The Chicken's Guide to Picking Stocks in 2008

The first step to solving a problem is admitting that you have one. Actually, I have two problems - compulsion and fear. I am a compulsive stock picker. I want to research and pick stocks because I love it. On the other hand, I am fearful of actually owning any stocks. I am long precious metal, and I am short retailers and the broad market, but it feels terrible. It feels like I am betting against America and going against my nature.

At the same time, I can’t help but feel a sense of danger in this market. I feel like any day now we could see that 1,000 point down day that we barely avoided last week. I really want to be positive. I want to buy great companies with great earnings power. I want to see things go up, but that little voice keeps nagging me “stay out, danger, danger.” I am scared, but gosh darn it, shouldn’t I buy great companies at cheap prices? That is what great investors do, right? I am deeply conflicted.

Here are some well-known names that I really want to own and brief reasons why I think they are solid picks:

1. Microsoft (MSFT): Microsoft just beat estimates and raised guidance. Isn’t Microsoft a screaming buy right here?

2. Proctor & Gamble (PG): The economy is slowing and this stock fits the recession playbook. P& G pays a nice dividend, has improving margins, covers interest 12 times and is a long run winner in any environment. In a recession everyone buys P&G, right?

3. Johnson & Johnson (JNJ): Isn’t this the ultimate defensive play? JNJ has 10 billion in free cash flow, can float triple AAA bonds at will, and pays a 2.5% dividend. Why not buy JNJ, it ain’t going out of business in the next decade, is it?

4. Bank of America (BAC): How about Bank of America with a 7% yield or even a strong regional bank with a 4% yield (there are a few)? Are they all going under?

5. Costco (COST): I love Costco! Costco has a strong balance sheet, huge growth potential, and unlike Wal-Mart (WMT) they appeal to every demographic in any economic environment. You can’t lose badly on Costco, right?

I have other names and other ideas of course, but what is stopping me from owning these names? It is just plain fear. I am afraid of a world I don’t understand. I don’t understand markets where a company like Microsoft beats and raises and the stock goes down. I don’t understand a world where some idiot in a cubicle in France can take down the world’s stock markets by a trillion dollars in a few hours. I don’t understand a world where the U.S. government is telling us the economy is strong with low unemployment and then four minutes later is borrowing $200 billion against my children’s future to send me a check to go shopping.

Anyway, to reconcile my compulsion to pick stocks with my fear of actually owning stocks, the only thing that I have come up with is to sell out of the money puts on names I like and covered calls on names I end up owning. The game then becomes not what stocks will go up, but what stocks will not go down too much. I am trying to stick with large cap, dividend paying, low volatility stalwarts like the names I mentioned above. With this strategy, everything is hedged but at least I get to do what I want to do and pick stocks. I know that it is sort of cheating, but the worst-case scenario is that I get stock put to me at a better price than I would have bought it anyway. I also get a little income if it doesn’t happen.

Of course, I know this is an old strategy, but it is proving to be good therapy for me and I thought that maybe I could help someone else by telling my story. Maybe Oprah will have me on and I can help even more people.

Disclosure: Author holds positions in some of the above mentioned stocks.

Comments

[Jake2]

You want us to feel sorry for you or what?

[RichShinnick]

No Duke, don't feel sorry for me, but you may laugh at me.

[tjschoenlein]

Actually I don't need to hear this. Maybe Dr. Phil would be interested?
We all have our emotional ups / downs .. just deal with them and take your lumps as they come. This is the world of investing.

[WAKEUP]

I like this article. I see the actual point (am I the only one, besides Richard Shinnick?). There IS real danger in this market. The market, this time around, has shown, and continues to show its true colors. The stock market is a rich man's game, and is 100% designed to be manipulated to assure that the rich boys win, in the long run. The bizarre happenings of late only serve to illustrate how malleable the workings of the stock market are, and how easily some computer-savvy desk jockey like Jerome Kerviel, of France's Societe Generale can rip the system's guts out, at will. I do think that the rich boys will tighten up the gears, now that others outside the Olde Boy Network have seen through the gauzy fabric of the machinations. But as far as ever being able to outflank Big Money, there will never be a time when your money is not in serious danger, in any stock market. You're better off, any day, in a poker game. At least there, you have some chance to catch the cheaters, since they're sitting at the table with you, instead of hiding in some bank's back rooms, plotting when to fold YOUR hand.

[RichShinnick]

TJ: thanks for the advice, I will give Dr. Phil a call, he has helped me a lot in the past.

WakeUP: you might be the only one besides me who gets my point, and hopefully the dry humor I used to try to make it..it zipped right past some people.

TJ: I'm kidding about Dr. Phil, you know, joking, its a joke, ding, ding, ding. An yes, I know, this is the world of investing, lets not take ourselves too serious though.

[thannagan]

Hey there's 3 of us out of the closet. (And, I believe it's a very big closet.)Thanks.

[dr_kimble]

Good article, I agree with WakeUp. But looking at the US market from Europe, I think it`s not this SocGen guy responsible for the insecurity in the market....for many European guys it is simply that no one is really telling us what is truly behind the US subprime chaos....

[Long-ShortGuy]

Excellent article. Can tell you really mean it by the serious look on your face in the photo.
:-)