Rodney Johnson | Tuesday, October 2, 2012 >>


Occasionally I have to go to Vegas on business. I hate it. The place teems with people trying to be excited about the possibility of winning big but all the while losing. They must be losing, or else Vegas would not exist.

As I point out to my kids on a regular basis, Las Vegas is a monument to stupid people who return often to pay their respects.

There must be some sort of homing signal buried in the desert that beckons people who are bad at math. I know there are some winners. Some people who have figured out a way to consistently (if not every time) go home with a little more money than they started with, but that is a very small minority.

Over the last several years, the stock market has taken on the same qualities as Vegas…

It used to be that investors would spend hours toiling over whatever branch of investment selection analysis they favored, typically technical or fundamental. Or they would obsessively gather data on the particular market they favored, like bonds or precious metals.

All of this made sense, right up until 2009.

Since then the game in town has been one of estimating government action and central bank action… then estimating the reaction to that action.

It has all the trappings of one of those endless conversations that seem to start with, “Well, I know that you know that I know that you know…”

[WI-Gold-$750-Banner-Collapse-of-Gold]

So What’s An Investor To Do?

The first thing to do is recognize where we are.

The economies of the world do not support the current levels of the stock market. Most major economies are in or near recession, yet the U.S. equity markets are at multi-year highs.

Inflation is running just under 2% and yet 10-year Treasuries are at 1.73%. Money is too cheap.

China is slowing.

Japan is slowing.

Europe is, well, Europe.

But here’s the problem: unlike Vegas, once you realize the craziness of the situation, you can’t very well get on a plane and “leave” investing. Most of us still want or need to grow our assets… so we must constantly work to avoid the pitfalls and take advantage of the opportunities.

That’s why, over the next several days, I’ll highlight some of the pitfalls AND opportunities. Here’s the first one…

Pitfall: The Growth Story

Growth at a time like this?

Really?!?

Don’t fall for the “growth” story.

I get so many calls from young investors who ask if they should be in growth stocks – those in typically high flying sectors like tech. I don’t blame them for asking this question. They’re young.

I always answer with a question of my own: which amendment to the U.S. Constitution stipulates young investors must buy risky stuff?

This hocus pocus was thought up by the investment community to absolve themselves of any responsibility for choosing what to own.

Using a very – VERY – long time horizon, it can be shown that equities in growth industries have more risk and provide greater return than others. Of course, if your own investment horizon is less than 25 or 30 years, this might not be your own experience.

Besides, doesn’t it make more sense to buy investments that seem to offer a positive return and an appropriate amount of risk for that return given the current economy? The point is to understand that a one-page questionnaire addressing your age and risk tolerance has nothing to do with how investments will work out over the next year, or two, or even five.

Choose better.

Opportunity: Hedge

We have talked about this before and we will again… and again…

The current economic and investment environment is distorted. Capital markets are looking to government intervention for price support. Trading platforms are the domain of high frequency trading firms that place and cancel thousands of orders a day. The system is rife with danger.

So hedge.

We use long investments and short investments in the Boom & Bust portfolio.

Many people use options.

Whatever your strategy, use a methodical approach to guard against catastrophic loss.

Sadly, we are one flash crash or one “bad” government announcement away from a 15% or 20% drop that could quickly turn into a rout.


Rodney

Editor’s Note: USA Today recently interviewed Harry for an article about why, despite the economy appearing to improve, there are still problems that could lead to a crash. This is scheduled to appear in the next couple of days, in the paper’s business section. Be sure to check it out.

 

 

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The investment approach known as “pairs trading” is one of the easiest ways for a retail investor to stay hedged. Here’s how it works…

 

 

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.