Last year was devastating for most sectors, if not most companies. Were you able to find any pockets of strength?
While there were occasional small areas of strength—genetic medicine, oil exploration and for-profit education come too mind—by far our best recommendation to subscribers last year was cash. Trends last year were clearly down, and our market timing disciple places great weight on the trends; we know how futile it can be to swim against an outgoing tide. So our growth-oriented editors spent a large part of the year praising the value of cash, and our subscribers are generally happy about that.
Once some sense of normalcy resumes in the financial world, what sector(s) do you think will lead us out of the bear and why?
First, I quibble with the word “normalcy.” Every bear market brings challenges that seem unprecedented when you’re living through them, but a longer-term perspective reveals that while history never repeats, it does generally rhyme. The sectors that we have high hopes for today are gold, genetic medicine and consumer thriftiness, and the reason we like them is simple; these are where the best-acting stocks are!
In the gold area, Randgold Resources (RGLD) is attractive, but there are many others also acting well, and the reason is not management but the Federal Reserve. As the dollar becomes less respected, and the prospects for Fed-induced inflation grow, gold and other precious metals gain value.
In the genetic medicine area, Myriad Genetics (MYGN) is one we’ve been recommending since last July, and it’s done very well. It’s the market leader in cancer predisposition testing, with a huge lead over its rivals.
In consumer thriftiness, Netflix (NFLX) is still attractive, though its advance may be getting a little long. The firm’s DVD rental programs offer great low-cost entertainment. And you can now watch online instead of waiting for the mailman. Founder Reed Hastings is a huge, under-appreciated asset.
If you were face-to-face with President Obama, what unique perspective could you give him regarding the markets and challenges facing investors?
Interestingly, I wrote a column a few weeks ago explaining what I’d do to fix America’s health care problem, but I said I’ve have to be dictator to do it; the entrenched powers make major change very difficult. (Many people suggested I send the column to President Obama, so I did. I’ve had no response yet, but you can read it online at http://www.cabot.net/Issues/CWA/Archives/2009/03/Obama-Healthcare-Summit.aspx.) As for the markets, I’d remind the president that our country was built by enterprising people who took risks to gain rewards. I’d warn him that reducing potential rewards by raising taxes could prove very destructive to growth. And I’d ask him to look at the wasted billions of hours spent complying with our increasingly complex tax code. I think simplifying the tax code would remove a great deal of the friction that slows our wealth creation process.
What areas of the market do you perceive as most safe today?
The safest area of the market is growing companies with the potential to be added to the S&P 500 in the years ahead — like Myriad Genetics and Netflix. They tend not to be household names, but that’s good. The past year has reminded investors what happens to household names when a thousand institutions try to bail out. As for cash, which is traditionally considered safe, if inflation develops, the value of cash drops, and you don’t want that.
What do you say to people who are tempted to buy technology, even financial stocks at these low, low prices?
I say don’t touch beaten-down financial stocks with a ten-foot pole. It takes years for a group that’s been that badly beaten to recover its health. (An exception is Fidelity National Financial (FNF), which is a leading title processor, and is enjoying the refinancing boom today) As for technology, it’s hard to generalize about such a large sector. I’d avoid beaten-down old favorites, but medical technology—and genetic technology in particular—has some attractive areas.
What fundamental strategy do you follow for buying portfolio positions?
Buy on dips, hold winners, and cut losses short.
What investment advice would you give to someone with a five-year horizon?
Back in the 1930s, when John Templeton thought the market had fallen far enough, and many good stocks were dirt cheap, he borrowed money and bought shares of every stock on the NYSE trading under a dollar. There were 104 of them; 37 were already in bankruptcy. Three years later, he had a profit on 100 out of 104! My advice is to ignore the bad news; be an optimist. We’ve just come through the worst bear market of your lifetime; the future will be far better.
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