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Thursday,
April 16, 2009
(Cont'd from
above)...
Jim (cont'd):
How huge… how
about the fact
that 50% of a
stocks move
depends upon the
performance of
the sector that
it is in, not
the company… do
you understand
what that means…
if you can call
the sector, you
can call half of
the gains or
losses in a
given stock… any
stock.. why is
this true…
because most of
the big fund
managers are
committed to
sector based
thinking… and
they are the
buyers and
sellers who set
prices… this is
not complicated…
you have got two
kinds of
companies out
there… cyclical
businesses do
well when the
economy is
growing fast…
when the Fed has
rates low… and
they do not do
well when the
economy slows
down… here is
the groups,
airlines, autos,
raw materials,
consumer
durables, think
washing
machines, heavy
equipment, that
kind of thing…
then you have
got your secular
stocks… your
secular growers,
in addition to
not keeping the
Sabbath, these
companies are
sensitive to the
underlying
strength or
weakness of the
economy… a
Generous Mills,
a Proctor &
Gamble, Brothers
Johnson, any of
these utilities,
these are
secular growers…
although the
utilities are a
slow secular
grower… they
won’t be
effected by the
cycle because
they don’t stop
buying Band-Aids
simply because
we are low on
cash.
So how do you
spot these
secular
rotations before
they start
moving the
stocks… how do
you buy the
secular growers
before they go
higher… how do
you avoid the
cyclicals before
they go lower…
easy… at the top
of the cycle
before you think
a downturn is
coming… maybe
because the Fed
is raising
rates… you load
up on your
secular growth
stocks… at the
bottom you swap
out for some
beaten up
cyclicals… let
me repeat… when
the economy is
humming along
with high
growth, you sell
cyclicals and
buy secular
growth stocks… I
know that it is
counter
intuitive… I
don’t care… when
our GDP growth
is in the
gutter, when you
think that it is
done going down,
then you move
into the heavy
duty stocks, the
cyclicals.
The reason that
this is actually
difficult… the
reason that you
can make money
off of this play
book is that it
is kind of just
the opposite of
what you thought
would happen…
when cyclical
stocks start to
bottom, everyone
cuts their
earnings
estimates for
them… remember,
this is the
bottom of the
cycle, so the
companies are
suffering… so
the estimates
get slashed… but
the companies
hit bottom and
won’t go much
lower, I
actually
describe this in
detail in
Real Money: Sane Investing In An
Insane World,
because I just
find it so hard
for people to
grasp.
See, this makes
stocks seem
expensive, when
the estimates
are cut, but it
is not the price
that we care
about at that
point… it is the
price to
earnings
multiple, when
these companies
are at their
most expensive
at the bottom of
the cycle… then
you have got to
pull the
trigger… then
you have got to
buy… you buy
because you know
that their
earnings are
going to
increase as the
economy picks up
and you will
never be able to
buy them so low
after we get a
little steam in
the economy.
The bottom line…
▼ ▼
▼ ▼
▼
 The Bottom Line!:
Play defense, buy
secular growth
stocks at the top of
the business cycle
and go on the
offense with
cyclicals when the
economy is so bad,
that you need to
take away the tie
and the shoelaces…
do not get killed by
the idiots out
there… who can’t
think a little
counter intuitively…
you be counter
intuitive… you make
the mad money.
[verbatim recap]
[end of segment]
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