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Sticking To An Investment Strategy Through Volatility

16 June 2009 No Comment

The last few months in the stock market have had some serious ups and downs.  In early March, people were disgusted with the market, doing everything they could to get out.  Today, in June, we’re over 30%+ off the lows and by the way people speak, you’d think happy days were here again!  My question is are you trading the market based on your strategy or is the market dictating your strategy?

Here are the basic tenants of my investing strategy that I have been sticking to for the last year and for the foreseeable future.

  • The American household is in a terrible financial position with little to no equity in their homes, credit card balances – an uncertain job market compounds the problems.  This does not bode well for an economy based on 70% consumption.  Consumption will not recover to levels in recent years for a very long time – therefore, economic growth will be stagnant for some time.  Sectors such as retail, home builders, and those tied tightly to the consumer will especially struggle.
  • Any economic recovery or “growth” will be mostly tied to monetary inflation.  If we print enough money and inject it into the economy, home prices have to stabilize and asset values may begin to rise; but, the important thing to ask is: is wealth or prosperity increasing or just nominal values?  My guess is that we will get inflation disguised as growth or recovery.  This means there will not be any growth or recovery without a huge increase in prices, especially commodity prices.  I’m very bullish on commodities such as gold, energy, agriculture.
  • I don’t attempt to know anything about the financial sector because frankly, not many people do.  Can you make money in financials?  Sure you can.  But you can also make money playing roulette.  Your odds are probably better with roulette.
  • Any long term positions I hold in actual companies better have a healthy dividend.  I want to be paid to own this stock for the long term.  Companies that have demonstrated dividend increases are where you want to be.  Any non-dividend stock position is more of a trade where the holding period may be a day or six months.
So, there is my basic investing strategy.  Let’s look how this has played out back in March when the market was much lower, and recently with the market up significantly.
The March Lows
I honestly didn’t do a whole lot of trading back in March.  I did cover some shorts that had made me some nice gains such as Simon Property Group (SPG) and Macy’s (M) (commercial real estate and a retailer).  These stocks really tanked hard and fast, so it made since to take some profits.  The timing was very good since as the market moved upward from the lows, these stocks took off higher.
Back in March, I continued to buy gold related stocks or ETFs such as AUY and GDX as well as the silver ETF (SLV).
My Recent Trades (May – June)
Over the last few weeks, the market is up over 30% from the March lows.  Sticking with my strategy, I have decided to take advantage of high share prices and heavily short the following stocks:
  • Macy’s (M)
  • Simon Property Group (SPG)
  • Vornado Realty (VNO)
  • Brunswick (BC)
  • Capital One (COF)
  • Williams-Sonoma (WSM)
The trend is pretty clear and it’s fairly obvious that it corresponds to my strategy above.  Macy’s and Williams-Sonoma are higher end retailers that I think will struggle in a down economy.  Brunswick manufacturers boats among other things.  Boat sales are one of the first things to go with a fall in consumption.  Commercial real estate impacted by struggling retailers and businesses will also deteriorate I believe.  Capital One is experiencing higher default rates from their consumers.  A trend that I think will continue.
As I mentioned in my strategy, I don’t think there will be any recovery without a surge in commodities.  The recent stock market rally definitely supports this claim.  Gold stocks skyrocketed and oil surged past $70 a barrel (notice the higher prices at the pump?).  I took advantage of this fast move upward by unloading about 50% of my positions from GDX, GLD, AUY, SLV and a few others for some very nice gains ranging from 20% to 90%.  I fully intend to buy back into these positions on dips.  In fact, I bought some AUY yesterday close to 20% lower from where I sold the shares the other day.  For the record, I think gold is going way higher and I think there is potential to hit huge gains in these stocks.  I’m definitely a longer term holder, but I’m also willing to trade them with large movements in both directions.
You don’t have to have my strategy, but I hope you have A strategy.  Stick to your strategy no matter what people on TV are telling you.  Be patient and don’t ever think you’re about to miss a run in one way or another.  You almost always have a chance to get in on a position later.

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