With the S&P 500 down 13% so far this year, the market has been terrible. But most people are suffering so much from the middle class squeeze that they lack the discretionary cash to invest in stocks. For those who do have cash on the sidelines, there is a strategy they might consider that could yield big profits in the future: sift the downtrodden industries for survivors and buy their stocks as their prices fall.
The best opportunities for this strategy are in banking, home building, automobile and oil refining stocks. I would look for companies whose stock prices have been beaten down the most but that are not likely to file for bankruptcy.
How should investors evaluate whether a company in a suffering industry is likely to avoid bankruptcy? One way is to analyze all the companies in the industry based on how much money they need to pay back over the next several years and compare that figure to the amount of cash they have on hand now and whether that cash is likely to rise or fall over the next few years.
Firms that appear to have the most potential cash available to repay their obligations are the ones most likely to survive. There is more pain ahead for each of these industries, but at some point in the future, they are likely to come back. The challenge is to buy at the bottom, and the bottom is impossible to predict. Therefore, one strategy is to start buying now and if the stocks fall further, buy more to achieve a lower cost basis.
If you're interested in specific names, please comment below.
Nobody ever said investing is easy. If they did, they've never done it. It's emotionally draining, intellectually challenging, and unbelievably frustrating.
Especially when markets are as volatile as they are today. It's not just the stock market. Commodities like corn, gold, and oil spike one day only to fall the next. Bond prices run up, then get knocked back. Stocks, most noticeably when reflected by the Dow Jones Industrial Average (which only has 30 issues in it), soar 300 points one day, then crash 350 the next. There are no safe havens. No sector is exempt.
You may see a recommendation to "overweight" a stock or sector. An analyst is bullish on a stock or group and feels buying more than usual will be rewarded. It may or may not come true. While it's a good idea to overweight at times, it should never be done in excess, to a point where you're putting too much of your portfolio in one stock or group of stocks. That's when overweight turns into speculate.
A rational approach to building a portfolio is to have at least five different sectors, ones that aren't correlated. There are different definitions of sectors but there are usually between 10 and 15, depending on what publication or expert you use. These sectors are categorized into broad groups, such as Healthcare, Technology, Manufacturing, etc. Within each sector are many industries. Value Line defines 98 different industries, ranging from Coal to Auto Parts to Water Utility to Beverages. Healthcare, as one example of a sector, has pharmaceutical companies, hospitals, medical devices, anything associated with health. Technology has a broad spectrum as well, encompassing everything from computers to wireless communication.
I've always sensed that women make better investors than men. Call me politically incorrect but when I talk to a woman about investing, she's focused on protecting her savings, not using it to make more money. Women don't think about "beating the market." They think about being safe. They don't want to make a mistake and avoiding mistakes is sometimes what makes all the difference in getting investment returns. And women are less prone to trading and more attuned to buying and holding. As Warren Buffett says, "Activity is the enemy of performance."
Maybe it's our testosterone that drives us to turn investing into a championship sporting event. I don't know. But I've felt that the male competitive spirit often is the very thing that drives us into stupid investments.
Until recently, I couldn't put my finger on how our male "Y" chromosome puts us at a genetic disadvantage to women. However, I recently discovered that Brad Barber and Terrance Odean of UC Davis validated my intuition. They published an article in the February 2001 issue of The Quarterly Journal of Economics titled "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment."
Barber and Odean obtained trading data from a discount brokerage for over 35,000 households and analyzed investing patterns for six years to test whether overconfidence leads to more trading and lower returns. Since in areas of finance psychologists have proven that men tend to be more prone to overconfidence, the genders were separated so that their trading habits could be studied individually.
This is the part of a series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
Your broker talks. You listen. At least that is the way it is for most investors. You assume (and she definitely assumes!) she has an expertise that will help you maximize your returns. Sometimes, you almost feel like you should be taking notes.
Based on my experience, this is often not the case. Brokers are not required to have any background in finance or economics and their training is focused primarily on sales.
I thought it might be interesting to turn the tables. Here are some questions you should ask them.
Question #1: What is the most important factor that will affect my returns?
Answer: Your asset allocation, which is the amount of your investments allocated to stocks, bonds and cash. Not stock picking; not mutual fund selection and not market timing. If your broker gets this wrong, get a new broker.
This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.
The financial pundits are in a feeding frenzy.
When oil was soaring, they told us to buy energy. When it dropped, they told us that energy stocks were "old news."
When financial stocks were tanking, they told us to dump them. Now they are telling us to buy them because this is a "buying opportunity."
Don't take the bait.
They have no idea whether a stock is poised to take off or about to plunge. Neither do I. That is the point. No one does.
Here is what we do know.
The stock market is random and efficient. Stocks are efficiently priced because all information about them is in the public domain, scrutinized by hundreds of thousands of amateur and professional investors every second of every day.
In a conversation with an attorney friend of mine, who happens to be a woman, she asked for some general financial guidance. During the course of the conversation it occurred to me that women need to save more than men. There are many reasons for this, here are a few:
The first and most obvious reason women need to save more than men is that they live longer -- often without the support of a significant other. Living longer and living alone cost more money.
Second of all, women still do not have complete earnings parity with men. Some of this has to do with job type and some with history. But nevertheless, we are not there yet. If there is a 15% disparity, then a woman is starting at a disadvantage whether saving for her retirement in the future or for buying a gallon of gas today. This can only be made up by saving more and investing more. This is a worthy goal except that with less resources the difficulty is exacerbated.
Preferred stocks are much like squirrels. They don't live on the ground. They don't fly in the air. They're always somewhere in between. A preferred is like that. It's not equity in a company. It's not debt of a company. It's always somewhere in between.
That state of being, being in between, sometimes pays handsomely to investors. Other times, it leaves them totally isolated, with nothing to show for their investments. Here's how preferred stocks work, and why they're really for institutions, not individuals. Still, individuals may find them irresistible when they see some of the yields these hybrids offer.
With the real estate market in the toilet, most people would never dream of investing in property right now. "It's going down!" How do we know that? Because reputable sources like BusinessWeektell us it is.
And then there are the people who have made fortunes in the industry, and they see it differently. In an interview with Portfolio, Related Companies founder, chairman, and CEO Stephen Ross explained his decision to make huge new investments in Manhattan real estate"
"Too many people believe that when things are bad, they don't know how they can get good and when they're good, they don't know how they can get bad."
Ross has ambitious plans for the next few years: a $3 billion mixed-use development in Los Angeles, a $3 billion Colorado ski resort, and a 144-acre development in Phoenix, one of the hardest hit real estate markets.
Maybe the naysayer journalists know something Ross doesn't, but I somehow doubt it: he's number 68 on the Forbes list.
This post is part of a series where retirement expert Dan Solin offers simple answers to the ten toughest retirement questions. See all 10.
Q: How much should I save for retirement?
A: I have bad news and worse news.
Most experts believe you will need 75% of your "pre-retirement" income in order to live with dignity in your later years. In order to reach that goal you need to save 15% of your income.
That's the bad news. Keep in mind, that number includes any corporate match your employer provides.
The really bad news is that you have to maintain this rate of savings for 40 years, with no borrowing or pre-retirement payout.
Here is the real kicker: This calculation also assumes that you will achieve market returns with your investments.
Unfortunately, the average investor only achieves one-third of market returns because of high costs, poor investment choices and lack of financial education.
If you have less than 40 years until retirement and haven't been saving 15% of your income, you may need to start socking away 20% or more to catch up.
Remember, you need to be sure you are investing in a properly allocated portfolio of low cost index funds so you can achieve market returns. Unless you dramatically change the way you invest, you may be in for a serious post-retirement shocker.
If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:
Not reading the prospectus. Too many investors buy stocks on tips from a broker or a TV stock promoter. They do not read the financial statements of a company. If they did, they would know about financial challenges, legal problems, industry uncertainties and other problems which could hammer their investments. But people don't read these financial statements, in many cases because they lack the financial education to make sense of the information.
Not setting stop losses. People fall in love with a stock once they've invested. If the stock goes down, they hold on because they don't want to admit that they were wrong. Investors should set stop losses – if the stock falls 2% to 5% from the original price, they should sell. Most investors do not have the discipline to do this. But if they did, they would limit their portfolio risk tremendously. Would they also miss out on some opportunities? Probably, but more often than not, they'd save themselves losses.
Tired of dealing with 15- or 20-minute delayed stock quotes on the internet? Now you won't have to. The Associated Press reports that CNBC, Google, The Wall Street Journal Digital Network, and Xignite are teaming up with the NASDAQ OMX Group to offer free real-time stock quotes, without a subscription.
This isn't that exciting: most retail investors are already to get free real-time quotes through the websites of the brokerages they use -- Fidelity, Schwab, E*Trade, Ameritrade, ScottTrade and every other broker I can think of already offers this service.
The question is whether investors should be excited and, I believe, the answer is a resounding no. Warren Buffett has said that investors should only buy stocks they would be comfortable owning if the market closed for 10 years. Online trading has led to many investors checking their stocks hourly, turning it into a video game atmosphere of overtrading, speculative buying, and panic selling. I cringe when I think about how much money retail investors have lost because of "free real-time stock quotes!"
I'm always on the lookout for pearls of investment wisdom -- information on the down and dirty rudiments of securities analysis is important, but the more subjective "investment psychology" material can be just as key to investment success.
In an interview (subscription required) with the Wall Street Journal, Lorenzo Di Mattia, manager of Sibilla Global Fund, a hedge fund, explained that good trades are often painful while bad trades can feel wonderful: "Actions that make us feel good are usually a lot less profitable than the ones that make us feel bad or stupid. The best trades are usually painful."
It makes perfect sense -- we're pack animals, and going with the herd feels good. But it often leads to disaster -- the internet stock bubble, Beanie Babies, etc. Buying the stuff no one else wants can make you feel like a social outcast, but history has shown that that's often a good strategy.
It's a lot like dieting -- the stuff that feels good at the time can lead to a pretty bad-looking body. For more on the science of behavioral economics, check out Why Smart People Make Big Money Mistakes.
These past weeks, the deteriorating stock market that responds to expectations of slower or no economic growth in 2008, continued high oil prices, sagging housing market, high debt consumers and the financial industry quagmire, got me thinking about "my pal Warren" again.
It's times like these, when we are looking for a solid footing in the investment world, the few people with positive track records -- measured in decades, not years -- are worth examining once more.
Last year I started a series of stories on Warren Buffett's very basic investment cornerstones. Buffett's Berkshire Hathaway (NYSE: BRK.A) has such a track record. Today, given how many companies are up to their penthouse executive suites in debt, I thought I would continue.
The subject of debt is a simple one. Companies that carry excessive debt on their books are not as good as companies that have cash sitting around. Debt can be a drag on earnings, reduce the company's flexibility and opportunity in a slowing economy, and has all the negative impacts to a company that it does to an individual household.
Fannie Mae (NYSE: FNM) announced disappointing earnings. But the stock went up. Is that a signal investors think the worst is over, that the future looks brighter for financial stocks? Maybe.
While Fannie Mae is only one company, it's the biggest in the mortgage business. That means everyone is watching what it's doing and how it's faring. As Fannie Mae goes, so goes the mortgage market. As of the latest earnings release, things aren't going too well. Earnings per share showed a loss of $2.57, much worse than the 81 cents analysts predicted. Management cut the quarterly dividend to 25 cents a share starting in the third quarter to save money. To bolster its capital, Fannie will raise $6 billion, most likely in preferred stock since there's a strong market for income shares.
With the S&P 500 down 13% so far this year, the market has been terrible. But most people are suffering so much from the middle class squeeze that they lack the discretionary cash to invest in stocks. For those who do have cash on the sidelines, there is a strategy they might consider that could yield big profits in the future: sift the downtrodden industries for survivors and buy their stocks as their prices fall.
Ted Allrich is the founder of 
This is the part of a series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
In a conversation with an attorney friend of mine, who happens to be a woman, she asked for some general financial guidance. During the course of the conversation it occurred to me that women need to save more than men. There are many reasons for this, here are a few:
Ted Allrich is the founder of 
If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:
These past weeks, the deteriorating stock market that responds to expectations of slower or no economic growth in 2008, continued high oil prices, sagging housing market, high debt consumers and the financial industry quagmire, got me thinking about "my pal Warren" again.
Ted Allrich is the founder of 
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