The time approacheth

By Duru

April 7, 2001


I am sending this unsolicited advice to those of you I think of as stock-pickers or potential ones or buyers of mutual funds...

Fear is FINALLY taking hold in the markets and analysts cannot revise their earnings guidance down fast enough for most companies. We are about to embark on what should be one of the more horrific earnings seasons in recent memory. We even have more and more business people admitting that a recovery is not likely until early 2002. I myself am pretty confident that we will not see true recovery in the economy until 2002.

Keeping in mind that the market rallies about 6 months ahead of the anticipation of a recovery, the time "approacheth" for you to take a gander at your favorite stocks and figure out your entry strategies. Mind you...things still look VERY bad out there, and we may not see the market truly bottom until late May or maybe late August. However, if you are trying to predict the absolute bottom, you will surely be wrong and will be very disappointed as you lose 15-20% more in value. If you are waiting for certain signals of a recovery, you will be too late and will feel uncomfortable at paying the "high" prices that will surround you.

So what's an investor to do?!?!

If it helps at all, I can tell you what I am doing. I am now on a "trickle money in" plan that has me placing bets on my favorite picks and mutual funds from now and for the next 6 months. I remain mindful of the remaining downside risk in the market and I am playing certain over-valued stocks short (mainly through put options). Thus, I am hedging, and it works great in a nasty, insane market like this one. I am avoiding like the plague any stocks that remain richly valued. I am only buying stocks whose further downside risk looks small because of low valuations but good future prospects. And I am certainly going after diversification across sectors of the economy...while largely avoiding the communications sector altogether. I am also largely avoiding any sector people think of as great and hot now: energy and drugs...with just a few exceptions on the energy side. I do this because most of the stocks in these sectors are already high-priced for success.

I am keeping a strict policy of maintaining high cash levels for the next 6 months so that I can pounce on any opportunities the market throws my way through further massive sell-offs. I am setting up my buy targets for these potential massive sell-offs. This helps to give me more cushion to survive additional sell-offs.

I am also NOT selling anything I currently own unless the company has truly become garbage and junk.

Finally, I remain realistic, rather the optimistic. It should take the market several years, maybe even 5-10 to fully heal from the pop of this bubble. So, if I buy a company that I am not confident can make it through this timeframe, I am simply trading it in hopes of a short-term profit. Related to this thinking, buying index funds and index stocks that represent bundles of stocks is a very critical part of my thinking.

What worries me the most? A restoking of inflation by the end of the year from all these rate cuts in the face of strong consumer spending and employment, and the economy's high-levels of consumer and corporate debt. Don't worry, I will write another economic missive in the next month or so to give my latest update on my economic perspectives. I will likely wait for the next Fed moves.

Be careful out there!