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Anthony Welch
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Anthony Welch is a founder and portfolio manager at Sarasota Capital Strategies, an investment advisory firm specializing in unique portfolio management featuring primarily Exchange Traded Funds. He has been involved in the financial industry for more than 21 years. Mr. Welch is invited to... More
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  • A Market So Easy A Caveman Can Do It

    After one of the most difficult and volatile years for active portfolio management, 2012 has started out to be quite simple - just buy any dip of 25 basis points. For those that prefer day trading, buy in the morning and sell on the afternoon rip. Works every time, easy money, piece of cake. And, of course, this strategy will work from now on since it appears the stock market will never correct again.

    You see, Ben Bernanke wants us in stocks. He wants us to invest, and he will keep interest rates low for as long as it takes to get every last dime that is currently cowering in fear in money markets and T-bills into risk assets. He knows that investors, contrary to popular belief, are most often irrationally driven by fear and greed. Seriously, who in their right mind would buy T-bills at negative interest rates? What rational investor would lock in a ten year yield at less than the inflation rate? Then again, what rational investor would sell out at the bottom and buy at the top? After all, didn't we learn in grade school to buy low, sell high? Note the weekly chart of the S&P 500 exchange traded fund, (NYSEARCA:SPY):

    As we can see, volume is highest at bottoms while volume decreases as the market improves. The elevator goes up empty and down full. Investors who were burned in the down times are hesitant to get back in, thus creating the proverbial "wall of worry". As the market improves, fear of losing eventually turns into fear of missing out, or greed. And the process continues as it has since the first stocks were traded under the buttonwood tree.

    So, what do we do now that we have yet another "V" shaped rally? Although fighting the Fed has once again proven futile, we must realize that it is improbable that the market will continue at this trajectory forever. Now is a good time to reflect on how we handled the massive three month decline last year. Did we ride the market all the way down, only to sell at the bottom? Or, did we use that as an opportunity to redeploy cash raised during the rally from October 2010?

    One way to view the stock market is as a giant retail store that you own. Imagine stocks as retail inventory, mittens, say. If you are in the mitten business, you desire to buy your mittens wholesale and sell them at a higher price to the public. You build into your pricing that some of your inventory will have to be marked down as spring approaches, but if you have the correct amount of inventory you can maximize your profits and use your cash to buy Bermuda shorts to sell in the summer. You have a business plan and, if you meet it, you're happy. You don't particularly care if you could have sold your mittens for a little more, you just price them according to your plan.

    Let's compare that to the stock market. You do your homework, buy at lower prices, and try to make a profit by selling at a higher price, right? Yet this strategy seems elusive to many market participants. What happens more often is we hold on until we can't take it anymore, sell at the bottom, then buy when the fear of missing out is greatest.

    One question I've asked myself over the years when making a sell decision is, "which would make me feel worse, selling this stock at a nice gain only to watch it continue up in value, or not selling and watching it turn into a loss"? Neither is an attractive proposition until we realize that there is only one reason to buy a stock - to make money. The good news is you can have it both ways. You can sell some of a stock. The way I see it is if it goes up from there, I'm happy I kept some, but if it goes down, I'm happy I sold some.

    What about the idea of just buying quality stocks and holding on through thick and thin for the long term? Ask the folks who bought Pfizer (NYSE:PFE), Citigroup (NYSE:C), Bank of America (NYSE:BAC), or Cisco (NASDAQ:CSCO) at $50 a share years ago how that's working out. I'm all for holding on for the long term as long as the stock is doing what it's supposed to do - make me money.

    Each investor is different, but think about the past several years and what's happened. Yes, the Fed wants us in stocks and is making them easier to own, but if your inventory of stocks is too high and you were scared to death a few months ago, maybe it's time to ring the cash register - if only a little. After all, isn't that the point of buying stocks - to make money? Buying is so easy a caveman can do it - it's the selling part that separates a good investor from the caveman.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 09 7:22 AM | Link | Comment!
  • Dow to Reach a Gazillion in 2011
    Yes, you read that right. A Gazillion on the Dow. You see, the game at the end of every year is for pundits to make predictions on how the next year will fare in the markets. If you’re right, you get bragging rights that can last for years. If you’re wrong, nobody remembers and no more mention is made of it. Many have made careers on just one obscure call. The good news is that if my prediction is correct, we’ll all be fabulously wealthy. The bad news is there’s a slight chance I could be wrong and that’s what I’d like to address.
    The fact is no one has any idea what will happen next month, let alone all of next year. This is where sound money management comes in. Investing is all about risk management. An old adage of professional traders is to cut losses short and let winners run. Instead, human psychology dictates we add to losers to avoid admitting a mistake and sell winners to reinforce our investing genius by booking a gain. Once we realize that this tendency is tattooed in our DNA, we can then work on a strategy for doing the opposite, and more successful, thing with our investments. 
    Of course, the first step in investing is often made out to be the most difficult, but in reality is the easiest – buy something. Investors use all sorts of methods to find something to buy. A tip from someone on TV, a neighbor, rigorous analysis, and chart reading are but a few. There’s no shortage of investment ideas out there and we can probably identify a few just by going out for a walk. Let me be clear – buying is the easiest part of investing. The most difficult part is the answer to the question, “now what”? 
    It may be helpful to discuss why we want a sell strategy in the first place. After all, there are those that believe we should never sell. The answer is in the math. General Electric (NYSE:GE) topped out at $42.15 in October 2007. It then fell to $5.73. The stock will have to gain 636% to get back to a new high – a daunting task. Even after the huge run the S&P 500 has had, the SPY still needs another 21% to get back to a high. The Financial Spider XLF needs another 138% from here to get back, and so on. These kinds of returns are difficult to achieve, if not impossible. All of which could have been avoided by having a plan in the first place.
    Any buy should be accompanied with a sell strategy. Over the years, I’ve heard and used many strategies for getting out. There doesn’t appear to be a Holy Grail, but the odds significantly increase where an “out” strategy is in place versus having no plan at all. Some folks use something as simple as selling when an investment price moves under a moving average line such as 50 day or 200 day moving average. Some take profits as the investment increases in value by selling a portion at predetermined points. Many use stop-loss orders, but a word of caution; many that had stop orders entered during the “flash crash” were hurt badly. The alternative is to write down the stop price and sell if it gets there. If you take the E-Trade baby’s advice and put your orders in before going away on vacation, you may come back to a much smaller account than you expected. 
    Whatever method you decide to use, I’d suggest writing it down and sticking to it. Investing can be quite emotional at times, especially when something is losing money. A bear market is no time to be making decisions off the cuff. In our office, we find that some of our best trades have been sells and many of those were for a small loss. By sticking to a plan, you may very well be around to fight again another day. 
    So, as we wind down 2010, let’s try to remember two things. One, take the rest of the year to plan a money management strategy and two, if the Dow gets to a gazillion next year, you heard it here first. 

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GE, SPY, XLF
    Dec 22 12:18 PM | Link | Comment!
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