Tuesday, November 11, 2008

Buyer's Strike

The market can remain irrational longer than you can remain solvent." - John Maynard Keyne

There is a Buyer's Strike in the U.S. equity markets.  Volume has shriveled up like an over 40 starlet starved of her botox.  No buyers, low multiples, high dividends... hmmm.... there is a pony in here somewhere.

Let me share with you my 20+ years of experience.

Investors buy high, and sell low.  They wait for markets to "stabilize" (go up 20% to 30%) before they buy so that they can get killed in the subsequent profit taking.

Investors over concentrate, don't hedge, never short, hold losers, sell winners, skip research... and wonder why they don't make money in the market.

Here is a little fund fact to know:

Over the past 50 years DIVIDENDS represented nearly 1/3 of the total return investors received.  Over the next 20 years, because stock prices of dividend payers have fallen so low, dividends could be well over 50% of an investor's return.  Look among the wreckage - you will find yields of well over 5%, some much higher, in a number of "best of breeds" - and these companies increase said dividend over time.  A covered call writing strategy on top of these names would make even the most cursed investor look like a genius. 

Everything is in the price you pay.  The world equity market has lost 50% of its value, peak to today.  The time to have sold equities and commodities was months ago.  The time to buy bonds was several years ago.  Don't compound one bad bad trade with another.  Forgive yourself.  If you cannot, email me, and I will forgive you by return email.  Your next brilliant idea has no idea how dumb your last one was.

For example:  In 1994, the beginning of the 1990's Bull Market I had a string of poor trades.  I could not find my ass with both hands.  I went back to the drawing board, and by luck or skill (does it matter?) I put together my hottest streak until I hit Crude Oil last year.  I remember investors shunning me during my hot streak.  They really screwed the pooch on that one.  What the hell did "Toys R Us" have to do with Michigan National Bank Corp (Toy was a big loser for me; Michigan National was the first of a series of picks that changed my career)?  Not a thing, except the broker recommending them.  

What does the equity market of November 2008 have to do with the equity market of July 2007?  Nada. Zip. Zilch.

I cannot make specific recommendations in this forum but the selling of late has created the opportunity to pick up some of the premier energy assets with dividends that will pay off in spades over the years.  That is, unless the energy crisis gets permanently called off.

I would not bet on that.

Remember, every asset (besides Gold) you hold is someone ELSES liability.  Those bonds you own?  Somebody owes you the money.  The cash in your wallet?  The Federal Reserve is on the other side... its their liability.  You gotta put your money somewhere.  Who (or what) do you want on the other side of the balance sheet?  For my money, I want Oil, Uranium, Gold, Food, etc... and I want it to pay me dividends.

This does not mean to say that I am calling a "bottom".  It does mean that I think we are pretty close (Housing is getting close, too).  A year from now, my bet is the market will be higher, and if you get 6% in dividends and another 10% to 20% in covered call premiums... it would be awfully hard to lose money.  Not that some folks won't be able to do just that, but it won't be easy.

By way of disclosure: I will be selling naked puts (trying to lower my entry price), and selling covered calls on the positions I already have (to bring in income and hedge my bets).

Good Luck!

Mentatt (at) yahoo (d0t) com


Jim said...

I've enjoyed reading your posts over that past few months. Keep up the excellent work.

bureaucrat said...

40 years ago, Grandpa bought us kids stock in such companies as T and People's Gas (now TEG), primarily for the dividends. Since then, I grew up and tried all the major ways of investing, to get a taste (medium and small companies, gold, junk bonds, REITs, short term bond funds (damn Russians), zero coupon bonds, etc.) but recently, I've come right back to Grandpa Paul Bradford (now deceased) with my investing. A big circle. He was right all along. I love dividends. I love cash in hand. I bought BPT to get cash in hand from the oil biz, and that took months for me to figure out. ;)

Donal Lang said...

May I sound a note of caution; you are right to recognise that the world has changed, but one aspect of this may be that the markets hit the bottom of the crash, but then keep going down and down (just more slowly). If (as I think) there is a new paradigm at work here, then there won't be a bounce, growth will have ended (with massive consequences for the fractional banking structure)and there will be a long term simplification and decentralisation of economies.

If that is the case then all dividends will be suspect because of a declining market for everything. Even oil and gold.

Greg T. Jeffers said...

Hey Donal:

My, you are in a cheery mood...

You must believe that the government cannot cause inflation ever again. Perhaps.

But while you have MONEY, you have to do something with it. Not everyone can buy a farm, or a ship, etc...
governments will insist that taxes be paid in their currency.

This is certainly a complicated issue, but even if you get the disaster right, the outcome might not be what you think... just look at the US$ and Gold of late.

We might not get the bounce. But if XYZ's dividend of 7% is safe, at least you will get the dividend. If you sell some calls, you will also get the premium.

Donal Lang said...

Sorry Greg, I must be having an off day; its cold and raining outside, and I think I'm reading too much news too!

But, that said, I'm old enough to have seen 3 major recessions in my working life, and I went off to study economics to try to understand why I thought fractional banking had inbuilt instabilities (and nobody else seemed to), and why i thought oil was more fundamentally important than other commodities (and most economists didn't).

I think this recession is different because I can't see the mechanism to allow any Western economy to climb out of it. Whether it is the redistribution of oil's bonanza (e.g. China and India outbidding the West), or our high and inflexible wages, or our lack of manufacturing, or lack of cash to reinvest in infrastructure, .....

How do YOU see us getting out of this in, say, 5 or 10 years time?