Crisis Investing Now!

By: Marc Courtenay Thursday, June 26, 2008 4:46 PM

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It seems so counter-intuitive to get excited as an investor when, as one consultant I know and respect put it, "the world as we know it is coming to an end!" Of course he said this in a tongue-in-cheek manner that reflects both his humor and intuition. "The world as we know it," when it comes to monetary policies, profligate credit practices and questionable business ethics needs to come to an end.

In the meantime it is not fun to see people getting hurt by the unfolding "penalty phase" of this current financial/monetary/credit/housing crises. "The credit crisis will extend into 2009, and perhaps beyond," Oppenheimer analyst Meredith Whitney sensibly wrote the day after some cock-eyed "experts" at the National Association of Business Economics (NABE) tried to claim the worst is over.

Whitney was 2007 contrarian superstar for bravely forecasting Citigroup's (NYSE:C) massive write-downs before they made headlines. So her words carry weight in the mainstream. And Whitney's recent call sent "investors" racing for the exits. "We see no near- or medium term comeback" she wrote of the firm this spring. "We believe losses will only accelerate further and be far worse than even the most draconian estimates."

If that is true of Citigroup, it probably is also true at Merrill Lynch (NYSE:MER), Washington Mutual (NYSE:WM) and maybe even at Lehman Brothers (NYSE:LEH). The U.S. financial system hasn't seen stress fractures this painful since the early 1930's. So it is not a good time for the country, but it might be a good time to prepare to do some "Crisis Investing."

Our friends over at Stansberry & Associates like Dan Ferris and Chris Mayer have been writing some interesting pieces lately on their version of being an investor during times of crisis and financial despair.

"It takes a long time for most investors to learn to be excited about a crisis. But really, nothing is better for investors than the kind of credit crisis we're having right now. Nothing is being destroyed except inflated prices and overconfidence, which will leave us attractive prices and a fearful environment.

"That's exactly what you want to see before you make a major, long-term investment. I recommend keeping an eye on our recommended holding company stocks, like Leucadia (NYSE:LUK) and Loews (NYSE:L). Experienced, long-term-minded dealmakers run these firms. At some point, they'll begin buying up troubled assets in real estate and finance. Watch what they buy.

"Another very good holding company, PICO Holdings (Nasdaq:PICO), just made its first real estate purchases since the crisis began. You might not recognize the company, but it owns huge tracts of land in Nevada and water rights. According to a very knowledgeable source close to the company: '[PICO Holdings] achieved the holy grail by getting voidance (water retitled from agriculture to municipal) to work in Nevada. Now they are planning on the eventual resurgence in Sunbelt single-family residential construction by buying very cheap tracts of land on the periphery of western metro areas, and working to secure adequate water supplies.'

"PICO has been buying up land around Fresno, California, where prices have fallen between 30% and 40%. And PICO plans to hold for a long time. Says the CEO, 'We're finding that we should be able to hold these properties... for a time period that is much greater than any previous cycle we've seen in real estate.' In other words, make sure you buy very, very cheap because it's going to be a long time before real estate turns around."

Go figure! When the wheels start coming off of real estate, the stock market, or commodity prices it still equates to both CRISIS and OPPORTUNITY. Just ask the Chinese, they can tell you much about the correlation of those two words.

It won't be too long before prices on real estate or stocks will get so temptingly cheap that only those who can't control their fears and anxieties will miss out on some "bargains of a lifetime." The last time I wrote that with conviction was back in 2001 when gold was selling for $285-an-ounce and silver was a dirt-cheap $4-an-ounce. I was also buying energy stocks even though one well-meaning friend was telling me, "oil will never be over $40 a barrel again."

The rest, as they say, is history.

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1/23/2009 8:08:30 AM Crisis Investing - A Three-Pronged WCM Strategy by Steve Selengut Crisis Investing - A Three-Pronged WCM Strategy One of the great things about being a professional investor is the opportunity one has to apply his or her long-term experience to the investment environment that is unfolding (or coming unglued) in the present. If nothing else, most successful investors develop a consistent strategy that allows them to take advantage of short-term changes and the opportunities that they create in a somewhat unemotional manner. You can always tell a "newbie" by a "let's see how you do for a year" comment, or a "what's hot" question. Wall Street would like us to ignore the fact that the stock market is a cyclical beast that changes direction periodically, and almost never at the turn of a calendar quarter or year--- cycles vary in length, breadth, and direction. Inevitably, less experienced investors get caught with their portfolio egos unprepared for market realities. Similarly, Wall Street would like investors to look at income securities (bonds, CEFs, preferred stocks, etc.) with the same analytical eye that they use for equities. They too are expected to grow in market value forever, even though it's the income that the investor is after. High total returns mean missed profit taking opportunities more often than they signal increased income. So as much as the wizards would like us to believe (a) that up arrows are always good and down arrows always bad, and (b) that they can get you safely hedged (protected) against the bad stuff with all forms of creative portfolio care products; its just never going to work that way. Cycles are a good thing. They cleanse the markets of both fear and greed residue, and (all appendages crossed please) this time, perhaps, they'll point out that both multi-level derivatives and congressional tinkering don't ever produce the intended results. Unfortunately, investors in general are a lot like teenagers. They know everything immediately; expect instant gratification; take unnecessary risks; fall in love too easily; ignore all voices of experience; prefer the easy approach; and feel that the lessons of the past just can't possibly apply to what's going on now. Duh, dude! That said, what can Joe the plumber do to protect his 401(k), IRA, or personal investment portfolio from the Bernies, Nancys, and Harrys that are waiting in ambush? How does he protect himself from unregulated scams, and Wall Street toxins now, and into the future? Well, it requires a slightly more mature mindset than the new media allows most investors the patience to develop, and an appreciation of the miracle drugs that have saved the lives of comatose portfolios victimized by the correction viruses of the past. What if: (1) In the 30's, you had purchased shares in from 20 to 40 prominent, dividend paying, NYSE companies, or even in October '87, or '97. Now, if you had sold all those issues that gained 10%, and reinvested 70% of the profits keeping a diversified portfolio of similar stocks, hitting "replay" religiously, how much more market value would you have today? What if: (2) At the same start date, 30% of your portfolio was placed in high quality income securities, and 30% of the income produced (and the remainder of that produced by equity profits) was reinvested similarly, how much more income would you have today than you do now? If you combined the two analyses, how much more working capital would be in your wallet? You would be amazed at the results of this research; it would lead you to these portfolio life saving, and KISS-principle preserving, conclusions: One: Every market up cycle produces profit-taking opportunities, and all reasonable profits should be realized--- in spite of the taxes. Two: Every market down cycle produces buying opportunities, and buying activities of three kinds must be continued throughout the downturn. Three: Compound income growth is a wonderful thing, so find investment vehicles that can be added to routinely and, if spend you must, always spend less than you make. Four: Unhappily, nearly all of your past decision-making has been back---wards. Just as the process described above is significantly more difficult to implement with mutual funds and other products, so too is the three-pronged strategy for dealing with market opportunities. Reinvest portfolio generated income in three ways, and leisurely according to your planned, working-capital-calculated, asset allocation. Good judgment and an awareness of overall industry conditions are always required: One: Add new equity positions, in new industries if possible, and keep initial positions smaller than usual. Never buy a stock that does not meet all Working Capital Model (WCM) selection criteria, and never stray more than 5% from your overall portfolio asset allocation guidelines. These acquisitions should be monitored closely for quick turnover, at net/net profits of from seven to ten percent, depending on the amount of smart cash (WCM again) in your portfolio. Two: Add new income positions when yields are unusually or artificially high, and watch for quick profits in this area as well. When yields are normal or lower than normal, diversify into new areas. For better results, do more "ones" than "twos" if possible. Three: Add to positions in stocks that have maintained their quality rating and dividend while falling 30% or more from your cost basis. If the addition doesn't produce a significant change in cost per share, return to "one" or "two". Add to positions in income securities to decrease cost per share and increase current yield simultaneously. Never allow a single position to exceed 5% of total working capital. When the going gets tough, the tough go shopping, avoiding the buy high, sell low Wall Street game plan. Steve Selengut http://www.kiawahgolfinvestmentseminars.com/ http://www.sancoservices.com Professional Portfolio Management since 1979 Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy" Reply Rating: (0) (0)

If nothing else, most successful investors develop a consistent strategy that allows them to take advantage of short-term changes and the opportunities that they create in a somewhat unemotional manner. You can always tell a "newbie" by a "let's see how you do for a year" comment, or a "what's hot" question.

Wall Street would like us to ignore the fact that the stock market is a cyclical beast that changes direction periodically, and almost never at the turn of a calendar quarter or year--- cycles vary in length, breadth, and direction. Inevitably, less experienced investors get caught with their portfolio egos unprepared for market realities.

Similarly, Wall Street would like investors to look at income securities (bonds, CEFs, preferred stocks, etc.) with the same analytical eye that they use for equities. They too are expected to grow in market value forever, even though it's the income that the investor is after. High total returns mean missed profit taking opportunities more often than they signal increased income.

So as much as the wizards would like us to believe (a) that up arrows are always good and down arrows always bad, and (b) that they can get you safely hedged (protected) against the bad stuff with all forms of creative portfolio care products; its just never going to work that way.

Cycles are a good thing. They cleanse the markets of both fear and greed residue, and (all appendages crossed please) this time, perhaps, they'll point out that both multi-level derivatives and congressional tinkering don't ever produce the intended results.

Unfortunately, investors in general are a lot like teenagers. They know everything immediately; expect instant gratification; take unnecessary risks; fall in love too easily; ignore all voices of experience; prefer the easy approach; and feel that the lessons of the past just can't possibly apply to what's going on now. Duh, dude!

That said, what can Joe the plumber do to protect his 401(k), IRA, or personal investment portfolio from the Bernies, Nancys, and Harrys that are waiting in ambush? How does he protect himself from unregulated scams, and Wall Street toxins now, and into the future?

Well, it requires a slightly more mature mindset than the new media allows most investors the patience to develop, and an appreciation of the miracle drugs that have saved the lives of comatose portfolios victimized by the correction viruses of the past.

What if: (1) In the 30's, you had purchased shares in from 20 to 40 prominent, dividend paying, NYSE companies, or even in October '87, or '97. Now, if you had sold all those issues that gained 10%, and reinvested 70% of the profits keeping a diversified portfolio of similar stocks, hitting "replay" religiously, how much more market value would you have today?

What if: (2) At the same start date, 30% of your portfolio was placed in high quality income securities, and 30% of the income produced (and the remainder of that produced by equity profits) was reinvested similarly, how much more income would you have today than you do now?

If you combined the two analyses, how much more working capital would be in your wallet? You would be amazed at the results of this research; it would lead you to these portfolio life saving, and KISS-principle preserving, conclusions:

One: Every market up cycle produces profit-taking opportunities, and all reasonable profits should be realized--- in spite of the taxes. Two: Every market down cycle produces buying opportunities, and buying activities of three kinds must be continued throughout the downturn.

Three: Compound income growth is a wonderful thing, so find investment vehicles that can be added to routinely and, if spend you must, always spend less than you make. Four: Unhappily, nearly all of your past decision-making has been back---wards.

Just as the process described above is significantly more difficult to implement with mutual funds and other products, so too is the three-pronged strategy for dealing with market opportunities.

Reinvest portfolio generated income in three ways, and leisurely according to your planned, working-capital-calculated, asset allocation. Good judgment and an awareness of overall industry conditions are always required:

One: Add new equity positions, in new industries if possible, and keep initial positions smaller than usual. Never buy a stock that does not meet all Working Capital Model (WCM) selection criteria, and never stray more than 5% from your overall portfolio asset allocation guidelines.

These acquisitions should be monitored closely for quick turnover, at net/net profits of from seven to ten percent, depending on the amount of smart cash (WCM again) in your portfolio.

Two: Add new income positions when yields are unusually or artificially high, and watch for quick profits in this area as well. When yields are normal or lower than normal, diversify into new areas. For better results, do more "ones" than "twos" if possible.

Three: Add to positions in stocks that have maintained their quality rating and dividend while falling 30% or more from your cost basis. If the addition doesn't produce a significant change in cost per share, return to "one" or "two".

Add to positions in income securities to decrease cost per share and increase current yield simultaneously. Never allow a single position to exceed 5% of total working capital.

When the going gets tough, the tough go shopping, avoiding the buy high, sell low Wall Street game plan.

Steve Selengut

http://www.kiawahgolfinvestmentseminars.com/

http://www.sancoservices.com

Professional Portfolio Management since 1979

Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

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