BUY and Hope Is Not A Good Investment Strategy

Mar.19, 2008 in Investment Opinions, Market Outlook, U.S Hot Stocks

“Buy and hope” is not an investment strategy. It’s a recipe for working until you’re 80. More and more of the investment world has come to the conclusion that we came to in early January:

1) We are in a recession. Even Warren Buffett is now saying it.

2) A bear market has preceded every U.S. recession in the modern age, and we are most definitely in a bear market.

3) This is a consumer-led recession. Tight credit and home price corrections have taken the wind out of consumers’ sails, and it’s going to take a while to work through this.

4) Unemployment rates will rise to 5.5%-6%. This is not the end of the world, but it will exacerbate the housing correction.

5) We’re only one-third of the way to the $600 billion to $700 billion in financial services writedowns. (People are recommending names like Citigroup (C) here, but I’d say it’s not a great buy until it drops to $15.)

So, how do you make money in this upside-down market? Well, first, you need to forget about “buy and hope” strategies. The world is simply moving too fast and economic conditions are too extreme to make money with the old buy-and-hold-forever strategy. It may have worked great from 1982 to 2000, but that was then, and this is now. Buy and hold works for Warren Buffett, but the genius of his strategy is buying privately-held companies with the excess premium from his $100 billion insurance company, i.e., he is using other people’s money. Do you have a $100 billion insurance company willing to give you tens of billions of dollars to invest? I think not. So, for the non-Buffett types, I have a strategy for profiting in a bear market. Hold on to the high levels of cash that you raised in anticipation of this bear market. I want to congratulate all who followed our advice to sell in January. They were able to take profits and build cash. And it’s going to be a great year when all of the blood is finally in the Street and we reach the final purging for stocks. That will be a great time to buy, but we’re not there yet.
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