A Great Stock for a Lousy Market

by Alexander Green, Oxford Club Investment Director

In our Oxford Club 2009 January Forecast issue, we agreed with the consensus that the economy will be an unmitigated disaster this year, but noted that the stock market might surprise investors on the upside, especially in the second half.

This is all well and good, one member wrote recently, but what about the first half? Should we hang out in cash until the coast is clear?

Absolutely not. Investors who are fully in cash have chosen a terrible long-term asset, one with a negative real yield.

Buy when times are good and sell when things look bad and you’re virtually guaranteed to buy high and sell low. Plus, you’re likely to miss some of the best days in the market.

This matters more than you might realize.

Javier Estrada, a finance professor at IESE Business School, has studied the daily returns of the Dow Jones Industrial Average back to 1900. He found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. (Two-thirds!)

Only 10 days out of 29,694 made all the difference. What are your chances of predicting those days in advance?

Virtually nil.

So rather than trying to outguess the market, let’s focus for now on companies that are likely to post surprisingly good earnings despite the downturn…

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