Have a Strategy Before You Invest

By Jim Farrish | July 31, 2008 | 11:18 AM | 2 Comments

“Toughest market I’ve seen.” A quote from Bill Miller’s shareholders letter for the Legg Mason Value Trust (NSDQ: LMVTX). This is a common phrase I have seen and heard in print and interviews with analyst, money managers and investors. As you know from some of my past posts I am heavily allocated to cash for this very reason. When the trend is against you why fight the tape. The tough part of this market is the up and down swings and irrational movement as a result. We can blame speculation, options, futures, day traders, and any number of other reasons for what is currently happening. The reality is lack of clarity looking forward. Today is a good example of disappointment in expectations. The GDP data showed initial growth for the second quarter at 1.9%. That is great compared to the 0.6% for the first quarter. But, the estimates had risen to 2.3% for the initial number and therefore it was disappointing. The step up in growth is a positive from my perspective and I would expect after further review investors will see it as positive more than negative. Regardless we opened to the downside by better than 1%. What investors like myself are looking for is clarity. The clearer the outlook the easier it is to invest and take calculated risk. It is easier to make up for missed opportunities than lost principle is my philosophy.

A good example of this recently is in the financial stocks. The clearer the data becomes and the more predictable the outlook for earnings. In turn, the more stable the sector becomes. That stability then allows for more predictable growth resulting in an increase in money flow. Speculation always breeds volatility.

So how do you play this market? Cautiously! There are always opportunities somewhere you just have to be patient in letting them develop. The jump in oil prices yesterday has the buzz of should we be buying energy stocks? Exxon’s (NYSE: XOM) earnings data this morning showed how tough it is in this environment to make investors happy even by making money. They showed a record net profit of $11.68 billion, but they missed expectations from analyst. Thus, the stock is down 3% in trading. The oil sector has some work to do in determining direction. The inventory data was a disappointment, but you can’t base the future outlook on one data point. To do so is speculation and if that is your strategy, go for it. Support for oil was near the $122 mark. It was in an oversold state and with the news negative towards supply, perfect opportunity for a bounce. I had been short the oil sector using (NYSE: DUG) Proshares UltraShort Oil and Gas. With the rally yesterday I was stopped out of that position. Now I will wait to see how it plays out and determine my next course of action. I am not rushing out to be long energy unless it fits my strategy for investing.

Investing is all about knowing what you want and developing a strategy to deliver it. If you would like more information on this  topic you can log onto SectorExchange.com/strategy.