Sometimes the shortest distance to portfolio disaster is a straight line between two points.
This, I believe, is one of those times. If I've been clear about nothing else in the past few weeks, I hope I've been clear on how impossible it is to find a reliable, investible trend in the current market if you're looking more than a few months out.
Most investors, even if they're being very, very careful, are radically underestimating the difficulty of finding an investible trend right now. According to the conventional wisdom, there are two possible trends: Either the trend line points up from here into a sustained recovery that looks a whole lot like the economy and market before the financial crisis, or it points down into a second bottom that looks a whole lot like the recent financial crisis.
- Bing: Watch for upcoming IPOs
But it's not even that simple. There's another alternative: that we're still passing through a period of confusion without a trend. On the other side, and yet to emerge, is a new trend that won't look like either the pre-crisis or crisis economies.
I have a strong suspicion that a year from now things will look very different from both where we are now and where we once were. I can't give you all the details of the still-to-emerge trend, but I can block in some of this third alternative.
Does that sound like I'm about to make your investing life even more confusing? You bet. But the likelihood, history shows us, is that the way to make money after a crisis like this won't strongly resemble the way to make money before the crisis. Investors need to consider that now it really is time for something completely different.
More from MSN Money and MoneyShow.com
No trend to befriend
We all like to draw trends. Give us two data points and we'll connect them with a straight line -- and extrapolate that line until we run out of graph paper. I suspect it's imbedded in our DNA from the days when the shortest distance to a meal was the straight throw of a rock. (These days, individuals with a strong genetic predisposition toward connecting data points become journalists or stock analysts or train men on the subway shuttle that runs between New York's Times Square and Grand Central Station.)And much of the time, drawing a trend line and following it puts money in our pockets. I'm a big believer in the old investing saw "The trend is your friend." In fact, my book "The Jubak Picks" and the Jubak Picks 50 portfolio are built on the idea that most of the time it's easier to make money in the stock market with the trend at your back than with the wind blowing in your face.
Video: The trend is your friend
If you're paying attention, though, I bet you've noticed my careful caveats, "much of the time" and "most of the time." (For why "most of the time" investing even after a huge rally like this works, see this blog post. For what happens when it does not work, see this column.)
Right now, connecting the dots into a trend stands a good chance of getting an investor into trouble. The data are just too contradictory, too subject to divergent interpretations and too volatile from day to day. I can make a strong case for this rally to continue as the economy takes off in 2010 and for a double-dip recession as the economy sputters in 2010 and fails produce a sustainable recovery.
If the first trend is correct, you ought to be loading up on the kind of stocks I mentioned in my post "Time to start planning for the next rally."
If the second is correct, you ought to be selling into this rally to raise cash and be loading your portfolio with things such as gold that do well when everything hits the fan.
And if the third alternative I've mentioned is correct? Then both of those portfolios will be left in the dust and you'll be left playing catch-up to a group of stocks that aren't even on most investors' radar screens at the moment.
A not-so-straight line: The IPO pipeline
Like all exercises in trend drawing, my third alternative connects a few dots and then extrapolates them into a trend.The dots for my third trend begin with the IPO of battery maker A123 Systems (AONE, news, msgs) that I wrote about recently. And they include the rest of what amounts to a huge backlog of venture-capital-funded startups with the potential to transform the current economy or at least create entirely new subindustries.
Ever hear of any of these companies? SilverSpring Networks. NanoH2O. Juvaris BioTherapeutics. AnoxKaldnes.
Unless you work at one of these companies or the venture-capital funds that have invested in them, the odds are that these are completely unfamiliar. And why should we have heard of them? They're still private. We can't put a nickel into any of them. And until this week, it looked like companies such as these were going to stay private for quite some time yet.
After averaging 70 initial public offerings a year from 2004 to 2007, according to Renaissance Capital, venture-capital-funded companies almost vanished from the market. If they were private, they stayed private. Raising money in the public markets has been that hard (next to impossible) and that expensive in 2008 and 2009.
Continued: When will the game change?
Rate this Article
High
The idea that without celluloisic tech we now have to "choose between eating or creating energy" is one of the biggest pieces of misinformation out there. Seaweed in the ocean, mesquite in the desert/roadside alone can fuel half of even gas guzzling America. See David Blume's work with exhaustive references.