By Bob Wood, MMNS
Investors have long been well served by adhering to the old adage â€˜â€™buy low and sell high.â€™â€™ Whenever someone thought up that bit of wisdom, it wasnâ€™t during times like now when all sorts of asset classes sell at premium prices. Yet there are always opportunities for astute investors. We just have to find them — and dare to go where the crowd will not!
For investors who have been trained in what I call â€œthe faulty theories of diversification and asset allocation,â€ looking for bargains is not really an issue. They simply build their portfolios to include several different asset classes, and those, as a rule, are the ones most widely held.
Traditional investors donâ€™t seem to mind whether an asset class is pricey or cheap. They simply build their portfolios much like everyone else does: start with a â€˜â€™core holding,â€™â€™ usually a domestic large-cap mutual fund; throw in some small caps, some mid caps, and a small portion of international stocks; and then add a nice domestic bond fund for the sake of taming volatility.
As Iâ€™ve said many times, that is one of the worst ways to invest, and itâ€™s too bad that so many still think itâ€™s a viable plan! Of course, if it werenâ€™t for how poorly so many invest, little in the way of under-priced choices would exist to find and buy.
Obviously, buying low makes the most sense, so weâ€™ll ignore the â€˜â€™buy high and sell higher â€˜â€™crowd like the Cramerâ€™s of the world — and his â€œmomentumâ€ peers. Buying low offers real advantages, including the â€˜â€™margin of safetyâ€™â€™ espoused by great investors like Graham, Dodd and Buffett.
So far, so good. It sounds easy, doesnâ€™t it? All we have to do is find holdings selling for much less than previous prices and off we go. Well, that might sound easy, but try to make it happen!
Letâ€™s face it, the stock markets are relatively efficient in that so many investors are involved in the same game. Little remains to buy that hasnâ€™t already been picked over — given massive money printing by the Fed and the reckless use of leverage and margin debt by hedge funds.
Some in the financial media now that think that investing in home builders is a play too cheap to ignore. Not me! Sure, those shares prices are well off their old highs. But a couple years ago, business was better than any of them had ever seen. That was the upside beauty of the asset bubble!
But not only is that industry watching business revert back to the long-term mean, the downturn promises to be one of the worst on industry record. While, from a trailing basis, those stocks may appear cheap with very low price-to-earnings ratios, their P/Es may well be heading much higher. Remember, when a company swings to a loss of earnings, no P/E exists. Perhaps Iâ€™m in the minority, but I see losses continuing in that industry for at least the next couple years. What looks like â€œcheap home builder pricesâ€ now may well reach new lows in the coming months.
Buyers are also interested in areas of todayâ€™s beaten-down financial sector, including those of banks, brokers and mortgage companies. Itâ€™s tempting for many when looking at the stock chart for a company like Citigroup or Washington Mutual, which are now selling at prices that most would have thought impossible just a year or two ago.
And weâ€™ve heard how much money a rich Saudi prince made by buying into Citicorp in the early 1990s, when it was on the brink of bankruptcy. Many, myself excluded, think that scenario can happen all over again. As tempting as the new, 52-week-low price is, Citigroupâ€™s troubles may be just starting, rather than nearing an end.
Other buyers flock daily to stocks like Freddie Mac and Fannie Mae, with bullish types thinking that implicit backing by our government will not allow them to fail. But a reading shows their balance sheets in horrible shape. Why take a chance on companies in such precarious condition just because their stock prices have fallen so much? Remember those who bought stocks like JDS Uniphase or Enron at prices well below their previous highs?
So, then, what is left to buy for todayâ€™s bottom-fishing investors? Well, the way I see it, not much! Thatâ€™s why I continue to be bearish, especially on the domestic stock markets, but thatâ€™s nothing new for me. Keep in mind that, as I write this column in mid-December, the S&P 500 sits at about the 1,475 level, still lower than its peak in early 2000. Trying to find bargains in a secular bear market is what investors in London refer to as â€˜â€™a mugâ€™s game.â€™â€™
The time to look for bargains in those areas will be when everyone else has given up on them. When the time comes that nobody wants to talk about buying Citigroup, Fannie Mae or home builders and their stock prices languish without much movement one way or the other â€“ that will be the time to take your chances on them.
I strictly adhere to my own investing strategy — my own maxim. I prefer to â€˜â€™buy it when itâ€™s quiet,â€™â€™ or when few others are interested. Right now, too many investors are bottom fishing for those troubled shares to allow all the bad news to be reflected in share prices. Wait for these share prices to become â€œrange-boundâ€ at low levels for a few months before wading in.
If youâ€™d like to do some bargain hunting for stocks, a very few good fishing places do exist. Of course, given my bias towards the international markets, I look there first. Yes, you can still find reasonable prices in domestic energy shares like COP, and check energy-related names like Frontline, the oil tanker company.
But the best places to look now are in Europe, and I donâ€™t mean the emerging economies of Eastern Europe. While that was a great place to invest over the past few years, the crowd has caught on and is now bidding up prices, thus taking out what might have been left of upside potential.
Take a look at Europeâ€™s older economies instead. How many stock market promoters are talking about places like Belgium, The Netherlands, Austria, Sweden or Norway? Not many, right? And that fits perfectly with my investing adage about buying when itâ€™s quiet or when few others are looking in the same direction.
The obvious disclosure here is that I have recently invested in those places for my managed accounts. And the obvious caveat is that, if you follow me and lose money, tell someone else! Remember, I could possibly change my mind and sell them, even before you read this — though I doubt it.
Right now, those, to me, may be todayâ€™s best-looking opportunities. Yes, I try hard to move away from the crowds â€“ but that doesnâ€™t always work as planned. And, just so you know, I tend to arrive very earlyâ€¦..
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.