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Jeff Saut Presents: What the Markets Are Saying


Lost in the "noise" of the year-end soothsaying contest, however, are some of the simple tenets of investing.


"It's what you learn after you know it all that counts." . . . Earl Weaver

Now is the time of year when strategists, economists, gurus, etc. all join in on the annual nonsense of predicting "What's going to happen in the markets for 2006?" For many, this ritual is an ego trip, yet as Benjamin Graham inferred - forecasting where the markets will be a year from now is nothing more than rank speculation. Or as we have noted, "You might as well flip a lucky penny." Manifestly, while forecasting is fun, it should in no way be construed to be investment advice. That is why we try hard to avoid the annual guessing game and attempt to focus on what the markets are "saying," what sectors look favorable, and what stocks we want to own in the new year. When "pressed" for a prediction, we tend to look at where the DJIA is currently and use that as our forecast for this time next year, accompanied by the mantra, "Assume the indices are going nowhere and invest accordingly." And, for 2005 that looks to have been a decent "speculation." That does not mean you couldn't make money, as demonstrated by the Analysts' Best Picks List's 17% yearly return and the Focus List's roughly 13% gain.

Lost in the "noise" of the year-end soothsaying contest, however, are some of the simple tenets of investing. One of the best examples of these tenets was published in The Financial Analysts Journal back in 1995. It was penned by Arthur Ziekel (at the time head of Merrill Lynch Asset Management) as a letter to his daughter on investing. To wit:

"Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal balancing one's risk tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

I hope the following advice will help:

A fool and his money are soon parted.
Investment capital becomes a perishable commodity if not handled properly.

Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don't, why should anyone else?

There is no free lunch.
Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in.

Most investors underestimate the stress of a high-risk portfolio on the way down.

Don't put all your eggs in one basket.
Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Never overreach for yield.
Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe).

Spend interest, never principal.
If at all possible, take out less than comes in. Then, a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.

You cannot eat relative performance.
Measure results on a total return, portfolio basis against your own objectives, not someone else's.

Don't be afraid to take a loss.
Mistakes are part of the game. The cost price of a security is a matter of historical significance, of interest only to the IRS.

Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds. When in doubt, get out. The first loss is not the best but is also usually the smallest.

Watch out for fads.
Hula hoops and bowling alleys (among others) didn't last. There are no permanent shortages (or oversupply). Every trend creates its own countervailing force. Expect the unexpected.

Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.

Take the long view.
Don't panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn't work. Recognize the rhythm of events.

Remember the value of common sense.
No system works all of the time. History is a guide, not a template.

This is all you really need to know.


The call for this week: The D-J transportation Average (DJTA) has been making new all-time highs. Meanwhile, the DJIA has gone nowhere for two years and last week actually broke below its recent reaction low (10730). That breakdown stopped us out of our remaining Dow Diamonds (DIA/106.95) trading position. The non-conformation between the DJTA and the DJIA is troubling, especially considering the much broader Wilshire 5000 Index has given a sell signal. Ditto the NASDAQ 100, which is why we were stopped out of that trading position as well. Consequently, even though we are fairly fully invested in the "strategic" side of the portfolio, out of all the "tactical" trading positions we recommended back in mid/late-October the only one left is the one-half position in the Bank Index (BKX/103.84). Hereto, if the BKX breaks decisively below its recent reaction low of 102.73 we will sell this position, in keeping with that old stock market axiom, "If Santa fails to call the bears will roam on Broad and Wall."

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