It’s January, and during this first month I always spend more time pondering the year ahead. My assumption is that there will be no gain in the stock market overall in 2010, following the 23.5% rise in the S&P 500 last year. In fact, I recommend being prepared for a fall back. Boom years rarely follow boom years. In hindsight, investors were overly pessimistic last March and, following the subsequent 70% stock market surge, are now overly optimistic regarding the economic outlook. A market drop of 10%–20% is likely, just to get things back into balance. Do not be lulled into complacency. This will be a challenging year for investors to eke out a positive return in their portfolios.
The new year and new decade is a perfect time to adopt new investment strategies. Revamp and realign your practices if necessary. Do not rely on the Street. Separate babble from substance, regardless of whether the source of the blather is Wall Street, the media, or companies. Alan Abelson’s stance is that “Selling, not analysis, has always been Wall Street’s strong suit.” And as Warren Buffett says, “Never ask the barber if you need a haircut.” The following is my investment philosophy, the essence of my entire book Full of Bull, for you to consider in the process of rethinking your own.
At the outset of the New Year your investment thinking should be focused on discerning the best themes and sectors that present the most promising prospects for the next several years. This is a critical aspect of proper investing. Upon identifying and deciding on these areas, your stock holdings that represent a particular sector should carry ample dividend yields. In my book, Full of Bull, the second most important investment strategy, after preserving capital, is to invest in the most favorable themes and industry sectors. There is no better time to ponder and formulate conclusions on such long-term trends than at the beginning of a new decade.
At year end there are tax related investment decisions to consider, and this year there are unusual economic and financial issues that could have a bearing on your investment outlook. These factors tend to encourage investment transactions and may be a catalyst to pull the trigger on investment positions. Certain moves may be warranted as the year end approaches (see earlier blogs), but my advice is to keep such shifts to a minimum and always emphasize the long-term nature of investing. In Full of Bull, one of my primary investment strategies is to hold stocks long-term. And I referenced this in my November 16th blog on Warren Buffett’s railroad acquisition.
The S&P 500 Index has climbed more than 60% since the March low. Stocks seem more vulnerable after this surge and in view of the highly uncertain, in fact, rather cautious economic outlook. Protection of capital is always the first investment priority, as I lay out in Full of Bull, but it is of paramount importance now given the valuations of many stocks. Extremely low interest rates, heavy government induced liquidity, and vast amounts of capital on the sidelines have aided the stock market during the last eight months. But there is likely to be unusual stock market activity in December and January, as institutions such as mutual funds and hedge funds lock in profits and decrease equity exposure at the outset of the new year. Focus on preserving your capital in advance. December–January will be a good period to stand back, be cautious, and avoid exposure to a potential market contraction.
Warren Buffett’s acquisition of the Burlington Northern Santa Fe (BNSF) railroad brilliantly illustrates several investment strategies that I recommend in my book Full of Bull. While the deal made headlines because of its size—$34 billion—I realized upon reading some of the details that Buffett’s rationalization underscored my own strategy of investing in themes and rising industry sectors, holding stocks long-term, and being value oriented.
These are highly unusual times. The stock market seems vulnerable following the more than 50% resurgence since early March. While Fed liquidity and heavy amounts of cash on the sidelines--combined with low interest rates--are providing solid underpinning to the market, the numerous cross currents are gaining gravity and may eventually drag the stock market lower. I hardly need to reiterate the serious issues on the horizon--rising unemployment, bulging multi-trillion dollar federal deficits, the worst deflation since the Depression, curtailed consumer spending, depressed home prices and surging foreclosures, extensive consumer and government debt levels, frozen credit, essentially no economic growth, coming higher taxes, the falling dollar, maxed out corporate earnings, and reeling commercial real estate. These burdens are likely to weigh down the stock market at some point, especially given the current exalted valuation levels.