A POPULAR BUSINESS
on which I appear regularly has launched a segment called "Stock of the Week." The premise: Each pundit names a stock he or she thinks could rise over the next seven days. Viewers love it. Nothing bumps ratings like the promise of quick, easy money.
I'm always preaching the gospel of absolute return. The truth is, a quick pop isn't the best way to achieve one.
It's hard to convince most people that they don't want a quick 10% jump in one of their holdings. But it's true. The best trades that is, the ones that tend to be the most profitable don't occur over a few days, but over months. They aren't knee-jerk reactions to an earnings report or a TV tout. Steady, silent price action defines a trend at work.
My philosophy starts with the notion that the market isn't chaotic. It moves in trends, most of which unfold over time and persist longer than most people think. Therefore, the smartest thing an investor can do is trade with the trend. This means following the market, not fighting it.
When I evaluate ideas for new money, I don't look ahead to next week, but to the next few months at least. And the types of investments that interest me aren't those poised for a 10% pop, but those that could rise by at least 50% or more. These big moves are where the real money is made and big moves take time.
Trends require patience, the thing most people lack. For them, the payoff isn't making money, but the excitement of bagging a winning trade. Their addiction is fed by a small cadre of snake-oil salesmen who prey on the public's eternal quest for a quick, effortless buck. You've seen the ads: 10 trading ideas a week for just $39.95 a month. Visa and Mastercard accepted.
For me, trading ideas are a matter of quality, not quantity. As we've pointed out before, a trader needs only a few really good ideas a year to make money. The object isn't simply to make trades, but to build strong positions in the market's dominant trends.
So what do I think of today's market? I must admit that despite the rally in domestic stocks, I'm not paying too much attention to the familiar names of the S&P 500. I am, however, captivated by and maybe a little bit obsessed with the continuing and persistent weakening of the U.S. dollar. As we wrote a few weeks back, this underreported phenomenon continues to be the biggest trend in the capital markets hands down. And because trends tend to persist, I'm sticking with many of the assets we've profiled over the past few weeks that capitalize on this undeniable trend.
First, as regular readers know, we've been looking overseas for quite some time. And from esoteric Latin American countries to the more established European ones, I see non-U.S. stocks outperforming their U.S. counterparts by a mile. From Brazilian banks to Turkish telephone companies, I'm still most interested in the foreign stocks that haven't yet been picked over by the herd, despite their strong trending performance.
Second, a weak dollar has also benefited commodity-related hard assets, continuing a bullish move that, as we pointed out this summer, started well before the California energy crisis or the Iraq war. From real estate to gold, palladium to potash, inflation-oriented names are among the only domestic issues where I'm finding significant value.
Finally, although interest rates haven't yet risen substantially, bank loan funds, whose interest rates "float" above a benchmark such as Libor, have continued to perform well since we highlighted them in September.
Best of all, while all of the aforementioned assets are strong, I've yet to see serious evidence that the herd is galloping through any of them. The message boards are dormant, the volumes still comparatively weak. And because their price action has been the slow and steady type associated with long-term trends, I'm of the mind that these weak-dollar plays still have room to run.
Jonathan Hoenig is managing member at Capitalistpig Asset Management, a Chicago-based hedge fund.>