Articles
Wartime Investing
by
Jason Kelly
6/9/2003
This page chronicles an ongoing journal of my investment activities
during the Iraq war. The most recent entries are listed at the top
of the page, older entries below. The first in the series, dated
Feb. 24, describes how to prepare for the war and suggests several
stocks to watch for cheap buy prices. If you haven't read that article
yet, I suggest that you scroll down and do so in order to fully
understand the updates.
This will be the final installment of my wartime investing series. It's
not as late as it seems. It wasn't until the past week or so that the
market transitioned away from a postwar recovery to getting excited
about a recovery in the second half of the year, an interest rate cut,
and the weakening dollar. Thus, only now am I officially closing the
book on my wartime investing advice.
So, how did I do? Not bad:
FLM - Sold at a loss of 24%
PFE - Bought $28, now $33, up 18%
DIS - Bought $15, now $21, up 40%
LVLT - Bought $4.50, now $6.50, up 44%
That will do it for my wartime investing advice. From here, I think
we've come too far too fast and will probably settle back a ways.
Things don't turn around overnight.
March 19, 2003
Just a quick word of warning if you're letting your emotions get the
best of you as the market rises. The methods I've illustrated below
of calmly setting your buy prices and waiting is always a good idea.
The stocks I bought recently at low prices all went through a
dramatic rise after the October lows that could have tricked many
people into buying at the higher prices, thereby missing the chance
to buy at the recent low prices and make money on the recovery.
The economy is still in tough shape. Even if the war goes off
perfectly well, the economy will be roughly the same but with an
additional $100 billion debt. Andrew Tobias asked on his
site, "Are we that much better off, with that much brighter prospects,
than we were December 5, 1996, the day of GreenspanÍs 'irrational
exuberance' remarks, when the Dow (now 8140) was 6500 and the
NASDAQ (now 1392) was 1250?"
The key to making money in stocks is to buy stocks, not markets.
You have no idea what this market will do, or why, or when. Neither
do I. What you might have an idea for, however, is which company
is strong and will do well in the long run. You get that idea with
a lot of research. Then you determine a fair price to pay and wait
for the stock to reach that price. If it doesn't, you don't buy. If
it does, you do.
The stocks I bought are doing well, overall. The stocks that didn't
hit my buy prices are much farther away than they were a few days
ago. Oh well. Anything could happen and I'm a patient man.
March 18, 2003
Sold Fleming at $1.40 for a loss of 24 percent since my Feb. 25
purchase at $1.85.
What I thought was a fantastic bargain is looking
more like a potential bankruptcy. Fleming lost Kmart, its most important
customer, and that brought the price down dramatically and made the
stock look like a bargain. Then there was talk of accounting problems
that sent the stock reeling to my buy price. The more I've watched those
accounting discussions, the more I've come to think that they might not be
signalling a buying opportunity, but rather the last chance to get out
before the company declares bankruptcy.
Thus, I'm cutting my losses here.
One thing important to note from this is that none of it has anything
to do with the lead-up to war. Fleming's problems are not from Iraq
or the Pentagon or the Unimportant Nations (U.N.). They are from
Fleming and Fleming alone. In this case, I misread the company-specific
situation and bought a loser.
However, the lesson is that when you focus on a company's specifics,
you can ignore the macro environment no matter how serious that
macro environment seems. Even if war is avoided and the economy recovers,
Fleming will still be in serious trouble.
The flip side of that with my other more successful picks is that even
if war begins and takes longer than expected, even if the economy
double dips into another recession, and even if terror strikes the
homeland, companies like Pfizer, Sun, Intel, Level Three Communications,
and Disney will eventually prosper.
One of my favorite sayings is, "Sometimes you win and sometimes
you learn." In this Fleming case, however, I'm not sure what I've learned.
The same techniques that have led me to pick up super bargains on good
companies led me to Fleming. It looked like a super bargain just like
the rest. These accounting irregularities weren't as intense when I
bought as they are now.
At any rate, I'm out at -24 percent and hoping for the best among
my remaining purchases.
March 17, 2003
This could finally be war week. After six months of fruitless
diplomacy with the Unimportant Nations (U.N.), it looks as if the
United States will lead the way to a better Iraq.
What does that mean for stocks? Everybody has an opinion, but nobody
knows -- and it doesn't matter. I am confident in the strategy I've
chronicled in this journal. I've been buying good companies at low
prices, and will continue that approach during the volatility ahead.
If the markets ever get around to that kangaroo jump of a rally all
the know-nothings keep promising, I'll make money off the companies
I've already bought. If we smash through those October lows that the
know-nothings said marked the bottom, I'll pick up even more great
companies at low prices.
Last Thursday's rally lifted my remaining
target buys further away from my limit order prices. Microsoft nearly
reached $22.50 last Wednesday before rising past $24.50 on Friday. My
limit order buy price is $22.
I'm having doubts about ExxonMobil, which hasn't been near my $30 buy
target since last July. With oil prices rising during all this mayhem,
the stock just doesn't want to sink.
Fleming, ah Fleming. A February 24 email from a reader chastised me for
setting a ridiculously low buy price of $2 for a stock that was then
at $3. Now $1 doesn't seem ridiculous and RISING to $2 looks like a
long shot. Set your limit orders low, folks. That's how to keep this
jumpy market from getting the best of you.
Luckily, my other buys are performing admirably. Since their respective
buys to last Friday's close, Disney is up 9.5 percent, Level Three Communications
is up 6.7 percent, and Pfizer is up 3.4 percent.
March 12, 2003
The endless delays in starting the war are killing stock markets
around the world. As planned, my limit orders are kicking in as prices
of good companies plunge for no fundamental reason. Already, I have
purchased four companies at significantly lower prices than I would
have paid just three weeks ago. The four companies are Disney, Level
Three Communications, Pfizer, and Fleming.
Before I get too cocky, I should hasten to point out that buying
Fleming at $1.85 was too soon. While that price is a full 38 percent
below the $3.00 it traded at when I wrote the Feb. 24 article, the
stock has since been removed from the S&P 600 smallcap index and
fallen another 28 percent to $1.33 as of yesterday's close.
This is
a risky turnaround investment and might not work. However, the stock's
P/E is only 1.86, the company has $53 million in cash, and there
was strong insider buying at prices over $5 late last year. Despite
all that, something feels fishy and I will not
average down on this position, that is, I will not buy more at lower
prices. My buy price will remain $1.85. If you have not bought
shares yet and can afford to take some risk, you could pay a much
lower price on the stock than I paid.
The good news is that the other three buys are already up. That's
somewhat irrelevant because all of my buys during this wartime period
are for the long term. Still, it's nice to buy and get an immediate
bounce. It beats the Fleming path of an immediate downdraft, right?
All bets are still off as to when the war will start and when the
over-announced market rally will begin -- if it begins at all.
I'm hoping that I get my target prices on Microsoft and ExxonMobil.
They are two of the world's best companies and will survive anything.
March 11, 2003
Bought Disney at $15.
March 10, 2003
Bought Level Three Communications at $4.50.
February 25, 2003
Bought Fleming at $1.85 and Pfizer at $28.
February 24, 2003
This stock market is a bundle of joy. Every time you
think it's about to break out, it breaks down. When you
sell just in time to avoid the final washout
you've been told must happen before the bear is
finally over, it zooms up and you miss some of the only
gains in sight.
All the talk at online sites such as TheStreet.com
is about daintily balancing the buys and sells to do the
opposite of what I described above. Yeah, right. If the
emails I receive from readers on any given day are an
accurate indication of how ordinary folks manage their
money, everybody EXCEPT the geniuses at TheStreet.com
is buying high and selling low now that they've been sold
on the complete lunacy of buying and holding for the
long term.
Listen, folks, buy and hold for the long term is what has
made the most successful investors wealthy. Jack Bogle,
the founder of Vanguard, said of market timing that after
50 years in this business he still doesn't know anybody who's
done it successfully and consistently. Moreover, he doesn't even know anybody
who knows anybody who's done it successfully and consistently.
The problem is that the same seers who pointed everybody toward
stocks when they were at Himalayan prices are now attaching
themselves to the current big thing: market timing. Hey, if
none of our picks are panning out for the long term, don't diss
the picks, diss the term. We said it would rise, it rose last
week, now it's hovering near bankruptcy. We never said you
should keep it forever. Come on! You gotta be quick.
Thanks a million, Merrill. 'Preciate it, PaineWebber. Such a
pleasure working with you, Smith Barney.
The problem is not the time frame, it's the stocks. The reason
Mr. Buffett sleeps well in any market is that he doesn't watch
the market. He oversees tens of billions of dollars by watching
quality stocks and he buys them when they're cheap
and will appreciate over time. He didn't buy Enron when the
morons called it a "must own" stock. He didn't pay attention to the
popular columnists when they said that he lost his touch when
he failed to keep up with once-highflying funds like
Firstflop Tech Trauma. Never heard of it? Perhaps you'll recognize
its euphemistic moniker, Firsthand Tech Value. Read more about
that winning investment here.
No, ladies and gentlemen, Mr. Buffett buys things like American
Express, Coca-Cola, and Gillette. He waits for good prices on
stocks of great companies. Whether those good prices appear when the
market is rising or falling is irrelevant. He's looking at the
price of a particular stock. That approach is summed up nicely
in the saying, "There is no stock market, but just a market of
stocks."
Which gets us back to the geniuses typing their online columns
at outrageous subscription prices. Do you want the kind of life
where you need to see what they're recommending to buy this morning
and then check again in the afternoon to see if it's time to sell?
Trading like that is growing in popularity because people are tired
of riding prices downward.
But it doesn't work. All of the performance figures you see
on the outside of envelopes and on websites are garbage. Mr.
Bogle's comments are worth remembering. Don't you suppose if
any of the traders were genuinely successful they'd be as well-known
as Mr. Buffett and Mr. Bogle? Of course they would. But they're not.
Here's what I suggest you do in preparation for the war: time the
market in the only way that has ever made sense, that is, by acquiring
shares of quality companies when they are cheap. Expect to own those
companies for a long time as they continue to succeed in business
and increase their earnings. Expect their share prices to rise as
a result of those increased earnings.
Get rid of any junk you bought on a tip that said there would be a
huge pre-war rally, during-war rally, or postwar rally. Get rid
of anything that you bought under the heading of the way to play
a rising industry. Industries are not companies. There are good
companies in bad industries and bad companies in good industries.
Good investors buy companies, not trends. Put the proceeds of this
portfolio cleansing in cash, the same place you
send your monthly investment, perhaps.
Now, what to do with all that cash as we head into war? Pick the
stocks you want to own at cheap prices and set some limit orders.
Not stocks that you intend to sell after the much-expected-but-it's-
anyone's-guess-as-to-when rally. No, no, no. War is a strange time
in the market. You just might be able to pick up a real company
at a bargain price. That's how you want to use this fluctuating
time. Buy companies, not trading opportunities.
As for me, I'm holding my shares of Sun Microsystems that I bought
between $2.56 and $3.20. Same with Intel I bought at $14.50. They are
not junk and my buy prices will
prove to have been brilliant in a few years. I can wait. Feel free
to put in a limit to buy shares at or under $3 for Sun and $15 for
Intel. They might just get there in the upcoming weeks.
What would I like to buy? Microsoft below $22, Disney below $15,
Exxon Mobil below $30, Pfizer below $28, Level Three Communications below
$4.50, Yum! Brands (Taco Bell, KFC, Pizza Hut) below $20, Washington
Mutual below $30, Anheuser-Busch below $44, and Fleming below
$2.00.
My limit orders are in place and I can safely
ignore the market as the war unfolds, or doesn't. I will certainly NOT be
looking to guess the ups and downs as we navigate weapons of
mass destruction, homeland insecurity, a ballooning deficit,
upcoming rate cuts, rising gas prices, falling bombs, and so on. If
you claim to know what all that will do to the markets, you're a liar.
If you pay some liar a lot of money to tell you what he thinks
all that will do to the markets, you're a fool. Don't be a liar or
a fool.
Be prudent and choose what you want at what price. To see how
my targets are doing,
click here.
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