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Jeff Saut Presents: "Patience"


Patience is one of the rarest traits on Wall Street...


"If there is ever a time when speculators should exercise patience, it is in waiting for a proper opportunity to buy stocks.

The desire to make money is at the foundation of all commercial and financial transactions, but the mere desire to make money should never be the mainspring of speculative action. Knowledge or belief based on intelligent analysis that a speculative opportunity presents itself is the only safe basis for making purchases of stocks.

It is in forgetting that principle that so many speculators err. They only ask when they are preparing to buy stocks, 'Is that stock going up?' The only sound reason for buying any stock is that it can be had cheap. Granted that, and also that it represents ownership in one of our great essential American industries, a speculative profit is practically assured, if one has patience, regardless of whether the price goes lower before it goes higher. But when any one buys a stock merely because he thinks or someone tells him it is going up, regardless of its real value, he is following a speculative plan which is absolutely certain to lead on to ruin. He may make a profit once, twice, or half a dozen times by that method, but sometime he is absolutely certain to be badly hurt.

One common error made even by those who know that the time to buy stocks is when they are low and cheap is, they buy far too soon in a bear cycle. Stocks look cheap long before they are at the bottom of a long decline. No one, of course, knows where the bottom will be, but it is well to wait before making purchases until the usual surface indications described in the previous chapter as marking the end of a bear market are visible.

Stocks always fall farther in a bear market than any sane person thought possible when the decline started. Stocks always look absurdly low as compared with previous high process long before liquidation has run its course.

As a result, many speculators who sold out at high prices are tempted into the market merely because stocks have already fallen far and because they already look cheap by comparison with the high prices of the previous bull market. They argue that 'they cannot fall much farther' when there is still so much additional liquidation to take place, and prices are still so far from bottom that purchasers will be ruined if they attempt to protect stocks bought with borrowed money at such figures."
. . . Beating The Stock Market (1927), by R.W. McNell

For years we have suggested that patience is one of the rarest traits on Wall Street. Even Warren Buffett has commented - the most important quality for an investor is temperament and patience, not intellect. Over the years we have learned the wisdom of those words and have often demonstrated "patience" while concurrently lamenting "The successful investor has to be willing to ignore two out of every three moneymaking opportunities." Indeed, better to lose face and save skin! Most recently this patience trait was demonstrated as we ignored the trading opportunity following Katrina because our proprietary indicators were not correctly aligned. In retrospect that was a mistake, because the DJIA rallied from those late August "hurricane lows" of 10350 to its mid-September highs of 10700. Our indicators did, however, "catch" Rita's hurricane-induced lows and we subsequently sold two-thirds of those trading positions into the early October highs, while being stopped-out (read: sold) of the balance of those positions the next week during the Dow's decline. Since then we have been sitting on our "trading hands," save a very small index position (DIA) last week when our indicators again became as oversold as they were at the March/April lows.

That said, we suggested that while last Wednesday's Dow Delight "might" be the start of something on the upside, our sense was that the equity markets would come back down and test, or break, the recent reaction low of 10156 and finally give us a capitulation-climax low. Plainly, for the past few weeks we have stated our work showed that a trading bottom was/is approaching and the only question is if it was going to be a selling dry-up low or a selling-climax low. Consequently, we advised participants to "get their buy lists together." As always, we prefer indexes, iShares, Holders, etc. for the trading (read: tactical) side of the portfolio. However, the investing (read: strategic) side of the portfolio is another issue. And, this morning we thought we would share a few of those potential ideas with you.

In last week's letter we mentioned a name that a friend of ours was acquiring in his mutual fund - that stock was Time Warner (TWX). The same bull case for TWX was reprised in Barron's over the weekend in an article titled "Fertile Ideas," which was an interview with two portfolio managers from Brown Advisory. To reprise a few lines, "Time Warner has struggled to deal with the aftershocks of an aggressive acquisition strategy and sluggish advertising revenues. But, we bought the stock at a price where AOL was thrown in for free."

Another stock worth watching is Disney (DIS) since it is around price levels where "smart money" became involved a while ago. Other names that look sold-out in the charts are 3.6%-yielding International Paper (IP/$28.01), 2.6%-yielding Alcoa (AA /$23.35), and 3%-yielding Dow Jones (DJ). DIS, IP, AA, and DJ are all covered by CS First Boston.

In last week's verbal comments we noted that the entire Raymond James Analysts Best Picks (ABPs) list is worth buying consideration for the anticipated trading-low that should set-up a year-end rally. We also continue to position 6.8%-yielding Enterprise Products Partners, L.P. (EPD) and 2.8%-yielding Crosstex Energy (XTXI), as well as Synagro Technologies (SYGR), which yields 8.8%. EPD, XTXI, and SYGR are all covered by Raymond James. Moving up the "risk curve," Cognos (COGN) is a name we have spoken of in past missives, as is ICOS (ICOS) (both covered by CS First Boston) since Icos's erectile dysfunction (ED) drug has been found to be effective in treating BPH (enlarged prostrate) . . . or as one of our 60-year old friends put it, "I spend half of my time looking for my glasses and the other half of my time looking for a bathroom!"

The call for this week: The history of October maulings is that they last three weeks and encompass roughly a 10% decline. They also tend to bottom near the end of the month with an "I think I'm going to be sick" type of downside hour or two. Whether it plays that way this time remains to be seen, but this week should resolve things. Indeed, selling dry-up or selling-climax?! Interestingly, Lowry's Buying Power Index dropped to its lowest level in 10 years (June 1995) last week, prompting Lowry's to note, "Such decisively negative patterns are not typical of those found during normal correction in bull markets."

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No positions in stocks mentioned.

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