“Kluger didn’t become an M&A lawyer until later in his career. The first school Kluger went to was the Kent, Connecticut-based Kent School, a private boarding school. He then went to Cornell, where he studied at the school of Hotel Administration… Later, Kluger worked as the General Manager of a Toyota dealership in California. He graduated NYU law school in 2005.”

From there, he eventually made his way to Wilson, et al, where he represented businesses in tricky cross-border transactions. Since those deals would have involved different languages and cultural traditions, they would have been complicated enough without adding in illegal aspects to the mix.

Nor was he playing around with small-time companies. His clients included well-known businesses such as CBS, Ducati, IBM, Johnson & Johnson, RiteAid and Unilever.

Not that the big names seemed to bother him at all. If anything, they probably enticed him all the more with their enormous potential for significant profits.

On April 7,2011, as the public was still finding out about the decade-plus-long dealings, Bloomberg divulged that “The scheme laid out by prosecutors began with Kluger’s passing tips about deals he worked on as an associate for major deal law firms.”

According to informed speculation over at Business Insider the day before, he already had a history of unethically passing along information from back when he was still in law school. But it seems that he had the correct connections well before then as well, considering how he initiated the fateful scheme in 1994. That was when he asked middleman Kenneth Robinson to locate people who could and would knowingly act on insider information he relayed to them.

Robinson, a mortgage broker, went on to contact Bauer, his longtime friend. And as history now blatantly shows – and Bauer now blatantly admits – Bauer jumped right on that bandwagon. In many ways, Bauer even took charge of the operations to everybody’s benefit.

Everything seemed to go smoothly for a while. From 1994 to 1997, Kluger passed along tips he garnered from Cravath Swaine & Moore LLP, the firm he was working for at the time. It all happened again from 1998 to 2001, after Kluger switched jobs and began working for Skadden Arps Slate Meagher & Flom LLP.

During those times, Kluger acted like the pro he was, making sure to never divulge information pertaining to cases he was personally working on. He didn’t even open any suspicious-seeming documents on his computer. Yet, even so, he was able to access enough information to make lots of money.

Insider Trap Laid, Set and Sprung

 Kluger might have been quite good at what he was doing, but Bauer was apparently even better.

For some unknown reason, the two men and their partner, Robinson, took a hiatus from their illicit activities for a while. Maybe it was because Kluger was so good at keeping his white collar crimes under the radar. Maybe one or more of the men had personal reasons that kept them away from it all.

Regardless, according to now-public records, the three put the brakes on the operation in 2001 and didn’t start back up again until 2005.

They should have just stopped while they were ahead, however, since that third and final round of illegal insider trading was what did them in.

At that point, Kluger was working at Wilson Sonsini Goodrich & Rosati PC in Washington. And Bauer had long since taken over the roles of paymaster and benefactor. Or so said the prosecutors in the case. They don’t appear wrong, however, considering that, of the $32 million the men made together between 2005 and 2011, Bauer held onto all but $2 million of it.

Admittedly, that’s small change compared to the money he was working with overall. Before his arrest, Bauer said he typically traded a minimum of $50 million per day. Considering that his daily maximum was usually in the $100 million range, it shouldn’t be surprising that his 2010 total was in the billions: $8 billion, to be precise.

Of that, he told Yale students, “well under” one percent was on illegally obtained information.

Following his speech, Yale Daily News summarized his story, writing that “The scheme was discovered after Bauer became more selective about which tips he used. Robinson – who had previously not generated large profits in his own personal trading account – then began acting on Kluger’s tips… and the Securities and Exchange Commission (SEC) became suspicious of the spike in profits and investigated Robinson, who subsequently turned in himself, Bauer and Kluger.”

Technically, it could be argued that Kluger and Bauer could have kept up their schemes indefinitely without ever tipping off the SEC. Either of them could have possibly messed up significantly enough to warrant government attention even if Robinson hadn’t been caught red-handed. But their previous history and even their behavior during the official investigations seriously suggest otherwise.

With the FBI breathing down his neck, Robinson not only divulged his own discretions and those of his partners, he also went so far as to wear a wire while making numerous phone calls with the two other men.

Bloomberg notes:

“Bauer, 43, told his friend [Robinson] he believed they’d sufficiently hidden their crimes by talking on disposable cell or pay phones and by using cash from small bank accounts to dole out profits of the alleged scheme.”

They even discussed literally burning money or putting it through a washing machine cycle to clear it from any incriminating fingerprints.

That’s why Kluger was confident in their ability to escape unscathed in the end. In one recorded conversation, he told Robinson, “As long as Mr. G [Bauer] keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything.”

Again, that might very well have been true. But Robinson already had talked and was still talking, which makes the question altogether moot.

Bauer told Yale students that his entire body “turned numb” when he finally recognized that his friend had ratted him out. While he has since come to terms with that betrayal, he still acknowledges the obvious: that the next several years will be difficult, also noting that the waiting period between his guilty plea and sentencing is the proverbial eye of the storm.

He’s using that window of opportunity to give talks addressing the consequences of what he did, volunteering at a soup kitchen, teaching English and math to the underprivileged and making balloon animals for children with disabilities.

Whether all of those good works will serve him well in March when the judge determines his punishment, however, is still left to be seen.

Why Stock Investing is Like Skiing

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

Is it a Good Time to Invest in Stocks?

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