INVESTING: Holding tight right now might wallop portfolio

Keywords Real Estate / Technology

While the seasons are a lot more predictable than the stock market, the market does go through climatic changes that investors should adjust to.

In late September, after the market had been rallying for about six weeks off the August low, I mentioned it would be a good idea to reduce equity to around 40 -cent to 50 percent.

In the middle of November, I wrote that it might be smart to reduce that level even more. If you’re still being stubborn about getting defensive, here’s a little story about what you can expect to happen.

This is going to be familiar to people who thought they could ignore the little light in their car that tells them they are running out of gas. They find themselves stuck on the side of the road at the worst possible time.

In late 1999, Eli Lilly and Co. announced a large growth plan for the next several years. The company was going to hire 10,000 people, expand its facilities near its headquarters, and beef up overhead across the board.

Why not? Everyone was partying like it was 1999! Lilly’s stock was at more than $100 a share, and everything pointed to the right time for “all in.”

Well, things didn’t work out quite the way management expected. Lilly lost patent protection for Prozac and suffered other setbacks. Eight years after the announcement, Lilly’s stock is about half what it was, and there was no stock split. The company didn’t meet its hiring goals and now is scaling back its work force.

What if, instead of spending all that money at the market top, Lilly instead conserved its cash? Perhaps it could have been in a position to buy several biotechnology firms at the market bottom in early 2003. Or maybe it could have bought Merck after the Vioxx disaster. Instead, the company is a wounded animal in a dangerous position. The combination of the strong euro and Lilly’s weak stock price might persuade a European firm to make a run at Lilly. You think the real estate market around town is bad now!

The management at Lilly made a simple mistake. It didn’t pay attention to the tornado warnings that were blaring at a deafening level. Are you doing the same thing right now? You see white stuff on the ground, but are you refusing to believe it’s winter?

There have been 14 bear markets since 1929. The average bear market has taken the S&P 500 down 29.5 percent from the high. Today, the S&P is down about 7 percent from the October high. That leaves a lot of room on the downside.

Investors seem to be under the impression that they can hide in foreign markets. Take a look at current prices, not your statement from a month or two ago. You’ve given back a fair amount of your gains. Pretty soon, all those gains will start turning into losses.



Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 829-5029 or at keenan@samexcapital.com.

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