"Obvious" Rule of Investing

"Obvious" Rule of Investing

By Andrew M. Gordon

Invest in strong sectors. Avoid weak ones.

This seems obvious, yes? But too often, people invest in weak sectors and avoid strong ones. Here are some of the culprits behind this backward thinking:

Bargain hunting. Strong sectors are expensive. Weak sectors are cheap. Unfortunately, when you invest in sectors where demand and other fundamentals are deteriorating, you often get what you pay for.
Bottom fishing. Does it get any uglier than banking? But investors have been recently pouring into banking in the belief that bank stocks have bottomed and are gearing up for a nice climb up the charts. Even if they do start to climb, it will be a sucker's rally. Weak sectors are afraid of heights.
Buying yesterday's news. High prices reflect a strong sector? Yes they do... until, that is, prices overreach and fall back to earth because the fundamentals of the market don't support them. The housing market is a great example. At the top, prices were no longer based on affordability or equivalent rent rates. Look forward, not backward, when you choose a sector to invest in.
There are other reasons, too, why people make the mistake of investing in weak sectors. A sector may be popular, fashionable but not strong - like the dot-com sector. Or investors buy on rumors, not fundamentals. (That's a dangerous game that can turn against you very easily.) And investors just pick up wrong information. (You can't believe everything you hear and read.)

So, what seems like a simple rule isn't so simple to follow, after all. But truly strong sectors can really help your portfolio grow. And truly weak ones can help kill it.

A final word of caution: If you're not quite sure if a sector is strong or weak, let it go. It's not worth the risk.

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Federal Reserve and European Central Bank on an Interest Rate Teeter-Totter

They don't serve ice cubes in their drinks. They drive on the left-hand side of the road. And Inflation is also a little bit different in Europe. Despite this fact, inflation analysis in these respective regions often focuses on generalities and overlooks one particular difference. Let me explain ...

Let's focus only on two countries and two central banks: the U.S. and its Federal Reserve and Europe and its European Central Bank. If you haven't been hiding under a rock for the last year, then you probably have some kind of idea how their respective policies vary.

The Federal Reserve has knocked off more than 3% from its benchmark interest rate in the last year. In that same time, the European Central Bank has mostly stood its ground, mixing in one rate hike of 25 basis points that brought its benchmark up to 4.25%.

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Spreading Economic Weakness Is Dollar Positive

Yesterday, the dollar rallied hard against the euro. And today I want to tell you what I think is happening. Let's start with a question ...

What happened to decoupling, the idea that other economies were immune to weakness in the U.S.?

Well, it seems as though the subprime fiasco has created bigger problems for the U.S. financial system than most people anticipated. And now we're seeing this economic virus spread across other areas of the globe.

If you want some evidence of contagion in other developed economies, look no further than these recent news items ...

German industrial orders dropped sharply - by 2.9% in June. What's most disconcerting is that Germany's economy makes up one-third of total Eurozone output. And speaking of the rest of the Eurozone, many of those economies are bogged down by housing busts.


The International Monetary Fund (IMF) called out the U.K. economy. Predictions for economic growth in the UK for 2008 and 2009 stood at 1.8% and 1.7%, respectively. Kiss those numbers goodbye. The IMF's latest forecast calls for a seriously lower 1.4% in 2008 and 1.1% in 2009.


Australia is battling sluggish household spending and their financial sector is being challenged. The National Bank of Australia recently reported a huge second quarter write down which it attributed to massive holdings of CDOs.


And the New Zealand Treasury anticipates a second consecutive quarter of negative GDP growth. By definition, New Zealand will have entered recession once official numbers are released. They'd be the second OECD-member country since Denmark to sink to official recessionary status.

The reality is that the big three in the developed world - the U.S. the U.K., and the Eurozone - are staring into the face of recession.

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Dow Jones Industrial Average

The Dow formed a small triangle, with declining volume typical of a consolidation.

Recovery above 11600 would signal continuation of the bear market rally,

while reversal below 11250 would warn of continuation of the primary decline.