WHERE SHOULD YOU HAVE PUT YOUR MONEY IN 2006?

A weekly newsletter based on the fact that stock market sectors are made up of industries, that industries are made up of individual stocks, and that individual stocks in the same industries and sectors move as a group. The proven best way to profit from the stock market is to keep your funds invested in the stocks of top performing sectors/industries at all times, and the best measurement of performance of these sectors/industries is their price movement over the previous six months. Below you will find commentary of Sectors, Industries, and Stocks based on the most recent 6-month period as well as updates on the past week’s action...

July 21, 2006

Is it strategy, or is it you?

That question has gotten me into some heated discussions from time to time. What I mean is that it doesn’t make any difference how much money other people or other strategies have made or lost, it's only about how much money your strategy has made for you.

Take the most famous investor in the world today. There must be at least 40 books telling you exactly what, why, how, and when Warren Buffett made his fortune. There’s even a workbook on it. And yet, how many other Warren Buffetts do we have?

But how many Warren Buffett wannabes do we have?

So it must not necessarily be the "strategy."

That’s my point. If the strategy you choose to use doesn’t work for you, then it doesn’t matter how well it worked for anyone else. All that’s important is what it did or didn’t do for you.

Let’s take diet books and plans. How many are there out there right now? How about how many have there been out there in the last 30 years? Do they work? Only if you internalize their concepts and can follow their guidelines. Is it safe to say they worked for those who adhered to the plans but didn’t work for those who didn’t? Can we agree it was correct implementation of strategy rather than strategy that did or did not produce results?

We all perceive things differently. Don’t believe me? Grab a friend the next time there’s a fire, flood, accident, natural disaster, or whatever. Hustle over to the scene of the incident. Mill about for a half an hour. Go to your separate homes. Each of you then write a detailed description of what you saw, how you imagined it happened, and what the consequences will be. Compare notes.

How could the two of you witness the same things, yet differ so much on what happened, and why?

So, we all see and interpret things differently.

When it comes to investing we also see and interpret things differently. And letting someone else tell you what to do without you first internalizing, even owning, that strategy yourself is probably the biggest mistake any investor can make.

Why? Because if you don’t fully understand why you’re doing something, then when it comes time to act, you’ll question your response and most probably will fail to take the necessary actions. If you do that enough, you’ll psyche yourself out so much you’ll be unable to operate rationally. And most definitely, you will be separated from your money by others who do understand why they’re doing what they’re doing.

This is why we run no model portfolios here at the Simplespread Institute. We’ve kicked the idea around occasionally when people asked about it, and we would certainly do our advertising department a lot of good by doing it. But we prefer not to. One reason is that different investors have different values, see things differently, interpret things differently, react differently. If we ran a portfolio that featured Altria (Phillip Morris), Lockheed Martin, and Halliburton, no doubt we’d turn off many potential Simplespreaders who would be insulted by our insensitivity. Likewise, if we ran a portfolio of Starbucks, Bed Bath and Beyond, and Michael’s Stores, we’d probably lose the people who admire the new Hummer commercial where the guy in the checkout line buying tofu compares  himself to the guy buying ribs, then goes out and gets himself a new set of big, manly wheels. People are different.

I’ve used these six stocks as examples because at different times over the past 6 years, each has been a great Simplespread only for investors whose portfolios and investing psyches they fitted into. Right stock, right price, right option, right time.

So, if you understand that the best place to have your money is in the stocks that are leading the market, and if you understand that the best place to buy those stocks is at prices where many other investors will also be putting in bids, and if you understand that by selling call options on stocks you buy you not only hedge yourself somewhat against loss, but also set a time and profit goal for yourself, and if you understand that the broad market goes through alternating periods of exuberance and depression, and that the best time to buy stocks is during times of depression, then you’ve already got the strategy. The rest is up to you.

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These pages talk a lot about what you should do; we don't dwell much on what you shouldn't do. This week we'll make a small exception thanks to a lesson the market has provided us. Below is a chart of Dell Computers. They make great product. However, for the last 7 years, a better place to have put your money would have been a local bank's CDs. There have been only two times since 1999 that DELL's price action might have caught your attention - early spring of 2004 and late spring of 2005. However, both times DELL's relative strength was weak. Thus, you would have paid it no mind. It's sad to realize that individual investors (and index funds, mutual funds, and professional money managers) who have bought DELL since 1999 are nursing up to 67% losses. When you look back at the sorry price action of this stock over 7 years, you see that the only people who can count a profit in their portfolios are those who bought under $20 at the end of 2000, and those who bought around 9/11. Everybody else made a mistake that they carry around with them daily. 

A study of the DELL's history tells us that when the relative strength of the stock and Computer Hardware sector were strong, the price action necessary for Simplespreading was not there. And when the price action was good, the relative strength was not there. That's what the Simplespread Strategy is supposed to do: point you toward the right stocks and point you away from the wrong stocks. As we say, the rest is up to you.

FOR THE WEEK...full of sound and fury, signifying nothing

Tobacco finally knocked Metals & Mining out of the #1 spot. The smokers have been big market leaders in late 1980s and early 1990s. Again during the 2000-2002 debacle, they took the lead. They have consistently stayed on the ever-upward trek over the past 20 years or so, slowly and quietly eking out consistent gains. They are basically the quintessential bear market hedge. Aerospace/Defense comes in at #2. This year has seen one of its best-ever performances. Food& Beverage rises to #3 on the strength of not dropping much. Number 4 belongs to the Metals & Mining sector, after getting walloped 18% since May. Real Estate stays strong at #5, regardless of what the media tells you about homeowners being in trouble from sea to shining sea.

Transportation stays strong at #6. Utilities, like Food & Beverage, wins by not losing, taking control of the #7 position. But there's not much money to be made that way. Banking, another dull sector climbed to the #8 slot. Automotive clings to the #9 position on the strength of the major auto makers, worldwide. The Dow Jones Industrial Average jumps up to the #10 position.

As you can see, market leadership is unimpressive, and more importantly, rather non-profitable. Besides the basic materials people, nothing else catches your eye and makes you want to jump into the fray. Watch very closely whether the Dow Jones Industrials can hold 10,700. If they do, maybe we can still salvage a summer rally. If not, then collect interest and be happy.

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