October 9, 2012
Written By Chloe Lutts Jensen
In the long-lasting wake of 2008-2007’s credit crisis, financial collapse and resulting recession, risk aversion has become practically the national sport of U.S. investors. It’s no surprise; and investors can’t be blamed for being gun-shy. At an investing conference I attended last week, one speaker actually likened investors’ lingering post-crash fear to PTSD.
There’s nothing wrong with avoiding risk—all investors should adapt their investing behavior to reflect the amount of risk they can tolerate. But the conference I went to last week confirmed something I’ve suspected for a while: many investors today are so risk averse that they’re letting their fear of loss dictate their investments entirely—and its getting them into even more risky situations.
There are two obvious (to my eyes) examples of this happening today.
The first is the still-raging bull market in treasury bonds (and to a lesser extent, other supposedly-low-risk fixed income investments). As most investors are aware, U.S. treasury bonds currently offer some of the lowest yields ever. And the prices investors are willing to pay for these bonds that yield next-to-nothing are so high, they have nowhere to go but down. And yet, investors are still clamoring for treasury bonds! They’re perceived as “safe,” despite the fact that some blue chip companies (like Microsoft and ExxonMobil) now have better credit ratings than the U.S. government.
Imagine someone pitched to you an investment that yielded less than 1% and had no price appreciation potential: would you jump at the chance to buy it?
The second sign that investors are letting their fear of risk get the better of their common sense is another supposedly-safe market: gold.
Gold is somewhat different from T-bonds because there’s no obvious indicator of how overvalued it is. While treasuries couldn’t yield much less (theoretically, the least a bond can yield is zero, although some maturities are now yielding negative amounts when indexed for expected inflation), there’s no ceiling on the gold price. So it’s harder to argue that gold is undervalued. And, as I’ve said before, I wouldn’t be surprised to see the gold price keep on going up for quite some time … possibly years.
But nothing goes up forever (especially not at the rate at which gold has been increasing), and at some point, the gold bubble is going to pop. When that happens, investors who bought gold because it was “safe” will be burned once again.
The truth is, there’s no 100% safe investment. Even if you keep your money under your mattress (or in a fire-proof lock box), you’re subject to “losing” money through inflation. Buying treasuries may protect you from inflation, but if you want to sell before they mature, you’ll probably get less than you paid for them. And finally, burying gold in your backyard (as one conference speaker suggested only partially-tongue-in-cheek) will only keep your wealth safe until the gold price declines.
Bottom line: Don’t let fear dictate your investment decisions. There are no risk-free investments: trying to find one is a fool’s errand that will only get you in more trouble. Instead, calculate how much downside risk you can tolerate, then buy a smart mix of assets from different risk classes, and put in place reasonable protections on the downside.
Cabot Stock of the Month just targeted another big doubler that’s beginning to look a lot like First Solar, which landed us a 321% gain.
Like First Solar, this company is riding a wave of profit growth–but it’s in the massive global energy sector where it is not only on the cutting edge of technology but also has a monopoly-like position in its sector as it continues to steal market share and profits from its competitors.
Once you see our full write up on this, you’ll see why we are convinced beyond a doubt this company will hand investors another 50% profits this year and another double soon after that!
Get the October Stock of The Month Free! Click here for details.
On that note, here’s a “safer” stock from the latest Dividend Digest, recommended by Louis Navellier’s Blue Chip Growth:
“Wal-Mart Stores, Inc. (WMT) is the world’s largest retailer. Just how large, you may wonder? I’m a numbers guy, so here are a few statistics to put it into perspective. With more than 10,200 stores across 27 countries, Wal-Mart has a footprint of one billion square feet—more than enough to cover all of the island of Manhattan. If Wal-Mart were a country, its revenues would put it in the top 25 largest in terms of GDP. A full 96% of the U.S.’s population lives within 20 miles of a Wal-Mart.
“With over 2.2 million people employed by Wal-Mart, this big-box powerhouse has more men and women in uniform that the U.S. military. Wal-Mart’s trucking fleet clocks in over 712 million miles every year—this is the equivalent of traveling to the moon and back 1,500 times.
“So Wal-Mart is clearly a big company, and it also has solid profit potential. Wal-Mart’s second-quarter earnings advanced 8% to $1.18 per share, topping the consensus estimate. And thanks to strong international sales and growing membership at its Sam’s Club warehouse, Wal-Mart has also upwardly revised its 2012 earnings guidance to a range of $4.83 to $4.93 per share. While I’m seeing a general trend that favors discount stores, Wal-Mart still beats out the competition despite its size. Within the industry (which boasts 19 total competitors), Wal-Mart has the fifth-highest Price/Earnings to Growth ratio, the fifth-highest long-term growth rate and the eighth-highest sales growth. Wal-Mart is also generous with its dividend payment, which adds up to a 2.1% annual yield—the third-highest in the industry. Keeping all these things in mind, I recommend that you add shares of this Conservative stock under $75.”—Louis Navellier, Blue Chip Growth, September 2012
As with any investment, there’s no guarantee WMT will never go down, but it has a few important factors holding it up: The company is growing, which helps support higher and higher stock prices. The attractive dividend helps to keeps investors buying and holding. And the company’s size and reputation make it fairly stable, unlikely to tank on one bad news day.
Along with other reliable stocks and good discipline on the downside (like firm stop losses), WMT is a pretty good place to keep your money safe… or at least safe-ish.
Wishing you success in your investing and beyond,
Editor of Investment of the Week
P.S. Mike Cintolo, Editor at Cabot Top Ten Trader tells me that he’s seeing more momentum in the marketplace than he has seen in the past six months. If his optimum technical momentum indicators are on target again, as they were in 2011, his next 10 new trades could hand you 30% to 50% gains by Election Day.
Judging from the action that he’s seeing, nearly every one of this week’s Top Ten trades is set to announce blowout numbers, and the smart money is beginning to pile in.
Don’t wait and let the big profits pass you by.