2011 Stock Market

Over the next couple of weeks, I will discuss how I expect the U.S. and global stock markets to perform in 2011 and how to develop a new investing paradigm to take advantage of what should be a very different market. Globalization is changing the way that markets work because there is greater interdependency and no market silos. Compassionate investing may also present strategic opportunties in 2011 while dispassionate investing may create headwinds to success. Stay tuned...

Compassionate Investing

I have gotten away from creating new posts on this blog due to a load of work, but also a lack of comments from any readers. It is difficult to know if anyone is actually reading these posts which I hope are valuable, but take time and thus some feedback would be appreciated to determine if these posts add value for those looking for both financial planning and professional investment advice. I will continue to post until the end of this year and then see where we stand.

Seeking Alpha recently published an article extracted from my newsletter where I discuss whether or not investors should consider compassion when they design their investment strategy for 2011. This is certainly not covered in any real way by the bible of strategic investing "The Intelligent Investor" written many years ago by Benjamin Graham. This certainly puts "Value" investing in a different light as it assigns intrinsic value to "Compassionate Investing", by investing in companies that better the human condition and/or improve the environment. Less value is associated with investing in things that only make or lose money and give no thought to the damage that is done to investors, the environment, countries, or society.

I am not proposing that compassionate investors only invest in social funds or in companies that improve the environment or human condition, but I am saying that compassionate investing can be made a part of a successful investment strategy and that we should consider the damage that we do when we invest in things that do more harm then good. Perhaps I should write a book called the "Compassionate Investor" to describe in more detail how this can be done without sacrificing investment returns and how investors can become more successful in their lives and meeting their financial objectives by doing so.

Institutional vs. Retail Investing

Institutional investors now comprise over 60% of the U.S. stock markets. This is up nearly 20% from 20 years ago. How institutional investors invest has a huge impact on the direction of the stock market. Many institutional investors are mutual funds so some of this shift comes from retail investors who did not invest before and now buy mutual funds for the knowledge that fund managers bring and for diversification. Not many actively managed mutual funds beat their indexes so individual investors are increasingly buying index funds and passively managed ETFs. Retail investors who buy stocks play an increasingly small part in the overall stock market and its direction and when they do buy they need to be extra cautious because an institutional investor that sells their entire stake in a company can cause a stock price to drop precipitously. Likewise, if a mutual fund buys a large stake in a company, the stock price may rise as demand for shares increases.

What this all means is that retail investors should perform due diligence when buying a company's stock to determine if artificial demand for shares has created a mini-bubble in a share's price which could be difficult to recover from when the share price stabilizes in line with its fundamentals. When retail investors follow institutional investors in a particular company, the retail investor will see diluted earnings or out-sized losses if the buy at the wrong time so they must be cautious when buying individual stocks.

The Global Economy is No Match for a Capitalized Media

I am back from an extended summer vacation with my batteries fully recharged so that I can clearly visualize the direction of the global economy and its impact on the stock and bond markets. My goal with this post is to provide some educated thought on how the average investor can protect what they have and still earn a decent return on their investment while the market tosses and turns like an insomniac nearing their next month without sleep.

The bottom line is that the global stock market, with the possible exception of emerging markets, is now driven more by human behavior than economic fundamentals which is exacerbated by the media who overly dramatize financial and economic news and are not beneath doing a little fear mongering to sell newspapers and ratchet up viewer ratings. In its present weakened state, the global economy is no match for a capitalized media! I will take up how to deal with the Pavlovian response of the markets to a media gone amok in a later post.

Sadly, the lower we are on Maslow's Hierarchy of Needs, the worse the stock market's impact has been on our retirement portfolios and, with housing foreclosures rampant, many of us are preoccupied with finding a place of shelter instead of assessing the health of our portfolios. To those I say get your house in order and then make a personal recovery plan to salvage your retirement portfolio. This is critically important and must include sufficient cash for liquidity, bonds and not bond funds, dividend stocks, and some low cost emerging market mutual funds or ETFs to even things out. I will provide more details on how to structure a retirement portfolio in today's market in my September "Smarter Investing" newsletter.

Dividend Yields Up to 20%

Well it has been awhile since my last post primarily because I celebrated my 60th birthday in Las Vegas and am still recovering from that wonderful week and a couple of other weeks of vacation. Now that I am properly rested it is back to the grindstone.

I have issued the July newsletter where I talked about some stocks that yield nearly 20% in dividends. Normally I would not advocate buying any stock with yields this high because it is very likely that there is something seriously wrong with the company whose share price has dropped so precipitously that their dividend yield has risen to double digit numbers meaning that the likelihood that they will pay that dividend is extremely small and it is more likely that they will cut ir eliminate he dividend causing the stock price to fall even further. There are , however, exceptions to every rule or cascading event.

The REIT stocks like Chimera and Anally Capital Management are potential exceptions because they have to pay out 90% of their profits as dividends and they are exploiting the spread in borrowing costs and mortgage rates to make a lot of money. This is goo management and a smart investor can take advantage of the huge dividend yield as long as they keep a close eye on interest rates and sell the stock as soon as there is any sign that interest rates are going to go up in the foreseeable future, likely a year from now. Still, a 15% to 20% return on your investment over a year's time is a pretty good deal if you understand what you are getting into and monitor the situation closely.

An Apple a day keeps Verizon at bay

I stopped in an Apple store yesterday to see the new iPad but more to observe the customer interest this device. The iPad had more heft than I expected and an avid reader may quickly tire of holding the 1.5 lb iPad for an hour or more at a time. Still there were a ton of people perusing the iPad and Apple has sold a million of them to date and interest does seem to span a broad demographic so sales may be better than expected. Add in Apple's new iPhone 4 which people are burning the phone and internet lines to pre-order and it looks like Apple has two big potential blockbuster products on its hands with the only caveat being poor AT&T (when compared to Verizon) wireless coverage. This is not yet a problem yet for the iPad since the 3G version has not yet been introduced, but will soon be. Being joined at the hip with AT&T puts some serious drag on iPad and iPhone sales but when my retired friends are drooling over their new iPhones and talking about buying an iPad for themselves it will no drag enough to prevent Apple from having a banner year especially when the 3G version of the iPad is introduced tot he market. Apple looks like good buy right now for those who need to diversify into technology stock with good potential growth.

Gold Bubble or Safe Haven?

The flight to safety in Gold is likely to catch up to anyone who is not paying attention. Graham sagely recommended that intelligent investors sell when stocks are expensive and to buy when they are cheap. This goes for gold and any other precious metal. Who doesn't believe that gold is expensive today? If you hold gold too long, there is a good chance that you will not be able to sell it fast enough when the bottom of the market drops out. It is better to sell off some gold now and put the money into other investments to hedge the market. I predict that as the U.S. economy strengthens, gold prices will beunder pressure and will fall under $800 an ounce by the end of 2011.