A friend of mine who’s an investment advisor recently wrote, “I’m wondering if you might address the very gloomy speech Nouriel Roubini made recently which has been all over YouTube. Also, I’m worried about students getting out of school with loans that need to be repaid and poor prospects for employment. Credit card debt is one thing, and may have a stigma attached, but student loans are socially encouraged. Are you aware of any program addressing this issue, other than personal bankruptcy? It’s going to be devastating.”
In response, I took a look at a couple of Roubini’s videos. Nicknamed Dr. Doom because he’s been predicting bad things for a while, he’s now famous because he’s finally right. Looking forward, he’s predicting the following.
* The recession will last through 2009, and growth will return in 2010.
* We’ll have trillion dollar deficits in 2010 and 2011.
* China’s growth will slow to 5% or 6%.
* We’ll avoid a great depression.
* And global equities will fall another 15% to 20%.
I can’t argue with any of this; in fact, it doesn’t seem all that gloomy!
But here’s a funny thing. All indications are that Roubini–being an economist but not an investor–has held onto his investments in equity funds through the entire bear market, believing what the academics have long advised, that long-term buy and hold investing in diversified mutual funds (particularly index funds) is the best strategy for the average individual. If this is true, his investments lost 30% to 40% in 2008, just like most people’s!
As to the point about students repaying college loans, filing for personal bankruptcy does not wipe out education debts; if it did, many students would immediately take that route upon graduation! I know of no program–or even proposed program–that will help indebted students, though it’s quite possible that one will come along. I think the #1 bailout resource will be parents.
Looking forward, however, I’m confident that we’ll see student debt loads shrink dramatically in the years ahead, as students work to minimize the amount of debt they assume while pursuing educations that lead to real employment. The result, in my opinion, will be dramatic shrinkage of the traditional education establishment and dramatic growth of the for-profit education sector.
I have lots of other expectations, too, which might or might not come true.
I think Americans have passed a tipping point, and that saving will trump consuming for decades to come.
I expect alternative energy to slowly supplant fossil fuels in the decades ahead and to spawn dozens of great investments.
I expect medical care to focus more on low-cost health maintenance (tackling obesity is #1), and thus enable growing numbers of people to avoid the need for expensive medical care.
I expect the U.S. to return to the growth track not by manufacturing (sorry, Detroit) but by doing what we do best, adapting to the changed conditions of the world and leading the way in creating software, entertainment, medicine, health care, science and education.
But when it comes to making money in the market, what I think doesn’t really matter.
And what you think doesn’t matter either.
What does matter is what the market’s doing. So, you can choose to focus on the economy, crunch the numbers, try to predict what sectors will shrink and grow and argue about whether the economic stimulus package is too big or too small. If you’re good, you might get as famous (temporarily) as Nouriel Roubini. You might also lose 30% of your money.
Or you can focus on the market. Recognize that the market, in its infinite wisdom, is always looking six to nine months into the future (so today’s news is next to useless). Study the charts, and listen, with as little bias as you humanly can, to the true message they carry. Then act accordingly.
For example, back in December, we twice recommended Myriad Genetics (MYGN) here, noting that it had earned repeated appearances in Cabot Top Ten Report, our publication that brings subscribers the market’s 10 top-performing stocks every week. In the December 1 recommendation here, the stock was trading at 58, having just completed a normal pullback, and I wrote, “The long-term trend of the chart is clearly up, and I think buyers who get on board here and wait patiently will likely be rewarded.”
Flash Player 9 or higher is required to view the chart Click here to download Flash Player nowThen on December 22, when the stock had climbed back up to 65, and was building a little base, we recommended Myriad Genetics again. This time, it was Michael Cintolo, editor of Cabot Top Ten Report, who wrote, “The past few weeks have successfully taken the stock out of the public’s eye, and while it may need a bit more time to set up, I think it’s primed for a breakout early next year. If the market’s nascent uptrend can persist, I think MYGN can be a big winner.”
Well, the market’s nascent uptrend hasn’t continued with quite the strength we would have liked. Nevertheless, MYGN has done extraordinarily well. The company announced excellent earnings results on Tuesday morning and the stock, which had closed at 71 on Monday, gapped up at the market open and finished the day at 84. Readers who bought on those earlier recommendations are now sitting on profits of 45% and 29%.
Admittedly, there was fundamental analysis involved, too. We told you how Myriad’s growing success in the genetic diagnostics business enabled it to predict which patients were most susceptible to which diseases. (The company calls it Cancer Predisposition testing.) We explained how this success had lead to fast-growing sales and earnings and the prospect that much more growth lay ahead. And we noted that institutional investors were climbing on board fast.
But there are lots of companies with similar great stories whose stocks are going nowhere fast. Myriad also had a supportive chart pattern, and in this case that has made all the difference.