2008 shaping up to be a difficult year for investors
By Jim Karger

Jim Karger wrote the “Business, Real Estate and Investing” column for Atención twice monthly in 2007. Due to other obligations and opportunities, he will contribute intermittently in 2008.

The year 2007 has been a volatile, wild ride for the markets, but for those invested in certain sectors it played out well. As of market close on December 14, 2007, I was ahead 15 percent for the year— not as good as those who went “all in” on energy or China, but well ahead of the broad US indexes. Buying Apple (APPL) early in 2007 didn’t hurt the cause— it ran from $87 to $190 a share. The drags were financial stocks— all of them.

Five rules learned the hard way

The volatility of this year’s market leads me to recount a few rules of investing and trading I have learned (the hard way) over the years that should never be violated. Here are five of the big ones: 

1. “Would have, should have, could have” is for masochists. If you make a bad investment decision, figure out why and do it differently the next time around Whining about what one “could have done” teaches us nothing except how to whine.

2. “Stock tips” are for suckers. My experience leads me to believe there are only three kinds of “tips.” The first comes from someone on the inside of a company who really knows what is about to happen and tells you about it, and then you trade on that tip. Not worth it, amigo. Prisons are filled with guys who used to wear white collars who wear jail denim today because they traded on insider information. The second “tip” comes from someone who knows nothing. They are “hoping,” and hope that you will hope with them. They are unlikely to provide you much in the way of prosperity. The third variety of “tip” comes from people who have recently purchased positions in the stocks they are touting in hopes they can get others to buy in, run the price up and then get out before everyone else hits the door. That’s zero for three, not good odds.

3. There are traders and there are investors. Decide which you are. Investors often use the “buy and hold” strategy and they usually perform at or near market returns, which is about 8 percent a year over the long term if fully invested. Traders, on the other hand, move in and out of the market based on many factors, including fundamentals, momentum and charts. Traders try to be long when the market is moving up and short when it falls. They will be wrong much of the time, but the good ones consistently beat the market because they will let their winners run and cut their losers quickly. Investing can be relatively passive. Trading is a job.

4. Decide whether you want to be proven right or whether you want to make money; they are often mutually exclusive. I wish I had a dollar for every time I’ve heard a friend say, “I’m way down on that stock but I know it will come back.” He’s probably right, but that’s not the point. If he had cut his losses early, he could have deployed that capital he is waiting for elsewhere, maybe in a stock moving in the right direction. 

5. Take profits from time to time. No stock moves in one direction only. When you have a good profit, say 50 percent in a position, take some off the table. This sounds easy but is very difficult. Don’t do as I did in 2007 and watch Starbucks hit $39.50 and then let it come back to $22 before you figure out the company is no longer compelling because it isn’t a growth story anymore. The facts changed; I didn’t. I paid for that mistake.

Evaluating your portfolio

Whether you are a trader or an investor, it is important to regularly review your portfolio and decide whether it makes good sense under current market conditions. In other words, are the reasons you bought a stock or bond or mutual fund still supported by the reasons you invested, or have the facts changed? I go through this exercise twice a year. Others do it more often; some less. 

December is the time each year I sell my losers and begin to reposition my portfolio for the coming year, which, as it so happens, is shaping up to be a difficult one. We all know the reasons: the U.S. economic slowdown, subprime loans going bad, adjustable rate mortgages readjusting, credit market disconnects, rating downgrades on complex debt instruments, whiffs of inflation in the air, the housing market in deep recession and a consumer who appears tapped out. 

Fear is everywhere. Even the “perma-bulls” (those who always believe the market is headed higher) are getting edgy as stocks continue to exhibit frightening volatility. Yet they remain optimistic, as always, quoting the newsletter pundits, most of whom predict 2008 will be another running of the bull. They remind us that the market is trading at a low price-to-earnings multiple, how the US enjoys low unemployment and has a Federal Reserve willing to do what is necessary to avoid recession.

Investors and traders must evaluate all of the information to which they have access and make fundamental decisions on what markets, if any, will move up and why, what markets are going to hit the bricks and how much risk they are willing to take to attain higher returns. About this time last year I invested in energy, Latin America, Singapore, China, Malaysia and India. I underweighted the US, Europe, bonds, commodities and cash. It wasn’t a perfect mix, but it beat the market by a long shot.

I don’t believe the same formula will be successful in 2008. The economic headwinds are too strong and the US economy will soon fall into recession, or even worse, stagflation. This means circling the wagons, getting into more defensive positions and staying liquid so that when the market bottoms and everyone wants out, I will be in a position to buy stocks that are “on sale.”

My investment strategies for 2008

While I do not ever recommend anyone follow anyone else’s investment strategies (including mine), here’s what I am doing and why.

Liquidating (selling)

- Losing positions. This is important to limit tax liability on the winners I sold this year.

- All US index holdings. I believe the US will (once again) underperform many other markets and if I am right on a recession it will significantly underperform.

Lightening up (selling some)

- Emerging markets. You’ve heard the adage, “If the US sneezes, the world catches a cold.” That hasn’t changed. I will lighten up my holdings in this sector but remain overweight because some parts of the world remain solid values (e.g., India and Taiwan). 

Maintaining (keeping what I have)

- Financials have been losers in 2007 and I may regret holding on, but too many investors are selling in a panic these days, and that usually portends a nice bounce and a better exit point. If am I wrong, then I may sell and go short this sector.

- Commercial real estate funds like CGM have had great returns over the last five years. They are riskier now, but some have decent returns even during recessions.

- Gold: the shiny stuff had a good run in 2007, but if the economy falls into recession gold will be a haven for investors and traders alike.

- Technology: several tech companies are well positioned for global growth even if the US hits the skids in 2008. I will keep my positions in Cisco and Apple but will begin selling out of the money calls on both of these stocks to hedge what will, no doubt, be some pullbacks during the year.

- Bonds: I am not a big bond fan, but if things get rocky and the Fed eases 100 basis points or more over the next year to try and stave off recession, long- and intermediate-term bond funds will do well.

Adding (buying new positions)

- High dividend plays: a plethora of energy stocks (and some others) pay annual dividends of more than 10 percent. While black gold may well finish lower in 2008 due to a slowing economy, the margins for some of these companies are high enough to maintain these compelling dividend yields. 

- Health care. People will stop going to Starbucks long before they stop going to the doctor and more people are popping more pills than ever. Drug companies overall underperformed in 2007. I’m betting they will bounce back in 2008.

- Utilities are traditionally a defensive play, if only because people don’t turn off their lights, and many utilities also pay good dividends.

- Hybrid preferred issues. Banks need liquidity and are willing to pay to get it. New hybrid preferred issues from banks like Wachovia are paying up to a 7.8 percent annual yield, which may not have been a great return in 2007 but it might be the pick of the litter in 2008.


This is my broad plan and rationale to begin the New Year and is just the beginning of a process. Next I will determine a target weight for each of the sectors in which I will invest and identify specific opportunities within each sector before buying, knowing that I face a challenging 2008, along with other investors and traders.

Jim Karger is a resident of San Miguel. He is not a stockbroker or investment advisor and does not provide investment advice. Any decisions on investments should be made only after your own research or consultation with your investment adviser. 

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