Wednesday, August 24, 2011

Don't Ignore Your Hidden Fears

Recently, on CNBC and on Mad Money (Jim Cramer's one-hour show on CNBC), I've seen (as I've seen very often doing market downturns) a strong recommendation to find those "accidental high yielders." And it's not only on CNBC, every station (radio and TV) during their business slots find pundits that recommend this strategy.

We know the strategy...find those stocks of Fortune 500 companies (i.e., solid companies) that normally offer decent yields and, when they are unfairly punished along with the rest of the market, pick them up to take advantage of their "accidental" high yield. Let's call these AHYs.

We can only assume that the reason that these yields are referred to as accidental is because the strong belief is that the price reduction of these AHYs is truly temporary and that their yields will be maintained regardless of economic directions. This seems to me a bit like fortune telling, in that these pundits want you to believe that they can see the future. They can't, as confirmed by the banking industry's near collapse in 2008/2009, so beware of these recommendations.

More importantly and to the subject of this post, don't ignore your hidden fears. Assuming that the pundits are right and these AHYs will maintain their yield and the selloffs in these stocks are temporary, then picking up these AHYs will be a great move as part of your long-term investing strategy.

BUT...most of us have a very innate fear that we don't admit to until it's too late...we hate losing money and we really get scared when things, particularly our portfolios, start falling like there is no bottom. Our long-term investing strategy generally goes out the window in bear markets when selloffs can often seem precipitous. And we often sell what we have held for the least amount of time...i.e., we have a LIFO mentality (Last In, First Out). It takes us time to love the stocks that we acquire so the most recent purchases get sold first.

So those AHYs that seem like a great buy may eventually turn into a great investment...unfortunately, during a bear market, MOST of us will sell the AHY we just purchased in the next leg down and thus take another brutal hit in our already battered portfolio.

Remember two rules in bear markets...nothing is a "great" buy and things generally become far cheaper than one expects before the market bottoms.

Note that the market appears to be inviting us back into the water (with a 60 point rally in the S&P in the last 2 days)...but as I noted in my last post, this selloff is nowhere near from being complete. Be safe, be nimble and don't ignore your hidden fears.


The Future said...
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The Future said...
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