By Alan Lancz
The Lancz Letter
There are many keys to long term investment success, but non of them are void of hard work and a strong batch of discipline. For over a hundred years, investors have sought ways to cut corners and find the foolproof method of investing. Many of the academic black box computer strategies that utilize historic quantitative analysis have become some of the biggest disasters when unexpected and unprecedented events occur. This was part of the cause of the dramatic sell-off this summer, as well as exactly what happened with Long Term Capital Management back in 1998. The fact is we feel the average investor becomes complacent if they believe an approach is foolproof or virtually guaranteed to outperform, but the truth of the matter is there is no such panacea. It is not as ideal to rely on a disciplined, intensive effort approach in a world where there are mistakes being made and no magic bullet. Some of the keys to what we have learned over the past quarter century can be broken down as follows:
1) Strategically being in the right areas or sectors of the market. It is not simply a matter of spreading assets into every asset classification and every segment of the market. A strategic approach that focuses on the areas with the best risk-to-reward can pay huge dividends over the long term. This is particularly the case when the markets go to extremes like in the latter part of last decade, when we become concerned about many outrageously priced technology stocks. Back then, technology surged to over 20% of the S&P 500, comprising a similar percentage to what the financial sector obtained this summer.
2) Being proactive instead of the typical reactive. The best current example of this comes from the technology sector which once again is becoming a favorite area - this time because of a flight to quality due to their lack of subprime problems. Our overweight position in technology mainly from holdings we purchased the past 1-2 years (when the sector was out of favor) will probably become an equal weighting by year end if the trend toward tech continues. In other words, we will lock-in gains as investors erroneously flock to tech as a safe haven because the sector will be seriously affected by an economic slowdown. Two weeks ago, Yahoo was the only tech opportunity still trading at an attractive risk-to-reward ratio, but now that the stock has appreciated of late, no technology company can be considered in buying range.
3) Be disciplined about taking profits and redeploy proceeds into lesser risk (low expectation) areas. This will not only prevent your portfolio from becoming a quasi-index fund, but more importantly reduces the portfolios risk, improving risk adjusted and, many times, overall performance. After all, a buy/hold strategy and other passive types of investing will go up and down with the general markets or indices minus expenses. We can give numerous examples of this from our strategic profit taking moves in the REITs, financials and utilities last May, to a more intricate current strategy of taking profits in the high flying oil area to redeploy profits into the depressed natural gas segment.
4) International opportunities - an area we have been emphasizing for years is now getting commonplace to a point where investors should tread carefully with any new purchases from current valuations. Four years ago we liked the infrastructure/commodity type plays like Cemex, Lafarge and Suez with select utilities, but have take profits in some of these areas to once again reduce risk and get more defensive with select out-of-favor healthcare recommendations like GlaxoSmithKline, Novartis and Sanofi Aventis.
5) Fixed Income - many investors make the mistake of figuring that a significant percentage of their assets should be in bonds, especially as they approach retirement. Just as with any investment, you have to get in at the right time rather than buy for the sake of owning into a category or classification. Now is not a good time to buy into fixed income because of uncertain credit concerns combined with historically low interest rates. Just like tech in 1999, investors in fixed income will be handicapped with low potential return and above average risk, just the opposite of what investors should seek. Safe monies should be placed in CDs of no longer than an 18 month maturity so that credit concerns are eliminated and interest rate risks are minimized.
Editor's Note: Alan Lancz is editor of The Lancz Letter, 2400 N. Reynolds Rd., Toledo, OH 43615, 1 year, 15 to 17 issues, $295. The Lancz Letter gives current recommendations and analysis on stocks, bonds, real estate, currencies and other related investment vehicles. It focuses on some of the same money management activities that has made ABL, Inc such a success story over the past 27 years. For more information visit www.ablonline.com.
