6 Mistakes You Must Avoid In 2009

By Andrew Mickey on January 30, 2009 More Posts By Andrew Mickey Author's Website “Our first priority is managing risk.” Seven months ago I had a chance to attend a presentation by investment manager David Burrows. You’re not going to find his name in the Wall Street Journal or a quote in a Bloomberg news article, but that doesn’t mean he’s not worth listening to. He is. Burrows is the chief investment strategist of Barometer Capital, a mid-sized asset management company with about $900 million under management. It’s not the amount of money Burrows manages that’s important, it’s how he manages it. And if we pay close attention, we can learn a lot (or at least get a timely reminder). I first came across Burrows early last summer. The markets were down and headed much lower. I was looking for ideas from who has successfully made it through past bear markets. As you can see in the chart below, Burrows has been one of the most consistent managers over the past 10 years (he’s the green bar). His strategy moves up with the markets, but not down with the markets. So naturally, he’d have some ideas on how to make it through the coming storm. To be completely straight with you, when I first saw his presentation last summer I was a little disappointed. Burrows explained his strategy, his top-down and bottom-up disciplines, etc. - which are effective. But when it came time to talk about where he saw “pockets of strength” at the time, I was a bit worried. Burrows said he was deep into agriculture and energy. He said he was about 45% energy, 8% agriculture, and about 25% cash. This was June of 2008 and these sectors were quickly running out of gas. Since then, energy and agriculture have been two of the worst performing sectors around. I figured Burrows might be licking his wounds, but he should be good for an idea or two. So it was probably worth an hour or so to hear what he had to say (free coffee and top-notch pastries sealed the deal). But he wasn’t down much at all. His funds held up pretty well. He did so relatively well, Barometer’s “High Income Portfolio” was ranked #6 out of 555 in that category in 2008. Here’s the thing though. He’s not a guru who knew the financial situation was going create the carnage we saw last fall. He’s not a chart-watching day trading hedge fund manager who relies on a mystical “black box” trading system to run everything. His secret is much, much simpler… He doesn’t make the common mistakes most investors make. It really is just that simple. So, let’s take a look at what separated his performance from the pack. And what he’s doing and the average investor is not doing. I spotted six of them pretty easily. 1. Buy on Weakness - Burrows is confounded by the amount of investors who are willing to buy on weakness. Don’t get me wrong, it makes a lot of sense to buy stocks when they’re down. And, hey, nobody wants to buy at the top. “Buy on dips” they say. (Which, by the way, is one of the great bits of “non-advice” I’ve ever heard) Burrows says principles are much different. His investment system focuses on finding strength and buying it. Average investors, on the other hand, like to buy something just because it’s down even though it doesn’t make any sense at all. For instance, who are buying Detroit’s Big Three and banks right now? Most of these companies have no hope of surviving, and if they do, there won’t be much equity left for investors anyways. And when there’s no strength to buy, stay away. Burrows moves to cash when there is no strength in the market. In October and November he was about 70% and 55% respectively. Where’s the recent strength been in today’s markets? As you might expect, it’s what we’ve been focusing on - Healthcare (primarily stem cells and other technology) and Agriculture (farmland!). Stick to strength and businesses and assets you actually want to own. 2. Thinking Like an Analyst - Another common mistake investors make is when it comes to the details. Burrows points out they spend all their time pouring over individual companies’ financial statements, margins, market share data, and other company-specific data. This is what analysts do as well. They painstakingly read the annual reports, go over every source of revenue, and determine the best companies within a given sector. By nature of their jobs, they’re not focused on the big picture. They’re just responsible for finding the best in their coverage universe (it’s also why managers of financial sector funds who may have lost 50% of their investors’ money, yet still “beat the benchmark” expect sizable bonuses). Burrows’ research concludes which stocks you invest in only account for 20% of the total return earned. Meanwhile, the overall market accounts for 50% and which sector you invest in accounts for 30% of returns. As a result, wouldn’t it make sense to spend more time picking a market sector rather than an individual stock? Still, most average investors don’t and the result is…well, average returns. 3. Selling Winners, Holding Losers - Taking a loss is the hardest thing to do. Not only are you admitting “I’m wrong” in a way, but you’re also paying a financial price for it. All too often average investors follow the old adage, “No one ever lost money taking a profit,” too early. The opportunity to book a 10% or 20% profit can be very enticing, but it often turns out to be a very costly move. The key to getting truly wealthy in the market is cutting losses early and letting the winners run. Burrows achieves this by keeping tight stop-losses, so he doesn’t ever have to take any big losses. He also ratchets up the stop-losses periodically to ensure he “locks in” profits and still enjoys any upside. The easy way to do this is with trailing stop-losses. E*TRADE, Ameritrade, and most major discount brokerages have them, but most investors don’t ever use them. 4. It Feels Too Good to Feel Good - It always feels good to be running with the herd. Over the past few years there have been a few times it was almost impossible to lose money in some sectors. Uranium, oil, and agriculture come quickly to mind. I’ll admit, when you’re in these sectors and you’re getting 10% to 20% returns per month it feels good. Whether the world is running out of food or oil, it feels good to be there. Of course, the good feelings don’t last forever in the markets. We’ve been over how bubbles form before. The thing is you never really know when you’re in one…or when it will be over. But if you’re constantly looking for signs that it’s over (rather than justification why “this time it’s different”) you’ll be able to get out before the bursting. 5. Fail to Identify Potential Investments With Positive Risk/Reward Characteristics - One thing an average investor never looks at is risk/reward situations. I can’t tell you how many times I’ve pitched an idea to a group of average investors. Their top concern would always be, “How much would I be able to make off this?” If it seemed like they could double or triple their money, it was a go. If not, they simply passed. They had no concept of risk/reward principles….or their role in making successful investments. They failed to ask, “what if I’m wrong?” Burrows points out this is one of the first steps to finding good investments. I agree completely. 6. Believing the Market is Wrong - This is the trickiest part of investing successfully. It’s the great grey area. To be successful, you’ve got to stand up and say the market is wrong - at times. Choosing those times correctly will lead to an immense fortune. Choosing those times poorly will lead to financial ruin. So the big question is when do you say the market is wrong? Inevitably you will be right sometimes and wrong sometimes. It happens. But that doesn’t mean you can’t invest successfully. This is why I prefer to find the extremes. When the market is at extreme highs or extreme lows, the risk/reward is greatly tilted in your favor. For instance, when oil is at $10 a barrel, we’re at an extreme. If it goes to $5, you’ll be out 50%. If it goes to $75, you’re going to walk away with 650%. When oil is at $50 a barrel it’s not at an extreme. If it goes to $25, you’re down 50%. If it goes $75, you’re only up 50%. In the first case, you’re risking 50% to make 650%. In the second case, you’re risking 50% to make 50%. If you’re going to take a stand against the market and say “it’s wrong,” the rewards better be worth the risk. That only happens at extremes. When it comes to my investment dollars, I can afford to wait for those extremes. Thinking the right way, finding the right opportunities, and avoiding disastrous mistakes are keys to becoming a successful investor. If you keep these six mistakes in mind, you’re much likely to have a much better 2009 than a lot of others. Any way you look at it, this year is set up to be a make or break year for many investors. There will be many who try to catch a bottom in some sectors and chase after unsustainable highs in others. Some ventures will prove successful, others won’t. There are a lot of uncertainties about the year ahead, but there’s one thing for sure: the raging bull market which covers up any and all mistakes will be on hiatus for a while.

Best High Yield Dividend Stocks For 2009

Dividend Growth Investor on December 31, 2008 More Posts By Dividend Growth Investor Author's Website There is a stock picking competition between several US and Canadian bloggers to pick the best four stocks for 2009, which I was invited to participate in. The rules do not allow trading or selling of these picks, and requires a quarterly review of how the stocks selected have performed. The stocks that I selected are representative of four high-yield sectors, where dividend investors typically shop for current income. Furthermore despite their high current yields, the dividend payments for the four stocks below seem sustainable. Realty Income (O: 22.21 -0.94 -4.06%) a commercial retail real estate company yielding 7.30% . Realty Income is a dividend achiever which pays dividends monthly to its shareholders. If the credit market remains frozen in 2009 Realty Income could suffer if its vacancies increase or it can’t find more funds to keep expanding. If the financial situation normalizes however, real estate stocks in general will benefit from low interest rates. Kinder Morgan Energy Partners (KMP: 47.54 +1.79 +3.91%) is a pipeline transportation and energy storage company in North America yielding 9%. This master limited partnership is a member of the dividend achievers index. The low energy prices could stimulate demand in 2009, which could positively affect pipeline businesses like Kinder Morgan. Consolidated Edison (ED: 39.26 +0.33 +0.85%) provides electric, gas, and steam utility services in the United States yielding 6.10%. Even during tough economic conditions people keep paying their electric bill and keep heating their homes. Con Edison is a member of the dividend aristocrats index. Phillip Morris International (PM: 44.12 +0.61 +1.40%) is an international tobacco company yielding 5.10%. The international tobacco market is a growth story, and unlike the US market is not facing as many issues in the short term as Altria (MO). Even during a recession, people continue smoking, as this product is very difficult to stop using. With an average yield of 6.9% and the possibility for long-term dividend growth, these stocks should weather well any market conditions in 2009. In order to generate dividend income for the long run however, a more diversified portfolio consisting of at least 30 stocks should be constructed in order to withstand market forces. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today’s post.

Charts Of S&P 500 And Some Predictions For 2009

Charts Of S&P 500 And Some Predictions For 2009By John Lee on January 1, 2009 This year was the year that defined “smart money” and “dumb money”. There was very little “in between”. This year was also a year full of the unexpected. Complete shockers. Who would have known that all of this stuff would happen?

The only way to trade was to expect the worst…even when we didn’t know how bad it could get. I remember pulling all-niters on Sundays in October, just because I knew something would happen! I’m sure many others had sleepless nights.

I am also sure that many people who have their money managed by a mutual fund or a shitty hedge fund may want to re-think where they invest. The biggest investment should be in yourself through education. You are the master of your money. I met my target of reading over 100 books this year. I read 113. What’s your target for 2009?

The fact is, I turned 24 just last month and I made north of 265%, my best year ever. I made a killing in CWST to cap off the year. I have an I.Q. of about 120, so I’m not a genius, I am just an average person. In fact, I failed Calculus I the first time I took it. The point is, anyone with the right mindset can become a successful trader - yes, even in the worst crisis of our generation. I am glad that I finally stepped up to the plate to create this blog for the many readers who did want to learn about technical analysis, chart reading, and short-term trading. Going into 2009, I will make my best effort in presenting the technical picture of the market on a daily basis. I take pleasure in doing what I do best.

Below are the usual charts but also my predictions for 2009:

SPX (^GSPC: 931.80 +28.55 +3.16%) 10-day

SPX 40-day SPX 4-month VIX (^VIX: 39.19 -0.81 -2.03%) 4-month

1) The S&P 500 will re-test the 750 lows in the first half of 2009, and we will close below 700 by the end of 2009. This bear market will not end in 2009.

2) Crude oil will stay below $75/barrel for all of 2009.

3) Gold will break out above $1100/oz.

4) The VIX will hit 100 for the first time ever.

5) Posted unemployment will hit 10.5%. Total Unemployment (U-6) will hit 20%. The Employment Diffusion Index will hit the teens.

6) Commercial real estate values will drop 30-40%. Land development, office space, warehouses, shopping malls, hotels, and resorts will do the worst. Large multi-family properties will do the “best” because they will house all the folks who will lose their homes. 20% of retailers will file for Chapter 11 bankruptcy.

7) The bailout money will run out and the Fed/Treasury will request an additional package… and be denied. This debate will drag on for weeks and weeks.

8) Numerous local municipalities and/or states will go bankrupt. Many states will be unable to pay out full unemployment benefits.

9) The U.S. will be involved in another war.

10) A major terrorist attack, economic/financial, and/or political crisis will hit the U.S.

11) Martial law will be declared and FEMA’s Executive Orders 10990-11921 will be activated by the President. Military units will be deployed on the streets of America. The UN will continue to ship large numbers of military vehicles to the US mostly via Port of Beaumont, TX. There will be a massive build up of military equipment. Ok, maybe not the last one, but you get the idea. I don’t see how our bear market (in the worst crisis since the Great Depression) can last for only 2 years. The tech bear lasted for more than 2 years and that didn’t even involve a global credit crisis! Bulls should not get too comfortable in 2009. There will be disappointments.