Internet Advisors

By on July 31, 2006

Originally published in May 1997:

The market has yet to break out of its bearish bent. The rally since the low achieved a couple of weeks ago has been narrowly based and appears to be unsustainable. A re-test of the intraday Dow 6315 bottom looks imminent. The market should pass the test on very heavy volume and resume the long term uptrend. Some of our smaller cap holdings such as Coachmen Industries (NYSE: COA; 15 1/2) and Novellus Systems (OTC: NVLS; 52 7/8) have dropped significantly and are experiencing their own personal bear markets. There is always the temptation to sell due to the emotionally draining experience of watching your stocks collapse. It is necessary to fight this urge because it will sink your returns over the long run. Sticking to the system is necessary during times like these.

Internet Advisors

I spent a little time in the investment chat area of America On Line recently. Participating in this chat was a neophyte investor asking for advice on “how to invest $500 per month.” I suggested that he dollar cost average into the Vanguard Total Stock Index fund and the Janus Overseas fund if he didn’t want to spend time researching stocks. I was bombarded by a couple of naysayers who claimed I shouldn’t give advice without finding out the particular situation of the individual. They also recommended that the investor utilize a full service broker instead of a discount firm. I went on to clarify that the closer a person was to retirement, the more conservatively they should invest their money. I was also lambasted for this view.

Thankfully we live in a country where everyone can express their viewpoint, however, there is no black and white when it comes to investing money. Trading stocks through a full service brokerage is not necessarily a mistake, however, studies show that most brokerages are mediocre stock pickers at best. Also, the risk that you’ll get a broker that “churns” (making unnecessary trades to generate commissions) your account is very real. With regards to the allocation question, I think it is only common sense that older people invest their money more conservatively than a younger person. The older the person is, the less time they have to recover from a severe bear market.

Nobody should expect to get a full financial plan over a chat session on the internet, although it is a good place to communicate different opinions and approaches. Investing is not that complicated, but it seems that the professionals want it to appear so since people will then come running to them for advice and pay them high fees. Investing in index funds on a dollar cost average basis is an attractive alternative for someone who doesn’t want to invest a lot of time and effort learning the investing game.

Subscriber Limit

Since this newsletter was started I’ve been offering to send the buy/sell signals and newsletter via e-mail to anyone who requested them. There are currently over 100 subscribers. Providing the buy/sell signals to too many investors can dilute the effectiveness of the Tactical Timing System, especially when I identify which stocks will be purchased in advance, as I have done. It is for this reason that I’ve decided to limit the number of subscribers to 150. When this number is reached I will remove the offer for these free services. I may reinstitute the complimentary offer anytime the number of subscribers falls significantly below 150.

Portfolio Updates

The stock price of Novellus Systems (OTC: NVLS; 52 7/8), held in the aggressive portfolio, has plunged since my last issue. The company lost a patent infringement suit to Applied Materials, their largest competitor. The juries decision will only effect about 10% of Novellus’ business, however, the amount of damages awarded has yet to be announced. On top of this, NVLS reported weak earnings. This experience illustrates the need for diversification and not allowing any single holding to become a large percentage of the portfolio. The drop of NVLS has hurt the performance of the aggressive portfolio, however, the damage was limited because a good portion of NVLS was sold at 82 1/2 when it became more than 10% of the portfolio’s equity.

Keane Inc. (AMEX: KEA; 43 3/8), held in the aggressive portfolio, reported sharply higher revenues and earnings for the First Quarter ended March 31, 1997. The stock price rocketed 40% in the two weeks following this announcement. Revenues for the First Quarter were up 33 percent as compared to the First Quarter of 1996. Earnings per share rose 81% to $.29, as compared to $.16 in the First Quarter of 1996. This from company President and CEO John F. Keane, “The increase in Keane’s revenues and earnings reflects a strong demand for Keane’s strategic services, particularly Year 2000 compliance projects and application outsourcing business. These results also demonstrate the benefits of the continuing implementation of Keane’s growth strategy.”

Recommended Allocations

Aggressive portfolios: 90% equities, 10% cash.

Conservative portfolios: 70% equities, 30% cash.

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