is to buy a few small stocks with good growth possibilities; you just might find the next Microsoft. Of course, it is far more likely that you will lose most of your money this way. On the other hand, although you cannot achieve extremely high returns with a diversified portfolio, it is the best way to avoid a retirement diet of cat food.’
William Bernstein
Thom Calandra
Thom Calandra is executive vice president of news and editor-in-chief of MarketWatch.com.
He returned to San Francisco in July 2001 after spending a year in London masterminding the successful launch of FT MarketWatch. Thom writes StockWatch, a popular daily column about U.S. investment trends, and has been named one of the 100 most influential financial journalists in the US.
General principles and the growing importance of debt analysis
1. Paint a contrarian streak across your portfolio.
Dare to be different. Everyone can’t be right, as the tech sell-off is teaching us. The minority can’t always be wrong. That doesn’t mean you need to convert your entire wad into cash or gold. But it does mean respecting divergent opinions.
2. Understand dominant trends - they can make or save you money.
Stock markets the world over are experiencing sharper intra-day swings, for example. That’s an age-old trend called volatility - which you can now trade as a security in the form of the CBOE Nasdaq Volatility Index.
3. Don’t trust equity professionals - their research is besmirched.
A backlash is building against stock analysts, who essentially are paid to generate positive research for clients. Less than 10% of the pros’ recommendations are ‘sell’ downgrades. When the ‘sell’ proclamations do come, it’s way too late for most investors. A day of reckoning is ahead for Wall Street and London’s self-serving equity analysts.
4. Trust the debt analysts.
Their financial models for companies are far more rigorous than those of the equity crowd. Start tracking corporate bond prices as barometers of your favorite companies.
5. Don’t take tips.
That market tip from a newsletter or a friend has a 1-in-10 chance of coming good. Instead, be your own tipster. If your assumptions turn out to be wrong, at least you’ve learned a valuable lesson.
6. Be very picky with your mutual funds.
Most funds sport fees that eat into investment performance over multi-year spans. The best rationale for buying into a fund is when you cannot easily ‘own’ its chosen securities - like below-grade corporate bonds.
7. Understand the psychology of investing.
If you’re overly confident about an idea, you may need to re-think your premises. If you’re terrified, you’ve probably done your research and should take the plunge.
8. Got a hunch, bet a hunch.
It’s tried and true. I’ve heard it a hundred times. Never put yourself in a position where you were absolutely correct but didn’t take enough of a bet to make a difference in your life.
9. Don’t short yourself.
We’ve heard it plenty of times and it’s genuine. Most investors sell their winners too soon. Let it ride.
10. Be in the game for the long-term - meaning decades.
This is the hardest one because it takes the courage of your convictions. Since hitting its December 1989 peak of 38,915, Japan’s Nikkei Index has had plenty of 50 percent rallies. But it was still a bear market. If you believed Japanese stocks were suffering for the long-term, and bet against the market, you’d have an annuity going on 12 years. This year’s biggest winners are the professionals who shorted technology stocks in March and April of 2000 and still hold their positions.
Donald Cassidy
Donald Cassidy is a senior analyst with Lipper Inc., a Reuters company, doing research on money flows and closed-end investment funds. He conducts frequent seminars across the U.S.A., can be heard as a guest on radio talk shows, and has been quoted in The Financial Times, The Wall Street Journal, Barron’s, Worth, Kiplinger’s Personal Finance, The New York Times, and Smart Money.
Books
Trading on Volume, McGraw-Hill, 2001
When The Dow Breaks, McGraw-Hill, 1999
It’s When You Sell that Counts, Irwin, 1997
30 Strategies for High Profit Investment Success, Dearborn, 1998
Which stocks to sell, and when
Principle #1: Always force yourself to move toward discomfort!
Investment/trading success cannot come from actions that make you comfortable. Buying or holding when stocks are high (following the crowd because you cannot abide ‘missing the action’) is a comfort-seeking decision. Likewise, fearful selling in a collapsing and low market is moving toward the comfort of cash - again at just the wrong time. Good decisions involve thoughtful analysis including pro-and-con lists. When leaping in/out rapidly, you’ve thought of only one side and are moving to what is apparently obvious. The crowd, a few million in size, doing the same thing thus collectively is creating temporary maximum pressure and so a predictable price-reversal point. Hold and/or buy when it is scariest and sell when the majority celebrate their brilliant conquests. Right, contrarian actions are always lonely and very uncomfortable.
Principle #2: Avoid the losers’ game of owning favorite stocks for the long term (a.k.a. Heresy #1).
Rapid and relentless change (technology, regulation, internationalization, competitors’ ascendancy) makes the odds of extended corporate dominance extremely low. In the five highly prosperous years 1996-2000, of more than 8,000 U.S. stocks, only 20(!) managed to avoid a single down quarter in earnings - a 99.8% failure rate. Companies rarely control the top of the hill for long; those situated there are priced very dearly. Holding them exposes your capital to sudden devastating loss at any sign of faltering momentum.
A tiny number of mutual fund managers compiles consistent above-average records. Their shares are worth holding while individual stocks of current corporate winners are at extreme statistical risk of obeying gravity. Xerox, Polaroid, Memorex, Digital Equipment, Sears, and AT&T are a few examples of the article-of-faith names of a generation ago. In the long term, there is no ‘business as usual’.
Principle #3: Never
