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Fear And Opportunity

|Includes: Bank of America Corporation (BAC), BWP, DUK, KMP, MON
With the July and August volatility in the market, we've seen once again how potentially difficult investing can be. There was some talk in the media as to whether we were headed for a 2008-2009 style meltdown, as the daily headlines screamed about the US debt crisis, the eurozone difficulties, and the final catalyst, the slowing global economy. What the media was talking about also was fear. Professional traders don't often talk about fear, except as it relates to other investors, but some were responding to the heightened sense of risk and the inherent fear of their positions losing value, by selling, large scale selling.

Fear And Loathing

What some of the professional traders and investors did and said during the latest round of market volatility may be of interest to retail investors. Many dedicated individual investors watch the professionals, what they buy and sell, and listen for any potentially insightful clues about what the market may do. Hedge fund manager Simon Baker, whose Baker Avenue Asset Management uses a combination of the VIX, the volatility indicator, along with studying the moving averages, a momentum indicator for equities, to develop a risk/reward profile which forecasts whether to be in equities or cash.

Baker wrote that when the VIX spiked back in June, that along with negative momentum from his technical indicators was a warning of things to come later in the summer. Baker's response? He sold everything and went to all cash. Baker is also a relentless critic of buy and hold, labeling it "dangerous." Then again, presidential candidate Ron Paul has held gold and silver stocks for over a decade, trouncing the market.

The Ron Paul portfolio      
Company Year to date 5-year return 10-year return
Goldcorp (NYSE:GG) 13.3% 73% 875%
Barrick Gold (NYSE:ABX) -4.6% 53% 201%
Newmont Mining (NYSE:NEM) 1.6% 19% 187%
AgniCo Eagle Mines (NYSE:AEM) -9.9% 89% 620%
AngloGold Ashanti (NYSE:AU) -9.1% -5% 150%
IAMGold (NYSE:IAG) 16.6% 94% 441%
Pan American Silver (NASDAQ:PAAS) -21.1% 51% 791%
Silver Wheaton (SLW) 0.6% 288% 1,129%
Standard & Poor’s 500 ($INX) -4.5% -7% 1%

Ron Paul's Portfolio from a Seeking Alpha/MSN Money article by Zvi Bar

Then there is controversial Dick Bove, the banking analyst of Rochedale securities. Bove has long been known for his quick changes on positions, and that's putting it mildly. In an August 24th interview with CNBC, Bove famously changed his mind on bank stocks. Bove sees value in the banks now. One month earlier, Bove had urged the sale of bank stocks. While Bank of America (NYSE: BAC) has been a stock whose worth has been hotly debated recently, Bove came down on the side of the bank's value, concluding it's been oversold. With BAC's $140 billion in cash Bove felt the market was mispricing the stock, in effect valuing it at below liquidation value.

BAC's 3-Month Chart Compared to The S&P 500

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Whom Should Individual Investors Follow?

It's one thing to read of Simon Baker's adept market exit, or to stay abreast of Dick Bove's ever-changing bank calls, or even to peruse the quarterly 13-F filings of the hedge funds to see what John Paulson's doing or Warren Buffett's Berkshire Hathaway, or even to follow the work of less well known though successful traders or money managers. It's another to attempt to try to mimic their performance or even their methodology. There is a certain nimbleness and confidence that the professionals act with, due to access to information and the dedication of most if not all their working time to doing what they do.

What's also interesting is that whether the professionals or big name money managers are traders or investors, they often disagree with each other. Think of the recent throwdown about BAC, with Bove and Buffett, via his recent $5 billion preferred stock stake, on one side, yet CNBC's Fast Money traders largely unimpressed with the bank's recent business and stock performance. Stephen Weiss said BAC's sale of its stake in China Construction Bank and even Buffett's investment were moves borne of desperation.

Other Ways

Some might feel the caveat from watching professional investors should be "don't necessarily try this at home," meaning leave the market to the pros. And one hears the anecdotal tales every time the market drops of individuals abandoning the markets, some for good. But individual investors are capable of trading and investing on their own, they need not permanently retreat as a generation did after the crash of '29, and as another generation has been edging away since the painful crisis of 2008-2009.

Investing isn't easy, but individuals need to focus on their own financial situation, not Baker's or Paulson's or any other professional, and either learn or develop their own investing approach and stay disciplined enough to follow either their own method or a professional's. It won't work switching from Baker's highly developed hedging methods one week to Buffett's fundamental approach the next, then to something else yet again. Fear and insecurity from getting rattled in the markets can understandably do this.

Opportunities Still

It's certainly prudent to be vigilant about the markets, perhaps have even a healthy fear and an understanding of risk, but it doesn't pay to become paralyzed into inaction or to abandon investing. There are plenty of stocks that continued through the summer's volatility to pay generous dividends. Some very dull names like utility Duke Energy (NYSE: DUK) which has a current yield of 5.4% is a relatively low risk investment. There are some big name stocks, such as Monsanto (NYSE: MON), while not a great dividend payer, saw its stock price hold up fairly well, and even after it dipped, it's returning. Apparently investors find value and growth there, two themes forgotten amid the market fear. There are also higher-yielding oil pipeline stocks such as Boardwalk Pipeline (NYSE: BWP), Kinder Morgan Energy Partners (NYSE: KMP), and others, which continued to throw off high yields through the summer crisis, while their stock prices are rebounding already.

Monsanto 3 month stock price chart

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Yes, investors should pay attention and take seriously the market's volatility, as well its dangers. But by going beyond fear and embracing opportunity, individual investors can still make their market involvement more profitable.

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