Adjust or Lose
Research for Online Investors

12/30/11

The last day of a tough year is upon us.  I will be glad to close the books on 2011, as it has been our toughest year.  After beating the market averages every year for the last three, we took it on the chin this year.

We didn’t recognize the importance of being defensive beginning in April.  It will sound self-serving (I don’t intend it that way), I thought about QE2 ending in April.  I gave it a lot of thought.  I thought about the eurozone credit crisis.  A lot.  We had written about it since Feb. 2010.  I felt like a town crier yelling “The End is Near.”  The market never took it seriously.  The problems in Europe never seemed to grab traction, so it became like a distraction rather than a ‘game-changer.’

Eventually all small fires grow into bigger fires.  All financial problems grow bigger until they are addressed.  On QE2 ending, I thought the U.S. economy was growing enough that the withdrawal of the QE2 stimulus would not be missed. I was wrong on both.

Without any adjustment to our investment mechanics, we charged ahead…it had worked so well before.  This is the danger of being locked into a pattern.  Every trading or investing plan works, until it doesn’t.

The hard lesson is to adjust your plan, or abandon it when the evidence tells you the gig is up.  As my brother would say, “That Dog don’t hunt!”  The easy comeback is “But he did last month!”  It is easy to continue doing what worked so well in the past.  It is hard to change.  Hard to adjust.  Hard to turn your back on the girl you took to the dance.

We have to have multiple approaches in our quiver of investment methodologies.  We have to be willing to change our approach.  We have to be willing to sell our favorite stock, a great company; because it doesn’t fit the investing environment we are in.

We didn’t move to Blue-Chips in our long-term portfolio because we thought they would be drug down too.  They were not.  We were overloaded with growth stocks.  High growth is great when the economy is growing.  High growth stocks take it on the chin when investors get nervous.

We were loaded up with high beta stocks in our covered call portfolio because they command the best premiums.  They got hit like a softball in a Yankee’s game.

Avoiding jumping into Blue-Chips was founded on our experience in 2008.  Investors got scared and bid the price of Blue-Chips up…and looked safe for a while.  Then 2009 came and every baby got thrown out with the bathwater.  We had a great 2009 buying the Blue-Chips at steep discounts when fear took over.

Are investors that are crowding into MCD today ready for a 30% pullback?  I don’t think so.  If 2012 turns into a bloodbath, eventually gravity will win.

We hope you enjoy New Years with family and friends.  My resolution for 2012 is to adjust.  Adjust because of new information.  Adjust because no plan is perfect.  Adjust because if you don’t, you will fall behind.

Mailbag:
Your extreme political, paranoid musings cloud what should be rational, financial advice. Ron Paul as president? The auto bailout was not necessary and successful in saving an American industry?—subscriber C.W.

John’s reply: yes---if you want real freedom from an oppressive government, and no—GM will go bankrupt again, just like Chrysler.  We didn’t save a company, just a union.

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John’s reply: Sorry about that, but we process all payments through PayPal to avoid scams and provide absolute security to our subscribers.  We do not get any information from PayPal except Name, Address and Email.  Our mailing address is on the website lower left column.  Welcome aboard.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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