Would You Rather Be Right – Or Rich? (QABA, FAS, FAZ, XLF, UYG, SKF)

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November 29, 2011 4:26pm NYSE:FAS NYSE:FAZ

Joseph L. Shaefer: No fair cheating. You can choose only one…  You may be surprised to find how many people answer they’d rather be rich — but their behavior clearly shows that being right is more important to them. I observed this strange phenomenon early in my financial industry career when one of my

fellow Kidder, Peabody stockbrokers back in those pre-computer days used to painstakingly construct point and figure charts, one little X at a time, for hours upon hours on end. Sometimes his charting resulted in purchases that worked out and sometimes it didn’t.

But more telling was when he’d make a mistake, which was pretty easy to do with endless columns to track and, unlike a computer, a mind that occasionally wandered. In those instances he’d make money for what he considered to be the “wrong” reason. “This should not have happened!” he’d wail to all and sundry. “The charts said it would go down and it went up!”

We’d console him by pointing out that, because of his mistake he hadn’t sold when he “should” have (according to the charts) as a result of which he actually made money. “That doesn’t matter!” he’d fire back, incredulous at our failure to comprehend. “The charts don’t lie. I know my analysis was right; the specialist must have manipulated the market.” (Back in those unenlightened days, we didn’t have high frequency and algorithmic trading; we had to blame the specialists if things didn’t work out the way we thought they would.)

We see this in the market every day. People who “know” that gold “must” go up to $5000 or down to $100 an ounce. Or they “know” that a certain sector or industry or stock is overpriced and “must” decline. (No. It mustn’t.) Or that a certain company “has to” be a ten-bagger. (No, it doesn’t.) These folks then become ever more stubborn and angry the more their certainty begins to fray in the harsh light of reality.

We also see it among some in the financial business, who trumpet to the heavens how they alone predicted the end of the secular bear in 1982, or the beginning of the cyclical bull in March 2009, or the October melt-up this year. Now, there’s nothing wrong with tooting your horn when you’ve made a prediction that fooled 90% of The Crowd. But if you then look at their portfolios you will often find they may have been “right” in their guess, but didn’t believe in it enough to do anything about it! Talk is cheap; investing means actually putting your money where your mouth is! It may gratify their ego (and future sales) to quote how right they were, but if they never provide any actionable strategy, their rightness didn’t help your portfolio one bit.

Me, I’d rather be rich than right. That’s why, even though I expected October to be the 6th month of the Dog Days of Summer, and positioned our portfolios where that expectation led (into inverse ETFs and other purely defensive hedges,) we turned on a dime when a changed market environment came to the fore in early October. I was wrong, wrong, wrong about what would happen in October. But since it is more important for us and our clients to be rich than it is to be right, there can be no clinging to my previous expectation, no sputtering, “But, but, but — historically it has gone down in times like this.” One simple reality overrides any such ego-driven decisions: “Don’t. Fight. The. Tape.” That’s why buy-and-hold will one day work again but, these days, you’d better be nimble or find someone who can be!

Why? Among other recent examples, The Drunken Chicken Market definitely ended on a single day. If you weren’t there that day, you missed it. And the market looked as if it was ready to soberly take flight. But that was then. This is now. We had a magnificent last couple weeks in October, then a dreadful November, mostly down, down, down until Monday morning. The Drunken Chicken Market was replaced by a Fleeing Turkey Market:

More reason to be wary of anyone who tells you they stay invested 100% of the time, no matter what the market is doing. We sold a number of positions in this past month’s decline, almost all of which were profitable positions we had placed tight trailing stops on. But we didn’t just go to cash. There were simply too many bargains available given our view that the bad news is mostly out and all around us. Heck, we are awash in the stuff! Could Europe be any dumber in handling the credit crisis? Could the US Congress be any worse at their jobs? If you answer “no,” as we do, then by definition the news on those two fronts can only get better.

The market is a forward-looking mechanism, not a backward-looking one. We plan to sell our stocks at a profit in the future, not in the past. Turning points are seldom recognized at the time simply because the preponderance of bad news and declining markets have been etched into our consciousness for a period of time. Even if it’s only been the past 5 months of sideways action, that is our frame of behavioral reference. So people say, “I don’t see the market going up. Look at the unemployment mess, the housing fiasco, Greece, slowing growth in China, etc. Now is clearly not the time to buy.”

The market always “looks” the safest when all the news and indicators are hunky-dory and the market is priced to perfection. That’s when someone suggesting it may correct downward is seen as a Grinch, which is why I typically simply place trailing stops and let the market tell me if my hunch that things were looking just a little too rosy is correct or not. Conversely, buying at or, worse, before a worthwhile bottom makes people think you are insane. So I can either be the Madman in the Attic or the Grinch. Great profession I’ve chosen, huh?

For those readers willing to accept that we will be wrong from time to time, will stay too long at the fair from time to time, will enter and exit too early from time to time, etc., you’ve come to the right place. We really don’t care about being “right” as long as our numbers at the end of each year keep distancing themselves from the benchmarks, year after year. I won’t always get it right but if I am willing to change my mind when wrong and make up for it with superior stock selection when right, that is exactly what will happen over the intermediate and long term.

What’s in my cloudy-as-ever crystal ball? First of all, while a rally looks likely to me, I have no idea if this is just another Drunken Chicken episode, albeit from a level above the sideways action of the past year (that is to say a cyclical bull move within the secular bear) or if it is the beginning of a new secular bull. If it is only the former, we’ll be willing to place those trailing stops and move back to the safety of defensive hedges and bonds.

If you agree the time to be more willing to commit funds is when others are afraid to, but you still only want to dip a toe in the water, as of November 28, the Molycorp Mandatory Convertible Preferred I discussed here is still yielding 8.5% and has an interesting growth kicker.

Or for a less volatile way to play an American recovery, might I suggest your due diligence on the NASDAQ ABA Community Bank ETF (NASDAQ:QABA). This ETF gives you exposure to the backbone of American banking where more and more of us are taking our money: community banks. QABA eschews all money-center (Too Big To Fail, Too Venal To Survive) banks, indeed any banks big enough to be listed on non-NASDAQ exchanges, as well as any that claim to enjoy an international specialization or a credit-card specialization. Just real bankers with a real face in the community who take in deposits and make local loans. What a concept.

Written By Joseph L. Shaefer From Stanford Wealth Management LLC

Disclosure: We are long MCP-PA. Lots of it. We are only now beginning to enter orders for shares of QABA. If you decide to buy, don’t chase it! This is a thinly-traded ETF — walk softly and carry a little stick.

About: Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. A retired General Officer, he spent 36 years of active and reserve military service, the first six in special operations, the next 30 in intelligence. He is professor of Global & Security Studies (Intelligence, Counterterrorism, Illicit Finance, etc.) at American Public University / American Military University. He analyzes the Big Picture first, then selects asset classes, sectors and individual securities.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month. We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. © J L Shaefer 2011

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