"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
Buy what investors they hate, sell what investors love. Sounds easy doesn't it? Well, actually it is if your time horizon is 2-5 years rather than 2-5 weeks. Since the majority of trading on Wall Street is done by people whose investment results are graded daily, weekly, monthly, and quarterly, many of their investment decisions are driven by emotion.
The smart money (those who have a longer time horizon) will do the opposite of what everyone else is doing.
Markets, like the one we are experiencing now, are what the smart money live for. While many investors hope for returns of 8-10% per year, the smart money look for stocks that can return 100% in 2-5 years.
In his latest shareholder letter, Warren Buffett revealed that Berkshire Hathaway posted a 21.1% compounded annual return over the last 43 years. He has said many times that what he does is not that hard, but the average investor cannot bring themselves to follow these very simple principles.
Several studies have been done over the past 50 years, and time after time investors who follow the contrarian strategy of buying high quality stocks that are out of favor tend to outperform the market.
As an example;
1) The Dogs of Dow- Studies have shown that investing in dividend strategy of the ten highest yielding Dow stocks tend to outperform the market.
2) Werner F.M. DeBondt and Richard Thaler study of the 35 best and worst performing stocks on the New York Stock Exchange from 1932 through 1977 found that" the best performers over the preceding five and three year periods underperformed, while the poor performers produced significantly greater returns than the NYSE index." Source- Investor Home
3) David Dreman, in his Forbes 5/6/96 column titled "Ben Graham was right--again, studied the largest 1500 stocks on Standard & Poor's Compustat, for the 25 years ended 1994. He found that the 20% lowest P/B stocks (quarterly adjustments) significantly outperformed the market which outperformed the 20% highest P/B." - Source- Investor Home
Here are a few calculators you can play with to get some historical return data- Moneychip
When I look at the annualized returns of Value vs Growth, clearly Value has outperformed.
When looking for stocks that have an 80-100% return potential, I look for stocks trading at or below their book values. When looking to invest in a sector, see what sectors are most represented in the discount to book value list.
Here are a few to consider;
Financials- Capital One (COF), Fannie Mae (FNM), Freddie Mac (FRE), Huntington Bank (HBAN), Regions Financial (RF).
Consumer Descretionary- Jones Apparel (JNY), Liz Claiborne (LIZ), Dillard's (DDS).
The Markets
Yesterday Fed Chairman Ben Bernanke's comments that banks need to do more to help borrowers avoid foreclosures caused a 226 point sell-off intra-day. The stock market was rescued in the final hour of trading after a report was released that a bailout of bond insurer Ambac was progressing. The DJIA gained back 180 points of losses to close down 45.10.
After trading down more than $2 per barrel yesterday, crude is trading up 80 cents to $100.32/bbl this morning ahead of the EIA data.
According to Bloomberg, consensus estimates for inventories for the week ending 2/29/08 indicate:
Crude Oil: Up 2.4 million barrels
Gasoline: Up 125 thousand barrels
Distillate: Down 1.875 million barrels
Today, OPEC ministers agreed to keep oil output unchanged saying that record high prices had been driven by factors that were beyond their control. You know what that means? OPEC ministers have been saying the oil market has been driven upwards by a weak dollar, speculation, political strife, and not by a lack of crude.
Today's Automatic Data Processing (ADP) employment report for February (-23,000 v. estimated +18,000) can in worse than expected.
The Labor Department said that labor costs rose a 2.6 percent annual pace in the fourth quarter which is not good news on the inflation front.
On the positive side, the Institute for Supply Management (ISM) report for February declined, but not as much as analysts had expected. If the market considers this good news, I guess they will take what it can get.
On the political front, the NAFTA- NWO gang had a good day as Hillary Clinton and John McCain swept yesterday's primaries.
I'll bet Mr. Rockefeller was proud.
