It has been over a month from my original post Investing in These Troubled Times (Part 1) so I thought of updating all of you on some strategies.

I have continued to stay out of buying in this stock market.  I have shorted the market from time to time using SDS which levers 2X1 moving opposite the S&P500 index.  It is not for the faint of heart as it moves as much as 20% in a day if the market moves 10%.  I usually step in when the DOW hits around 9400.  I put a stop in at 5% in case I am wrong.

For the slightly longer term investment 3 to 6 months maybe slightly longer, I have been buying municipal bonds with a average term of 14 years. The yields are around 5% tax free.  The thesis is that the credit crisis caused a flight to Treasuries The three issues/risks that I see for this investment are:

1. Liquidity
2. Default
3. Inflation

In terms of liquidity, I decided it is too risky to buy individual munis so I bought AAA rated Fidelity long term no load muni funds.  Much easier to get out if things go the wrong way.

Default risk is present and I will be keeping an eye out for any signs that the recession is impacting muni prices further than the 10% move already in.

Inflation is not of great concern right now.  We are entering a recession where rapidly decreasing demand is pushing all prices down accross the board.  Not to mention the significant deleveraging which will more than offset the dollars being pumped into the system by the fed.

Why is this a 3 to 6 month trade?  Well I believe that the credit crisis will thaw by then and the flight to Treasuries will reverse. I suspect that money will flow back to Munis and the price will appreciate about 8% for this type of investment.

 

I will keep you posted.  Until next time.

Angrywatchdog

This is obviously a very tough market in which to get your feet wet. I am currently sitting on cash and waiting patiently for the opportunities to evolve over the next 6 months to 1 year. These opportunities will present themselves but as a conservative investor, I want to wait until the risk has diminished in the market before I jump in. The following may sound ridiculous but it works. Create a list of 10 to 20 very simple investment rules and follow them religiously. Books on day trading will give you a great start on these rules. They sound simple but prove very difficult to follow as you become emotionally involved in the market. Having the list and referring to it before making a trade will keep you disciplined. The market runs on greed and fear and your advantage over the market is to remove these two emotions when you trade. Some of my rules are:

1. Don't fight the market. (If the market is going down don't try to stand in its way).
2. Don’t try to catch a falling knife: (This is what is happening right now in the market so do not be a buyer yet).
3. If you get in a trade that does something different than what you expected, get out. (If this happens, you did not fully understand what was driving the stock price and you need to take a time out and re-evaluate or move to a different stock.
4. When you enter a trade, put in your sell order and your stop loss. (By putting in your sell order, you will be reminded of your expectations for the trade when you entered it. This will help you evaluate when to get out of the trade.
5. Buy and Hold is for suckers. (A rule that is definitely not preached by money managers but has saved me more money than any other rule.)

As far as company picks, most stocks will get killed in this crisis and recession and a recession is here. If you must invest, I like Google and Intel. They are market leaders in their segments and may pick up market share in a recession due to their cash positions. I would stay away from the retailers for now. In terms of when to buy Google and Intel, wait. The stock market usually leads main street by 6 months. That means you want to buy these two 6 months before the end of a recession. How do you know when this is? There is no one answer to this question and any answer I give will run counter to what every money manager will advise you to do. I do believe you can time the markets and I will be following this market closely to try and pick the best time to buy. The forces that are causing the market to go down will drop away one by one until there is one or two powerful forces that keep pushing down on the market. As soon as these last two forces show signs of dissipating, that will be the trigger to enter your trades. Right now I believe we will not see the lows in the market during 2008. As such, I would not be a buyer of any stock right now.

Watch the market every day and try to understand why it is behaving the way it is behaving that day. After a few months of this, you will be able to identify the forces that are influencing market moves (employment, VIX, interest rates etc…).

For Recruiters:  A sample of my recent work is available below. It is a financial model of Brick and Mortar, a real estate investment company with 3 independent funds. Based on risk analysis in conjunction with this model, we averted a potentially disastrous investment in single family homes at the beginning of 2007.

• Brick & Mortar – Financial Model:  Financial Forecasts v3.xls (493.50 kb)

 Please feel free to download a Microsoft Word copy of my resume (Peter Sharpe resume.doc (33.50 kb)).