Health-Care ETFs May Cure an Ailing Portfolio

NURSING MAJOR LOSSES, many investors are understandably reluctant to commit new funds to anything right now. That's the natural reaction to getting spanked in the markets. Most people turn so risk-averse they sit on the sidelines, as many burned tech investors did in 2001-02. Perhaps worse, some people even become so frantic to make up losses that all discipline is thrown aside and bets become all-or-nothing attempts to get back to even. Neither reaction is ideal.

Emotionally, a good place to start is by letting yourself off the hook. As has been well-documented, there are only a handful of strategies and techniques that have actually made money this year, and even many well-known and high-profile managers have struggled. If your overall performance is anywhere near break-even, then you're doing much better than most.

Keep in mind too that investing is a marathon, not a sprint. Despite the seductive attraction of a huge Hail Mary bet, the real money is almost always made over longer periods of time — buying gold, international stocks or some other asset long before the herd is on board, and waiting for a number of months or years as the rest of the world slowly bellies up to the bar. As frustrating as the current market environment might be, it's a process that simply can't be rushed.

In my experience, P/E and P/B are useful indicators when it comes to analyzing companies, but less beneficial when it comes to picking stocks. As we've seen with the financials, a company's stated book value is oftentimes a subjective estimate at best. And just because a company is cheap doesn't mean it can't stay cheap — or get even cheaper. Plenty of stocks with astronomical P/Es soared in the late 1990s. Those valuations eventually contracted, but not before the shares rose thousands of percent.

When putting money to work, I think it's vital to focus on grabbing the first harvest of gains, focusing on those investment themes that are just being discovered by the market. The first harvest occurs quietly, before the news breaks and before the fundamentals become clear. Oftentimes these are just the ideas where the fundamentals aren't that enticing, namely because the stocks almost always move long before the fundamentals improve.

Yahoo (YHOO) is a perfectly fine company, but no longer a growth stock. Same for Starbucks (SBUX) and Advanced Micro Devices (AMD). That doesn't mean they can't rally, even sharply so. But their growth period — that initial harvest of gains — has already been taken, even though the companies in many cases make more money now than they did when their shares were more highly valued.

I'm called a speculator because I'm paid to speculate, taking risks before the fundamental justification becomes completely clear. I pass on the weak and widely followed names and try to focus on new ideas that haven't already experienced recent and rapid growth. It's comforting to buy stocks whose fundamentals indicate they should rally. It's harder, but ultimately more beneficial, to focus on early-stage ideas where the news isn't out and the move hasn't already been made.

Yet there are few other sectors where government regulators play such an influential role. An unfavorable FDA ruling can easily send a biotech company's shares plummeting. Witness last week's shellacking of biotech stocks Biogen (BIIB) and Elan (ELN), which dropped 28% and 51%, respectively, on Friday after it was announced that two patients taking the drug Tysabri contracted a potentially fatal brain disease.

Although it's not a theme in which I'm currently invested, it has become more apparent in recent weeks that more than a few health-related names are quietly plodding forward, even amid difficult macroeconomic circumstances. Health is a vast sector, encompassing everything from early-stage biotech to medical-related real estate, but even a few of the well-known large stocks like Johnson & Johnson (JNJ) and Novartis (NVS) have shown impressive strength.

HealthShares offers a family of exchange-traded funds focusing on a variety of different ailments, from cancer to cardiology. For those investors like myself who just happened to have skipped medical school, these ETFs provide an excellent introduction to learning about which companies are focused on which medical issues. HealthShares Infectious Disease (HHG), HealthShares Emerging Cancer (HHJ) and HealthShares Cancer (HHK) are among those that look particularly attractive for further analysis in today's market.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.

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