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Up/down, buy/sell, gloom/boom: It’s not easy to be a long-term investor

posted on November 3, 2009 at 8:30 am
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Take the long view

The stock market is fixated on the short-term, we all know that. It’s an unusual occasion when stock analysts and investors look more than a few quarters ahead. That means stock prices often tend to respond to short-term news as if it were the only news.

And that means investors with a long-term view of companies and economic trends can often buy likely long-term winners while they are temporarily depressed by short-term news. This kind of long-term thinking in a short-term market is one of the best ways I know of for the average investor to beat the stock market indexes.

In pursuing that kind of strategy, however, too much caution is actually a bad thing. Let me explain—and give you some examples of stocks and sectors where taking the long view will pay off.

The last week or so has been vivid reminder of how hard it is for investors to take the long view.

Many of us are convinced, rightly I think, that over the next decade or more the U.S. dollar will decline in value, commodity prices will climb, inflation will re-emerge as a worry, gold will continue to march higher, and developing economies will outperform.

But all it took was a very modest (so far) correction—a 5% drop in the Standard & Poor’s 500 Stock Index from October 19 through October 28—to rout all those convictions.

Investors who believe, firmly, in those long-term trends sold gold, oil and other commodities; bought dollars; and dumped developing economies. The iShares MSCI Brazil Index ETF (EWZ) fell even more steeply than the S&P 500, dropping 6.2% from October 19 through October 28.

That’s completely understandable.

 After all investors have suffered through two vicious bear markets, the one that began in 2000 and the other than started in 2007, in the last ten years. And the lesson of those bear markets is sell first and ask questions later.

It also doesn’t help that everyone is waiting with bated breath for a correction that will take some of the exuberance out of the rally that began on March 9. You just don’t get 60% rallies without 10% corrections, everyone knows. But that is exactly what this rally has delivered. Call it Too good to be true.

Now caution is a good thing. I don’t believe the economic recovery is clearly sustainable yet (see my October 29 post on the third quarter GDP numbers for why not http://jubakpicks.com/2009/10/29/three-very-cautious-cheers-for-the-gdp-numbers/ .) It’s certainly not the time to get reckless.

But just as you can overdo fear at market bottoms and greed at market tops—to the very real detriment of your portfolio—I think you can overdo caution.

And right now caution shouldn’t be stopping you from making the kind of long-term bets that you’ll need to earn decent returns in the decade ahead. If, as I suspect, average annual returns are going to be lower than the long term average for stocks of about 10%, then you need to some kind of strategy for beating the market if you hope to meet your financial goals.

Most of us aren’t going to get where we want to go averaging 5% a year before inflation. And while saving more is great advice, it’s awfully hard for many people who are struggling to rebuild household balance sheets and seeing paychecks stagnate (at best) as costs of things like insurance and energy rise.

If you have a long-term investment trend that’s as clear cut as the ones I’ve mentioned above, you ought to regularly fight through the temptation to be overly cautious and set up a strategy for buying low whenever you get a chance.

That’s exactly what the best oil company CEOs are doing right now, for example.

Oil companies have to take the long view. Any investment decision that they make today—ExxonMobil’s (XOM) decision to bid for oil and gas exploration rights off Ghana, for example—isn’t likely to pay off for years and years and years. That time frame for decisions makes them inherently cautious: They certainly don’t want to make a decision with a payoff ten years down the road on the basis of today’s fleeting enthusiasm or pessimism about oil prices. But they also know that if the company doesn’t take risks today, it won’t be around tomorrow.

And what are these cautious long-term risk takers investing in right now? Natural gas. They’re taking advantage of the currently depressed prices for natural gas to buy into future sources of supply. In the long-term, they believe, the price of natural gas will move up as a recovering global economy demands more energy. Natural gas, they also know, is a key transitional fuel for a world trying to reduce its output of carbon dioxide. It burns with less CO2 emissions than either coal or oil and it doesn’t require an expensive retooling of the energy infrastructure, as say wind and solar do, before it can become a major source of base-load power.

 Individual investors can take the same long-term investment by buying shares of a low-cost natural gas producer in the United States such as Ultra Petroleum (UPL) whenever the energy sector goes into one of its periodic panicked sell offs. The stock’s certainly got the volatility that makes this strategy work for a long-term investor. At a current price near $53 a share, Ultra Petroleum sells for well below its June 2008 high of $98, but also well above its 52-week low of just below $29. It treaded near $45 as recently as August and I’d certainly be interested in adding to positions when it next hit that price range.

But I think you can get even more bang for your long-term point of view by looking to Europe’s oil and gas companies. The United States has pioneered the production of natural gas tight shale formations in places such as Texas and the Rocky Mountain region. Fast growing production from those resources is one reason for the current glut of natural gas on the U.S. market.

But Europe is just getting into the natural gas from shale business with an effort to map potential production areas over the next six years. I think that’s an indicator of exactly how tight a vise Europe finds itself in right now. There’s plenty of natural gas available to European consumers but supply is denominated by Russia’s Gazprom (OGZPY), which has shown a disconcerting willingness to cut off supplies to Western Europe in disputes with Eastern European nations.

That’s made expanding other sources of supply a high priority. Which is why European companies have expanded exploration in the waters off Norway and northern Scotland, and why they’ve stepped up exploration and production in areas of Africa, such as Algeria, where getting the natural gas Europe is relatively less expensive. Here I’d suggest that investors with a long-term point of view consider Norway’s StatoilHydro (STO) and France’s Total (TOT). (StatoilHydro was a Jubak’s Pick on September 23. See my original buy http://jubakpicks.com/2009/09/23/buy-statoil-hydro-sto/ .)

This approach will work outside of the oil and gas industry, of course. Here are two more examples worth watching.

In Canada changes to the country’s tax code has created turmoil in the investment trust area. Investment trusts used to get extremely favorable tax treatment and they were a favorite buy for income investors. Now that tax treatment is changing and with a provision that lowers the cost of converting from investment trust status to a regular corporation, many trusts are doing just that. That’s created uncertainty among investors and price volatility. One stock I’d look at here is Alliance Grain Traders (AGXXF or AGT.TO). I’m always on the lookout for stocks that let me invest in the increased global demand for food and this company, one of the world largest exporters of lentils, peas, and pulses, fits that trend like a pea in pod. The company is in process of converting from an open-ended unit trust to a dividend paying corporation following its acquisition of Turkey’s Arbel Group. The stock has traded between $22 and $7.60 in the last 52 weeks. (Thanks to Gavin Graham, director of investments at BMO Asset Management, who put this, and the next stock on this list, Telkom Indonesia, on my radar screen by putting them on his picks list at the Toronto World MoneyShow.)

Another stock to take a look at is Telkom Indonesia (TLK). This is a play on the growth of the wireless phone and data delivery markets in one of the world’s most promising developing economies. Indonesia looks like it’s reached a degree of political stability that will let this under-performing economy move closer to the kind of growth we’re seeing in India and Brazil. The ADR for this stock has traded between $38 and $16 over the last 52 weeks. I’d wait for the current enthusiasm for emerging markets to grow more temperate—as I think it will sometime in 2010—before adding this one to my portfolio.

Be patient. Good things come to those who wait. Or at least lower prices do.

Full disclosure: Jim Jubak owns shares in his personal portfolio of the following stocks mentioned in this column: StatoilHydro.

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4 comments

  • terryw on 3 November 2009

    Buffet is buying Burlington Northern, one of the 50 portfolio members.

  • mopama on 3 November 2009

    Well said Jim! Time horizon is the key. There are “investors” for every time frame. You have well defined yours in your investment strategies.

  • ryanpatrik on 3 November 2009

    For good exposure to the Canadian oil and gas sector Encana (ECA) might be a good play. They are about to split into an oil company and a gas company. Buyers now may well see a nice bump once these trade as separate companies. Great exposure to nat gas and heavy oil in a reliable stable economy. Good entry point right now at $55

  • robert1234 on 3 November 2009

    What about DBA, or DBC as a simple long term stable investment ?

    DBA is grain, and DBC is a huge basket of commodities.

    Jim Rogers says buy commodities no matter which direction the global economy runs .

    -

    I hope someone will consider an answer to my question.

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