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We
are pleased to present the following
excerpt from the book
Full of Bull: Unscramble Wall
Street Doubletalk to Protect and Build
Your Portfolio
by Stephen T. McClellan
FT Press - June 2009
(Updated Edition)
Order
at Amazon
5
Strategies for Investing Properly,
Cautiously, and Intelligently
in This Bear Market
This is a perilous period in the stock
market; a deceptive bear market that
disguises its downward drift. Beware of
misleading Wall Street doubletalk, as it
tempts investors into this dangerous bear
market. The Street tends to discourage and
even hinder proper investing. Its advice
is unreliable and often contradictory.
Professional insiders know better than to
take the Street literally. To be an astute
investor you must fathom the puzzling,
strange, ambiguous ways of Wall Street
that it would prefer to keep secret. Be a
cautious, realistic, long-term investor.
Preserving capital is paramount -- the
most important investment strategy that I
emphasize in Full of Bull. Entering this
bear market is a risky strategy.
1. Keep Short Term Influences at
Bay.
The Street wants you to pay attention
and generate commission trades on a
regular basis, to create business. That is
why it regularly alters stock opinion
ratings and is always so optimistic.
Brokers market stocks, analysts recommend
stocks. They are not objective advisors.
The investment world evolves around the
exceedingly short-term trading mentality
of Wall Street. So too the media. TV stock
market programs need you to tune in
everyday, every hour, to collect
advertising dollars. The message had
better be new and different every time you
switch it on, to keep you interested. It
is all about drama, ideas, news, and color
to engage you. Companies and executives
are similarly short-term focused. Their
emphasis is on current quarter earnings
results and managing Street and investor
expectations low enough to "beat" the
consensus. Keep these subjective
short-term influences at bay. Put them in
perspective. Pay some attention but do not
let them be a consuming distraction.
2. Steer around confusing Wall
Street gibberish.
A Wall Street Journal headline recently
declared, "AIG Corrects . . . " Given the
Street's eternal optimism and favorable
bias, it uses the term "correction" to
indicate a stock-price decline. I always
viewed this as absurd since the Street
never labels a stock-price rise as a
"mistake." Thus, I assumed the article
pertained to the dive in the AIG stock.
What a surprise. It was referring instead
to a 24% rally in the shares and described
"what analysts said was a partial
correction from the stock's sharp decline
in the first four days of the week." This
is an ultimate example of the baffling
Street terminology and guidance. You need
to cut through this malarkey, correctly
interpret Wall Street commentary and
opinions, and avoid the pitfalls of
inappropriate research guidance. Step
back, think, ponder, observe, and take an
intelligent approach to investing.
3. Understand that being wrong is
part of the process.
A Wall Street pioneer and renowned
investment consultant, Peter L. Bernstein,
who passed away recently, lived through
the boom and bust of the 1920s and had a
70-year career as a Street portfolio
manager. When asked what was the most
important lesson gleaned during his seven
decade run, he was emphatic -- the idea
that " You can figure this thing out. You
have to understand that being wrong is
part of the [investing] process."
His approach was always to consider the
consequences if the investment decision is
wrong. His strategy was to take big risks
only with small amounts of capital, and
only take small risks with big amounts of
money. Investors must avoid incurring
whopping losses. Have the discipline to
reassess if a holding declines by some
20%. The economic and stock market
outlooks are ominous. Investors should
take a guarded stance.
4. Know that bear markets regularly
tempt investors to wade back in.
During bear markets, each time there is
a precipitous drop, it is followed by a
modest recovery, masking as the beginning
of a new bull market. Do not be deceived
into believing that such bear market
rallies are the outset of a new bull
phase. Alan Abelson pointed out in
Barron's that the new buzz word on the
Street was "exit strategy," as the market
faded following the March-April bear
market rally. His view is that investors
could have avoided this necessity with
better foresight, that is, with an
appropriate "entry strategy."
5. Beware of dead-cat
bounces.
Even a dead cat will bounce if it falls
far and fast enough. Any stock or market
that drops similarly will experience a
rebound at some point. After single-digit
declines four quarters in a row, the stock
market nosedive worsened to double-digits
in the fourth quarter last year and again
in the first quarter earlier this year. So
a spring back in the second quarter was a
reasonable occurrence. But it was hardly
the beginning of a sustained recovery. The
market could still easily plummet by at
least 10% as the bear market endures. A
reasoned, conservative investment approach
precludes jumping into stocks given the
hazardous conditions. However, this is not
the counsel you will hear from Wall
Street.
Use Wall Street's information and
research content, not its conclusions or
recommendations. Do not be fooled by the
Street. Successful, long-term investors
focus keenly on investment entrance
strategy and conservative management of
capital. It is not what you make, it is
what you keep. The Street pays little heed
to risk, the possibility of permanent loss
of capital, in the pursuit of big gains.
But an intelligent investor should seek
consistency rather than outsize gains, and
always pay attention to protection of
capital, especially in these precarious
times.
©2009
by Stephen T. McClellan and reprinted with
permission.
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Stephen T. McClellan, author
of Full
of Bull: Unscramble Wall Street
Doubletalk to Protect and Build
Your Portfolio,
was a Wall Street investment
analyst for 32 years, covering
high-tech stocks as a supervisory
analyst. He was a First Vice
President at Merrill Lynch for 18
years until 2003, and ranked on
the annual Institutional Investor
All-America Research Team 19
consecutive times, The Wall
Street Journal poll for 7
years, and has a place in the
Journal's Hall of Fame. From 1977
to 1985, he was a Vice President
at Salomon Brothers and before
that held a similar position at
Spencer Trask for 6 years. Before
commencing his Wall Street
career, he was an industry
analyst with the U.S. Department
of Commerce. From 1964 to 1967,
the author served as an
operations officer aboard the USS
Suffolk County (LST-1173) in the
U.S. Navy.
Mr. McClellan has a Chartered
Financial Analyst (CFA)
designation, is a member of the
New York CFA Society and the CFA
Institute, was President of the
New York Computer Industry
Analyst Group, and was President
and Founder of the
Software/Services Analyst Group.
He has made television
appearances on Bloomberg TV,
FoxBusiness News, CBS, CNN
MoneyLine, CNBC, and Wall Street
Week. He has conducted several
radio interviews on such programs
as Bob Brinker's Moneytalk and
given presentations to numerous
organizations, at conferences,
and to companies. Mr. McClellan
has published articles in the
Financial Times, The New York
Times, Forbes, and other
publications. His MBA in Finance
is from George Washington
University and his BA is from
Syracuse University. For more
information please visit
www.stephentmcclellan.com.
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