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My Plan For Healthy Stock Returns For The Next Few Years

15 October 2008 3 Comments

With the stock market down considerably, it is definitely a time to start thinking about investing in stocks if you haven’t yet become an investor. That’s not to say we’ve hit a bottom, because the more I look at it, I don’t think we have hit a bottom. Before investing, I’d recommend determining your strategy.

If you are a new investor, I’d definitely consider entering some positions to hold for the long term. I think we are near a bottom (definitely closer to a bottom than a top), but I do not expect huge returns for the overall market over the next few years. My opinion is that we are in for a few years of weak economic activity which will definitely prevent large broad market gains.

If you are a seasoned investor, you may consider some more advanced strategies. To beat my estimated weak broad market returns, you will have to either pick individual outperforming stocks or do some swing trading. By swing trading, I mean taking advantage of some momentum moves in the overall market or an individual stock. For example, after the hideous week last week, many anticipated a large bounce to start this week, you could have entered and exited a position on Monday for a nice gain. Likewise, after the 936 increase in the Dow, my thoughts were that we’d see a little pull back from such a large bounce. These are just examples.

My strategy is to first of all not be afraid to hold cash. I want to hold cash until I see truly a great buy. Investing just because you have the money is not a good idea especially when you want every point of potential return possible.  When you see a truly great buy in a long term position, take advantage of it.  Best opportunity I have seen recently is when Philip Morris Int’l (PM) hit $33 last friday.  If you took advantage of that, I’m impressed.  Note: I added to my PM position today at $42/share.

Another key aspect of my strategy is to not get emotionally attached to a specific stock.  I have to admit, Chesapeake Energy (CHK) was one of these for me recently.  I rode the stock down far too long and after hearing the CEO was forced to sell 33 million shares, I decided enough is enough.  I sold the majority of my position into the rally the other day.  Don’t get attached to a stock.  When it is a losing position, bail on it.  For the record, McClendon being forced to sell his shares wasn’t the nail in the coffin.  That plus the company being out of cash in this credit stressed environment caused my action.

Lastly, to make money in a down market or a sideways market, you may need to bet against a stock, sector or the market.  If shorting individual stocks is a little too complicated for you, consider buying short ETFs such as SDS, SKF, etc.  My best positions in recent weeks have been my short position in Amazon and my Oil & Gas short ETF (DUG).

3 Comments »

  • john said:

    If you want to track individual stock sectors you may use Stock Sector Monitor http://www.ashkon.com/ptt.html

  • torbjornrive said:

    good work on the DUG. though when shall one DIG?

  • kevin duffey said:

    Good question. Where do you predict the bottom in energy is? Meanwhile oil is below $70 for the first time in a while.