Questions

A few readers of this blog have asked me why I haven't been more specific in my posts, regarding investment picks. It's a regulatory issue--it is a slippery slope to offer specific stock recommendations in an open forum, even when properly licensed by the SEC. This prevents the notorious "pump and dump" schemes, where hucksters attract the vulnerable into questional stock schemes, only to pull the rug from under them, leaving them holding the bag, as the stock crashes. It's hard enough trying to make money without the added pressure of snake oil salesmen.

And sometimes the regulation is obsolete. For instance, the SEC forbids licensed financial planners from implementing home equity management strategies, deeming them risky apparently. Quite the contrary: home equity management can be the most conservative strategy for wealth-building, assuming a mortgage is preferred debt (deductible) and investments compound in a tax-free positive arbitrage scenario. A white paper by the Chicago Federal Reserve Bank explicitly addresses this, theorizing most Americans are building equity inefficiently by making extra principal payments on their mortgage.

I will offer some insight on what I have purchased or sold, and my investment theses, but with disclosures and disclaimers for readers to consult with their financial advisors.

I would further caution readers to look beyond qualifications and professional accreditations in sizing up financial professionals. After all, most professional advisors lost money for their clients in the last decade--in some cases, huge losses, despite the latest hedging techniques and portfolio theories.

If you're not comfortable with them, or if you don't understand what services they offer, move on and find someone you are comfortable with. Make sure your expectations are aligned on the criteria for YOUR success. Many people lost millions trusting their money with Bernie Madoff, because they didn't perform due diligence and blindly trusted someone who turned out to be a crook.

The best way to prevent becoming a victim of fraud or of the markets is to raise your financial IQ. Personally, I would never invest in something unless I knew everything there was to know about it. I would apply the same caution before considering marriage. But I understand most people don't have the inclination or capability of understanding investment concepts. These people need to find advisors they can trust. Getting referrals, and doing some cursory investigation is a pre-requisite, but understand that even that won't always prevent embezzlement (see Madoff as a glaring example), negligence, or just asset bubbles bursting. As in life, there is no free lunch--you must do your homework. How much is up to the individual.

Due Diligence

In this environment, there's not much to be excited about in the stock market. I'm hearing many aren't even opening up their 401k statements, knowing they're down over 50% from their 2007 peak levels, and knowing they've been declining for months on end.

I believe we haven't reached a secular low in this bear market yet, but I do believe when we do reach it, it will be the buying opportunity of a lifetime. In between, we may even experience violent bear market rallies, but the trend is still down.

It just doesn't feel like a bottom, because so many are trying to find it. Stock market bottoms usually aren't reached until the last bull has thrown in the towel. I don't think we're there yet.

Yes, some stocks are cheap, but they could get cheaper. Investors with a very long-term horizon (10+ years) will probably do well buying at current levels, and if the fear is missing the train, perhaps nibbling at solid companies with cash flow, dominant market share, and low debt levels may be tempting. But this falling sword isn't done falling yet.

Meanwhile, aside from precious metals, the only promising sector I see is biotech, as they look increasingly enticing as acquisition targets. Big pharma companies face daunting challenges going forward, as their pipelines are depleted and at risk of being decimated due to patent expiration. Pfizer will acquire Wyeth, and Merck is paying over $41 billion for Schering-Plough. Genentech is mulling over Roche's higher bid of $95 per share. Expect to see more mergers and acquisitions activity.

I've placed bets on a biopharmaceutical company that will announce results of Phase III clinical trails by the end of this month. It's a calculated speculation--if results are negative--either due to lack of efficacy or safety, it'll drop by 50%. However, if results are positive, it will triple. If a partnership agreement is offered to co-market the drug, it should double again. And if an outright buyout offer is made, it'll double again. I like that reward/risk profile.

I performed heavy due diligence on the company: no insider selling, phase I and II trials results, manufacturing facilities, preliminary feedback, competitive analysis, marketing partners, history, fundamental analysis, subjective analysis and technical analysis. All indicators look good, but with biotech, the odds are indeed against success. Volatility is high. In other words, biotech investing is not for the faint of heart. It can be disastrous, but it can also be extremely rewarding--both for investors and health patients. Good luck to all longs.