Why This Market Truism Just Isn’t True

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

The Best Trade You Can Make in November

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

How to Beat “the Mania of Pessimism”

How to Beat “the Mania of Pessimism”

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, September 12, 2011: Issue #1598

Two weeks ago, I opined that the biggest obstacle a stock market investor faces today is “headline risk.”

That is, relentless media negativity.

The idea seems to be gaining traction. On last week’s “This Week” on ABC, Pulitzer Prize-winning columnist George Will said, “The very least the media should do right now is not detract from the nation’s understanding or add to the synthetic hysteria.”

In the September 17 USA Today, James Paulson, Chief Investment Strategist at Wells Capital Management, said, “We are in the middle of a mania of pessimism. The nation is suffering from “Armageddon hypochondria.”

Again and again, the media reminds us about the weak dollar, high unemployment, the soft housing market, problems in the Euro Zone, political dysfunction in Washington, trouble in the banking sector, and the down-and-out consumer. After a few hours of this, you’d expect to walk outside and see bread lines and angry mobs.

That’s not what you see, however. What you see instead are ordinary people going about their everyday business – and getting bombed periodically with media sensationalism calculated to attract viewers and sell advertising.

It works, too. In fact, it works so well that few people see all the positives that exist today.

“Positives?” a friend asked me the other day, genuinely perplexed.  “What positives?”

Exactly. We’ve gotten to the point where people have had so much downbeat news dripped on them for so long that they can’t even imagine there is a positive side to recent events or that any logical case can be made for owning stocks to meet their financial goals.

So let me take a stab at it now.

For starters, realize that it is not possible for anyone to accurately and consistently predict economic growth or stock market performance. But here’s an insight you can take to the bank: Share prices follow earnings. (Earnings, of course, are the net profits of a business.)

In the third quarter of last year, the companies that make up the S&P 500 reported all-time record earnings. In the fourth quarter, those record earnings were exceeded, as they were again in the first quarter of this year… and yet again in the recently reported second quarter.

If you didn’t hear that we’re in a period of all-time record corporate profits, you really ought to think twice about who’s delivering your newsworthy information. Or at least who’s providing your investment guidance.

As investment legend Peter Lynch once noted, “People have all this data and yet they look at all the wrong things… It’s about earnings. They need to follow the earnings.”

Of course, just because corporate earnings have hit an all-time record four quarters in a row, it doesn’t mean they will continue. And, conversely, it doesn’t mean that they won’t.

If you can’t imagine why stocks would rally from here, just imagine what will happen if the much ballyhooed double-dip doesn’t appear.

• There are plenty of good reasons to be bullish on stocks right now. But if you’re developing your investment perspective from gloom-and-doom media reports, you may not recognize the positive factors. So I’ll tick off four big ones for you now:

• Interest rates are at historic lows and inflation is negligible. That isn’t likely to change any time soon.

• Energy and food prices are moving lower and Ben Bernanke has pledged to hold short-term rates at zero for two more years.

• Valuations are cheap.  When the S&P 500 traded at these levels eleven years ago, it sold for 44 times earnings. But because profits have hit new records lately, the S&P 500 today sells for just 13 times trailing earnings, well below the long-term average of 16.4.

• Investors are anxious and afraid. This may seem like a negative but it’s not. Investor sentiment is an excellent contrarian indicator, especially when accompanied by low valuations. Think back to the market low of March 2008, when the consensus was that the world was coming to an end and the Dow briefly traded below 6,500. From that point the market put on an impressive rally, essentially doubling in two and a half years. As investment pioneer John Templeton rightly said, “Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.” Do you know anyone who’s feeling euphoric right now? Not me.

• Mutual fund investors have yanked money out of stocks over the past six weeks. It may seem counter-intuitive but that’s yet another positive. A 25-year study published last year in the Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills. In other words, it pays to buck the consensus.

Don’t get me wrong. More bad news from the Euro Zone and political wrangling here at home will still push stocks around from day to day. That’s not important. What is important is whether you’re confident – as The Oxford Club is – that the companies you own are set to report dramatically higher profits in the weeks ahead.

You may be reluctant to invest in stocks. I understand. It takes nerve and resolve to go against the trend and invest in times like these. But you should.

FDR was wrong about some things. But he got one big thing right. The only thing you have to fear… is fear itself.

Good investing,

Alexander Green

The Best Buy Signal in 53 Years

The Best Buy Signal in 53 Years

by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, August 25, 2011: Issue #1586

Just weeks before the stock market made a dramatic bottom in early 2009, I wrote an Investment U column entitled “One of The Best Buy Signals in 51 Years.”

It was one of our most widely read columns that year – and syndicated many other places, as well.

I have no idea how many readers acted on my analysis at the time. After all, the financial crisis was in full swing and investor sentiment – to quote Jed Clampett – “was lower than a hog’s jaw on market day.”

But those who bought stocks on this signal made gobs of money in the months that followed. After all, the market essentially doubled between the lows of 2009 to the highs earlier this year.

Now – for only the second time in 53 years – this uncanny signal is flashing again. Here’s what it is and why you should take advantage of one of the best and most accurate signals in stock market history…

Market Yields: Stock vs. U.S. Treasuries

In the first half of the twentieth century, investors found that if you bought stocks only when the market’s yield exceeded the yield on 10-year Treasuries, you would have been in for every single major rally.

The returns were huge – and the system made perfect sense. Stocks are riskier than bonds, market participants reasoned, so they should yield more to compensate for greater volatility and the likelihood of occasional losses.

The system worked like a charm until 1958. Then it stopped cold. Why? Because for the next 50 years, stocks never yielded more than Treasuries.

Public companies began using their cash flow to fund operations and acquisitions rather than paying out dividends to shareholders. With stock yields sharply lower, most analysts reasoned that the indicator was dead, that the yield on stocks would never again top bonds.

And, indeed, it took a full blown financial crisis but two and a half years ago to finally happen again. With the luxury of hindsight, we can see that was yet another superb buying opportunity. And today it’s happening yet again thanks to both the tremendous rally in government bonds and the socking that stocks have undergone. For only the second time since 1958, stocks are yielding more than bonds.

Granted, it’s a squeaker. As I write, the 10-year Treasury is yielding 2.07 percent. The S&P 500 yields 2.16 percent. Of course the S&P 500 Index was only created in 1957. It was the Dow that investors used in the first half of the last century. And the yield on the Dow is more than 50 percent higher at 3.24 percent.

History Says… Stocks Are a Terrific Long-Term Buy

If history is any guide, that means stocks are a terrific long-term “Buy” right now and Treasuries – which have become a complete bubble and a table-pounding “Sell” in my estimation – are due for a long period of underperformance.

True, GDP growth is likely to be anemic in the months ahead. But – shocking and surprising most investors – stocks (and especially dividend-paying stocks) should do exceptionally well.

There are no guarantees in the world of stock market investing, of course. But as Patrick Henry famously said, “I know no way of judging the future but by the past.”

Good investing,

Alexander Green

Editor’s Note: So how can you capitalize on the best buy signal in the last 53 years? As Alex said, it’s important to focus on dividend-paying stocks… And the best way to read Alex’s favorite picks and his regular market commentary is to join The Oxford Club…

I Was Wrong About Gold and Internet Stocks and Real Estate

I Was Wrong About Gold and Internet Stocks and Real Estate

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, August 15, 2011

In the summer of 1999, I warned my friends that they were playing with fire, that the rip-snorting bull market in Internet and technology stocks was likely to end badly.

Most of them scoffed – and were glad they did. After all, Internet stocks weren’t anywhere near a peak in the summer of 1999. I was early. It would be nine long months before the scaffolding began to shake.

I never dreamed the mania could go for so long. But it did. And it taught me a valuable lesson. You can’t make a rational estimate of when irrational behavior will end.

The same thing happened with the housing bubble seven years ago. Almost no one was buying my skeptical take. I talked to realtors who had been in the business their whole lives and had never witnessed anything like the dramatic run-up in prices that was occurring. Yet most managed to convince themselves – and their clients – that prices would only keep rising.

Which they did. Until, of course, they didn’t.

Now we’re in the midst of a spectacular run in gold and silver. When I bump into typical investors at cocktail parties or backyard barbecues, they invariably tell me they are loading up on precious metals. “It’s a no-brainer,” a Merrill Lynch broker told me just last week.

I agree. I think some investors have left their brains with the hat-check girl. Here’s why …

• The price of gold and silver are now way above the marginal cost of production. When that happens, you get new supply. Yes, it takes time but, trust me – it’s coming. (High commodity prices always sow the seeds of their own destruction. Have you checked out agricultural prices lately?)

• Unlike oil, a depleting asset, all the gold ever mined is still around and is available to be sold.  If consumers rush to cash in on higher prices – or (ahem) falling prices – supply can quickly swamp demand.

• Higher inflation does not necessarily portend higher prices for precious metals. Gold hit $850 an ounce in January 1980. Although inflation hit 12.4 percent that year, the yellow metal was $300 an ounce lower in December. That was a 35-percent hit. And yet that was just the beginning of the end. Gold didn’t bottom out until almost 20 years later. Silver took an even more spectacular ride, hitting a high of $48 an ounce in 1980 and losing 90 percent of its value by 1982.

• Or take a look at gold equities.  While the price of the barbarous relic keeps rising, you’ll notice the gold stock index is no longer tagging along. Here’s the chart… Gold has pushed ahead over the last three months. But blue chip gold stocks have fallen, even though most of the big producers have removed their hedges. The smart money is betting that today’s high prices won’t be sustained.

• And how about the smartest money of all? Warren Buffett isn’t buying any nonsense about gold being “undervalued” at current levels. He openly scoffed at the idea in this April clip. And gold is only more expensive now.

Some readers might remind me (and should) that I was bearish on gold several months ago. Yet gold and silver have only pushed on to higher highs. Just as Internet stocks did. Just as residential real estate did. Just as tulip bulbs did.

Don’t get me wrong. Everyone should own some gold as a hedge against economic or political catastrophe. But if you are piling into gold and silver now – or if it makes up a quarter or more of your portfolio – you are truly living in Las Vegas.

I could be wrong, of course. Maybe gold and silver are still in the early stages of a tremendous run-up. But what if I’m not wrong? A 60 year old who jumped into gold in 1980 was down more than 60 percent on his 80^th birthday, if he lived that long. And that’s ignoring inflation, something gold bulls are not traditionally inclined to do.

The truth is no one can tell you where gold will be in a month or a year. Still, it wouldn’t hurt to heed the words of Mark Twain:

“History may not repeat itself. But it rhymes.”

Good investing,

Alexander Green

How Traders and Investors Should Play This Market

How Traders and Investors Should Play This Market

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, August 8, 2011: Issue #1573

You often read in the financial press that stock market investors should do this or short-term traders should do that. But which one are you and what should you be doing now?

Here are my quick and dirty definitions, followed by a few thoughts about how each ought to approach today’s wild and wooly financial markets.

• An investor is someone set on achieving long-term financial goals: a comfortable retirement, the kids’ college education, or perhaps the down payment for a new house. Success here is measured in years, so this week’s market action is largely irrelevant except as it offers unusual opportunities. The important things to consider here are quality, diversification, asset allocation and keeping annual expenses and taxes to a minimum.

• A trader is someone who is trying to beat the market in the short term either to goose returns or reach short-term financial goals. This approach is inherently more risky, as the market action over the last few weeks has made crystal clear. The key here is to own great companies that are likely to post positive surprises in the short term (for example, great sales, high earnings, new product announcements, or an unexpected takeover bid). A trailing stop is essential to protect profits and limit any losses.

For the long-term stock investor, the current sell-off is almost certainly a gift from Fortune. I know, no one you know sees it that way, but look back through history. You’ll find that virtually every widespread market sell-off was a buying opportunity.

Yes, the market can go lower in the short term. (That’s always the case, incidentally.) But over the last 40 years, the S&P 500 has seen 25 corrections of 10 percent during a bull market. In only nine of them did the losses grow to 20 percent or more. Despite all the naysayers, a further sell-off is hardly assured.

One of the Few Reliable Rules of Investing

Still, you should only nibble at great stocks right now, not throw money at them in wild abandon. (Although I’ll bet that’s not your instinct right now, anyway.) One of the few reliable rules of investing is that perceived risk and actual risk are inversely related: The more dangerous the market feels, the more likely it is to produce generous returns in the years ahead.

So long-term investors gradually shift some money out of assets like bonds that have appreciated sharply and move them into stocks which have depreciated sharply. The fact that this feels like the wrong thing to do is, paradoxically, just the confirmation you need. (You need only recall the market meltdown two and a half years ago to see what I mean.)

Short-term traders need to take a slightly different approach, however. If you’ve been using our recommended trailing stops, you almost certainly have been building cash the last few weeks as you protected profits and preserved capital.

Don’t be in any rush to put this cash back to work. To take advantage of a crisis, you don’t have to be the first one to the fire. Pick your spots and trade judiciously. (One good strategy is to buy the same stocks that corporate insiders are currently loading up on.)

Don’t Risk Missing a Significant Rebound

Despite the stormy weather, you should cast a few lines right now. It may be tempting to simply wait until things “settle down” but then you run the risk of missing a significant rebound.

In short, tune out all the end-of-the-world hysteria and think rationally.

• As a long-term investor, shift money in cash and bonds into stocks.

• As a short-term trader – and you may well be both – scoop up great companies selling at unusual discounts – there are plenty of them out there – and adjust your stops to protect your gains.

You’ll thank me when things get back to normal. As they always do eventually.

Good investing,

Alexander Green

Do Trailing Stops Really Work?

Do Trailing Stops Really Work?

by Alexander Green, Chief Investment Strategist
Monday, June 18, 2011: Issue #1558

Editor’s Note: This week Investment U’s Chief Investment Strategist, Alexander Green, is in Seattle for an annual investment conference. Given his priorities to his subscribers, Investment U will be running one of his classic pieces on trailing stops. We hope you enjoy…

Somebody recently told me over lunch that one of the most controversial aspects of our investment policy is trailing stops.

But they shouldn’t be.

If you don’t have a premeditated sell discipline – and the vast majority of investors don’t – you’re flying by the seat of your pants. And that rarely leads to superior investment performance.

But do trailing stops really work?

Survey Says: Use Trailing Stops

In a word: Yes. Trailing stops protect your profits and your trading capital. And there’s much more than just anecdotal evidence.

In a study published in The Journal of Portfolio Management, Christophe Faugere, Hany A. Shawky and David M. Smith – finance professors at the State University of New York at Albany – researched the performance of money managers who oversee pension funds, endowments and high-net-worth accounts.

Because most institutions work under strict investment guidelines, these academics were able to analyze performance based on differing approaches to selling stocks.

The result? Institutional managers who fared best were those with restrictive rules that didn’t allow much leeway for holding stocks for emotional reasons. Managers who relied on “flexible” sell strategies did far worse.

Count me as unsurprised. Institutional money managers are just as prone to rationalizing as individual investors when they make a mistake. (Hence the old Wall Street chestnut, “What does a broker call a trade gone wrong? A long-term investment.”)

Trailing Stops: Providing Protection… Securing Profits

The culprit is almost always pride, ego, or emotion. Without any kind of sell strategy, emotions come into play. And emotions are almost always wrong.

But by adhering to a disciplined trailing stop strategy, our investment system mows down emotion-driven trading errors like a field full of dandelions.

It cures greed. Eliminates fear. And does away with wishful thinking – as in, “I hope this stock turns around and starts going the right way.”

Of course, trailing stops aren’t the only sell discipline out there. But they’re one of the easiest to implement. They serve two purposes…

• They make sure we never let a small loss become an unacceptable loss.
• They keep us from selling stocks while they’re still trending up.

Maneuver Past the Market Makers With TradeStops.com

The one knock against using trailing stops is that unscrupulous market makers will sometimes take out your stop order right before a stock takes off.

But Richard Smith, President and Founder of TradeStops.com – and a PhD in mathematics – has a service that provides an ingenious solution.

If you visit www.tradestops.com, you can enter the stocks you own, the price you paid and the percentage trailing stop you want to use. There are several valuable benefits…

• If any of your stocks close beneath your selected stop, TradeStops sends a message – to your cell phone, e-mail, or account page – alerting you.
• Some brokerage firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops information never expires and even offers a 30-day risk-free trial.
• You can track up to 50 stocks at a time. (And whenever you stop out of one, you can replace it with another.)
• TradeStops is easy to use. It’s specifically designed for technophobes.
• It’s reasonably priced. There are additional services available for dedicated short-term traders who want even more.

It’s important to note that TradeStops notifies you of stops, not your broker. And it doesn’t enter sell orders. But the key is to make sure you have an acknowledged point where you’d be willing to sell any individual stock.

Trailing stops don’t just offer to cut your losses and protect your profits. They guarantee it.

Good investing,

Alexander Green

A Solid Investment Strategy For a Shaky Market

A Solid Investment Strategy For a Shaky Market

by Alexander Green, Investment U’s Chief Investment Strategist

Monday, June 6, 2011: Issue #1528

As you may have noticed, the stock market is acting hinky again. That makes now a good time to review your investment foundation.

Here’s what I mean…

We keep past issues of our Oxford Club Communiqué – which includes our Trading Portfolio – posted on our website. A few months ago I received a letter from a new Oxford Club member who went back through the past couple of years and was astonished by what he found.

“You were heavily invested in top-performing stocks before the financial crisis, then went totally into cash early in the meltdown, then profited from the enormous market rebound that followed. How in the world did you get it so right? How did you know what would happen?”

The short answer is we didn’t know, never will know and neither will anyone else.

What will happen in the future to interest rates, currency values, and stock prices is always an open question. This is especially true when you throw in unforeseeable geopolitical events, thousands of pages of government legislation (and their unintended consequences) and a large dollop of fear, greed, and hope.

Accept the truth. You will never know what the future holds. And that’s okay because you don’t have to…

Taking Advantage of Stock Market Uncertainty

What you need instead is an investment system that allows you to take advantage of the uncertainty inherent in the markets.

Start by looking back at history. You’ll notice two important things.

1. Owning profitable businesses is the best way to preserve and build wealth.
2. Over the past two hundred years, the stock market has gone up more than three-quarters of the time.

Over the long term, shareholding is a winning game. Trying to time the market’s ups and downs isn’t. So we buy great companies – those we believe will post the biggest earnings surprises in the months ahead – and don’t worry about the tone of the market.

Protect Winning Positions With Trailing Stops

Yes, bear markets (which are normal) are nasty and will take your stocks way down. We don’t want that to happen. So we don’t let it. Instead, we carefully protect our winning positions by using trailing stops. As long as our holdings are trending up, we’re happy to stick with them. But when any stock pulls back 25 percent from its closing high, we bid it adieu.

That’s exactly what happened in the financial meltdown a couple years ago. When things started coming apart at the seams, our trailing stops protected our profits and raised cash. By October 2008, we had sold all 44 positions in our portfolio for an average gain of 28 percent. (Not bad for a year when the S&P 500 fell 36 percent).

Since we are not market timers, we started gradually rebuilding our portfolio and were able to profit handily all over again. We currently have 27 positions in our Oxford Trading Portfolio. Twenty-five of them are profitable. And our average short-term gain is 43 percent.

Yet here’s what millions of other investors did over the last few years instead:

• They watched their profits evaporate and didn’t buy much while things were cheap.
• They panicked, switched to cash and missed the rebound or
• Worst of all, they rode their stocks down, panicked and sold, waited too long to invest and only recently bought back in. Now they’re starting to feel nervous again.

Get Rid of the Fear and Anxiety of Stock Market Investing

Fear and anxiety are natural when you don’t know what the heck you’re doing with the money you intend to live on some day. But you can get rid of the fear by dumping an investment approach that doesn’t work.

Please understand, we couldn’t possibly have known how everything was going to unfold. And neither could anyone else. But we used – and still use – an investment system, for our Oxford Club subscribers, that allows us to profit in good times and protect our capital in the bad.

Now that the market is acting jittery again, the question to ask yourself is “Am I using a system that allows me to capitalize on the uncertainty that is inherent in the markets? And, if not, why not?”

Good investing,

Alexander Green

Potentially Make Money Despite Your Investing Mistakes

Potentially Make Money Despite Your Investing Mistakes

by Alexander Green, Investment U‘s Chief Investment Strategist

Monday, May 23, 2011: Issue #1518

Investment mistakes can be expensive and some times fatal to your financial health.

Yet you will make them. And that’s okay.

The key is to:

• Not make the terribly stupid ones,
• And to learn from the rest.

Here’s what I mean …

Bone-Headed, Life-Altering Investment Mistakes

Those who make bone-headed, life-altering investment mistakes – the kind that destroy retirement dreams or radically change standards of living – almost always make the same ones:

• They didn’t invest in quality.
• They didn’t diversify.
• They repeatedly tried – and failed – to time the market.
• They delegated their investment decisions to someone unworthy of the task.

There’s a simple way to avoid these pitfalls…

Divide and Conquer Through Asset Allocation

Divide your investment portfolio among different asset classes (stocks, bonds, precious metals, inflation-adjusted Treasuries and so on) using our Oxford Asset Allocation Model, re-balance annually and follow proven, battle-tested rules of investment (which obviates the need for a full-service broker).

When you buy individual stocks, there are further mistakes you can – and will – make. Sometimes your timing will be wrong. Occasionally, you’ll be hit with a bolt out of the blue, like:

• A surprise earnings miss,
• A product recall,
• A patent infringement,
• Or an unexpected class-action suit.

Performing your due diligence – thoroughly investigating each business before you invest in it – can mitigate these risks. But that can’t eliminate them. There are too many potential risk factors for even the most diligent investigator to uncover.

Lessen the Sting of Investment Missteps with Trailing Stops

What do you do? First, you understand that you’ll be wrong occasionally – and take steps to lessen the sting of these missteps.

A good example is our trailing stop policy. They give you unlimited upside potential and strictly limit your downside risk.

• Longer-term investors might use a 25 percent trailing stop.
• Short-term traders will run their stops closer, say 15 percent behind a stock.

The important thing is to follow a proven discipline. That protects your hard-won gains and keeps the inevitable mistakes from derailing your investment plans.

I mention these timeless notions because I see a lot of investors making fundamental errors today.

• They’re loading up on gold and silver at the expense of almost everything else.
• Or sitting with most of their money in cash, earning next to nothing.
• Or they’re buying extraordinarily risky bonds to earn higher yields.

Successful investors hedge their bets. They understand that they’ll get hit from time to time, just as NFL players get slammed to the ground. It’s all part of the game. Expect it. Prepare for it.

What If You’re Wrong?

No matter what your investment posture, take a minute to ask yourself, “What if I’m wrong? What do I stand to make if I’m right? What do I stand to lose if I’m wrong?”

Mull it over. Visualize your best-case and worst-case scenarios. Focus on where your investment portfolio might be overexposed or out of whack – and adjust accordingly.

As someone who has been active in financial markets for more than 25 years, I have a finely honed sense of all the potential things that can go wrong – and a good appreciation, too, that there’s plenty more we can’t even envision.

As long as I’m an active investor, I know I’ll keep making mistakes. But I’m done making the foolish ones. The older you get, the tougher it is to imagine starting over. My advice is this: If you’re going to learn the hard way, start small and do it early.

Better still, learn from someone else’s mistakes. As I tell my regular readers, “I’ve made all the dumb mistakes so you don’t have to.”

Heed the words of Benjamin Franklin. “Experience is a dear school, but fools will learn in no other.”

Good investing,

Alexander Green

What Your Investment Guru Isn’t Telling You

What Your Investment Guru Isn’t Telling You

by Alexander Green, Chief Investment Strategist
Monday, February 28, 2011: Issue #1458

Two weeks ago, I spoke at The World Money Show in Orlando – one of the largest investment conferences in the country. More than 11,000 investors registered to attend.

(Unfortunately, the conference room was far too small. It filled up half an hour before I spoke and we ended up turning away a couple of hundred people. Not good.)

In my talk, I argued that the only certainty in the world is uncertainty. Then I demonstrated how investors can effectively capitalize on this uncertainty, starting with the seven factors that determine the future value of your portfolio…

Seven Factors That Shape the Value of Your Portfolio

Those seven factors are:

• The amount you save.
• The length of time it compounds.
• Your asset allocation.
• Your security selection.
• Your annual compounded return (as a result of 3 and 4).
• The expenses you absorb.
• The taxes you pay.

As I walked around the event, however, I listened to other speakers talking instead about the outlook for the stock market. And I kept hearing the same thing.

No, not persistent bullishness or bearishness. There’s always plenty of both at a conference of this size. The universal part was analysts confirming just how right their previous market forecasts had been.

Count me as skeptical.

“I Wasn’t Wrong… Just Early”

If I flipped a coin and said “heads” and it came up heads, would you be impressed? If not, why not?

What if I flipped it again and said “tails” and it came up tails this time. Would that impress you?

Maybe on the next coin flip, I get it wrong. Then I remind you that no system is perfect and that no one bats a thousand. Does that add to my stature and make my next prediction more credible?

The idea is laughable.

Yet listen to some market gurus and you’d think they’re all a bunch of smart guys who never get blindsided by events. Even those who missed the boat generally claim that they weren’t wrong… “just early.”

I suspect that more than a little revisionist history is going on here. The truth is that even the market forecasters who are right are generally dead wrong.

Let me give you an example…

The Bear Philosophy: Every Silver Lining Has a Cloud

I know a famously bearish investment analyst – one who has been bearish not just for years but for decades. He sincerely believes that every silver lining has its cloud.

Just before the financial crisis of 2007-2009, he let his readers know that we were on the edge of catastrophe. He predicted that inflation would soar, the dollar would crash, foreigners would repatriate their assets and the stock market would keel over.

And it did.

Today, he insists he “called the recent market crash.” It’s true he was bearish before the market tanked – and I hate to quibble – but…

• Inflation is 1.2%.
• The dollar is up against the euro and the yen.
• Foreigners have clearly not repatriated their assets.

Yet he crows about how much money you would have made if you’d listened to his analysis before the recent meltdown. Of course, you’d also have made a ton if you’d bet large on my first call of “heads” a few minutes ago.

What? You say my forecast had nothing to do with the result, that my success was meaningless?

That brings me to analysts who are busy claiming that they called the recent spike in oil and gold prices…

The Core Principles for Investment Success

Think about it: Who foresaw that a frustrated market vendor in Tunisia would set himself ablaze in the street – a move that would ultimately bring down the Tunisian government? In turn, who knew that would lead to a successful uprising in Egypt and then anarchy in Libya – developments that would cause oil (and thus gold) to soar?

Who? Precisely no one.

There’s a lot of money to be made in the prophecy racket… I mean, the market forecasting business. But here’s the industry’s dirty little secret:

Real investment success doesn’t come from following the right predictions. It comes from following the right principles:

• Allocate your assets properly.
• Diversify your portfolio broadly.
• Buy quality investments.
• Reduce your investment costs.
• Tax-manage your portfolio.

Yes, you can make it a lot more complicated than this. But you really don’t need to.

Good investing,

Alexander Green