Rules for Investing in a Changing World and More…

A simple philosophy for momentum investing is the following. Follow the money. When the money piles on, pile your money on with it. When the money starts sinking and piling on to bonds, move your money with it. If you invested heavily from 1993-1999 in tech stocks you would have been rich. Then when it started to dive in 2000, you would have still locked in profits while you sell and move into bonds (which then would have a huge rally, as yields plummet). Even if you started selling 2001, you would have not been too late. There really was no reason to buy back until 2003 because money continued to fall off. Then when markets started rallying in 2003 you jump back in…then you would be here today sitting pretty with 50-100% gains today. Also following the money would have lead you to emerging markets, which has seen 500-1000% gains over the past 5 years. The thing is that you do not have to be a visionary or ahead of the pack. If you started piling in money in emerging markets in 2003 or 2004 or 2005 or even 2006, you still would have fared nicely. Even in 2007 it’s continuing. During the tech boom, 1995 or 96 or 97 or 98…all wasn’t too late. And this rally could continue well in to 2010.

I don’t believe in buying and holding…that’s not how the big boys make money typically (holding on to AT&T, Lucent, Pfizer, Microsoft, General Electric like old people do…have lead to returns flatter than Keira Knightley’s chest over the past 8 years).

Flat no good. . Bigger better.

As Jim Cramer says…buy and homework. And as John says…trendy investing is the best investing.

When it comes to investing, I have 10 rules:

1. Follow the money (on the way up and way down, follow what the big boys and market are doing)
2. Better late than never (emerging markets 03-present, tech and dot com 93-99, never too late to buy or sell…look at Brazil and China…you get dips along the way….but they are going straight up with no end in sight)
3. Flat is no good, Bigger is better
   
   (5 year charts of Playboy vs Hansen (maker of Monster Energy Drinks))
4. Don’t try and catch a falling knife (2000-2003, if your stock keeps dropping get out, look at homebuilder stocks now)
5. Buy and homework (Jim Cramer….would lead you to stocks such as CROX and MA)
6. Trendy investing is the best investing (rich get richer, poor get poorer…what do you do? Buy Goldman Sachs, Buy Tiffany & Co, Buy Sothebys Buy MGM… Sell Wal-Mart, Sell Capital One, Sell H&R Block … Housing bubble bursting what do you do? Sell or Short Indymac, Hovnanian, H&R Block … Buy Portfolio Recovery Associates and Buy Landamerica)
7. Don’t listen to analysts (I remember that Enron and Worldcom were the most heavily recommended stocks in 2000. They will upgrade a stock for a false rally in order to bail out their struggling holdings. They will upgrade a stock at the peak so they could starting shorting the stock. They will downgrade a value stock so they can start buying. They are only out for the interest of their trading and investment banking division)
8. Shorting and Options are for everyone, not for just advanced investors. Options contracts allow investors to control 100 shares of a stock, usually for the price of 10 shares. Calls allow you to make money on the way up, Puts allow you to make money on the way down. And covered calls allow to you to make money on flat stocks. Shorting stocks is a great hedge tool and if used properly can really get the max out of “trendy investing”. (Go long on emerging markets, short on US housing & mortgage stocks)
9. Don’t care about dividends (high dividend yield often means slow growth, dividends don’t matter either way…if it pays one, it doesn’t hurt…if it doesn’t pay one…it doesn’t hurt). But if it does pay one, reinvest it (option not available at all brokerage firms…like Scottrade).
10. Invest for a changing world. (We’re facing global warming and we are doing something about it. We’re moving towards a cashless society. There are a lot of old people now, and they are living longer. World is beginning to tackle the hunger and AIDS epidemic. The separation between rich and poor, growing exponentially. Need for waste and water treatment has never been greater. Just thinking about this should bring up at least 10 ticker symbols in your head)

Let me dole out two buy and sell recommendations.

BUY BUY BUY

American Express – This is an investment for a cashless society, separation between rich and poor and also people being older and living longer…all rolled into one. AMEX is the #3 credit card processing company after Visa and Mastercard. And you’ve seen how Mastercard stock has been doing. I however do not recommend the newly IPOed Discover Financial because that is a card poor people tend to have and also nobody accepts it. It also is a leader and the premier provider of upscale travel services. If it had not spun off Ameriprise it would have been even better…but just buy AXP and AMP separately to get best of both worlds.

Veoilia Environnment – This French company is the world leader in water treatment/distribution, waste management, energy services and transportation. This stock is what Vivendi used to be before they took on Universal Studios (was a cancer to the old Seagram, cancer to Vivendi, now a cancer to General Electric). To boot, this company owns SuperShuttle (the blue van airport shuttle company) which is a trendy investment for the boom in travel. Buy both American Express and Veolia…you pretty much have half of the changing world covered.

SELL SELL SELL

FirstFed Financial, Downey Savings, IndyMac Bank, BankUnited, Regional Bank HOLDRS – There’s 4 stocks that are really one and the same. FirstFed/Downey Savings/IndyMac Bank are the three largest producers of Alt-A home loans in the state of California. BankUnited is a large player in state of Florida. Regional Bank HOLDRS gives you all the regional players rolled into one. Alt-A loans are basically nonconforming loans given to people with decent credit scores. They really aren’t much better than Subprime loans. Lenders aren’t really selling subprime products anymore, they’ve pretty much renamed it Alt-A. The knife will fall, but it’s just getting sharper at this moment. If you look at the charts of this stock, they are on a bearish trend, although they haven’t fallen hard. They are being upgraded by analysts. And CEOs are giving out misleading information. I would SELL SELL SELL or SHORT.

H&R Block – Look at the 5 year chart, the stock has been completely flat. Look at the 10 year chart you’ll see that the stock roared from 2000-2002? Why? This company made tremendous money with its subprime mortgage lender OptionOne. Now that division is counted as a discontinued operation and a tentative agreement has been reached with Cerberus Capital to sell it for book value minus 300 million. The operations are continuing to flounder and could be worthless soon (book value might be negative 1 billion soon, who knows). I think with the problems Cerberus is having with GMAC already…I think they will take a pass. And while this stock has been in the rut, we see analysts upgrading…activist investors making noise (which if you been investing for awhile is not always a good sign, as explained before). The CEO has been giving out misleading information for a couple of years now (once saying he was confident he could sell OptionOne for 1.3 billion dollars). On top of that…it’s core business of tax preparation is growing but struggling. It’s crooked tax refund anticipation loan business had to be curtailed due to regulators, it’s facing sharp competition from Liberty, Intuit and Jackson Hewitt. And it often pays rent for 12 mos, for a business that only is open for 3 mos. Is this a good company? You do the math.

I will update this blog entry tomorrow. Hope this helps investors out a little, it comes from my 8 years of investing experience.

***Note that John is currently short on HRB, FED, DSL, BKUNA, HOV. No long positions are held in any stocks mentioned at this time***

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