Tuesday, February 27, 2007

400 Points? No Big Deal........

Everybody just relax...... A 3.4% decline is nothing . It all started when Alan Greenspan , who I can only assume was well into a bottle of Makers Mark and is rapidly become the most irritating former public official since Jimmy Carter incoherently mumbled something on a conference call about the current conditions in the US leading us into a recession, despite all economic indicators to the contrary. Then, the Chinese market dropped 9% overnight and set off a scare. These events would be unnerving to me except when you consider the Chinese market had been UP 13% the previous week and Greenspan, to be honest kids, doesn't have the best track record in my eyes. Look at his reign, he was too slow to get a grip on the bubble of 1999- 2000 (by raising rates behind, not ahead of it) that lead to it "popping" rather than "deflating" and then he was asleep at the wheel on the back end to ease rates and lead us like General Custard into the recession that followed. Personally I am a huge Bernanke both for his plain spoken testimony and his refusal to let those on "The Hill" frame his comments for their own agendas. I will follow Ben's lead here when he says the economy is strong a settling into a "sustainable growth" phase vs. a guy who was too late to recognize what was going on when he was at the helm and hid it by talking in riddles .

Back to today. Events like this while scary are good for a couple of reasons.

-They allow you to test your portfolio
-Allow you to pick up shares you had been wishing you bought "when they were cheaper".

How do you "test" your portfolio? Warren Buffet has a quote he equates to stocks "A rising tide lifts all boats.... and vice versa". What does that mean? During big rallies, most stock advance no matter what the underlying fundamentals. The same is true of sell-offs like today. You would be hard pressed to find many stocks up today. That means almost everybody's portfolio took a hit. Here is the test: What you want to happen on a day like today is for your portfolio to drop less than the market. If you are a value investor this is a true test of it. Since we are buying "cheap" stocks, if they truly are, there will not be as much pain during sell-offs. The opposite is true also. During rallies, we should see percentage growth in excess of the market because our shares are so cheap others will rush to pick them up. That is how we should beat the S&P. Drop less during sell-off and jump more during rallies. Also, as a test of how we are valuing companies, the stocks on the "Avoid" list ought to drop more than the S&P because if they are truly overvalued, sell-offs like these should really hurt them. So, then how did the ValuePlays Portfolio do today?

The proof in in the pudding...(4 pm prices)

ValuePlays Portfolio= -3% (up 2% to date)
S&P = -3.47% (-2.2% to date)
"Avoid" = -3.8% (-9.5% to date)

Down today? Yup.. who wasn't? The key takeaway is we picked up another 1/2% against our benchmark, the S&P extending our lead over it to 4.2% and unlike the major averages remain in positive territory for the year. This also positions us to extend those gains even further once things turn around.

Now, what is cheaper that we may want to buy again? Keep an eye on the watch list, there are certain names that are getting closer as of today to our target prices. Another drop like this and we may get to go shopping. Please do not pull the trigger too soon though. Some of them may still drift lower over the next couple of days. Be disciplined and patient. Remember, "great" prices not "good" ones.

Those of you who are subscribers to the Premium Portfolio Service will know what I pull the trigger on and buy before I actually do it.

blogger templates | Make Money Online