What Do You Do When the Market Goes Flat?
By Michael Masterson I wrote last week in Early to Rise about the financial trends I was watching this year and how they were going to influence my investments.
Many of the trends I talked about are being followed by the editors at ETR's sister publication, Investor's Daily Edge. If you think you might want to invest alongside me, check out the interview below with IDE's Senior Investment Director, Bob Irish.
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An Interview With Bob Irish By Christian Hill
Managing Editor, Investor's Daily Edge
CHRISTIAN: Bob, you have been with Investor's Daily Edge for approximately six months now. When you came aboard, you talked about upping the ante in terms of the quality of the research coming out of IDE. What grade would you give yourself? BOB: I would say an A-minus so far. I am very happy with the strides we have made. I reviewed the year-end track records for our newsletters last week. Ted Peroulakis had 17 winners -- with at least 100 percent gains -- in only six months. Dr. Russell McDougal, our resource expert, has made 11 recommendations since I came aboard. Right now, 10 of them are winners, and the only losing position in the bunch has an 8 percent loss. A very strong winning percentage, and a very small loss on his one losing recommendation. Andrew Gordon made one recommendation to his readers in July that is already up around 30 percent, and another recommendation in August that is up nearly 15 percent. Overall, since our changes were made, all seven of Andrew's recommendations are making money. Steve McDonald continues to impress me with his bond expertise. He has made something like 90 recommendations to his readers, and has taken only one loss. That was on CIT Group, and the company went bankrupt. Still, Steve's members took only a 15 percent loss on that one. This is what I meant by increasing the level of research coming out of IDE. Our experts buckled down and really went to work. Judging by the results, I think it's evident that it paid off. CHRISTIAN: Back in August of last year, you said that you expected a flat or sideways market for the next few years, possibly even the next decade. Has your outlook changed? BOB: Short-term, my outlook has changed. Absolutely. What I didn't anticipate was that the Fed was going to keep rates as low as they are for as long as they have. And with the type of liquidity we have washing around the system today, this market has a lot of upside. However, I suspect that over the next 10 years we'll be in a trading range. And in 10 years, you'll look back at a market that was, on balance, fairly flat. But that doesn't mean people can't make money. In a flat market, selection is important. You have various sectors that do well at various times. The key to making money over the next 10 years is going to be identifying powerful, long-term trends. Many people who have been investing for the last 20 years really don't understand that. Their perspective is the market from 1982 to 2000, which was up 11 and a half times. You just couldn't lose in that environment. Today, those people are scared because they think that in order to make money in the market, the market has to go up. But history shows us that money can be made in flat markets. CHRISTIAN: Give us some examples, Bob. BOB: Okay. Let's look at the last 10 years. The Dow at the end of January 2000 was around 10,900 -- in the neighborhood of where we are today. So you could say we've had a flat market for 10 years. If you'd bought the index in 2000, you would have made zero over the last decade. CHRISTIAN: I'm with you so far. BOB: But let's suppose you'd bought utilities at the end of January 2000. That sector went up 52 percent at a time when the market was flat. CHRISTIAN: How about another example? BOB: In November of 1972, the Dow was around 1,000. Ten years later, in 1982, it was around 1,000. Another flat market. How could you have made money over that 10-year period? One area you could have done very well in was energy. Specifically, oil stocks. In 1972, the price of a barrel of oil was around three and a half bucks. Ten years later, it was over $30! Close to a 10-bagger during a flat market. CHRISTIAN: You mentioned that identifying long-term trends will be key to making money over the next 10 years. What are some of the major trends you are watching? BOB: One of the biggest trends is the aging of America. Two-thirds of all the people who have ever reached the age of 65 are alive today. That's a mind-blowing statistic, one that obviously favors the pharmaceutical and healthcare industries. Those are two sectors we'll be studying. In fact, Christian, this month's' issue of Sound Profits highlighted two opportunities in the healthcare field. Steve McDonald and Andrew Gordon did an incredible job of identifying those two opportunities for the members of Sound Profits to take advantage of this trend. Another key trend is the population explosion. The global population is currently at 6.6 billion. By 2050, it will be 8.9 billion. That is a 47 percent increase in 40 years! When you have population growth like that, it creates huge financial shifts that move trillions and trillions of dollars. That means big opportunities. CHRISTIAN: In? BOB: Especially in the basics: energy, food, and shelter. I believe the International Energy Agency (IEA) has predicted that energy demand will be up 40 percent by 2030. And this demand will create fortunes for some investors. We are already experiencing a shortage of energy, and it will only increase. That means opportunities in several energy sectors, but especially nuclear. The reason for that is simple. If you compare the power that can be generated by a kilogram of wood, coal, or oil, it's dwarfed by the power that can be generated by a kilogram of uranium. A kilogram of uranium produces 50,000 kilowatt-hours of power. And a kilogram of wood produces only about one kilowatt-hour. So nuclear is the future for energy in this country. I'm not sanguine about solar and wind power, because they're not going to be able to add enough capacity to make up for the long-term energy shortage. But new alternative technologies will be developed. And we will be investing in them. CHRISTIAN: We've written about nuclear energy in IDE recently -- but there is a great deal of fear associated with it. People remember Three Mile Island and Chernobyl. I don't think anyone wants it. BOB: There's an emotional component, certainly. But the smart money isn't invested emotionally. China is building 10 nuclear power plants per year. Their goal is to have 25 percent of their power generated by nukes. They're taking the lead on this. It's going to be a race -- and Americans are competitive. We got into the space race in a big way when the Soviets launched Sputnik in 1957. I think there's an analogy there. When push comes to shove, Americans will come to the fore... simply because we don't want to fall behind in the world. But even if America drags its feet, there are still ways for our readers to make money on nuclear energy. No matter where the reactors are located, they all need the same resource to operate: uranium. And our resource expert, Dr. Russell McDougal, has identified the main players in the uranium industry. His readers are very happy with his picks. CHRISTIAN: Let's talk about the banking industry. President Obama recently said that, in light of the financial crisis, bank profits and bonuses are obscene. And he is considering taxing Wall Street -- going after $117 billion to make up for the bailout shortfall. I know you have a strong libertarian bias, but is this one instance where a government tax is justified? BOB: Do two wrongs make a right? Our government transferred all the losses that the banks sustained to the American taxpayer. Now Obama is playing to a populist sentiment, anger with the banks, to try to curry some favor with voters. Let's face it, $117 billion used to be a lot of money. But at a time when our total deficit is in the neighborhood of $3 trillion... come on. This is just posturing on Obama's part. Nothing more than that. CHRISTIAN: Do you think he has any chance of getting the money out of Wall Street? BOB: He might. The banks realize that public opinion is very much against them at this point. But it won't solve the problem. It's just robbing Peter to pay Paul. If the banks ultimately capitulate, believe me, the consumer will be picking up the tab. Bigger fees or crummier returns on their saving or checking accounts. The banks won't take this on the chin. CHRISTIAN: Our readers are familiar with your love of cigars. You've crafted many of your articles while sitting at a local cigar bar. But they may not know that you're also an avid golfer. Which has humbled you the most? Golf or investing? BOB: Golf and investing are very similar in a lot of ways. Both are humbling at times. But you can't lose much money golfing. Unfortunately, when you're humbled on the investing side, there's an impact on your family. There can be an impact on your lifestyle. The repercussions are far greater, and they tend to stay with you for a much longer period of time. CHRISTIAN: What's the best investment you ever made? BOB: It's really funny. The best investment I ever made was also the worst investment I ever made. About 15 years ago, I picked up shares of Alliance Pharmaceutical, the manufacturer of radioactive seeds that were used (and are still used) to treat prostate cancer. That stock was my first 10-bagger. It was a $5 stock, and it went to $50. I patted myself on the back for letting it run. And at $50 or $52 or $53, I sold it and had a very tidy profit. I felt pretty smart. But the stock continued to run. That really ticked me off. I couldn't believe the stock could possibly go up any more. (Of course, I was a much less experienced investor then.) But it did. So I said to myself, "This thing has a lot more life in it" -- and I bought my position back. And that's when the story goes bad. CHRISTIAN: You handed it all back? BOB: All of it and a little more. That's called a round-tripper in the business. Fun name. Not a fun experience. But I learned from it. Avoiding round-trippers is just one of the lessons I hope to bring to IDE readers. CHRISTIAN: Any other golf-related investment thoughts for our readers? BOB: With investing, you need to have a long-term time horizon. Yes, it's played trade by trade, just as golf is played hole by hole. But you need to keep a long-term perspective in both. Both also require emotional control. In my early golf days, I might be playing well. But then, if I had one bad hole, I would continue to have bad holes for the rest of the round. A bad hole would upset my emotional apple cart.
The same thing can happen in investing. You need to know when to accept your mistakes -- cut your losses and move on. And that is one of the hardest things for investors to do. There is a third analogy, too. On the golf course, I play better when I have a caddy.
Caddies can point out something I hadn't noticed. Say I am standing over a shot. It's 140 yards, an eight iron for me. But my caddy might say "There's more wind than you think. You just can't feel it here. Hit the seven." Caddies can inspire confidence. Say I've just hit a terrible approach shot to the green. My caddy might say, "No worries. We've been getting up and down all day." I see IDE as kind of like your investment caddy. You're on the course. You can go it alone if you want to, and that's fine. Plenty of people do. But the best golfers in the world all have caddies. And every one of them will tell you they rely on a caddy to help them improve their scores. CHRISTIAN: Thank you for joining us, Bob. I know our readers will be looking forward to our next interview with you. BOB: You're welcome, Christian. I'm looking forward to it too.
[Ed. Note: Bob Irish, the investment director of our sister publication, Investor's Daily Edge, has made a lot changes since coming on board six months ago. He's put an emphasis on deep, thorough research. Made up-to-the-minute news and commentary a priority And he's totally revamped IDE's Sound Profits newsletter.
The new Sound Profits features all of IDE's financial experts in one place, every month. You get the best of the dividend and natural resource stocks, bonds, options, and much more.
To find out more about Sound Profits, and a breakthrough silver company the editors are watching right now that is poised for huge gains, go here.]
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Today's Words That Work: Sanguine Sanguine (SANG-gwin) -- from the Latin for "blood" -- means cheerfully optimistic, hopeful, or confident. How did blood come to mean optimistic? The ancient Greeks and Romans believed that there were four bodily fluids: blood, phlegm, black bile, and yellow bile. And they believed that an imbalance of these "humors" determined a person's personality. People with an overabundance of blood tended to have a cheerful disposition. Those with too much phlegm were phlegmatic (calm and unemotional). Those with too much yellow bile were choleric (hotheaded). And those with too much black bile were melancholic (gloomy and depressed). Example (as used by Bob Irish in today's interview): "Nuclear is the future for energy in this country. I'm not sanguine about solar and wind power, because they're not going to be able to add enough capacity to make up for the long-term energy shortage. But new alternative technologies will be developed. And we will be investing in them."
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