atans1

Investment Strategy for 2010?

In Economy, Investments on 31/12/2009 at 10:59 am

Look for strong balance sheets and dividends that will compensate if brokers’ optimism turn to be wrong. If past form is any guide, the brokers will get it wrong again. If my fortune teller’s track record is as bad, he would have starved to death for lack of clients.

Remember in late 2008, they were pessimistic for 2009 (and they were nearly right: remember March 2009?). Now the brokers are bullish for 2010, predicting STI will break 3000. As this is only 3% away, this should be a no-brainer. But what then? I’ve not seen a negative outlok for the whole of 2010.

STI tracks the US market closely. The 10-year price-to-earnings ratio of the S.& P. 500, a measure of how expensive stocks are relative to profits, was more than 20.3 in late December, up from 13.3 in March. The average for the last 130 years is 16.4, according to calculations by Robert J. Shiller, the Yale economist. So there are reasons for being cautious again.

In mid-2009, the FT carried an intervieww with a strategist from CLSA  who said we are in the midst of a bear market rally. Nothing new here. But unlike other pundits, he said this rally could run for another two years before collapsing. He cited what happened after the dotcom bubble bust in 2000/ 2001.

He said, with hindsight, it was clear that the recovery from 2003 to 2007 was a bear market rally.

Bottom line: A bull run or bear market rally can only be predicted in hindsight. So a little caution is again called for.

As this NYT blogger wrote:

“Travel back in time to the dark days of last March, when the Dow was flirting with 6,500 and pundits were predicting the end of capitalism as we know it. As a result, stocks were dirt cheap — as they always are in a panic. Should you double up with your last cash reserves or slowly feed in more limited amounts of cash?

‘The conservative approach turned out to be wrong: although you did just fine, you could have made a bundle by going all in. But suppose the economy, and the markets with it, had indeed fallen off a cliff. Those who went all in would have been wiped out, while those who kept some dry powder would still at least be paying the bills. Which just might be how it turns out the next time.” Italics are mine.

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