Investing Guide

The Most Profitable Contrarian Investment Strategies for 2010 and Beyond
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Investing Guide: The First Investment Rule… and How To Put It To Work

by Dr. Mark Skousen, Chairman, Investment U
Tuesday, October 4, 2005: Issue #474

I am delighted to be the new chairman of Investment U, and to build on Steve Sjuggerud’s success. I look forward to meeting you through these issues and sharing some thoughts. Let me start off this investing guide with my # 1 investment rule.

Investing Guide Rule #1

In my 30 years on Wall Street, I have learned a very important lesson that is incredibly simple, yet profound. When applied, it’s the fastest way to wealth, and when ignored, the source of greatest frustration and lost opportunity. It’s a rule that is instantly recognized as true, but one of the hardest things for an investor to learn

“Be a bull in a bull market, and a bear in a bear market.”

Applying this rule today will both guide you for the long haul and generate excellent profits right away Violating it will make you vulnerable to big losses.

Now, before you dismiss this rule as too simplistic, consider how often investors violate it.

Investors will try to be “contrarians” by being a bear in a bull market, or a bull in a bear market. (Contrarian investing works ONLY during market extremes, which happens very seldom.)

They think it’s too late to buy because a stock or mutual fund has already gone up too much so they remain on the sidelines, fretting.

I learned these lessons the hard way – through my own mistakes. (The best way to learn!)

The Shocking Truth and How to Profit From Rule #1

Peter Lynch, legendary manager of the Magellan Fund (the most profitable mutual fund in the 1970s and 1980s) told me that most of the shareholders LOST money in the Magellan Fund because they refused to stay invested in the fund for the long term.They tried to buy in and out of the fund.

Edwin Lefèvre, author of Reminiscences of a Stock Operator, which tells the story of the world’s most famous speculator king, Jesse Livermore, says that rule # 1 of our investing guide is “one of the hardest lessons to learn.” Indeed!

Here’s how to make money with Investment Rule # 1:

1. Most bull markets (and bear markets) last several years, so there is plenty of time to get aboard.

2. Answer the question: “Where are the bull markets – and bear markets – today?”

And here is how I would answer that question right now:

The U.S. is stuck in a flat market, so I would avoid U.S. index funds at the present time. But there are strong growth sectors inside the U.S. market – defense and biotech. Buy these TODAY.

Fidelity Select Defense & Aerospace (black), Fidelity Select Health Care (blue), and the S&P.

Investing Guide, Chart 1: Fidelity Select funds against the S&P

Foreign stock markets are hot, especially Europe and Asia. Buy these TODAY.

iShares MSCI Japan (black) and iShares S&P Europe 350 (gold)

Investing Guide, Chart 2: iShares MSCI Japan and iShares S&P Europe 350

Commodities are in a long-term cyclical bull market due to the war on terrorism and inflation. It could last another five years. We are in the midst of a major growth market in oil and gas, alternative energy (uranium, etc.), and mining (gold, silver, platinum, copper, palladium, etc.). Buy these TODAY.

streetTRACKS Gold Shares

Investing Guide, Chart 3: streetTRACKS Gold Shares

These are today’s bull markets, with plenty of room left to run. Remember our Investing Guide Rule #1: “Be a bull in a bull market, and a bear in a bear market.”

And one final tip: When there are corrections in these bull markets, buy on dips.

What if we are near or at the top of the market? I don’t think we are, but use stop loss orders to protect yourself (I will write more on the use of protective stops in future IU columns).

Good trading, AEIOU,

Mark

Today’s Investment U Crib Sheet:

Not only are individual investors moving some gold into their portfolios, institutions are, too. For more on why foreign banks are swapping U.S. treasuries for metals, check out IU #471: Foreign Buying of National Debt.