Do not be Complacent
Research for Online Investors

by John Dalt

1/12/11

Watching the market today can make us complacent.  It is not natural to have this much “green on the screen.”  Complacent traders and investors are a contrarian signal.  As investors become confident that ‘everything is ok’ the forces are building for a splash of cold water in our face.  This dose of realism serves to wake us up to the dangers that constantly threaten our portfolio.

Investors that sold into the rally during the last month as we approached the April 2010 high are coming back into the market.  This combined with new money in funds after the first of the year gives us fuel to push the market higher.  The difficulty is finding a stock that represents a value.  When many stocks are up significantly from their lows last year, how does an investor find a true ‘value’ stock?

The answer is not a simple formula, or checklist.  This is the challenge we face for our subscribers in the long-term portfolio.  No matter what the market conditions, we look for a company that represents the best opportunity for the next year or two, but the stock is priced so attractively that we have very little downside risk.

Many times I come back to some old sayings from Warren Buffett.  Two of my favorites are “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” and “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Many days, I have the chance to visit with some of our premium subscribers.  Many of us are more fully invested now than we have been in some time.  That tells me it is time to sell into this rally.  I don’t mean sell everything, but we should look for one stock that has not performed well.  Why do we still own it?  Has the market or company changed from our original premise?  Why hasn’t it performed as well as we thought it would when we bought it?

Another stock to look at is one of our largest gainers.  Has the stock price gone higher than what we think it is worth?  Would we rather have the money than the stock at the present price?  Will you be upset at yourself if the stock price drops 10% in the next month?

We sold one of our holdings this morning in the Long-Term Portfolio that had been an under performer.  We made a few percent on it, but it is time to move on.  This rally gave us the chance to sell at a profit, and I am glad to have the money in the account.

Now we are going to look at our biggest gainers to see if any are overvalue.  Locking in gains is a fun business.  You can never be 100% correct, but risk increases as stock prices move higher.  The VIX index tells us that investors are complacent; this is a time we want to be vigilant and proactive.

We will prune our holdings of laggards and over achievers, then look for new "values."  We may choose to sit in cash for awhile while we research our next undervalued future overachiever.  There will be opportunities in the future.

To the mailbag:
Will Chinese inflation and the eventual rise of the Renminbi in value make products we get from China more expensive?---paid up subscriber T.M.

John’s reply:  Right now we are exporting inflation into China.  When they let their currency adjust higher, their export products will cost more in dollars.  They will then export inflation into our economy.  This is the problem with the political pressure Oh! Bama and Geithner are putting on China to let their currency increase.  Inflation in the U.S. has already pushed energy and food higher.  If the Yuan appreciates 10%, every do-dad you buy will cost that much more.

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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