Warren Buffett isn’t a gambling man. Yet, the world’s most famous investor just bought a $5 billion stake in Goldman Sachs (GS), one of the last investment banks still standing amid the recent Wall Street carnage.
Does this mean Buffett sees an amazing buy? It’s possible. Financials will inevitably rebound. However, this is not a gamble I’m willing to take just yet.
I hate to throw cold water on investors’ already sunken portfolios, but come October (and the beginning of 4th-quarter earnings season), financials are going to take another bath, which started me thinking.
While most investors don’t have $5 billion to bail out the U.S. banking system, they still have a lot at stake that’s riding on the economy, the Fed and this so-called bailout package (see, “Why the Treasury Hit the “Reset” Button“). In times like these, I’m sharing 6 tried and true tips for profiting and protecting your wealth in these choppy waters:
Tip #1
Don’t keep more than 30% of your net worth in your own company’s stock.
I want to be crystal clear on this point. We all know what happened to the employees of Enron—the head of the company, Ken Lay, encouraged employees to buy Enron stock as a clear path to their retirement. The company folded along with employee’s stock options and their retirement dreams.
We can see the same thing happening at Lehman Brothers (LEH) just last week. As it turns out, LEH employees own 30% of the bank’s stock which is now worth zero. So, please, don’t keep any more than 30 percent of your net worth in your company’s stock no matter now much you love it (see also, “Three Tips to Survive a Recession“).
Tip #2
Buy a house in a good school district—whether you have kids now or not!
To all of you future home-owners out there, remember to buy in the best possible school district—even if you don’t have kids yet. These are the homes that will keep their value in times of economic uncertainty (see also, “Should You Buy a House in Foreclosure?“).
Tip #3
Contribute the maximum to your company’s 401(k) plan.
This is especially true for recent college graduates and those starting at a new position. The first thing you need to do is…
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enroll in the 401(k) plan at your company and contribute the maximum percentage in order to get the company match. It’s a no-brainer really. 401(k)s allow for your contributions to grow in the stock market each and every month—tax-free (see also, “3 Must-Follow Rules for Your 401(k).“)
Tip #4
Buy big dividend stocks with variability in their earnings.
I want to throw out an unusual idea here. What we’ve seen lately—particularly with Fannie Mae and Freddie Mac and also with the fall of Enron—is that a lot of companies that have touted themselves as having made earnings each and every quarter.
Frankly, many of these companies turn out to be frauds. So do not look for "perfect" stocks. They most likely have accounting problems. I’ve been telling my Trader’s Advantage subscribers to actually look for companies that have some variability in their earnings, because those are the companies least likely to be in any trouble (see also, “There’s Safety in Technology Stocks!“).
Tip #5
Keep your money safe with large national banks.
Let’s face facts here: The Fed and the Treasury are giving conflicting signals about which types of banks it considers too big to fail. It saved Bear Stearns, but it didn’t save Lehman or Washington Mutual. It bailed out AIG, but no one knows if it will save Goldman Sachs. Think about that for a moment. What are they more likely to save? And I think the United States as well as England and Germany are likely to save the banks that are considered to be part of their national image. In the United States, I think the three big banks that are tied to that image are: Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC). Wachovia (WB) is a possible fourth.
Right now, I would be very wary of some of the regional banks particularly around the United States. They may be your neighbors, they may be your friends, but this is your business. Keep your money where it’s safe (see also, “3 Simple Steps to Protect Your Money“).
Tip #6
Find a solid stock-trading strategy.
When it comes to trading stocks in the market, find a solid strategy that feels comfortable for you and then stick with it. I’ve been talking for years about a strategy that I have called StrateGem, which is a method for finding cheap growth stocks on the verge of a breakout.
Every month, we buy five to ten more stocks, and we hold them for six months. This is a method that’s worked solidly through the bear market of 2000-2003 and is perfect for today’s bear market. Right now, it’s up 6% this year in a very turbulent stock market that’s down 15% as a whole.
For the past two weeks, we’ve had the wildest stock market (statistically speaking) since the 1987 crash. It’s enough to drive an investor crazy! During these turbulent times, it’s important for investors to build upon a strong foundation of investing basics.
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