Holding On In A Turkey Of A Market

by: Joseph L. Shaefer

I wouldn't ordinarily share with our SA readers the real-time updates we provide for those clients who have chosen to have us manage their portfolios. But given what a horrible pre-Thanksgiving week this has been, I thought some readers might like to step back, view the big picture and step aside, rather than rush to sell on down days. Here is our note to clients, as of November 23.

To Stanford Wealth Management Clients,

So far November has been a bust for the stock market. It isn't that there aren't good signs out there: in the USA, new building permits jumped 11% last month, employment is slowly rising, inventories are so low that more manufacturing is virtually locked in, loans for business and homes are cheap and likely to remain that way for many months at least, and companies have once more gotten lean and mean and able to bring more dollars to the bottom line.

But all this is trumped by Europe's failure to learn the lessons of the Soviet Union's demise -- socialism doesn't work. Anywhere. Ever. "From each according to his ability" in the absence of economic reward leads to diminished ability and "to each according to his need" in the absence of no ill consequence for malingering creates greater wants in lieu of genuine need. Hence the malaise created by an education until age 25, followed by 30 years of 37-40 hour work weeks, months of paternity, counseling, family crisis and sick leave, 4-6 weeks of mandatory vacation, etc., before "retiring" at 55. 30 years of work in a typical 85-year life span doesn't pay the nation’s bills.

Add to this the transitory issues like the failure of 6 partisan politicians on the Super (Stupor?) Committee to agree on essential spending cuts and/or tax increases, and allowing Wall Street to destroy the short-term markets with algorithmic day-trading and you have the recipe for a day-to-day headline-driven frenzy of 250 points up, 300 points down, 300 up, etc.

We try to hew to Warren Buffett's best advice when asked how to become wealthy in the markets: "Be fearful when others are greedy and greedy when others are fearful."

This is clearly a time when others are fearful. For almost all clients, if you look at your portfolios, you'll see a sort of pyramid. At its foundation, most of your funds are in bonds and preferred stocks, with one very day-to-day-volatile preferred, Molycorp, the largest of those positions. These bonds and preferreds will fall on days of panic-selling, too!! When people are selling the kitchen sink, even these will decline. But they aren't going out of business and they will continue to pay their interest and dividends, giving them an investment floor.

The mid-level of the pyramid will be ETFs on the broad markets and the sectors we view most favorably. They, too, will be down on panic-selling days, but they have superb liquidity and rebound potential on the day the market rallies (usually the day after most everyone has sold in panic -- when there are no sellers left, the buyers find fewer shares for sale and power the market back up all out of proportion to their numbers.)

The tip of the pyramid is reserved for those common stocks that we believe will out-perform the market over the coming months and years.

I know it's tough to keep faith in the market's ability to deliver outsized returns when you see six large down days in a row. The alternative is selling at a bottom, then buying at the top when all the news is once again all rosy.

I can only refer you to our Investor's Edge model portfolios where we can stay the course without panic, buy near bottoms, and sell near tops. In that portfolio, no one ever needs to remove money because of fear of the market, family emergency, etc. (Of course, we never get to add anything, either, so it behooves us to Not – Lose – Money…) We have a 10% compound return for the past 12 years, during which time the market has gone nowhere. I believe, painful as it is to watch the current market, this too shall pass. it always does. Investing for the long term works.

Happy Thanksgiving to all at Seeking Alpha.

Disclosure: We are long MCP-PA, but that is merely one of our positions. We may place tighter stops, but we aren't selling a thing into the panic today.

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.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. 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.