A Different Way Of Thinking

July 18, 2002
Dave Floyd

Let’s do a 180Â° turn regarding the theme of the
column today. Yes, I will still touch upon the trading day to come,
but let’s sidestep the usual banter and focus on something that, unlike the
day-to-day trading, is equally important — investing. For me, perhaps others, I
am really only highly effective at doing one to two styles of trading, HVT
and intraday swing trading. Naturally, my bread and butter is HVT.
Investing, on the other hand, is a completely different approach. I am OK at it,
but not consistent enough to make it an occupation.

I sympathize with portfolio managers to some extent because it is a tough
game, especially in this wild market. Trying to stay the course on an investment
theme is tough nowadays, especially when each day seems to send the market off
in new directions. Nonetheless, a close look at where we have just come
from will partially explain this phenomena.

Now that the bull market has officially ended, say a year or so ago, people’s
expectations of the markets have not changed. Many still expect a triumphant
return to the go-go days. Sure. Whatever they say. Like all manias in history,
they all end the same way, and more importantly, the rules that were applicable
prior to that are no longer valid. In fact, history shows that the vehicle of
the bubble (stocks, and tech stocks specifically) will not be the vehicle of the
next bull phase/bubble. The truly independent thinkers were sniffing out
alternatives long before the word bubble ever graced the covers of our nation’s
periodicals. Yes, there will surely be some wonderful rallies in the months to
come in extremely beaten down sectors, but the point here is to be able to
identify areas that very few people are looking at currently.

This requires a far different mind set than trading. It is an approach I
truly enjoy, simply because it is completely different from the frenetic pace of
trading. I am reminded of hearing Jimmy Rogers and Nicholas Talib talk about how
they simply go about their day at a carefree pace (so to speak) while they
contemplate investment ideas. Both men have been wildly successful. Investing is
truly about contemplation, not racing toward some speculative arena like us
traders do. It is different, but at the same time similar. The one who thinks
most clearly and objectively will wind up with the lion’s share of the gains.

Investing, by nature, is an act in patience. As daytraders, it is too easy to
outthink your longer-term positions, simply because you do have a good idea of
where the market is heading in the short term. I have been guilty of exiting
perfectly good investments because of my ability to forecast the market in the
short run, only to not get back in when the timing was better. The point is
simple:

Either invest and forget with a protective stop, and re-evaluate from time
to time.

Or Invest and manage the position based on your timing skills.

If there were ever a time to implement this strategy, it is now. With most
Americans and foreigners getting more and more disgusted with equities each
passing day, you can be sure that other opportunities will be uncovered. Just
uncover them before everyone else does.

Naturally, even if our market is not the only game going forward, trading
will still exist, but perhaps in different sectors. The investment sectors going
forward will naturally be the areas that traders also reside in. For those of
you who were trading back in the early ’90s, do you recall names like Telefonos
de Mexico
(
TMX |
Quote |
Chart |
News |
PowerRating), Halliburton
(
HAL |
Quote |
Chart |
News |
PowerRating) and Compaq (CPQ back then)? Sure
you do. Those were the hot investment areas, so naturally the hot trading areas.
So, despite the market acting like a rudderless ship, you can be sure that the
next investment theme will offer us active daytraders some new stocks to toss
around.

So what are those potential areas? Well, I can only offer my insights based
purely on my reading and observations. One thing is for sure, they are not
mainstream, and typically mainstream views tend to be toward the end, not the
beginning of cycles. A casual student of market history will quickly validate
this point.

Bonds

Convincing arguments can be made for either case, however, with everyone
bullish on bonds, naturally one needs to look the other way. There is no
question that our economy is not exactly healthy. I have stated this many times
in this column, so I will not go into it. I will only say that if everything is
so wonderful, why have the retail stocks been getting slammed and the Big 3
automakers brought back 0% financing? That being said, the chance of rates going
higher is slim. Combine that with the stock market getting slammed, and the case
for bonds is pretty strong.

However, given that the Fed has flooded our system with "easy"
money and increased military/government spending in wake of 9/11, one can also
make a case for inflation down the road. The plight of the US dollar also hangs
over bonds. While many have debated the resiliency of foreign capital coming to
our market, we still do not truly know when and if it will ever seek other
investments. What is different this time is that the weak dollar is eating
further into the total returns.

If you go back to the early 1980s when inflation was running rampant and a
30-year (yes, 30-year!) bear market in bonds was coming to a close, you could
not get a soul to pony up and buy bonds, yet that was the absolute best time.
Given that the yield had gone from a low of 2% in the late ’40s to almost 15% in
the early ’80s, this was a logical conclusion to draw. We now have the opposite
psychology.

Today we have a situation where most people feel that bonds are the best
place to be. Perhaps, but give it some serious thought. I believe this easy
money orgy prompted by central bankers will turn out to be a double-edged sword.
So, while bonds still offer a nice alternative to equity-based alternatives (I
am long bonds), keep your radar screen on for the subtle or not-so-subtle signs
of inflation.

Emerging Markets

Based purely on valuations, it is really hard to ignore
these areas. Not only are the valuations in line, several of these economies are
beginning a more robust recovery than here. Obviously, if our economy stumbles
further, there will be a ripple effect. That is a distinct risk. However, if
there is some sort of an inflationary environment developing, countries that are
the lowest cost producers to begin with would have a built in advantage. A few
to look at:

Minerals: Russia and South
Africa

Software: India

Electronics: China

Textiles: Bangladesh

Steel: Brazil

Source:
Marc Faber International

Domestic Real Estate

While I will not claim to be a real estate expert, my
observation is simply that we have easy money once again chasing an asset which
has appreciated quite a bit already. When and if a bubble exists/bursts is open
to debate. However, high turnover is always associated with speculative
conditions. The outpacing of existing home sales to new home sales is one sign
of froth.

Additionally, any market that is increasing because of
a colossal increase in credit should be viewed with skepticism. The telecom
sector is a wonderful example of tons of money chasing not-so-solid business
models. The Austrian School of Economic Thought
lays out the ramifications of these decisions and why they are so detrimental. A
stock like Fannie Mae
(
FNM |
Quote |
Chart |
News |
PowerRating) is a potential disaster in the making, not only from the exposure to
negative equity in the event of a real estate slowdown, but some astute
investors have questioned just how "clean" their books are. Naturally,
it has not exactly been the easiest stock to be short for the last few months,
but the trend is slowly coming the way of the short sellers.

My point in all this is really simple. It is not to
make recommendations on where to allocate capital, but to offer a way to think
differently from the crowd. It takes incredible patience and insight to go down
this road, but all the great investors I have read about have this trait in
common. So the next time when software companies in India or Russian REITs
suddenly become the next investment fad, you can be sitting there unloading
toward the top with incredible gains while the talking heads and investment
lemmings are just getting their positions established.

Yesterday’s long pick of Intersil
(
ISIL |
Quote |
Chart |
News |
PowerRating) based on the 15-minute chart with a move above 23.26 panned out very
well. However, like many trades these days, it was short lived. I trust you had
in place either a protective stop, or better yet a trailing stop, so that some
profits were locked in.

Key Technical
Numbers (futures):

S&Ps	Nasdaq
937-35	1066
926	1049
917	1040 (key)
908	1033
898 (very key)	1014
879	1007
875 (contract low)	995
	972

As always, feel free to send me your comments and
questions. See you in TradersWire.

Dave

A Different Way Of Thinking

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources