Why Doing Nothing is the Right Investment Strategy
by David Fessler, Advisory Panelist, The Oxford Club
Thursday, July 24, 2008: Issue # 826
Nobody likes watching the stock price of a great company in their portfolio sink into the sunset. But with the market’s ongoing case of indigestion, that’s exactly what’s happening.
So what can you do?
Well, the other night - as my family and I were watching a Seinfeld re-run on TV - the answer hit me.
In this particular episode, George and Jerry were trying to sell the president of NBC on the merits of a TV show about “nothing.” (Mind you, they were already IN a show about nothing.)
Right then, I decided to follow their lead and write about… well, why doing nothing is the right investment strategy.
We’re well into another earnings season and outstanding companies, which have posted promising results in the face of a flagging economy, are being ignored altogether.
Instead, traders have chosen to focus on any perceived “outlook negativity” uttered during the quarterly calls as a reason to take down a stock.
Doing Nothing As An Investment Strategy
Consequently, prices have been inching further south. But instead of doing something you’ll later regret, consider doing nothing as an investment strategy.
You see, this market seesaw will likely continue until the banking capitalization problem is resolved. We need to see fundamental financial underpinnings that calm fears about risk in order for the market to establish a sustained rally.
The good news is that we’re starting to see some positive signs:
- Shares of national banks rose sharply yesterday as Bank of America - despite reporting a big decline in second-quarter earnings - still beat analysts’ estimates.
- That marked the fourth straight trading day in which a national bank reported second-quarter results that - despite being well off the pace of last year’s numbers - trumped analysts’ expectations.
- Last week, JPMorgan Chase and Wells Fargo did the same thing.
- And Citigroup’s second-quarter loss was smaller than analysts anticipated.
Doing Nothing Could Be Your Best Investment Strategy
So sitting tight and doing nothing in this environment could be your best investment strategy.
Don’t get me wrong; with shares of good companies being hammered down through the floor, there are some very tempting bargains and “buys of the decade” out there.
The problem is that in this environment, there’s no guarantee that Wall Street will reward your courage to buy with higher prices.
And since we can’t time the market - and shouldn’t try to - patiently waiting out the choppiness that defines market corrections is a great strategy.
Inevitably, the market will once again look forward and return to fundamentals. Earnings and valuations will matter again. And doing nothing might just be the reason you’ll be looking at some handsome gains in your portfolio.
Good investing,
Dave
David Fessler is a renowned equity specialist and an Advisory Panelist at The Oxford Club. Right now, the Club’s “Perpetual Money Portfolio” is rife with safe, high-income bargains… and will cut you 96 dividend checks a year. You can use the extra monthly cash to buy more shares, purchase new investments or simply increase your current income.
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Today’s Investment U Crib Sheet - Trailing Stops
Far from sticking your head in the sand, doing nothing involves using logic and discipline to decide whether to exit a stock, or when to take a loss. It makes more sense to have an effective method for determining whether to stay in or not. Using trailing stops ensures you’ll never let a small loss become an unacceptable loss. It also keeps you from selling your stocks while they’re still in a major uptrend. Here’s how to use them…
- First, set up your trailing stops. If one of your stocks has had a nice run and it retreats back to your trailing stop, liquidate it from your portfolio. This will keep you from retracing your steps too far off the high.
- Second, adjust your trailing stops higher for stocks you feel have had a tremendous run or that seem excessively high for their value. Raising your trailing stops helps you capture more of the gains should they decline.
(Adjusting trailing stops is a matter of preference. The closer you set the stop to the current price, the more likely it will be triggered in market volatility. We recommend using a 25% trailing stop for most stock positions.)
In short, trailing stops allow you to maintain control over your portfolio, without trying to time the market’s ups and downs. Letting your stops do the work for you is a good “do nothing” approach.
For more on trailing stops, check out Investment U Issue #803, Trailing Stops: Lock In Your Profits with This Not-So-Secret Sell Strategy.
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- Recession Investing: Why It’s Still Not Time to “Time” the Market
- The Credit Crunch: 2 Ways To Profit From Credit Crisis Opportunities
- Market Timing: What All Great Investors Have in Common
