The market teaches hard lessons. One is that, in a bear market, what looks like 'value' is often anything but. The financial sector stocks have been beaten down hard over the past year. The XLF, the ETF that tracks the financials, now sits at $20.56, down from a high of nearly $37 - a drop of about 45%. Many individual stocks have fared even worse. Citygroup (C) reached a high of nearly $53 last year. It dropped under $25 in January and then below $20 in May, bouncing off those lows both times. When it hit $21 a few weeks ago I thought I saw value and I grabbed it, my rationale being that, at 40% of its value of a year ago, how much lower could it go?
Ahem. Citygroup, to my dismay, closed at $17.25 on Friday, having dipped into the $16s interday - about a 20% haircut for me, to this point. Trying to pick a bottom for beaten down stocks in a bear market is a fool's errand, and this time I'm the fool. Trying to find 'value' in this environment is folly. When in a bear market, stick with what's working until it's clear it doesn't work anymore. Currently that would be oil, natural gas, coal, steel, agriculture, railroads, materials; in other words, all the sectors that benefit from the global infrastructure expansion. If you drop it on your foot and it hurts, buy it. Luckily, most of my money is in these sectors, and City is my only major mistaken play over the past few months.
So, if a stock in a beaten down sector is still heading south, like City and almost every other financial, don't even think about buying it. Don't touch it until there is clear evidence that it's moving up and the bad times are over. Yes, you may miss the initial pop back up but that's okay. You'll avoid idiotic trades like my City fiasco.
I still think City could work over the long term. I went into it a few weeks ago thinking it could be a double in five years, and who knows, it still might be. But I'm far less confident now than I was, simply because I'm far less confident about the economy, and the market, in general. With oil prices where they're at, and probably heading higher, I think we could be in a long-term range-bound market, like the 1970s. During the 1970s, high energy prices, inflation (which is again on the horizon) and global instability put a hammer lock on the U.S. economy, and the world economy as a whole (while the ties are still there, the world economy was far more reliant on economic conditions in the U.S. then than it is now.) The stock market ended that awful decade at approximately the same level it began. If we are indeed entering into such an environment again, sticking your money in an index fund that tracks the general market is a bad play - your money goes nowhere, and gets devalued by inflation. You'll end up poorer.
But, as the saying goes, there is always a bull market somewhere. The smart investor will be on the lookout for these money-making opportunities. So my advice to myself is, again, find out which sectors are working and stick with them until they no longer work. Pay attention - you can't simply look at your account once a year and expect everything will work out. But you don't have to analyze every company out there either. If you pay general attention to the economy and the markets, you can invest in ETFs that track the sectors that are working. Forget S&P index funds. In an inflation-laden, range-bound market, they won't work.
DISCLAIMER: I'm strictly an amateur investor. The notions in this post are not meant to be advice to any reader on how to handle your own money. They are simply my own musings about the market and how I myself intend to proceed. Anything you do, you do at your own risk.
No comments:
Post a Comment