Wednesday, November 09, 2005


Successful investors tend to lean against the crowd. They buy real estate during recessions. They raise cash when stocks are hot and they buy stocks when consumer sentiment is low.

Successful investors trade relatively infrequently. Those who buy and hold do better than those who trade rapidly. However, those who manage accounts smartly do much better than those who buy and hold.

I like the gardening analogy. One should plant stocks when conditions are good. One should weed the garden and one should harvest the garden. Weeding the garden means that one should sell the losers and hold onto the winners. Many investors simply cannot seem to let a winner run long enough.

Tomorrow I have decisions to make in a couple of aggressive accounts that are sitting on net new highs. These accounts are aggressive accounts; they trade on margin accounts. When margin accounts make net new highs, they have buying power. The temptation is to buy more and more as stocks go up and this is consistent with my belief in tending to average winners up and to seldom average losers down.

However, margin accounts are special. They take extra skill to avoid big losses. The current rally is nice but it is already over bought. It is not likely to be the "big breakout". On the other hand, specialist short selling has dropped precipitously, suggesting there is more upside.

The tough thing is that I believe in holding stocks for an average of at least 4 years and I believe that those who buy the right sectors today and hold for four years will do very well. I don't believe that anyone can call the markets short term moves. Intermediate term and long term moves are much easier (I'll give you 1,000 to 1 odd on the market being up over the next 20 years but no odds on if it will be up or down a month from now).

A considerable majority of traders currently believe in the year end rally. The majority is typically wrong. As an intermediate term RAGING BULL, it is tough for me to bet on a market decline. However, in these leveraged accounts, I must be extra cautious. I have made no final decision yet but it is very possible that I will use some of the buying power in these accounts to sell short; maybe as early as tommorrow. Before making the final decision, I will look at the market "internal signals" and I may wait for a major positive event. For example, if the congress were to pass a budget bill and the market were to go up strong on the news, I will probably sell into the rally.

Again, I am a RAGING BULL. Stock earnings yields are cheap relative to real estate rents and bond coupons. Diversions of this nature can last quite a while and, in this case, real estate reached a very extended price back around March of this year. Stocks have been cheap relative to bonds for two years or more. I suggest that even conservative investors should over weight big cap quality steady earning stocks in their portfolios. Ten year bonds are certainly more attractive today at 4.6 than they were just a few weeks ago but still should be avoided by investors. Traders may buy bonds for a quick pop here but the risk reward is not great. The bottom line remains that good quality steady earning companies will return substantial returns over the next 4 years. Don't miss the boat playing my projected short term pull back!

Playing short term moves is always dicey. In this case, note that I am not saying I will sell short tommorrow. Timing is key to short term trading and letting the move come close to completion requires great patience. I am not saying that I am great at playing short moves. Again, I have never met a great short term trader. I have met a lot of folks who make it sound like they consistently win. By the same token, I have met a lot of folks who talk as if they win money on every trip they make to Las Vegas. Don't believe it. The odds of winning in stocks are extremely good in the intermediate term and overwhelmingly good in the long term. The odds of winning on short term trades, after commission expense are not much better than 50/50 for experienced traders.