Income Tripler

The 4 Pillars of Investing: Don’t End Up as Stock Market Road Kill

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, June 25, 2008: Issue # 812

Next time someone casually asks, “What do you do?” I’m going to tell them I’m a high school chemistry teacher… or a volunteer fireman… or maybe a spy. Because every time I say, “I’m in finance. I invest and write about the stock market,” I find myself stuck in another conversation bloviating about where oil’s heading… whether the Fed will raise or cut… if China’s finally undervalued… and if we’re in a recession or not.. Arguing over what Peter Lynch appropriately deemed “background noise” - events that ultimately have no bearing on our long-term investing goals.

But that’s the thing. When the markets act up, everyone (and I’m guilty of it sometimes, too) refuses to pick their chin up and refamiliarize themselves with the 4 pillars of investing. Instead they stare at their feet, at the economic landscape right beneath them. They worry incessantly about it. Worst of all, they want, and try, to figure out precisely what will happen next - so they can trade and profit from it.

You know, I want a Herculean body on a Krispy Kreme diet. But that’s not going to happen. And neither is predicting the very next move of the stock market, oil, interest rates, or foreign currencies. Even our most thought out forecasts, theories and/or hunches are bound to be wrong more than they are right - and our portfolios will suffer from it…

Peter Lynch On Predicting the Economy

In other words, Peter Lynch clearly understood that all the worrying and questioning is a complete waste of 99.99% of our time, saying, “If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes.”

So as hard as it may be right now, we need to stop worrying about what’s going to happen tomorrow, next week, even next year. If we’re truly after long-lasting investment success, we only need to answer the big questions - the important ones that we can take action on no matter what’s happening in the markets - like:

• How can I get the highest return with the least amount of risk?  �

• How can I protect both profits and principal?  �

• What can I do to guarantee my investment portfolio will be worth more in the future?

At first blush, you might think the answers to such questions are similarly elusive. But they’re not…

The 4 Pillars of Investing

Since we can all benefit from a quick refresher course now and again, let’s get reacquainted with our 4 pillars of investing today…

Pillar 1: Stick to an Asset Allocation Model

Pillar 2: Adhere to a Sell Discipline

Everyone knows you should cut your losses early, and let your profits run. Well, the only way to consistently do both is to use a trailing stop. That’s we why created The Oxford Safety Switch - a customary 25% trailing stop on all of our recommendations. It defines an exit strategy for all our positions right from the start… and makes sure we have the gumption to stick to it.

Pillar 3: Understand Position-Sizing

Knowing how much to invest in each and every situation is crucial to building long-term wealth. Position-sizing ensures that even if a number of our investments turn sour, we’ll never lose our shirts again. As a guideline, we recommend investing no more than 4% of your equity portfolio in any particular stock. If you want to be conservative, invest less. If you want to be aggressive, invest more - but not too much more.

Pillar 4: Always Look to Minimize Investment Expenses and Taxes

There’s nothing we can do to affect a stock’s performance once we own it. But there is a way for us to guarantee our portfolio will be worth more 5, 10, 20 years from now. All we have to do is cut our expenses… and stiff-arm the taxman (legally, of course). On the expense side, that means avoiding investments that carry front-end loads, back-end loads, 12b-1 fees, or surrender fees. On the tax side, it means reducing what the IRS is entitled to take. We can do that by avoiding actively managed funds in non-retirement accounts, owning high-yielding investments in tax- deferred accounts and buying high quality investments (high-quality = less turnover = less capital gains taxes).

Investors - Don’t Let The Market Cloud Your Judgement

As Peter Lynch also observed, “It [the market] does get nasty at times, but it shouldn’t cloud investors’ judgments about thinking long term. The key organ here is your stomach. Everyone has the brainpower, but not everyone has the stomach for it.”

So instead of worrying, it’s time for a gut-check. And if you’re following our 4 Pillars of Investing on how to build wealth, break out the Tums - or spring for the Prilosec OTC if you’re a real stress ball - and endure it. The pillars (and our portfolios) will do more than just endure everything the market throws at us.

Good investing,

Louis Basenese

Louis Basenese, The Oxford Club’s Associate Investment Director and a regular contributor to Investment U, was a former equity specialist at one of the world’s largest investment banks. Louis recently gave us Weak Dollar Rising: 10 More Reasons Not to Bet Against the Greenback.

Today’s Investment U Crib Sheet: A “Prescription” for Healthy Dividends
by Floyd Brown

When most investors approach pharmaceutical stocks, they usually spend time dreaming about new therapies, treatments or an experimental compound that they pray will become the next mega-blockbuster drug.

I prefer to dream about cash flow and compound interest on stock dividends. Making a pill for a nickel and selling it for $4 is a business you can sink your teeth into.

In a troubled economy, investors head to safe havens, where dependable profits provide downside protection. Pharma stocks often filled that role, but not in 2008. Big drug companies have taken a beating and are hitting historical lows.

• Recently, Merck (NYSE: MRK) hit a two-year low and Bristol-Myers Squibb (NYSE: BMY) hit lows of $19 - erasing six years of gains. The world’s biggest drug stock, Pfizer (NYSE: PFE), bottomed out at its lowest price in nearly 11 years.  �

• American drug companies aren’t the only ones being slammed. European drug makers GlaxoSmithKline (NYSE: GSK) and Sanofi-Aventis (NYSE: SNY) are also way down this year.

The overall perception on Wall Street is that pharmas carry too much risk. In the next few years, U.S. drug makers will lose patent protection on many current blockbusters, including Pfizer’s Lipitor, Merck’s Singulair and Bristol Myers’ Plavix.

But Wall Street has over-punished these firms. Their cash flow and dividends are underappreciated, and that’s exactly what we like to see…

Undervalued Dividends at Excellent Prices

While shares of drug companies have traded downward, profits have held strong. Price-to-earnings ratios have traveled to generational lows. You could make a bundle at current prices. And if you need another reason, these firms have been raising dividends along the road.

As the market beats up their stocks, it can be profitable for you to hold shares of these dividend-paying firms while waiting for the shares to catch up. The compounding effect will make you richer even if the shares were to stay flat for years, an outcome I consider unlikely.

• Pfizer yields 7.2% right now
• Glaxo 5.0%, Bristol Meyers yields 6.3%
• Sanofi-Aventis yields 3.4%.

Louis Basenese 2008 Archives, Building & Protecting Wealth, Louis Basenese 4 pillars investing, pillars of wealth

Weak Dollar Rising: 10 More Reasons Not to Bet Against the Greenback

by Louis Basenese, Advisory Panelist
Associate Investment Director, The Oxford Club
Tuesday, June 03, 2008: Special Report

With the weak dollar rising against foreign currencies and the Fed’s new willingness to hike interest rates, investors now have a reason to look at the greenback again. But is it really time to go long the almighty dollar?

Well, imagine my surprise when I surfed over to MarketWatch.com last night and found a special report entitled “Dollar Comeback.” Only a few days earlier, during a lunch-hour errand, I heard the unthinkable on CNBC radio - a segment on a dollar rebound.

Two months ago, such “reporting” would have landed the editors and anchors in the corner, donning a dunce cap. And I know. When I issued my warning against shorting the dollar, our inbox overflowed with passionate reader comments about my “intelligence…”

Dollar Bears Becoming Dollar Bulls?

Are the dollar bears finally turning into dollar bulls? Could the tide finally be turning?

If so, we may have called a dollar bottom within 12 days of it happening. The U.S. Dollar Index hit a low on March 14. I recommended a long dollar trade to my subscribers on March 26… and then echoed those sentiments here  in Investment U Issue #780, The End of the Weak Dollar.

Time will be the great arbiter. But based on the following developments, I’m convinced we’ll come out on the winning side…

Top 10 Reasons That The Weak Dollar Is Rising

Here are my top 10 reasons why the weak dollar will rise:

Bernanke & Paulson Rediscover “Verbal Intervention.”
Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

The “Smart Money” is Cashing In.
The smart money - Wall Street institutions - tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal - take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.

George Soros Changed His Mind.
Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line - we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar:

“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”

“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.’”

My guess is he will make a fortune on this change of heart, too.

The Fed is Done.
Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.

Busted Rhymes and Tattered Clothing.
The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.

The Retail Investor is (Blindly) Headed for the Slaughter.
Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof - the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.

New President = Clean Slate.
Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.

We’re Still Not Decoupled.
At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest - a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line - the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.

Institutions are Secretly Hedging their Bets.
It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.

The Dollar Decline is Getting Too Long in the Tooth.
As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.

Consider this my second warning that the weak dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.

Good investing,

Lou Basenese

Editor’s Note: Louis is the editor of The Alpha Intelligence Alert, which seeks out profit opportunities in all areas of the market, with limited risk. His one objective is to “significantly outperform” stocks, and generate hedge fund-like returns for subscribers. So far this year, Lou has closed out a 44-day 96% return in Cal-Maine Foods, a 41-day 87% return from Hibbett Sports, and a 11-day 53% return in Waters Corp. Just go here to get all of his trades via e-mail.

Today’s Investment U Crib Sheet - 2 Ways to Profit from the Weak Dollar Rising

• If you’re willing to be brave - a true contrarian - you could be handsomely rewarded for going long the dollar. Aside from holding greenbacks in your savings account, here are two ways to make money from a rising dollar: 1. The Rydex Strengthening Dollar Fund (RYSBX). This fund’s objective is to match 200% of the return of the U.S. Dollar Index. So for every 1% the dollar rallies against the world’s major currencies, the fund aims to move 2%. To make this possible, the fund uses derivative instruments, such as index swaps, futures contracts and options. The risk, of course, is that the fund will fall twice as fast as the dollar, should it move lower.

  2. The EverBank Dollar Bull CD*. FDIC insured and available in 3-, 6-, 9-, and 12-month terms, this product allows you to pick the currency to speculate against, including certain emerging markets. Just follow this link for more information, or call 800.926.4922. Just be sure to let them know you’re an Investment U subscriber.

Louis Basenese 2008 Archives, Interest Rates and the Dollar Site Map, Louis Basenese strong dollar, weak dollar, weak dollar rising