The Beardstown Bamboozlers

By on September 15, 2006

Originally published in April 1998:

The market has shown incredible strength….but it probably won’t last much longer. The riskiness of equities has increased significantly in the last couple of months. U.S and European large cap stocks have gone up so much recently that there are no longer many attractive buys in this area. The smaller cap area does have some bargains here and there, if you’re willing to search with an open mind (in other words, there is more to life than tech stocks). But just because new highs have been reached in the DJIA and S&P 500 indexes doesn’t mean that a bear is going to come along immediately and spoil the party. However, markets don’t normally go up 15 percent in two months as we’ve witnessed and proceed unabated. If the market does keep rising at this rate it would be an indicator of a classic blow-off, where euphoria replaces common sense and eventually leads to a scary decline in stock prices. The best we can hope for in the next few months is sideways action, because a sustained rise from here would indicate real danger ahead.

The Beardstown Bamboozlers

The most celebrated investment club of all time is one run by The Beardstown Ladies, the cutesy moniker they ascribed to their club. The Ladies touted a return of 23.4 percent per year over the 10 year period from 1984 to 1993, beating the mighty S&P 500 index handily. It was recently disclosed that their actual return over the 10 years was 9.1 percent per year! I haven’t and probably won’t read the how-to investing book the Ladies wrote which sold 800,000 copies, but my senses tell me they made some inappropriate timing moves. That’s the only thing that would explain such dismal results during a roaring bull market. It would be interesting and might serve as a valuable lesson to see all of the trades they made which caused them to underperform the market so remarkably. It would likely be a lot more enlightening than their book.

Wade Cook’s Nemesis Found

A great site to visit if you’ve experienced the seductions of Wade Cook is located at http://members.aol.com/GaryZZZZZ/index2.html. Gary has assembled quite a bit of negative press on Mr. Cook. This is definitely stuff you should read before throwing your money away on one of his seminars.

Portfolio Activity

The Tactical Timing System issued a sell signal on 3/18/98. To comply with the system, the following positions were sold (followed by the reason for sale):

Aggressive Portfolio:

Vanguard European Portfolio (VEURX), 30 percent of the position (European exposure needs trimming)

Mutual Discovery Fund (MDISX), 30 percent of the position (foreign exposure needs trimming)

Tricon Global Restaurants (NYSE: YUM), 100 percent of the position (small position not meaningful)

Callaway Golf (NYSE: ELY), 100 percent of the position (low relative strength since last signal)

Conservative Portfolio:

Bristol Myers Squibb (NYSE: BMY), 100 percent of the position (low relative strength since last signal)

LSI Logic (NYSE: LSI), 100 percent of the position (low relative strength since last signal)

NVR L.P. (AMEX: NVR), 100 percent of the position (small position not meaningful)

I really hate reducing the equity exposure right now, but the only way a systematic approach will work is to follow it. The system helps me control my own euphoria about this market.

Portfolio Updates

Carnival Corp. (NYSE: CCL; 69 3/4) has been a stellar performer lately. Even a couple of Wall Street Week with Louis Rukeyser panelists recommended it in the past month. The strengths of CCL are just starting to be recognized. Also, the most recent annual report was very encouraging. Likewise, Royal Caribbean (NYSE: RCL; 70 3/8) in the same industry has skyrocketed and is getting the attention of the momentum players.

Recommended Allocations

Aggressive portfolios: 60% equities, 40% cash.

Conservative portfolios: 40% equities, 60% cash.

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