FYI | Aug 06 2014
By Peter Switzer, Switzer Super Report
I feel like we investors are in a Dirty Harry predicament where we have to ask: “Do we feel lucky? Well, do you?” The luck doesn’t relate to the longer-term outlook for stocks, which I’m sure will be good for at least a year, and I suspect longer.
It’s all in the timing
What we need luck with is timing and that is the hardest game of all when it comes to stocks. Want proof? Well, think about three nightmare-creating letters — Q-B-E! One day these guys running this company will pull it altogether but getting the timing right is pure punting.
I think there are two ways to play stocks right now but each has a Dirty Harry risk or luck factor attached to it.
First, you forget about timing the correction and simply buy great companies that will do well when the Oz dollar falls. Some experts will sometimes throw in the line “if it falls…” but I’m putting my money on that one. It will happen when the Fed raises interest rates or, more accurately, when everyone thinks it will soon happen.
Given this, you should be looking at a collection of companies that will benefit and not just one, as this could leave you open to a QBE curve ball. Maybe the play could be to go for a fund that has set itself up to benefit from a lower dollar. Eley Griffiths (see Shortlisted) has taken a long position on smaller cap resource stocks on the belief that a lower dollar will help long-run returns.
Play the long game
And that’s the crucial message for all of us now – we should be playing a long game. I reckon you could easily put a few small cap funds together that could spread your risk and even bump up your returns.
Chris Cuffe is a smart guy who runs a fund of funds, where he has about 10 different fund managers. That’s excessive for an individual, but two or three could work. It could work for you as a satellite play around your core portfolio of dividend stocks that we have been encouraging you into for the past three years.
But what if the correction shows up over September or October as some expect, or more rightly guess? Then you could dollar cost average into the lower share prices, or simply cop the loss, as I think the bounce back over a year or more will easily KO any correction losses.
You could put half of your money in now and the other half when a correction happens.
The other way to play this is to simply wait for the correction but that involves risk and that’s why I call it a Dirty Harry problem.
If the market falls 10 or 12% and you pick it, it could be a nice pocketing but our market was up 4.4% in July so if the market drops 10%, you only gain 5.6% and you might have missed out on a dividend if you have been out for some time.
The right moves
Before you make your judgment, you need to wonder how big a sell-off will happen when the Fed gets close to a rate rise and it is worth thinking about these observations from David Kelly, who is the chief market strategist at J.P. Morgan Funds in the US.
“I find it very hard to get scared by a sell off caused by an economy that is improving and rates coming up from very low levels. It's not a recipe for stock-market disasters,” he told CNBC.
What am I doing? I’m buying the companies ahead of the dollar drop because I think when it does fall there will be a stampede for those companies.
Timing is tricky but buying good companies is easier, though I am trying to punt on a lower dollar, which is never easy.
Of course, if making great money on stocks was super easy, everyone would be doing it.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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