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...

September 29, 2006

Being Right 

A lot of energy over the years has gone into promoting the idea that successful investing means hitting home runs, or in Peter Lynch's verbiage, finding that "10 bagger" - the 1000% profit maker. 

You say to yourself, "If I could just find the next Dell (up 38,000% since 1990, or Best Buy (up 21,000% since 1990), or United Health Group (up 13,000% since 1990), or Amgen (up 6,000% since 1990), or Benihana (up 1,000% since 1990), then I'd be rich." And maybe you would.

Advertisements from newsletter writers catch your eye with: 
     "The Next Stock to Triple in 90 Days!" 
     "Get Into the Biggest Stock of the Coming Decade!"
     "I'll Show You How to Get in on the Biggest Trend in 50 Years!"  

This may work for the advertisers and promoters of such programs...but it doesn't work for you. Why? Because there is a method to their madness. If you read  between the lines, you see that if you invest like they advise, you should also expect to have losers in up to 8 out of 10 trades. Since you're searching for the needle in the haystack, they think you can afford to take many small losses in anticipation of that mammoth, mother-of-all stocks that soars far beyond the fence. The idea is that you keep taking small losses (and this is one BIG assumption that your losses are always small), always keeping in your mind that you will be making up those losses when you finally hit pay dirt - it's like the state lottery mentality (just keep plugging away at it until you win big). The problem is that all too frequently, your "many small losses" wipe you out before you clear the bases with that towering home run. But the spiel looks good, and sounds good, and ropes you into a strategy that has tremendously negative odds of producing a winning investment strategy over a lifetime.

We, at the Simplespread Institute, believe that there is a much easier, simpler, and better way to seek out stock market profits than by trying to hit home runs all the time. By the way, baseball history shows that most home run leaders are also frequently strike out leaders. And while strike outs may be common on the baseball diamond, they are death to your investment program.

First, a little more history to prove a point. Below you will find a table of the current Dow Jones Industrial Average's 30 stocks. These are some the strongest, longest lasting companies in the country. More information is created and digested about these companies than any others. Although they don't come close to the home runs listed above (Dell - 40% annualized return since 1990), they are representative of the better opportunities presented by the stock market over the past 17 3/4 years. Otherwise, they wouldn't have been selected to be in the Dow.

But...what a pitiful bunch of returns are portrayed here. Half of the stocks returned 10% or less per year, annualized...not counting dividends. 

So...where are the home runs?

Let's take a more representative group of stocks - the Standard and Poor's 500 Index. Since the end of September 1996 (10 years ago), half of the stocks have returned 8% or less a year, annualized. And only 50 (10% of the 500) have returned better than 20%, annualized. Only 5 stocks did better than 35% a year, annualized. We won't even discuss the 85 (17% of 500) that lost ground over the past 10 years.

So, we repeat ourselves: Where are the home runs? And remember that the past 10 and 17 years have been two of the best periods in stock market history, as the Dow today sits only 40 points below its all-time record close, and the S&P 500 sits about 12% below its record close.

That's why we write, talk, and even preach about setting your goals for 10% four times a year. It adds up a lot faster than swinging for the fences.

And think about the odds. What are the odds of finding that 1000 percenter versus chalking up 10% four times a year? We don't know the answer to that, but we're sure the odds are on our side and grossly against those who would have you search for that one winning lottery ticket.

So why would anyone try this "let's get rich overnight" come-on on you, and why would you ever fall for it if you recognized it?

Two simple reasons you do it, and two simple reasons why the advertisers keep coming back with the same script.

     1) Nothing grabs hold of your attention better than filling your head with dreams about that $2 stock that's going to go to $100.
         It catches your eye, gets your heart racing, and forces you to open your wallet. "It'll make you RICH!" they yell.

     2) And as long as you're looking for that pie in the sky, you never have to contend with your past (losing) record of investing.
         Hey, what difference do the past losses make? You're going to make it all up with that "next" home run that will put you way
         ahead of all other investors. In other words, you never have to question your strategy because it's supposed to have losses.
         Remember the old "80-20" rule? So, don't complain when you stack up loss after loss. Just keep on trying, and like the
         lottery player, eventually, you'll hit the jackpot. It's a great plan to keep you playing while you're losing.

Simplespreaders would rather try to make a profit on every trade. That strategy, also, has two reasons behind it.

     1) By trying to make money on every trade, if you're successful, you will build up wealth fast through the magic of
         compounding.

     2) And by having many more winners than losers, you'll keep a level head and a good emotional outlook on life. And most
         of all, each profit you bank, you'll be reminding yourself that your view of reality was just proven right. Never discount the
         positive role of "being right" has on your outlook on life. And bottom line, being right is also so very good for your wallet.

The next time you go to the plate (with your investment dollars), choke up on the bat a little and try to hit a single or double - just get on base. Let the sluggers swing for the fences. And when they strike out too many times, they will be sent back down to the minor leagues while you lead your team into the World Series.

FOR THE WEEK...Try, try again

Three times this week the Dow tried to make it through the 11,722.98 mark, and stay there. It failed. We have so many crosscurrents coursing their way through the financial markets that it's hard to take a stand one way or the other. The trend is up, but the weakness of the summer rally doesn't give one much confidence of continued higher prices. Seldom do we remember more negative news coming out of the economy conflicting with higher and higher stock prices. A disconnect seems to be the best term for our situation today.

Tobacco got hit by bad legal news and took a dive, but still hung onto the pole position. Utilities kept up with the market's advance and stayed glued to the #2 spot. Food & Beverage moved up to the #3 level. Media stayed strong in the #4 position. Insurance moved up to the #5 position.

Aerospace/Defense continued to enjoy its superior performance this year and moved up to the #6 spot. For the 17th week in a row, Real Estate resided in the Top Ten, this week at the #7 position. The #8 spot went to Chemicals, making their strongest showing in over a year. Drugs advanced up to the #9 position with the help of a coming-alive Biotech spurt. Rounding out the Top Ten was Telecommunications, putting in their best performance in a year.

We expected the "window dressing" - strength at the end of the quarter. Now the pros get back to real business and see if the Dow can punch through to new highs, or fail and make it a triple top. We make no prognostications. All positions initiated in May, June, and July involving August, September, October, and November calls, should be closed out or close to being closed out by now. We can only wait for the market to give us another opportunity. As the blind poet Milton told us, "He also serves who sits and waits." And so we will.

THE BEST...