Adapt Your Strategy to the Choppy Market

We certainly know that it’s been a horrible few weeks for the major U.S. markets, but stock markets around the world have also taken big hits. Major global market indices like Japan’s Nikkei 225 Index, Hong Kong’s Hang Seng Index, and the UK’s FTSE 100 Index are all now sitting on double-digit losses for the year. Most of the pressure is coming from concerns about a U.S. recession.

I’ve been asked many times in the last few months if we’re heading for a recession, and I believe that there will likely be a major slowdown, but it remains to be seen if there will actually be a full-blown recession.

Recent economic and earnings data confirm that the U.S. economy is slowing down significantly. Recently, the Commerce Department announced that housing starts plunged 14% in December to a seasonally adjusted rate of only 1.01 million, the worst in 16 years. And last week it was announced that sales of existing homes dropped by the largest amount in 25 years. Housing and financial service industry woes are spreading to the retail sector and other parts of the economy as well. This certainly adds to the probability of a recession, but isn’t the final nail in the coffin.

There have been a few attempts to avoid a recession so far in 2008. President Bush has proposed a growth package of as much as $150 billion to counter escalating risks to the economic expansion—now in its seventh year—saying the U.S. needs a “shot in the arm” to keep housing woes from spreading. The plan, worth about 1% of the U.S. GDP, included tax incentives for businesses and direct and rapid income tax relief for individuals. Given that the global markets were apparently unimpressed by the plan and sold off sharply over the holiday weekend, I don’t think that Bush’s effort will help the situation.

Then last Tuesday morning, the Federal Reserve cut interest rates by 75 basis points to avoid a stock market crash. This marks the Fed’s first emergency rate reduction since the September 11 terrorist attacks in 2001. The aggressive rate cut enabled stocks to stage an impressive rally before returning to a choppy trading pattern.

The Importance of an Investing Strategy

Given the increasing risk in global markets, it’s important for investors to have a plan. In a higher-risk environment, stock valuation becomes more important. You should look through your portfolio and closely examine any stocks with a high P/E ratio that have struggled in current market conditions. Even though they might be good companies with strong balance sheets, they’re not safe stocks to hold right now.

Also, in the face of slowing U.S. consumer demand for electronics and weaker guidance throughout the sector, it’s a good idea to sell stocks that focus on the U.S. electronics market. In the weekly update that I’m sending to China Strategy members today, I’m recommending that they sell two companies in the consumer electronics industry. These two blue-chip stocks are popular holdings that are a part of many investors’ portfolios. Do you want to know which electronics giants to sell? Click here to get immediate access to my sell advice in this week’s China Strategy Dispatch.

At China Strategy, we’re also taking defensive measures by holding a percentage of our portfolio in cash and increasing our position in an important hedge against a weaker U.S. dollar. We began this defensive strategy back in early November, when the markets first started showing signs of weakness. As soon as the market began to look unstable, I recommended that China Strategy members protect their profits by selling two stocks and half-positions in several of our biggest gainers.

I tell you all of this not to brag, but to illustrate to you the importance of adjusting your strategy in order to adapt to a changing market. It’s important to make money in both up and down markets, but in order to do so you have to be flexible and roll with the times. Today I want to share a story with you that demonstrates how being patient can pay off.

Patience + Flexibility = Profits

Many years ago, I asked an enormously successful centi-millionaire trader to recommend an investing book for me. He told me that he once asked Warren Buffett the same question, and that Buffett gave him a baseball book. It’s called The Science of Hitting, and it’s by the Hall of Fame Red Sox slugger Ted Williams.

I got the book myself and right away found Williams’s first commandment of hitting—”Get a good pitch to hit”—as relevant to investing as it is to baseball. In fact, it’s a key part of my answer when people ask me how I’ve made money in down years (like 2002) as well as up years.

Every time you buy a stock, you put your money at risk, so it’s crucial to make sure there is enough upside potential in the stock to justify taking that risk. Just like the baseball slugger who waits for the fat pitch, you need to be opportunistic and wait for the right opportunity.

And believe me, it works. I made double-digit returns in 2002 by simply sitting out of the market in the second quarter when stocks fell nearly 30%. I waited until a selling climax in late July and then bought stocks aggressively. I made over 30% that year while the S&P 500 fell 23%.

As you can see, it pays to be patient. There’s no faster way to strike out than by swinging recklessly at any pitch that comes your way.

The second key to making money in flat or down markets is to look for opportunities beyond our borders and our stock market. As a reader of Inside China Dispatch, you already know that many of the best and most exciting investing opportunities today are overseas.

Even though global markets are struggling at the moment, I still believe that China will continue growing this year. Fundamentally, the Chinese economy continues to be strong. China just reported 11.2% GDP growth for Q4 2007, and a total of 11.4% for the entire year—the largest growth in 13 years. Currently China accounts for 17% of total global economic growth, which is about the same as the United States. If U.S. economic growth slows down to 2% in 2008, China will overtake the U.S. as the world’s most important economic growth engine.

But despite China’s strength, investors need to be cautious in the current market environment. That’s why I give China Strategy members detailed recommendations to help them make informed decisions about what to buy and sell. Join us today, and get firsthand China research and information that will help you weather the volatile U.S. markets.

As a former hedge fund trader and a professional investor, I’ve made money consistently in both up and down markets, and I expect to do the same for members of my China Strategy service. My goal is to trounce the broad market in both good times and bad and I look forward to helping investors like you do that. Become a member and discover how you can profit from China’s growth despite a struggling U.S. economy.

I just put the finishing touches on the February issue of China Strategy. This issue is a special one because it’s all about the Beijing Olympics. With the Summer Games rapidly approaching, I wanted to give investors an in-depth profile of the host city, a look at the problems China will encounter in August, and some of the surprising benefits of the event. This issue will be posted to the China Strategy website next week, and you can be among the first to read it by signing up for China Strategy today. Click here to get started right now. You can’t afford to miss out on this special opportunity to learn about the biggest and most expensive Olympics in history!

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