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What to do with Your Stocks

Posted on Monday, May 4, 2009 in Stocks

In late 2008, Lakeside observed investors nationwide displaying unprecedented panic over the stock market. Both large corporations and small investors alike sold stocks in a massive attempt to get cash in hand and quickly.

Where we once turned to our parents to gauge the severity of the market’s cycle, we now turned to our grandparents to see if they’d experienced anything this devastating in their lifetime. First, reports indicated the economy was the worst it had been in 10 years, then it became the worst market in a generation, and now, some people say it’s the worst market most have ever seen or heard about.

Much like our peers in the investment business, our clients rightfully demonstrated concern about their investments. Some wanted to sell their stocks and a few did.

To understand the situation from Lakeside’s perspective, it’s important to note that our average client is debt free and had no more than 20 percent of their investments in the stock market. We can only imagine what an investor under the auspices of a Wall Street firm must have felt - 50 percent account declines, zero accountability and to top it all off, many investment firms were either bought, sold, merged or closed the doors.

Even more important, is knowing that today the market is less volatile than last fall and there are many opportunities for investors with the right guidance.

The media propaganda machine is once again in full force. The talking heads tell you excitedly that the market rallied 20 percent in the past few weeks and they are absolutely correct. As a word of caution, there is always opportunity to manipulate and segregate performance to tell a good story and Wall Street is a master at that. This is something investors have seen since railroad stocks were pushed into their hands right before the panic of ‘07, 1907 that is.

Here is the scenario we see and the rules to follow:

Rule #1 –We believe that the stock market is indeed a forward-looking indicator, historically, moving six to nine months ahead of the actual economy. If we are correct, and you are an investor planning to “get back in when the economy looks better,” you will be too late. The economy will look better in the rear-view mirror and that may be 18 months too late.

Rule #2 -The media sets the tone as a contrarian indicator. In our work, we are regularly asked to give an opinion on business issues. Often we are given a list of “hot topics.” A hot topic is one that will sell well and is determined by where the public places its worry that month. I can assure you that what worries us is rarely what harms us.

Here are a few examples:

  • Forbes Magazine Cover 1990: Japan, The New Global Superpower. In print right after Japan’s stock market reached 40,000 and right as it began a long decline toward 16,000 - a 60 percent drop.
  • Fortune Magazine Cover 2000: Ten Stocks to Buy and Hold for the next Ten years. Both Enron and Qwest were on that list. Need I say more?
  • The Seattle Times Cover Story 2007: Why Seattle’s real estate market will hold up better than San Diego.
  • The Seattle Times Cover Story 2009: Local Foreclosures up 300 Percent - Oops.

Rule #3 - Know the source and motivation behind the research you follow. An extremely bright young analyst I follow has been calling buy signals on local bank stocks for two years. She recently gave up and started sending sell signals after stocks fell 80 to 90 percent. We often provide her our insights about what we see in the market, however, her MBA usurped her instincts in this instance.

Since 1999, we’ve obtained our research from independent research firms. We follow research from Wall Street as well, but have not put much faith in it for years.

I will end today with a few statistics for you to digest:

  • Last fall, less than 30 percent of all stocks had more buyers than sellers.
  • Today, more than 60 percent of all stocks have more buyers than sellers.

Looking back, October 2007 was the perfect time to reduce your exposure in the stock market. During this time, most stocks had more buyers than sellers. Late 2008, was the time to increase your exposure.

We feel that the easy money has already been made with 60 percent of all stocks on a buy signal. Careful selection is necessary going forward.

The information presented is the opinion of Lakeside Capital and is not meant to serve as investment advice.

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