Thursday, November 29, 2007

The History of Two Markets

To say that markets are nervous these days, is an understatement.

With oil reaching the $100 mark, the sub-prime mess weighing on markets, commodities at very high prices, the housing market in the doldrums and the dollar on life support, the question then becomes: Why invest in equities at a time of so much turbulence?

Answer: Because we are living in extraordinary times in terms of global economic development, as large nations such as China, India, Russia and others embrace capitalism and with it the potential for enormous economic growth in the years to come.

Result: The history of two markets.

At a time that many sectors in U.S. markets must be avoided in the short run (housing, finance, retail), others must be embraced (industrials, minerals, energy, technology, drillers) given their potential for continued profits.

Given the drop in the dollar of late, America is on sale as far as foreign buyers are concerned. Hence, goods exported by large U.S. corporations (Boeing, GE, oil drillers, cyber-retailers and others) are doing very well as they overseas profits are translated into dollars.

In short, selectivity is the name of the game as far as equity investments.

To sit and watch the unprecedented growth in a large portion of the globe would be a major mistake given its enormous potential.

Sure, stocks swing widely at times given that investors are either too anxious to join the party at any cost, or allow fear to trump reason when bad news come to the fore.

The intelligent investor tries to avoid both, fear and greed, by tailoring a portfolio of companies that are growing earnings in timely sectors, both abroad and at home.

A portfolio that does not include foreign stocks these days, is doomed to under-perform given that the S&P is largely unchanged year to date. Hence, an investment in an S&P index fund would also be largely unchanged.

Conversely, a portfolio largely tilted toward foreign equities that trade on the NY stock exchange and NASDAQ in the form of ADRs, have yielded gains of 50% to 100%, depending of the ratio of foreign to domestic stocks in the portfolio.

For those who prefer to invest in mutual funds, the advent of FTFs (exchange traded funds) is a welcomed change given that these funds trade like stocks and can be bought and sold at the click of a mouse. In addition, ETFs can be found for all sectors and or exchanges, say, the Great China Fund that covers "A" shares in the mainland that are listed in Shanghai, or the "H" shares that trade in Hong Kong and are, generally, less costly.

However, since nothing goes up in a straight line, taking profits as equities advance too fast is recommended given that a profit is not a profit until it has been taken. The patient investor will wait until these stocks have corrected (they always do), at which time he may want to jump back in and ride the next leg up, assuming that particular company is still of interest.

As they one has ever gone broke by taking profits....

And finally, had the Administration embraced free trade, even with nations such as Iraq, as opposed to wasting lives and treasure by launching an UNprovoked war, the dollar would not be in the cellar nor would our national debt have grown exponentially during the past seven years.

After all, if we can do business with China, a Communist nation, why not do business with the rest of the world, regardless of leadership, given that it is precisely free trade that can trigger major change within those governments?


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