Full Disclosure Finance

By Andrew

Well its been a tough start to 2008 for investors to say the least. The markets put in their worst January in 17 years and volatility has been king. We had a sharp rally in the major indices over the past few weeks only to have them snap back 4% in two days at the beginning of last week. As tough as it may be, I still believe that this market is loaded with great opportunities for the long term investor. So in that light I’ve put together some rules for investing that might help you stay in the game and stay profitable in the current market environment. Here they are in no particular order.

1. Buy quality dividend paying companies with strong fundamentals.

Strong fundies are always important for successful investing, but even more so in a hostile market environment. Speculative companies with small market capitalization can be dangerous investments in the best of situations, but in times of economic slowdowns these plays carry an even greater amount of risk. Its hard enough for these companies to thrive in the best of times let alone in a recession. So in times like these stick with the quality, blue-chip companies that aren’t going to board up their doors when things get bad. The Microsofts and Exxon Mobils and Coca-Colas of the world will still be around when things turn around. These are companies that were strong going into the slowdown and will continue to be strong when we come out of it. In addition look for companies that pay solid and consistent (this is important) dividends. You can check back over the past 3-4 years to make sure that the dividend was paid to shareholders and wasn’t skipped out on (Google Finance is a great tool for this). These quarterly payments will help offset any losses that come with a down market. Be skeptical, however, of companies that pay a dividend higher than 10%. It may be very tough for the company to keep the yield this high if the economy goes south.

2. Volatility is your friend use it to your advantage.

Volatility can create some great entry points into certain stocks, but it can also make for some terrible ones. When you have crazy swings up and down like we had the past three weeks it is very important not to chase stocks as they soar higher. Its usually when the skies look like there starting to clear that the storm rolls in and the market tanks 4% like it did last week. Use the dips to accumulate stock in your favorite companies and, as a long term investor, hold on through the rips. If you are relatively nimble you can even take some profits when you get a big move in a stock. Most likely you will be able to get back in at a lower price point in the near future. Your entry point matters even more in this market. Take ConocoPhillips for example. The stock was at $68 per share less than three weeks ago. It then popped 10% to $80 per share in only eight days, dropped to below $74 the next three days, and ripped back up to nearly $77 where its currently trading only three days later. $68 would have been a great entry point, but if you had missed it and chased the stock towards $80 you would have been on the hook for the 7.5% drop. If you were patient however you would have gotten another sweet entry point at $74. Now this all sounds like common sense (buy low, sell high) but it is easier said than done. It is very tough to put your money into motion when it looks like the sky is falling. But its at precisely those times that you need to hold your nose and jump into the deep end. You need a way to identify the good stocks from the stinkers when everything is on the way down. Which leads me into Rule #3…amazing how that works out.

3. Make a list and check it twice.

Make a list of your favorite companies…the ones we talked about in Rule #1. These will probably be companies that were firing on all cylinders before things started to tank. Companies that you would have loved to own stock in but didn’t want to chase as they soared higher (see Apple, Google, McDonalds, and Freeport-McMoRan as Exhibit A). Companies that are now probably 20-30% off their highs from just a few months ago. Companies that you believe will remain strong into and after the downturn. Use the list to identify the stocks that you want to buy when our good friend volatility gives us the chance. Use the dips to build your position in the companies so long as the reason you put them on the list hasn’t changed. If you want to accumulate 100 shares of a company use each successive dip to add 25 shares to your position. This reduces your risk in the case that something takes a turn for the worse. After each dip you can evaluate whether the overall story has changed or not, keeping your investment time-frame in mind. If the story hasn’t changed you probably have a buying opportunity, if it has then you may have rethink the situation.

4. Invest in Companies with International Exposure

The companies that will continue to thrive as the US slows will be the ones with good international exposure. Especially ones that are tied to rapidly developing countries such as Brazil, Russia, India, and China. Some people think that as the US goes so to does the rest of the world. Personally, I believe that the development in these countries is far less coupled to the US economy than some people might think. The industrial development, construction projects, and energy demands in these countries are not going to grind to a halt just because the US isn’t importing as many lead contaminated children’s toys. Obviously it is a lot more complex than this but the story remains the same. As these countries ramp up construction on buildings, highways, and refineries, the companies with exposure to these areas will benefit. They will need the mineral and mining companies to provide the raw materials of construction, shipping companies to deliver the materials across oceans, and construction companies to work on the projects. Its not all about development either. Companies like McDonalds, Coca-Cola, Nike, and General Motors have great exposure in terms of international sales. Aerospace and Defense companies like Boeing, Honeywell, Lockheed Martin, and Raytheon have contracts in a number of the developing nations. So when looking for prospective investments, look for companies with international exposure.

I hope these rules help you stay informed and involved in these tough times for investors. Stay involved because the opportunities are there, you may just have to look a little harder.

Disclosure: Long McDonalds, Long Apple, Long ConocoPhillips