Tech bubble and housing bubble
Bonuses paid ‘midst Wall Street rubble
Now by the misdeeds of these bums
Something wicked this way comes
-- with apologies to Wm. Shakespeare
If you are a farmer, there are two possible schools of thought about the weather:
- If it’s sunny today it will be sunny tomorrow. We call farmers who believe this “Walmart greeters.”
- The weather can change on a dime. We call farmers who believe this “successful.”
It isn’t any different in investing. A successful farmer anticipating hail or freeze or some other adverse weather will begin to harvest his fields or orchards a little early – maybe not at the absolute point of perfection but still quite good, and certainly better than destruction of the entire crop.
A farmer on his way to becoming a Walmart greeter decides he’ll wait until the hail actually begins, then just work faster. It’s too late then.
It’s the same with investing. I believe you must be willing to nibble at bargains in the market even while all others are tearing their hair out and the pundits are predicting the imminent demise of civilization as we know it. You must overcome fear to at least go for one or two great bargains. (We did. See our March 3 article, “Can You Hear the Bell Signaling a Bottom?” here.)
Conversely, I believe that you must be willing to overcome greed when you are looking at 50% and 60% profits in 9 or 10 months. Be willing to harvest a little grain, pick a few peaches, or nail down some of those profits.
That's what we are doing today, harvesting some of what we planted back in March. Our bank preferreds are not going to go higher than par -- where many are now hovering --even in a rip-roaring bull market. So our decision becomes: do we hold on to them to enjoy the 10% and 11% yields they pay at our basis price or do we forego a quarter or two of income and stash the wheat in the granary for safekeeping? Our decision is to stash the cash; the most we can lose is a little income, the best we can gain is a profit now and a lower entry price après le deluge.
It’s the same with our natural gas pipelines which have soared like tech stocks in this market rally. But they aren’t tech stocks. They have no pending breakthroughs in communication, productivity or search. As I wrote in a recent article, “pipelines haven’t found a cure for cancer, though they are now beginning to be priced as if they have.” We face the same keep-the-high-yields-or-buy-them-later-possibly-cheaper conundrum here. And we’ve answered it the same way.
How about you? Do you have some great profits that you are just waiting to rise from 60% to 100%, “then” you’ll sell? Gordon Gekko was wrong: greed is not good. It makes us do dumb things. Far better to harvest a little when you feel the change in the air or hear the sound of distant thunder.
I don’t have a crystal ball. I don’t know when the thunder will get close enough and the skies will open up, either in the field or in the stock markets. But I do know that trees do not grow to the sky and that genius is a rising market which melts in the rain. I’d rather be a little too early when I begin my buying – that’s when the great bargains abound. And I’d rather be a little early when selling as the PE, yield and Price-to-Book, to Cash Flow and to Revenue presents a less-than-attractive new purchase decision.
There will always be special situations in which to place a few dollars, even in a market that is correcting. Among those we are buying are the iPath S&P 500 VIX ETF (VXX), which is basically a play on the volatility of the market. Since most people will wait to sell until all others are selling, we’re betting, via VXX, that volatility will rise.
Others include plays that will benefit if inflation proves to be more virulent than the government currently wants us to believe it is. These would include the iShares TIPS Bond ETF (TIP), the ProShares UltraShort 20+ Year Treasury ETF (TBT) and the Direxion Daily 30 YR Treasury Bear 3X (TMV) – recognizing the inherent volatility of leveraged ETFs in these latter two.
Finally, I would look at gold and silver mining firms as yet another hedge against inflation and/or uncertainty in the markets. I have discussed a number of these in the past and am planning a forthcoming article on the precious metals “royalty” firms to add a little fuel to that fire!
Author's Disclosure: Having taken some profits in recommended sectors, we and/or clients for whom it is appropriate are now redeploying those assets into, among other selections, VXX, TBT, TMV, and TIP.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.