Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, September 7, 2010: Issue #1338

When the Dow bottomed near 6,500 in the thick of last year’s financial crisis, few investors thought it was a good time to buy stocks. Sentiment was overwhelmingly bearish.

So when the market bounced higher, the consensus was that it was a “dead-cat bounce,” a bear-market trap. But it wasn’t.

As the rally gained speed, investors began to think that perhaps the worst of the financial crisis was indeed over and they would buy some stocks on a retracement or when the market tested its lows.

But that didn’t happen either. In fact, the Dow didn’t tire until it crossed 11,000 in May. By then, the market was up over 70% in just 14 months.

That was pretty depressing to investors sitting on the sidelines, earning microscopic yields on their cash. Many were so busy licking their wounds from the sell-off that they made little or no new investments during the rebound.

So what should you do now?

Investing in Stocks: Follow the Earnings

Since the market high four months ago, the Dow has lurched back and forth. But the primary direction has been down. No surprise here. After a rally of this magnitude, a correction is not unusual.

But don’t be like last year’s investors and miss the next rally. Now is a good time to put money to work in high-quality stocks.

In fact, the market is almost as cheap today as it was during the depths of despair in March 2009.

How is that possible when the Dow is more than 3,500 points higher?

Because a stock or index price doesn’t tell you anything about valuation. What matters are earnings and the multiple that the market puts on them.

Three Reasons Why You Should Buy Stocks Today

When measured by profits, the market is almost as cheap today – at 14.9 times trailing earnings and 12.2 times prospective earnings – as it was in March last year.

That’s because earnings are up. Way up. Second quarter profits at U.S. companies hit an all-time record.

A year and a half ago – when investors should have been buying stocks – the media was busy telling them about The Great Recession and how the world was coming apart at the seams.

Today, it provides saturation coverage of home foreclosures, personal bankruptcies and endless political carping. And because we’re blanketed with bad news, few investors see the positives. Consider, for example:

• The Fed has taken interest rates to near zero. That makes it cheaper for consumers and businesses to borrow. It also makes ultra-low-yielding cash a horrible investment.

• Inflation – the great bane of both stock and bond investors – is M.I.A. With the consumer price index showing virtually no increase, businesses don’t have to battle rising costs.

• Around the globe, most stocks are unloved and undervalued. Historically, when the P/E of the S&P 500 has dropped dramatically – as it has since the highs of May – it isn’t long before the market puts on a significant rally.

A Leaner Corporate America Could Drive the Next Rally

I know analysts are saying that earnings won’t be anything great. But they could be wrong – yet again – for two key reasons.

1. Businesses have tightened up their cost structure, laid off unnecessary personnel and refinanced debt at lower levels. Even a modest uptick in sales could deliver surprisingly good bottom-line growth.
2. It’s so cheap for businesses to borrow right now that I expect we’ll see many of them issuing debt to buy back their own shares. This could lead to robust growth in earnings per share, even if growth in gross earnings is less dramatic.

The bottom line?

Investing in Stocks: The Ultimate Contrarian Indicator Right Now

Stocks today are almost as cheap as they were when the Dow hit 6,500 18 months ago. And the macro-economic picture – while always cloudy – is a heck of a lot better now than it was then.

As an investor, look at your options. Cash pays next to nothing. Treasuries yield little more and could easily drop precipitously. Real estate is a non-starter, due to illiquidity, a flood of foreclosures and tough new lending rules.

But stocks offer excellent potential. And if you know anything about contrarian indicators, the fact that so few believe it only confirms it.

Good investing,

Alexander Green

Business/Finance, contrarian investing, Dow 30, Dow Jones Industrial Average, Economics, Equity securities, Finance, Financial economics, Financial markets, fundamental analysis, investment, Market trend, Short, Stock market

Why Burton G. Malkiel is More Right Than Wrong

by Alexander Green, Chief Investment Strategist
Monday, July 12, 2010: Issue #1299

At FreedomFest in Las Vegas last week, I debated Burton G. Malkiel, author of the investment classic A Random Walk Down Wall Street.

Malkiel is one of just a few men alive who has profoundly affected modern investment thinking. And his position is straightforward.

He believes that rational, self-interested investors take all public information and immediately incorporate it into the price of stocks. (This is where we get the term “efficient market.”)

He therefore concludes that market timing and security analysis is foolhardy… that it’s simply not possible to beat the market over the long term… and that you’d be well advised to give up that dream and just own a broad selection of index funds.

I actually agree with much of what Malkiel says. Much… but certainly not all.

Irrational Exuberance

For starters, you can count on investors to be self-interested. But rational? Not always. Just take a look at recent history…

• How rational were investors 10 years ago when they bid Internet and technology stocks to the skies, forgoing sales and earnings for financial metrics like “eyeballs” and “web hits?”
• How rational were investors five years ago when they put themselves deeply in hock to flip land, rental properties, vacation homes and condos because “real estate always goes up?”
• How rational were investors when they dumped stocks en masse 16 months ago – with the Dow at 6,500 – and plunked the proceeds into money market funds just as yields reached an all-time low?

It’s true that most investors behave rationally most of the time.

But it’s certainly not true that all (or even most) investors behave rationally all the time. And that creates opportunity.

Let’s take a look at another flaw in the “random walk” argument…

Get the Insider Advantage

Malkiel mentions that investors incorporate all “public information” into the price of stocks. But how about non-public information?

Most investors don’t have access to non-public information, that’s true. But that doesn’t mean no one has access to it.

Some of the best trades I’ve ever made have resulted from visiting a retailer and asking the manager how regional and national sales are going. Are they supposed to talk about these things? Absolutely not. But do they?

Sometimes they do. Gaining a bit of key information by talking to customers, suppliers, competitors and employees can give you an edge.

And how about company insiders? Officers and directors have access to all manner of material, non-public information. That gives them an enormous advantage over ordinary investors. And that’s also why Uncle Sam requires them to file a Form 4 with the SEC, divulging the details of their buys and sells.

If you watch what the insiders are doing, you won’t access the non-public information that they possess. But you’ll certainly know whether they think their companies’ shares are overvalued or undervalued. And that’s crucial information.

A 10-Year Market-Beating Performance

In short, Malkiel is right that it’s difficult to beat the market. But does that mean it’s futile to try?

Not only have men like Warren Buffett and Peter Lynch put the lie to that line of thinking, so has our own Oxford Club Trading Portfolio. The independent Hulbert Financial Digest confirms that we’ve beaten the market by a wide margin over the past decade.

But while Malkiel is wrong on some crucial points, he is absolutely right on several others. For example…

• He believes it’s a fool’s errand to try to time the market. I agree.
• He insists that an index fund will outperform the vast majority of actively managed funds over time. He’s right. They have and almost certainly will.
• He argues that index funds provide a big performance boost due to cost-efficiency and tax-efficiency. Right again – and this is far more important over the long haul than most investors realize.

In short, I agree with Malkiel far more than I disagree with him. His research – and similar work by John Bogle, William Bernstein and others – has had a profound impact on the development of my own investment philosophy. In fact, our Gone Fishin’ Portfolio is the very embodiment of much of what he espouses.

And Malkiel may be surprised to learn that this portfolio has beaten the S&P 500 – with far less risk than being fully invested in stocks – every year for over a decade.

I’d call that a non-random success.

Good investing,

Alexander Green

Burton G. Malkiel, Burton Malkiel, Business/Finance, Economics, Economists, efficient market hypothesis, Finance, Financial economics, Financial markets, investment, market timing

The Japanese Stock Market: How to Play “The Land of Rising Stocks”

by Alexander Green, Chief Investment Strategist
Monday, June 28, 2010: Issue #1290

The Wall Street Journal reported last week that, for the first time in three years, foreign investors are increasing their holdings in the Japanese stock market.

Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier.

The Journal suggests that a recovery in Japanese corporate earnings is tempting foreign investors back to the country’s equity markets.

But I think there’s more going on here. Perhaps hedge fund managers and other savvy global investors have paged back through their old, dog-eared copies of Dr. Jeremy Siegel’s Stocks for the Long Run.

If so, they may have recognized something significant…

Crunching the Numbers on Japan

Siegel notes that it’s rare for stocks to go 10 years without giving a positive return. Yet we’ve experienced just such a rarity over the last decade.

For stocks to go 20 years without giving a positive return is almost unheard of. And 30 years? That’s rarer than Big Foot, Nessie and the Abominable Snowman combined.

Which brings me back to Japan…

• In 1989, the Nikkei 225 – Japan’s equivalent of the S&P 500 – hit a new all-time high near 40,000. Today, more than 20 years later, it languishes near 10,000 – almost 75% lower.
• In other words, the Nikkei 225 would have to rise 300% just to get back where it was in 1989.

And it wouldn’t surprise me if it did just that by the end of the decade. After all, it’s happened before.

In the 1970s, the U.S. market returned just 0.34% a year – a 3.4% total return for the decade. Yet the Japanese market compounded at 16%, generating a 10-year return of 344%.

What other asset class offers that kind of potential return over the next decade? (Gold bugs, keep your seats.)

Don’t Chase the Bullet Train… Get on Board Now

The groundwork has been laid.

Last August, after more than 50 years, Japan’s opposition party trounced the Liberal Democratic Party in a landslide election.

The new government has promised to shrink the country’s massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses.

Of course, we’re all skeptical of politicians’ promises, but there is evidence that they mean business this time. Twenty years is a long time to leave your economy in a funk.

It’s resulted in Japanese stocks being among the cheapest and most unloved in the world. Virtually no one is enthusiastic about the Tokyo market.

However, great opportunities are born when dirt-cheap valuations marry investor apathy. Plus, Japanese investors are flush with cash. They’ve largely ignored domestic stocks after two decades of sub-par returns. And as that money begins to find its way out of mattresses and back into Japanese equities, the Tokyo market should lift off.

This is doubly true when institutional money managers return to Japan in a serious way. For years, global fund managers have outperformed the world benchmark by simply underweighting Japan. But let the Shinkansen take off without them and they will be forced to dash after it.

So how do you play this?

Two Ways to Ride the Japanese Stock Market

There are dozens of worthwhile Japanese ADRs trading on Nasdaq and the Big Board.

But you can gain exposure to the Japanese stock market through two ETFs…

• iShares MSCI Japan Index (NYSE: EWJ), which invests in large-cap Japanese stocks.
• Wisdom Tree Japan Small-Cap Dividend Fund (NYSE: DFJ), which captures the best of the Japanese small-cap sector.

Or you can spread your bets and own both.

Incidentally, if you remain skeptical about Japanese stocks digging their way out of this 21-year hole, consider again how unlikely it is that Japanese stocks will earn a negative 30-year return.

As Dr. Siegel writes in Stocks For the Long Run:

“In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.”

The story in Japan was similar. By the end of 1945, stock prices stood at about approximately one-third of their level just prior to the Empire’s surrender. Over the next 40 years, the Japanese market returned more than 20 times its American counterpart.

If 200 years of world stock market history is any guide, the current decade should be another barnburner for Japan.

Good investing,

Alexander Green

asset allocation, Business/Finance, Economics, Finance, Financial economics, Financial markets, Financial services, Funds, investment, Japan, jeremy siegel, Stock, Stock market, Stocks for the Long Run

Treasury Funds: Get These Time Bombs Out of Your Portfolio

by Alexander Green, Chief Investment Strategist
Monday, June 21, 2010: Issue #1285

Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.

Are you one of them? If so, there’s still time to defuse it.

A few weeks ago, I wrote an Investment U column entitled, “Why the Safest Investment is Now One of the Riskiest.”

I noted that investors – frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) – have poured money into longer-term Treasury funds.

Their thinking is simple. Too simple: “These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What’s to worry about?”

Plenty…

Aren’t Treasury Funds Free of Risk?

Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren’t free of interest-rate risk.

When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn’t currently a problem and that long-term rates remain near historic lows.

Don’t be fooled. There is a monster on the horizon – and he makes Beowulf’s Grindel look like Barney.

• Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.
• Two years ago, it was 38% of GDP. Today, it’s 59% of GDP. And by the Congressional Budget Office’s own estimates, it’s going much higher still.

This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further – especially if some emergency action is needed – short-term rates are already at zero.

Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.

The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.

Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true…

The Triple Threat to Treasury Funds

Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people’s bond portfolios.

Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers’ recommendation.

Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds’ yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction.

In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy…

• The bonds in the fund will drop when interest rates rise.
• The drop will be compounded by the fact that the portfolio is leveraged.
• The fund could plunge to a deep discount to its net asset value, too.

Become a Bomb Disposal Expert… On Your Portfolio

Not pretty. So what to do?

• First, check to see what percentage of your portfolio is in long-term bonds. It shouldn’t be more than 10% as a maximum (as protection against a deflationary scenario).
• Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.

Then look at the number beside the fund’s “effective leverage.” Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That’s how these funds are able to yield more than the bonds they invest in, even after expenses.)

In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.

Don’t take these words lightly. There is danger on the horizon. But if you act now, there’s still time to get that ticking time bomb out of your portfolio.

Good investing,

Alexander Green

Bonds, Business/Finance, Economics, Finance, Financial economics, Funds, Global Treasury Funds Plc - Sterling Fund, Interest, Interest rate, investment, Money fund, Portfolio, Subprime mortgage crisis, United States Treasury security

Do Trailing Stops Really Work?

by Alexander Green, Chief Investment Strategist
Monday, June 14, 2010: Issue #1280

While I was in Baltimore last week, one of our Oxford Club researchers, Matt Carr, told me over lunch that one of the most controversial aspects of our investment policy is trailing stops.

But they shouldn’t be.

If you don’t have a premeditated sell discipline – and the vast majority of investors don’t – you’re flying by the seat of your pants. And that rarely leads to superior investment performance.

But do trailing stops really work?

Survey Says: Use Trailing Stops

In a word: Yes. Trailing stops protect your profits and your trading capital. And there’s much more than just anecdotal evidence.

In a study published in The Journal of Portfolio Management, Christophe Faugere, Hany A. Shawky and David M. Smith – finance professors at the State University of New York at Albany – researched the performance of money managers who oversee pension funds, endowments and high-net-worth accounts.

Because most institutions work under strict investment guidelines, these academics were able to analyze performance based on differing approaches to selling stocks.

The result? Institutional managers who fared best were those with restrictive rules that didn’t allow much leeway for holding stocks for emotional reasons. Managers who relied on “flexible” sell strategies did far worse.

Count me as unsurprised. Institutional money managers are just as prone to rationalizing as individual investors when they make a mistake. (Hence the old Wall Street chestnut, “What does a broker call a trade gone wrong? A long-term investment.”)

Trailing Stops: Providing Protection… Securing Profits

The culprit is almost always pride, ego, or emotion. Without any kind of sell strategy, emotions come into play. And emotions are almost always wrong.

But by adhering to a disciplined trailing stop strategy, our Oxford Club investment system mows down emotion-driven trading errors like a field full of dandelions.

It cures greed. Eliminates fear. And does away with wishful thinking – as in, “I hope this stock turns around and starts going the right way.”

Of course, trailing stops aren’t the only sell discipline out there. But they’re one of the easiest to implement. They serve two purposes…

• They make sure we never let a small loss become an unacceptable loss.
• They keep us from selling stocks while they’re still trending up.

According to the independent Hulbert Financial Digest, over the past 10 years our Oxford Club portfolios have beaten the S&P 500 by a wide margin. Part of our success has come from diligent research and careful stock selection. But part has also come from cutting our losses and letting our profits run.

Maneuver Past the Market Makers With TradeStops.com

The one knock against using trailing stops is that unscrupulous market makers will sometimes take out your stop order right before a stock takes off.

But Richard Smith, President and Founder of TradeStops.com – and a PhD in mathematics – has a service that provides an ingenious solution.

If you visit www.tradestops.com, you can enter the stocks you own, the price you paid and the percentage trailing stop you want to use. There are several valuable benefits…

• If any of your stocks close beneath your selected stop, TradeStops sends a message – to your cell phone, e-mail, or account page – alerting you.
• Some brokerage firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops information never expires and even offers a 30-day risk-free trial.
• You can track up to 50 stocks at a time. (And whenever you stop out of one, you can replace it with another.)
• TradeStops is easy to use. It’s specifically designed for technophobes.
• It’s reasonably priced. Ordinarily, the cost is $7.95 a month or $79.50 a year. (If you’re an Oxford Club member, you get a special rate of $39.95 a year.) There are additional services available for dedicated short-term traders who want even more.
• It’s important to note that TradeStops notifies you of stops, not your broker. And it doesn’t enter sell orders. But the key is to make sure you have an acknowledged point where you’d be willing to sell any individual stock.

Trailing stops don’t just offer to cut your losses and protect your profits. They guarantee it.

Good investing,

Alexander Green

Editor’s Note: Much of what it takes to become a successful investor comes down to knowing the best times to buy and sell. Some investors rely on technical analysis; others pinpoint fundamentals. But regardless, trailing stops are essential to protect yourself from a volatile, unforgiving market.

Adhering to a disciplined trailing stop policy is just one of the core wealth-building strategies that has made The Oxford Club one of the most of the most successful investment publishers. In fact, over the past decade, the independent Hulbert Financial Digest has ranked The Oxford Club’s Communiqué as one of the top five investment newsletters.

So if you want to take all the guesswork out of the buying/selling process and let the Oxford Club analysts do the work for you, then consider becoming a member. For $79, you’ll receive an entire year’s worth of stock recommendations, with instructions on when to buy and when to sell for maximum profits. (You’ll also be eligible for the special TradeStops rate mentioned above, too). Take a look at the full list of Oxford Club membership benefits.

Business/Finance, Finance, Financial economics, Financial services, Funds, investment, Order, Oxford Club, Stock market

Gold: The Ultimate Salvation Investment

by Alexander Green, Chief Investment Strategist
Thursday, May 27, 2010: Issue #1269

There are a lot of reasons to buy gold.

Besides being lovely to behold, gold has an attractive combination of chemical and physical properties. It’s virtually immune to the effects of air, water and oxygen. It will not tarnish, rust, or corrode. And it is completely recyclable.

As Time magazine pointed out last week: “It is an amazing metal. It can be pounded into a sheet so thin that light passes through it, yet the sheet won’t crack. Gold can be stretched into wires thinner than a human hair, yet those wires will conduct electricity beautifully. Implant it in a human body in the form of a medical device, and it will resist the growth of bacteria. Gold is beautiful, pliable, ductile, strong. The Stone Age, Bronze Age, and Iron Age all came and went, but gold is forever.”

In short, gold is used in everything from wedding bands, to fillings, to optic lasers – and more…

• Thousands of mechanical devices require gold to ensure reliable performance over long periods.
• Billions of gold-coated electrical connectors are used throughout the computer, telecommunications and home appliance industries.
• Weather and communications satellites depend on gold-plated shields for protection from solar heat.
• Even the automobile industry depends on gold-coated contacts for sensors that activate air bag systems.

The price of “the barbarous relic” recently hit new all-time highs. But that has little to do with gold’s fabulous properties.

Gold is also the color of anxiety. And investors are fearful right now…

Why You Don’t Want to See $5,000 Gold

Like all sensible investors, I own gold and gold shares. But I truly do not want to see the metal soar to $5,000 as some are predicting. Why?

Because, in all likelihood, that will be bad news indeed for the economy and our standard of living, not to mention the rest of your investment portfolio.

By and large we are living in disinflationary times. Yes, the price of food and oil (and hence gas at the pump) have climbed over the past few years. But technology and deregulation have reduced the prices of many other things…

• Look at the computing power you get for the money today. (And look how those computers lower costs for business.)
• Deregulation has brought down the price of airline tickets 25% – in constant dollars – over the past 15 years.
• When I went to college out of state many years ago, I didn’t call home that often for one simple reason: I couldn’t afford it. But the break-up of Ma Bell has reduced the cost of long-distance calls to a pittance.

There is little threat of sharply higher inflation in the near term. But the longer term is a different story. And as the mess in Greece has proven, poor decision-making can cause long-term problems to suddenly show up on your doorstep.

Gold: Your No. 1 Economic Insurance Policy

Right now, gold is rising due to a lack of confidence in government and the reality that government bailouts don’t necessarily fix problems. Sometimes, they just kick the can down the road awhile.

All the European Union has done, for instance, is take the risk of owning Greek sovereign debt away from banks and other creditors and passed it on to taxpayers. Politicians often believe they can do magical things with other people’s money.

• We all know what happens when an individual exercises long-term irresponsibility in his financial affairs: personal bankruptcy.
• We’ve all seen what happens when a highly leveraged business can no longer service its debt: corporate bankruptcy.
• And in the years just ahead, Westerners may very well see what massive fiscal irresponsibility does to national governments, their debt ratings and their currencies.

No one can say exactly how and when this will play out. But there is a distinct possibility that gold will be your salvation investment.

That means – just like property and casualty insurance – that gold is something you really can’t afford not to own.

Good investing,

Alexander Green

Economics, Finance, gold, investment, Matter, Methods of investing in gold

Why Value Investing and Trading Don’t Mix

by Alexander Green, Chief Investment Strategist
Tuesday, May 18, 2010: Issue #1262

Last week, I spoke at a special conference on value investing at the beautiful Driskill Hotel in Austin, TX.

Virtually every stock market investor talks about “recognizing value.” I’ve found that interest in value investing ebbs and flows depending on the market. No one wants to overpay for a stock, or keep holding one if the price gets nutty.

And that leads to a basic question: How do you find value in the stock market?

It depends whom you ask…

The Fathers of Value Investing

The fathers of value investing, of course, were Ben Graham and David Dodd, two teachers at Columbia Business School who wrote the investment classic, Security Analysis.

They argued that value investing is about buying companies that are selling below their intrinsic value.

How do you determine that? According to Graham & Dodd, that means buying companies that…

• Trade at significant discounts to book value.
• Have high dividend yields.
• Have low price-to-earnings (P/E) ratios.

Buying this way is not only supposed to lead to higher returns. It’s also designed to provide a significant “margin of safety.” The idea is that if you buy a security right, your downside is limited.

A number of academic studies have shown that if you follow the principles of Graham and Dodd, you should do very well over the long term.

But there are potential problems with this approach…

Don’t Let a Cheap Stock Suck You In

First of all, stocks are rarely as cheap as they were back in the 1930s when Security Analysis was written. Or even as cheap as they were back in 1982 when the typical stock sold for less than book value and eight times earnings and yielded more than 6%.

And if you sat out the last 28 years out because stocks were too expensive, you missed an awful lot of opportunities.

When you do find a stock that does meets Graham and Dodd’s stringent requirements, you also need to be patient. Why? Because companies that are very cheap are out of favor for a reason. Sales are often flat or down. Earnings are weak. Profit margins are low.

You can’t succeed just by buying a company that’s cheap. (It can always become cheaper.) You have to buy a company that will someday – and perhaps not too far off – be dear to others. Otherwise, when will you take profits?

So maybe Graham and Dodd’s message needs modifying. (Warren Buffett, Graham’s most famous student, has certainly found ways to modify it.)

The Problem With Defining “Value”

I’ve found that the definition of value and the tools to achieve a margin of safety are flexible. And The Oxford Club has found successful ways to bend them.

To my mind, any stock that goes from $10 to $50 was a “value” at $10. I don’t care what the P/E or price-to-book was at the time. With the luxury of hindsight, it was clearly a bargain. Why quibble?

But die-hard value investors will argue that if the stock was “overvalued” at $10, it’s only more grossly so at $50 – and therefore, you’re at great risk holding it.

I disagree. If you use our customary trailing stops, your upside is unlimited and your profits fully protected. As long as a stock keeps trending up, we’re content to hold on – no matter what the valuation. When the stock eventually turns, as all do eventually, our stops will keep the profits from slipping through our fingers.

As for value analysis, quite frankly, we don’t spend a lot of time poring over P/Es and book values. We’re just interested in identifying companies that are likely to show dramatic, better-than-expected growth in the quarters ahead. These stocks tend to be more expensive than average, just as companies that will show little or no growth tend to be cheaper than average.

This method works, too…

Do You Have the Key Traits to Profit From This Approach?

The independent Hulbert Financial Digest has ranked our Communiqué among the top five newsletters in the United States for 10-year performance.

And our approach has one significant advantage over value investing. It works quickly.

• Growth stocks tend to sprint.
• Profits often come sooner rather than later.

As someone who spent 16 years as a money manager, I know that most investors don’t have the patience to be good value investors. (John Templeton, for instance, held companies in his flagship Templeton Growth Fund an average of 7.5 years.)

Yet clients will start to grouse if a stock doesn’t move for six months. They call it “dead money” and start itching to move it elsewhere.

I understand this instinct. But deep value investing and rapid trading don’t mix.

If you’re a patient, truly long-term oriented investor, value investing can work wonders. If you’re not, you’ll be better off searching for companies that are set to smash estimates.

When a stock doubles or triples – or rises 50-fold or more like Apple (Nasdaq: AAPL) and Amazon (Nasdaq: AMZN) – don’t worry, other investors will concede it was a “value” before.

Good investing,

Alexander Green

P.S. If it’s value you’re looking for, look no further than The Oxford Club. For just $79, you’ll receive a whole year’s worth of our experts’ top stock recommendations, investment ideas and strategies that you can use to amass profits and build wealth.

You’ll see exactly why The Hulbert Financial Digest has ranked The Communiqué newsletter in the top five in the United States over the past 10 years and have a portfolio of your own that can weather the market’s storms, but thrive, too.

Take the guesswork out of the investing process and let some of the best, most successful analysts do the work for you. Sign up (risk-free) to The Oxford Club today.

Business/Finance, David Dodd, Equity securities, Finance, Financial economics, fundamental analysis, investment, margin of safety, P/E ratio, Stock market, Stock valuation, Valuation, Value investing

Timing the Market: If Only You Knew What Mark Hulbert Knows…

by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246

For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.

Now the evidence is even more definitive…

Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.

But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…

Trying to Time the Market? Don’t Do It!

The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”

Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.

This led to an interesting discovery…

• The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
• The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
• Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.

To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.

Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)

That’s not the best part, however…

An Impressive Performance… For Serious Contrarians Only

What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.

I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.

Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)

As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”

The Oxford Club doesn’t. And it shows in our results…

A Top Five Ranking for 10 Years Running

Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”

It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.

That allows us to give entirely honest answers to the two most commonly asked questions:

• “How has your investment advice worked out?” – Beautifully.
• “What do you think the market will do next?” – We haven’t the foggiest notion.

Good investing,

Alexander Green

Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.

The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.

For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.

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