Saturday, 20 February 2010

Only an Idiot Would Buy This Today

Only an Idiot Would Buy This Today

By Tim Hanson
February 11, 2010

Think back to last Thursday at 3:45 p.m. The Snowpocalypse was bearing down on Washington, D.C., and the market was about to close down 3%. It was so bad around here that you'd be forgiven for thinking the end was nigh.

And that was just one more day in a whole season of bad news. What in the name of all that is good and sane in this world should we investors be doing to protect ourselves?

The old standby?
The obvious answer is that as uncertainty spikes, investors seeking peace of mind should flock to lower-risk or even risk-free assets such as Treasuries. These, after all, are backed by the full faith and credit of the U.S. government, and that means something -- or at least, it did 10 years ago. But only an idiot would buy Treasuries today.

In fact, financial supergenius Nassim Nicholas Taleb, of Black Swan fame, recently told a conference in Moscow that "every single human being" should short U.S. treasuries. (If you agree, then Ultrashort 20+ Year Treasury ProShares (NYSE: TBT) is your play.) Taleb cited looming hyperinflation and the inability of the U.S. government to get its spending under control, prospects that eliminate holding plain old dollars as well.

What does Taleb recommend instead? Gold.

Only an idiot would buy gold today. The price of that commodity is currently north of $1,000 per ounce, and flirting with new all-time highs on a daily basis. According to billionaire George Soros, gold today is "the ultimate asset bubble."

Given what's happened with the last two ultimate bubbles -- real estate and tech stocks -- it may be best to avoid this one. Recall that if you bought Oracle (Nasdaq: ORCL) or Intel (Nasdaq: INTC) in 2000 or Bank of America (NYSE: BAC) in 2007, you're still down 40% or more.

What about bonds?
Both short- and long-term bonds look like another idiot move. Although bonds tend to offer a regular return and better principal protection than equities, remember that interest rates are near an all-time low. As soon as they revert to the mean, today's bonds, both low- and "high-" yielding issues, will get crushed.

Furthermore, thanks to a risk-averse market, high-quality corporate bonds offer next to nothing in terms of yield. This prompted Forbes to recently declare a "monster bond mutual fund bubble." That sounds even worse than "the ultimate asset bubble."

So … equities?
Master investor David Dreman is bullish on stocks, describing them as good hedge against inflation. But again, the stock market was down near 3% last Thursday, unemployment keeps hovering near 10%, and our country still has to survive significant deleveraging. I've heard from several sources that only an idiot would buy stocks today.

Even Berkshire Hathaway (NYSE: BRK-B), a stalwart if ever there was one, has lost its coveted AAA credit rating. As the last two years have shown, the U.S. stock market is not the place for risk-averse investors.

With the U.S. in trouble, you might look abroad.
  • Unfortunately, Europe's situation, with Spain, Portugal, and Greece all struggling to meet their debt obligations, looks worse than our own. 
  • As for fast-growing emerging markets, they're all going down as soon as the massive China bubble pops -- as short-seller Jim Chanos has predicted that it will. 
  • This, in turn, will take down commodity prices as well, so don't seek safety in oil or food.

Thus, you're only courting double trouble by getting interested in Chinese energy stocks such as PetroChina (NYSE: PTR) or CNOOC (NYSE: CEO). Only an idiot would buy any of those!

Have you noticed there's nothing left?
All told, if you have money to invest, and have spent any time at all reading about the markets, chances are you're panicked. You don't know what to buy (since everything's a bubble), and you don't want to hold cash (since its value will just get inflated away).

This is the perfect illustration of why, when it comes to investing in good times or bad, you can't get caught up in the short term, or in breathless market commentary.

In order to make money in the stock market -- which we all want when we're trying to "protect" our portfolios -- you need take a long-term view, diversify across asset classes, and commit to buying great companies at great prices whenever the market gives you the opportunity. After all, anything has the chance to make you look like an idiot in the short term. But if you stay balanced, stay patient, and stay invested, you'll be in pretty good shape.

Are you any of those things?
That's our view at Motley Fool Global Gains, and we've been tilting our exposure more and more toward emerging markets this year because, while we do expect some volatility, we also expect that emerging markets will be the global economic success story of the next decade.

Furthermore, we recently advised our members that they should consider buying CNOOC -- one of the aforementioned Chinese energy plays -- below $150. That's because the company has increased its production guidance, and it remains a very good way to play the inevitable increase in China's energy demand long-term.

Unfortunately, most U.S. investors remain dramatically underexposed to foreign markets and stocks such as CNOOC -- a vital part of any balanced, long-term, protected portfolio. If that describes you, then get our latest stock recommendations -- including today's two brand-new picks -- by joining Global Gains free for 30 days.

Tim Hanson is co-advisor of Motley Fool Global Gains. Berkshire Hathaway and Intel are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Stock Advisor pick. CNOOC is a Global Gains selection. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Berkshire Hathaway and Oracle. The Fool's disclosure policy does not fear the Snowpocalypse, only the Snowmageddon.

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