Published: January 20, 2010
When it comes to the global financial
crisis, many so-called "experts" think the worst is behind us.
But I don't buy it.
And I'm not alone.
Just look at what some other big-name investors - each also
known for their independent thinking - are saying or doing right
- Bond king Bill Gross is nervous and raising cash.
- Author, commentator and global-markets guru Jim Rogers
has repeatedly said that he's not investing in stocks
anywhere in the world right now.
- Hedge-fund heavyweight John Paulson is moving
aggressively into gold.
- And investing icon Warren Buffett - never one known for tipping his hand -
is candidly stating that the U.S. financial-crisis cleanup is far from complete.
The fact that he's reportedly buying more shares of Korean steel dynamo Posco
(NYSE: PKX) would punctuate this point.
Indeed, entire nations - I'm thinking
specifically of China, India, Brazil, Chile and one or two
others - are adopting similar stances. And they're doing so for
the same risk-fearing reasons. They want to grow their money but
they don't want to place it at risk any more than we do.
This kind of uncertainty can be paralyzing, making it tough to
decide where - or even if - we should deploy our investments.
Fortunately, we've been here before. And what we learned will
allow us to profit no matter what the financial future holds for
the U.S. marketplace.
Using Past Losses to Zero in on Future Profits
A decade ago, in the middle of the euphoric ardor of the dot-com
bubble, I warned that we were following in Japan's footsteps and
risking a repeat of that country's "Lost Decade." A balanced
approach to investing was the key to success, I said, and value
and dividends would win out over growth in the decade to come.
The U.S. stock market had become a giant casino - but one in
which everybody won - so my warnings were ignored, and even
ridiculed, by the "tech-savvy" investing set, whose members said
I was out of step with the Brave New World of the World Wide
Web. Never mind the fact that I have lived in Japan and spent
nearly 20 years in Asia.
We all know how this turned out.
In 1999, if you'd followed the masses and invested $100,000 in
the Standard & Poor's 500 Index, you'd have incurred an average
annual loss of 1.1% - leaving you with only $89,000 for 10 years
Had you taken that same $100,000, and invested it using a simple
stock/bond split (60% in stocks and 40% in bonds) - maintaining
that ratio by rebalancing the portfolio every Dec. 31 - you'd
have reaped an average annual return of 4.3% for that same
10-year stretch and ended the decade with $300,500, according to
a recent study by The Vanguard Group Inc.
There's a message here. Not only is it very clear, but it's one
we repeat frequently: successful investing isn't about "buy and
hold" - it's about "buy and manage."
"Buy And Manage" Your Way to Long-Term Wealth
"Buy and manage" is an investing mantra that's near and dear to
my heart for a couple of reason.
First, it forces you to take profits. Most people think this
means to "buy low and sell high," but that's not the case.
Rebalancing forces you to "buy lower and sell higher." It also
helps tame two of the most costly human characteristics - fear
and greed - by instilling a level of discipline that helps you
make the right decision at the right time.
Most investors do the reverse: They fall prey to their fears,
and sell at market bottoms, and ahead of rallies that could have
saved them; and they give in to greed and buy in at market tops,
just before the indices reverse course and head for the cellar.
There's another benefit, too, and it's one that most investors
fail to consider. Because rebalancing forces you buy in at lower
lows, it can help position your money for the next big rally.
For instance, we began urging investors to rebalance their
portfolios early last year to take advantage of the run in bonds
and abnormally beaten down stock prices.
Second, buy-and-manage investing forces you to properly
concentrate your assets so that you maintain your game plan even
as different investment choices move in and out of favor with
Third, managing your assets - even if that "management" is
limited to simple rebalancing - can help you to automatically
tap on the brakes at a point when other investors are skidding
out of control and toward a ravine.
I talk to thousands of investors during the course of a year,
most of them at the many conferences that I appear at all around
the world. And I still find it surprising that - even after the
dot-com (2000-2001) and banking-crisis (2008-2009) investing
debacles that were largely Wall Street engineered - investors
continue to believe that buy-and-hold investing is a legitimate
It isn't: It's a marketing gimmick that was created by Wall
Street. It's proxy for a complete lack of personal
accountability, especially when it comes to the sweeping bull
markets that are propelled by nothing more than abnormally low
interest rates, debt and marketing hype.
In this post-financial-crisis environment, the winners will be
those who learn how to buy and manage their assets. The game has
changed forever, and investors who fail to change with it and
understand the new rules will once again find themselves left
behind - after their assets have been eviscerated for a third
time in recent memory.
One key new rule is to view earnings statements with skepticism.
For decades, stock prices have turned on earnings reports. But
let's face it, at their most basic level, earnings are really
just a bookkeeping entry. Accounting rules allow for all sorts
of shenanigans. And we all know that corporations "manage" their
earnings, pulling profits from a future quarter to "save" a
current quarter, or pushing "excess" current profits into a
future quarter to "save for a rainy day," so to speak. Years
ago, a former Wall Street chief financial officer told me
confidentially he could push earnings as much as 5% in any given
quarter - whether he wanted to do so or if The Street "needed"
him to do so.
If earnings can be manipulated that easily, it's no wonder that
some of this financial tomfoolery led to the greatest loss of
empire in modern history. What I mean by that is that America
went from having the world's strongest currency and being a
force to be reckoned with to the world's single largest source
of debt and a liability for every single one of our trading
partners. Bear in mind that this happened despite one of the
most powerful stock-market surges in U.S. history.
Although we still use earnings in a limited
way, tomorrow's markets will require other quantitative and
qualitative metrics that we can use and trust as we evaluate a
company and its stock - including certain "balance-sheet"
attributes that I recently wrote about.
This shift to other metrics makes sense on a personal note, too.
Fueled by rising home prices, rising incomes and cheap money
(there's that cheap-money thing again), credit rose, too. So
millions of people acted like they had their own personal piggy
banks and bet the ranch when they should have been tending the
farm. Adding insult to injury, our regulators not only failed to
take away the punchbowl, but they actually poured in some
financial moonshine, liberalizing the once-strict laws and
regulations that could have prevented this financial disaster
from happening in the first place.
Not to be left out, Wall Street created some "innovative"
financial models that were really nothing more than fancy
accounting and badly calculated risks. And the U.S. Federal
Reserve watched blithely from the sidelines and actually refused
to take action several times.
Meanwhile, back in the corporate world, low rates meant that
earnings rose because debt cost less and the banks - here we go
- fell all over one another in the bid to loan these companies
more money. That's how the concept of "leveraged assets" came
into vogue. It was all about "OPM" - Wall Street parlance for
"other people's money."
Four Rules to Rule the Future
We've clearly come full circle, and run the risk of repeating
past mistakes. That's why I am advocating careful, measured
investment moves. It's why I'm also telling investors to dump
"buy-and-hold" (a.k.a. "buy-and-hope") investing strategies in
favor of the afore-mentioned "buy-and-manage" philosophy.
Following a 60% rise off of the early March lows, many investors
have dropped their guard, relieved that the worst is behind us.
Don't you believe it. In fact, allow me to leave you with four
solid strategies that are tailor-made for the uncertain times
that history suggests are certainly still to come:
1. Concentrate Assets: The best investors know that the
composition of their holdings matters more than the selection of
the individual holdings, which is why they spend inordinate
amounts of time making sure their money is not spread
willy-nilly all over the place. I'm not and it is not
conventional diversification which doesn't, as many investors
found out the hard way, work when everything goes down at once.
The simplest way to achieve this goal to make sure your
portfolio is set to the 50-40-10 proprietary allocation. That
way you'll be forced to tap on the brakes if the economy falters
again, but will still able to grow your money if the U.S.
marketplace defies the odds and continues to chug along.
2. Stick With Quality: Make sure you've got a healthy
dose of "balance sheet" businesses with high global cash flow,
globally recognized brands and strong access to credit. We're
bullish as long as the Fed doesn't ask us to pay the bill.
Whenever possible chose companies meeting these criteria that
have Price/Earnings (P/E) ratios of 12 or less. That tends to
present you with stocks that have more upside than down. Add to
positions on really bad days so that you're maximizing each
dollar you invest.
3. Explore New Territory: Integrate hard assets - such as
commodities and currencies - even if you have never considered
them before. That way, if the going gets tough and the 14
trillion reasons for inflation (the dollar measure of U.S.
federal debt) that we believe could come home to roost, you'll
have the intestinal fortitude to ride out the rough times. And
the profits you'll have in hand will put you in a much better
position, especially when you realize that most investors have
been taken to the poorhouse - again.
4. Accede to Asia: Near-term bubble or not, China's on
track for an unprecedented 700% expansion in gross domestic
product (GDP) over the past 30 years and over the long haul will
prove to be the greatest wealth-creation opportunity in history.
Double your exposure to this region. The proper combination of
protective stops and a few choice stocks can help you capitalize
on the what will undoubtedly be the biggest profit opportunity
of our lifetimes.
-- Keith Fitz-Gerald