The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets
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Investment Guru John Mauldin Shows How to Make Money in this Bear Market
To make money in this troubled economy you need to understand where the markets are headed, not where they've been. Clinging to outdated strategies and played out market trends are sure ways to miss out on new investments. In The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets (Wiley; May 2012; $22.95; 978-1-118-15913-2; Hardcover; Ebook), acclaimed investment expert John Mauldin demonstrates how to read the direction of the markets to make decisions that capitalize on today's investment opportunities.
Providing a road map to the future by looking at how and why markets have behaved in the past, Mauldin debunks many of the myths and so-called scientific studies used by Wall Street to entice investors into putting their money into buy-and-hold, relative return investments. “As should be no surprise, they use “facts,” theories, and statistics that are carefully selected and in many cases plain wrong. And when the market goes down, they just shrug their shoulders and say, ‘Wait till next year. And buy some more, please,’” Mauldin explains.
Mauldin argues that we are still in the secular bear market that began in 2000 and is likely to last for the next five years. As a result, investment strategies that worked during a bull market may not be so successful now. In today’s market environment, stock market valuations are still relatively high—though well down from the stratosphere where they were flying at the beginning of the decade— and interest rates will eventually have to go up. In addition, gold is volatile, as is the dollar against other currencies, and the twin deficits of trade and government debt stare us in the face.
So which way is the stock market going? And how about bonds? Gold? Real estate? Wall Street and the mutual fund industry would say, “The market is going up. You should buy stocks, and now is the time to do it. You can’t time the markets, so you should buy and hold for the long term. Don’t worry about the short-term drops. And my best advice is to buy my fund.”
The traditional wisdom of Wall Street is to buy low and sell high. While it sounds simple enough, the philosophy has fostered an entire industry of financial advisors, prognosticators, and experts. “When you reflect on the carnage on Wall Street in the last few years, it is easy to place stock market experts in the same category as TV weathermen. Their advice for you to buy what they’re selling has been their same advice every year for a century,” Mauldin says. “And it has been wrong about half the time. There are long periods when stock markets go up, but there also are long periods when markets go down or sideways.”
Instead of investing in the broad stock market, The Little Book of Bull’s Eye Investing focuses on investing in particular stocks and strategies. When you go to an Italian restaurant in New York City with more than 100 items on its menu, you don’t order the entire menu and take something of everything. Instead, you order specific items according to your tastes. Mauldin suggests buying stocks to generate income or that have the potential for growth. “This isn’t a new concept, but the way we define income and growth potential is somewhat novel.”
There are numerous possibilities for investment growth while the secular bear market proceeds. “You just won’t find them on any standard Wall Street menu,” says Mauldin. His advice for how to dance with the bear without getting claw marks is to understand that:
- Past performance does not guarantee future results. Only a very small percentage of companies can show merely above-average earnings growth for 10 years in a row. However, analysts make the fatally flawed assumption that because a company has grown 25 percent a year for the past five years, it will do so for the next five.
- Due diligence is the most important element of the investment process. Historical data shows that analysts typically overstate earnings by at least a factor of 2.
- In a rising interest rate environment, boring old bonds are anything but safe. Bonds rise in value as interest rates fall and fall in value as interest rates rise.
- Average investors do not get average performance because they are chasing the latest hot sectors or funds.
- When it comes to statistical studies, remember that the numbers don’t lie, but you can lie with the numbers.
- Successful traders use data to determine market psychology and thus market movement. They also employ excellent money management and risk control skills.
Making the most of the markets is like hitting a moving target—difficult, but not impossible. The Little Book of Bull's Eye Investing navigates investors through uncertain waters to improve their eye for making decisions that can turn a profit in even the most turbulent of times.