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

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

World’s Most Contrarian Investment

World’s Most Contrarian Investment
by Alexander Green, Investment U Chief Investment Strategist
Monday, February 13, 2012: Issue #1707

How do you identify great contrarian investment opportunities?

Two ways. First, rather than limiting yourself to your national borders, you seek out opportunities worldwide. Next, you insist on two essential factors: abject pessimism and extreme valuations. That’s exactly what we have in European stocks today.

Ask your friends and neighbors which stocks in Europe they’re buying right now and they’ll ask you to sit down so they can feel your forehead. After all, no one in his right mind would buy stocks in a region where socialist policies reign, economic growth is almost nonexistent and the currency – the euro – is coming apart at the seams, right?

Wrong. The fact that almost no one is enthusiastic about Europe right now – indeed, most see it as a ticking time bomb – tells you that sentiment is entirely negative.

How about valuations? Those are compelling, too. The benchmark MSCI Europe Index, for example, currently sells for just 9.8 times estimated 2012 earnings, versus an average of 17 times earnings over the past 25 years. Plus, the drop in prices has boosted the dividends on many of the well-known global companies based in Europe.

Lower Values, Higher Dividends…

In sum, you have low valuations, high dividends and extremely negative sentiment. Yet the vast majority of investors reading these words won’t plunk a dime in these markets. (And, if history is any guide, a year or two from now they’ll scratch their heads and say they just can’t fathom how European stocks could have rallied so strongly.)

Not that buying contrarian investments in this troubled region doesn’t present some risks. After all, the European Central Bank (ECB) is propping up troubled banks. Many Eurozone countries are teetering on the brink of recession. And there’s a decided lack of bold political leadership in the region.

But the good news is that all these factors are already well known and fully priced into European stocks. (That’s why they’re so darn cheap.) Meanwhile, the U.S. economy has stabilized – reducing a big risk to the global economy – and the ECB has at least addressed liquidity problems at the banks.

Plus, a weaker euro is actually boosting the earnings prospects for the many companies that export to other parts of the world where economic growth (and currencies) are stronger.

Prime examples are:

• Siemens AG (NYSE: SI),
• Nestle (Pink: NSRGY),
• Novartis (NYSE: NVS), and
• BMW (OTC: BAMXY.PK).

So how do you play this contrarian investment opportunity? One of the best ways is with a low-cost, Europe-focused ETF like the Vanguard MSCI Europe Fund (NYSE: VGK). It’s easily the least expensive ETF in the sector with annual expenses of just .14%.

Companies in the U.K. account for around 34% of VGK’s assets, while France, Germany and Switzerland make up approximately 40%. The fund holds more than 450 stocks, but a quarter of its $2.4-billion portfolio is in its top 10 holdings, which include Vodafone, Royal Dutch Shell and HSBC Holdings. You’ll earn a 4.4% dividend here.

If you want to benefit even more from a potential slingshot recovery in these markets, try the WisdomTree Europe SmallCap Dividend Fund (NYSE: DFE). It keeps a third of its assets in smaller British companies and the rest in small-cap stocks in the Eurozone.

Remember, when an equity market rallies, the small-cap issues generally outperform larger stocks. And your contrarian investment will get a whopping 5.8% dividend here.

So there you have it, two great ways to play one of the most compelling opportunities in the world right now. Of course, most investors simply cannot bring themselves to invest against the herd. That’s how they got stuck in internet stocks a decade ago and residential real estate five years ago.

It’s also why this is perhaps one of the best contrarian investment opportunities today.

Good Investing,

Alexander Green

The Best Investment You Can Make In Four Minutes

The Best Investment You Can Make In Four Minutes

by Alexander Green, Investment U Chief Investment Strategist
Monday, February 6, 2012: Issue #1702

What if you could reach total financial independence in just four minutes a day?

If that sounds unrealistic, stay tuned. Because in the weeks ahead, our panel of experts at Investment U is going to show you exactly how it’s done.  Best of all, it won’t cost you a dime. After all, this service is free.

It’s a shame, really, that the average person graduates from high school and still doesn’t truly understand compound interest, or adjustable-rate mortgages or what a 401(k) is. Far fewer still know how to navigate the world’s treacherous but lucrative financial markets.

Since financial literacy and advanced money management skills aren’t taught in school, many men and women follow a predictable path when it comes to investing.

First, realizing they don’t know enough to risk their saving without potentially making huge mistakes, they turn to a stockbroker, insurance agent or mutual fund salesman for advice.

Not good.  Many people in the financial industry are peddling advice that is pedestrian, self-serving, far too expensive or all three.  Expect to hear these folks tell you, for example, that full-load mutual funds, whole life insurance and high-cost variable annuities are the best things since night baseball.

After a few years, the typical customer realizes that he’s dealing not with a fiduciary but a salesman – and a primary reason he’s not doing well is that his broker is doing too well.

That’s when many investors make their next predictable move. They transfer their account to a discount broker like E-Trade or Charles Schwab.

And while a discounter is a whole lot cheaper than a full-service broker, it quickly becomes apparent that the customer isn’t a professional money manager himself and – truth be told – really doesn’t know that much about what he’s doing.

The typical discount customer ends up with a few winners and a few losers, but doesn’t know when to sell them or why. At the end of the year, he looks at his statement and sees he isn’t much closer to his financial goals – if, indeed, he ever took the time to set any.

This brings many investors (older, wiser and generally poorer) to the conclusion that they do need qualified help, just not from a salesman in a transaction-based relationship.

Eventually, hundreds of thousands of investors turn to Investment U, the free, Web-based source for men and women seeking to achieve and maintain total financial freedom.

Proven Principles Don’t Change

We do something virtually no one else does. Investment U provides daily commentary and analysis about today’s fast-moving financial markets, but always with the objective of tying our advice to timeless investment principles.

Economies expand and contract. Currencies rise and fall. Governments come and go. Markets zig and zag. But proven investment principles don’t change.

Yet the sad fact is that most investors have never learned them. They’re trying to ace Trigonometry without having mastered Algebra 1. Why don’t you have the crucial knowledge you need?  Because schools don’t teach it and telling the unvarnished truth isn’t conducive to selling high-priced financial products.

As Vanguard founder John Bogle likes to say, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

We don’t have conflicts like that here. We don’t charge commissions or fees. We don’t want to “capture your assets.”

Yes, Investment U offers premium services to subscribers. (We couldn’t support a free e-letter forever if we didn’t.) But there is never any obligation to buy and any purchase comes with a free-trial period and a money-back guarantee.

So stick with us. In the weeks ahead, we are going to reveal big dividend plays, high-yield bonds, undervalued currencies, ultra-cheap commodities, risk-reduction techniques, and proven strategies to prevent losses, protect gains and navigate today’s volatile investment environment.

Best of all, we’re going to do all this with a single goal in mind: To show you the shortest, most direct route to total financial independence.

The only commitment it requires from you is four minutes a day. That’s how long it takes the average reader to finish our daily column.

The service is free. But the knowledge is priceless.

Good Investing,

Alexander Green

Investing in Alternative Assets

Investing in Alternative Assets

by Alexander Green, Investment U Chief Investment Strategist
Friday, February 3, 2012: Issue #1701

Rarely have Americans faced a more challenging investment landscape.

Bonds yield next to nothing. Money markets pay literally nothing. Residential real estate is swamped in a flood of short sales and foreclosures. Gold – after climbing six-fold over the last 12 years – may have topped out. And stocks are gyrating madly.

Given all this, where does the prudent investor put his money to work?

That’s what I asked Rick Pfeifer, an Oxford Club Pillar One Advisor and Senior Portfolio Manager with Fund Advisors of America, a Maitland, Florida-based money management firm, in a recent interview:

Q: Rick, the typical investor is disgusted with the yields on bonds and cash and scared to death of the stock market. What are you saying to clients?

A: I’m telling them that now is an excellent time to take a portion of their portfolio and diversify into alternative assets: convertible bonds, preferred shares, foreign currencies, hedge positions, ultra-cheap commodities and so on.

Q: Okay, let’s take these one at a time. What are you buying now and why?

A: We recently launched a managed account for individual investors that we call The Global Hedge Portfolio. The idea is not to replace your traditional stock and bond portfolio, but to offer a complement to it. We’re seeking profits in investments that don’t move in lockstep with either the S&P 500 or Lehman’s Treasury Index.

Q: Give me a couple of “for-instances.”

A: Take the situation in the Eurozone, for example. We see European leaders and the European Central bank doing a whole lot of talking, but we don’t see genuine, concrete steps toward solving the huge fiscal problems in Southern Europe. Some might even argue that the reason they haven’t yet taken serious corrective steps is because their options are so limited. Italy, for example, is simply too big an economy to bail out, in my view. My co-strategist Greg Galloway and I forecast that the euro will fall to parity with the dollar within 12 months. So we are short the euro in our Global Hedge Portfolio.

Q: Can’t fault your thinking there. I’ve been saying much the same thing for months now. What else are you doing?

A: We’re investing in overlooked asset classes with plenty of upside potential. Take timber, for example. Over the long run, investments in timber have beaten stocks by about 4% annually – and with considerably less volatility. Plus, timber is uncorrelated to stocks, making it an excellent way to balance your portfolio. One timber trust we own is seeing revenue grow 23% annually. Operating margins top 24%. And we’re getting a 3.5% dividend yield, too.

Q: What else are you buying?

A: We’re finding bargains in certain international markets, particularly Asia and Latin America. Because domestic demand there is growing, these areas are largely immune to problems here at home and in the Eurozone. For example, we’re buying an Asian auto manufacturer that’s selling for just half of annual sales. It’s trading at a substantial discount to book and should easily triple its earnings this year. We’re also picking up undervalued oil assets in Brazil, high-yielding energy trusts in Canada, a high-quality wine maker in Chile and the world’s leading food company, denominated in Swiss francs.

Q: How about metals?

A: We’re not buying commodities directly. Instead, we’re buying metal producers that appear undervalued and have big dividends attached.

Q: What about gold?

A: I don’t know what gold is going to do and I don’t think anyone else knows, either. But some gold producers are selling at mouth-watering prices right now, even if gold goes nowhere. One of our favorites yields 10% right now. If gold takes off, great. But if it moves sideways for a while, a 10% yield makes it a comfortable wait.

Q: What if gold moves south?

A: We run trailing stops on our investment positions. That gives us unlimited upside potential with strictly limited downside risk.

Q: Anything else you really like?

A: Quite a few things, really. I’ll mention one. Residential real estate is a mess, not only in the United States but in many overseas markets, as well. But we’re finding real bargains in commercial real estate in select overseas markets. Of course, we’re not buying the buildings themselves. Our investments are totally liquid. And, in addition to potential share price appreciation here, some of the assets are currently yielding more than 7%.

Q: Good to know, Rick. And an excellent reminder that for investors who are willing to invest worldwide, there are always opportunities available somewhere. Thanks for sharing your thoughts with us today, Rick.

A: Any time. It’s my pleasure.

Good Investing,

Alexander Green

Everything You Need to Know about Insider Trading

by Insider Alert Research Team

Insider trading.

You might have heard the term back in 2011 when Peter Schweizer’s book, “Throw Them All Out,” first caught the attention of 60 Minutes and quickly ignited a firestorm of controversy.

In “Throw Them All Out,” Schweizer detailed numerous examples of congressional corruption, including our lawmakers’ habit of legislating themselves exclusive loopholes to profit off of the rules and regulations they shackle the rest of us with. That includes insider trading.

Let me explain…

Insider trading, at its very basic, is when somebody with special knowledge about a company decides to either buy or sell shares or security of said company. Usually this is somebody high up on the corporate ladder but, as Briefing Investor explains it, it can also include “officers and directors of companies, owners of restricted stock, and owners of more than 10% of a company’s stock.”

What’s wrong with that, you might ask?

Well, that’s where things start to get a bit more complicated.

You see, when the stock market crashed in 1929, setting off the Great Depression, a lot of blame started flying around pretty quickly as blame usually does. And while the government was in part responsible for the mess and definitely for the ensuing chaos, it didn’t want to acknowledge that blatant fact.

So, for better or worse, it began meddling in the private sector more than it already had been.

In 1934, Congress passed the Securities Exchange Act, which was promptly signed by President Franklin Delanor Roosevelt. Arguably the first of its kind – at least on the federal level – it placed strict controls on publicly traded companies with the stated intention of evening the playing field against the “fat cats” on Wall Street and in favor of main street.

Among the long list of regulations the Securities Exchange Act outlawed were:

• Using any “device, scheme, or artifice to defraud,” investors, essentially requiring companies to list all relevant information about their businesses, profits, etc. or, as Cornell University Law School explains it, anything “that investors would think was important to their decision to buy or sell the stock”
• Manipulating the market to suggest that stocks are worth more than they actually are
• Employee purchases or sales of ownership in a company without first making the public aware of the transaction, also known as insider trading

Altogether, the Act was supposed to force companies to behave more ethically and investors to act more intelligently, with the combined result of keeping the markets from crashing again. The same was true for the Sarbanes-Oxley Act of 2002, which demanded even more transparency from businesses, adding additional paperwork for them to fill out and information they had to release.

Obviously, neither have prevented very much, as evidenced by the multiple stock market crashes and recessions 1934, corporate scandals such as Enron, WorldCom and Satyam, as well as the government-connected Fannie Mae and Freddie Mac, corporate crooks such as Bernie Madoff and Jon Corzine, and Raj Rajaratnam and the other 55 people who have been charged with insider trading since 2009.

And those are just the ones who get caught!

That also isn’t to mention that company’s are really quite clever about following the letter of the law rather than the spirit much of the time. (Though it’s hard to blame them sometimes when they have to follow so many of said laws.)

As Cornell University explains:

Section 9 of the 1934 Securities Exchange Act “addresses manipulation of the stock market by traders… However, modern market manipulation is accomplished through methods that are more subtle and harder to detect… [partially because] investors must prove that the price was actually affected by the manipulation, and that the defendant acted willfully. Proving damages also involves proving the actual value, since successful claimants may recover the difference between the actual value and the price they paid.”

And the same can be said of many other aspects of insider trading law, as discussed further on.

Their Insider Pain Can Be Your Outsider Gain

Regardless of whether either the Securities Exchange Act of 1934 or the Sarbanes Oxley Act of 2002 were right or wrong, helpful or harmful, effective or ineffective, or even selfishly or selflessly motivated, they are the reality that the publicly-traded business world has to operate under in the United States.

As the aforementioned “Throw Them All Out” by Peter Schweizer pointed out, Congress doesn’t have to abide by any such rules since they loopholed themselves right out of any such responsibility or accountability, but that’s another topic for another article.

In the meantime, average investors can get ahead of the game if they only have the know-how and commitment to utilize their resources properly. (For anybody who doesn’t have the time or inclination to not only look into the following resources but follow them up and research the company as well, consider Alex Green’s Insider Alert, which does all of that work for you. For more information about the Oxford Club service, click here.)

Unless you want to get into the world of shorting stocks, forget paying that much attention to when insiders are selling. Partially that’s because there are at least a dozen good reasons for company employers or head honchos to sell what they have. And most of them are personal, having nothing to do with the company’s short-term, mid-term or long-term growth.

The chief financial officer might have a daughter going off to college, the CEO might be buying a new house, or the vice president’s young son might require a costly medical treatment. And an easy way for any of them to get the finances necessary for any of those purchases is by selling off some of their shares.

Now, if the CFO, CEO and VP are all selling at the same time, that’s reason to think twice about investing in the company. But if it’s just one or even two corporate insiders offloading some shares, more than likely, it isn’t in any danger of becoming the next Lehman Brothers.

On the other hand, there is only one reason that insiders buy, and that is that they expect their company to do well in the near future. And, let’s face it: Out of all of the analysts, investors and industry experts who like to spout their opinions at every opportunity, it’s the insiders who should know the best how their company is really doing and what it is really capable of accomplishing.

Back in 2009, Alexander Green, who edits the Insider Alert, wrote how, in 2008, he discovered that:

“David Abrams, a Director of Crown Castle International made the single-largest insider purchase in the nation. He bought 4.5 million shares at a cost of more than $60 million.

“Based in Houston, Crown Castle leases cell towers and antenna space to wireless communications companies. Most of these are in the United States, although more than 1,400 are in Australia.

• The company has more than 24,000 towers in prime markets and is actively building more to lease.
• Recent earnings, released earlier in the month, contained a few surprises.
• While earnings were in the red, revenue was still growing at 9%. And I noticed that site rental revenue, gross margins and recurring cash flow all exceeded expectations.
• Moreover, the company had lost three-quarters of its market value and was selling below book value.”

Triggered by the SEC filings that Abrams legally had to file within two days of his purchase, Alex was able to identify it as a potential growth stock worth targeting. But he didn’t stop there, taking the additional necessary step of researching the company from what it did to how and how well it did it.

Then he recommended Crown Castle International to his Insider Alert subscribers and he watched it.

Of course, the markets weren’t behaving well in 2008. At all. Yet two months later, the stock had shot up 58%. And Alex was able to lead subscribers to that significant short-term gain all because he was paying attention to what the insiders were doing.

Insider Activity Isn’t So Easy to Find

As previously mentioned, while insider trading can prove extremely lucrative, it isn’t always the easiest task to interpret or even find.

For starters, the SEC – in typical governmental fashion – doesn’t just have one generic form for insiders to fill out whenever they’re making a transaction. They have multiple ones, including:

• Form 3 filings, which officially record how much an insider owns
• Form 4 filings, which officially record any changes to what an insider owns
• Form 5 filings, which basically sum up everything recorded in Form 4 filings for the year
• Form 13D filings, which have to be filled out as soon as a shareholder owns 5% or more of a company’s shares or securities
• Form 144 filings, which officially record the POSSIBLE sale of what an insider owns (No sale actually has to be made, so someone like a CEO can just keep filing Form 144s every 90 days just in case he does want to someday sell something.)

Starting to get the picture?

And it gets even more complicated than that…

As Briefing Investor says: “Unfortunately, even if you could access all insider filings electronically as an Internet investor [which you can’t, considering that much of the data doesn’t ever have to make it onto the internet or any traditional news source either], the time requirements on these forms does not always prove helpful. Form 144s must be filed in advance of the actual sale, but it may be done as early as the morning of the sale.”

In other words: not helpful at all. The same goes for Form 4 filings, which are submitted to the SEC after any changes are made, not before or even during.

Any savvy businessperson or anybody with access to a decent legal advisor can easily get around the rules and regulations – though not the paperwork – to profit just about as nicely as he or she would if the government didn’t meddle as much as it does.

Clearly, researching insider trading with the intent of capitalizing on it can easily become a complicated and unhelpful mess for anybody who doesn’t know exactly what they’re doing or at least knows somebody who does.

But for those who can successfully navigate the complicated, convoluted world of insider trading, there’s major money to be had.

Why Most of the Investment Advice You’ve Heard is Wrong

Why Most of the Investment Advice You’ve Heard is Wrong

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 20, 2012: Issue #1691

A conversation with a friend last week sounded numbingly familiar.

“I just can’t seem to win for losing in the stock market,” he confessed. “Five years ago, my broker had me fully invested in stocks and I took a drubbing. Then when things were bottoming out a couple years later, he talked me into making my portfolio more conservative. As a result, I didn’t get much of a pop on the rebound. Now he’s trying to get me to reshuffle again. But I’m too scared to do anything.”

Since he was a friend, I felt obliged to tell him the truth: He’s getting lousy investment advice. Not because his broker failed to outguess the market… but because he’s guessing at all. As if that wasn’t bad enough, there’s a good chance that the advice he’s getting is tainted by self-interest.

Here’s what I mean…

It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.

Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?

The same is true of market timing. It’s easy to look in the rearview mirror and see when you should have been in the market and when you should have been out. But when you look ahead, it is always a blank slate. No guru or trading system can change that.

Even if you could somehow divine what the stock market was going to do next – which you can’t – you still wouldn’t know which stocks would outperform and which ones would lag.

The only way to determine that is to look at business fundamentals. Companies that are doing all the right things – increasing sales, compounding earnings at high rates, growing market share, improving operating margins, paying down debt, buying back shares – will post superb returns, regardless of what the economy or stock market are doing. And those that are doing the opposite – experiencing flat or negative sales, lackluster earnings growth, small margins, high interest costs and diluting existing shareholders with new stock issues – will be laggards.

In short, stock market success is about analyzing businesses not investing in some self-styled expert’s macroeconomic forecast. Yet that’s exactly what the mass media and much of the investment advisory industry encourages people to do every day.

The media does it to attract viewers – and thus advertisers. The advisory industry does it sometimes out of ignorance but often just to justify its fees. This is especially true when you have a transaction-based relationship with an advisor where the more you trade the better he or she is compensated. Trust me. That doesn’t generate satisfactory long-term returns.

Every time you hear a pundit talk about “the new normal,” the rally just ahead or the prolonged economic slump we’re likely to endure, understand that you’re listening to opinions that are no more helpful than a weather forecast for three weeks from Sunday.

Both pieces of advice are worthless. But one is a lot more expensive – and harmful – than the other.

Good Investing,

Alexander Green

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

Will You Fall Prey to “Headline Risk”?

Will You Fall Prey to “Headline Risk”?

by Alexander Green, Investment U Chief Wealth Strategist
Friday, September 2, 2011: Issue #1592

In the last couple of months, millions of investors have done a 180. It happens all the time. And – just as in the past – they will surely come to regret it.

The story is as old as equities themselves. When the market is an uptrend, investors focus on opportunity and considerations of risk go out the window. When the market is in the tank, they focus on risk and forget about opportunity.

This is the very opposite of what you should be doing.

During my 16-year career as an investment advisor and portfolio manager, I used to show new clients a 200-year chart of the stock market and ask them to identify the best buying opportunities.

Invariably, they pointed to the periods when the market had cratered.

I asked if they would be willing to step up and take advantage of such opportunities in the future. Most nodded vigorously and assured me that they would.

Few actually did.

Why? Because you can never imagine the news backdrop that will accompany a major stock market decline.

When the market recovered – as it always does – these same investors kick themselves for not scooping up bargains when stocks were cheap. Yet when the market declined again, they would generally react the very same way.

Nothing could be simpler than to say, “buy low, sell high.” But pulling the trigger when times are tough isn’t easy.

How to Avoid Headline Risk

It’s easy to fall prey to “Headline Risk.” Here’s what I mean…

On August 9, national newspaper and television headlines shouted that the Dow had plunged 634 points the previous day. That was not an insubstantial drop. It amounted to a 5.5 percent decline in the index.

Yet few sources reminded investors that the Dow was still up 66 percent (excluding dividends) from the market lows 2 ½ years ago. Or that the drop wasn’t even in the top 50 for largest daily percentage losses.

Similarly, the media made a big deal about the market sell-off the week of August 1 to 5 representing an evaporation of more than $4 trillion in world equity values. That’s a big number. (Unless you’re a Congressman, apparently.) Yet the total value of all stocks worldwide is approximately $55 trillion. And, for the overwhelming majority of investors, these were temporary paper losses.

Where was the context? There wasn’t any. The media needs sensationalism to grab viewers’ attention. Newspapers, magazines and television shows aren’t interested in helping you reach your financial goals. They’re interested in helping their marketing departments sell advertising. Sensationalism does just that.

Understand this and you can inoculate yourself against “Headline Risk.” Scary headlines create strong emotions. But strong emotions are usually the prelude to bad investment decisions.

Flee common stocks – the greatest wealth creator of all time – and where will you go? Into 10-year Treasuries yielding 2 percent? Into money market accounts paying next to nothing? Into gold which has already risen six-fold in the past 10 years? Into residential real estate which is mired in a sea of foreclosures?

High quality stocks are still your best bet to meet your long-term financial goals. National headlines are screaming just the opposite, of course, just as they have during every major buying opportunity of the past 75 years.

The truth is your greatest risk is not market fluctuations. It’s that your money fails to keep up with inflation – or that your investment portfolio kicks the bucket before you do.

Consider that before extravagant headlines prompt you to do something foolish.

Good investing,

Alexander Green