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Pondering 2010 -- Be Realistic and Ready for Cross Currents

Posted January 26, 2010

Topics: Finance & Investing

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.

In thinking about 2010, stay abreast of investment, financial, and economic trends. I attended a breakfast presentation by a leading economist last week on “Current Economic Conditions: Where are We Headed?” This week I am attending the “Fifth Annual Forecast Dinner” sponsored by the San Francisco CFA Society, featuring a panel of Wall Street professionals. You should be doing the same type of thing. Peruse The Wall Street Journal or The Financial Times, The New York Times business section, Barron’s, Forbes, Fortune, or other such financial publications for background knowledge. Keep up with current investment strategies, changes and shifts, sector trends and ideas, and the bigger picture. TV investment programs, such as Bloomberg and CNBC, are good for gaining perspective on equities, bonds, real estate, treasuries, commodities, options, annuities, and all types of investments. The same goes for a plethora of Internet sites. But do not get too bogged down in details or specific investment recommendations. Use these sources to gain insight on promising investment sectors and the overall investment outlook.

Barron’s is one of my key investment tools. A recent issue revealed how its panel of 10 Street experts’ stock picks performed in 2009. The record was mixed. Out of 84 recommendations, some 69% outperformed the market. Not bad, though one expert alone, Marc Faber, accounted for half of the outperformers. All 29 of his picks beat the market! But of the other 9 panelists, barely half of the  recommendations outperformed. My point is, don’t think that Wall Street is necessarily any better in its stock recommendations than you can do on your own.

Wall Street does not always have your interest as its first priority. In the New York Times this month there was news that a Goldman Sachs executive admitted in an email message to select institutional clients that “we may trade, and may have existing positions…before we have discussed those trading ideas with you.” In other words, in some cases the firm is trading on internal research analyst information for its own account and profits, before disclosing the ideas to its clients.

In assessing the year ahead you need to be realistic. Wall Street is eternally optimistic. Current economic improvement may be only a half recovery. The phenomenal prosperity during 1995-2008 was partly phony based on financial paper shuffling and speculative shenanigans. The business profits from financial engineering were never real, and may not be seen again until we enter another period of speculative irrationality. Federal, state and municipal deficits are surging. Consumer mortgage and credit card debt is daunting.  The eventual rise in interest rates may have a big dampening effect and will certainly push bond prices lower. Consumers cannot spend as long as unemployment is high. There is a commercial real estate debt bubble and more home mortgage defaults ahead. Taxes will be rising. Weigh these influences in your investment thinking for 2010.

In my book, Full of Bull, I discuss not only the pursuit of the best sectors and themes to invest in, but also to periodically reassess. January is the time to rethink your overall strategy or themes and shake off any emotional paralysis that has locked you into certain stock positions. A market analyst I respect, Ray DeVoe, Jr., terms this “liberation from the prison of past decisions.” But I disagree with most “experts” who advise periodic rebalancing by trimming back oversized positions. The biggest winners, which become the outsize positions in your portfolio, are probably the last thing you should contemplate selling. Hold a higher weighting in your best investments rather than just a normal position. If you believe that the prospect remains favorable for one of your most sizable stock positions, buy more, if anything, rather than cutting it back.

Some stocks you own might have lagged for so long that it is time to give up. What is your comfort level with each individual stock in your portfolio? Maybe your theme is stale. Are there newly emerging trends to begin investing in? A reluctance to sell stocks that have not worked out—that is, to admit past mistakes—is normal. But by not selling your losers and moving on, you commit another mistake. Accept your failures, step up to the plate, and dump your junk so that you can start afresh. It hurts only for a bit, and then you feel liberated.

January is a good time to contemplate the investment outlook and review your investment strategy. Periodic disciplined reassessment is critical, and December or January is the best time to get ready for the new year. Take a sober, realistic view.  Have conservative expectations. As John Bogle, founder and former CEO of the Vanguard Group, stresses, have “the wisdom of long-term investing.” Position your portfolio holdings properly for the uncertain 2010 prospects ahead.