June 24th, 2008

Don’t Fight the Tape – Rev. 2.0

“Don’t fight the tape”, that’s something I learned years ago when I was still a novice investor. It’s only because I wanted to find an authority to quote in my book, “Running with the Herd” that I located one confirmation for this pearl of wisdom in the person of Prof. Benjamin F. King (University of Chicago, 1962) who discovered that “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.” If the market’s going down, there’s a good chance your stock will too.

This market proves that there’s actually a corollary to the market version of this “don’t fight the tape” rule, a Rev 2.0 so to speak, and its that rather than searching for those your own golden needle in stock market haystack, stick with the winners. Don’t find new places to put your money but follow the tape and buy those things that are moving. And today that means oil & gas in almost any shape or color.

I got excited last week when my various scans turned up quite a number of new names (symbols) but, today, the scan results reverted back to the old oil & gas, coal, fertilizer, solar winners. You can try to be a contrarian and buy some homebuilders or finance or retail stocks but in all likelihood all you’ll prove that it’s a losing strategy.

I remember talking to a relative last Thanksgiving, a holder of Potash (POT), that he should consider selling at around 120 because it had run up around 150% in the year since the previous Thanksgiving when he bought it at around 50. I hope he didn’t take my advice because over the past 7 months it’s gone up another 120% to 236. I have no idea of what I’d tell him now.

Likewise, I wouldn’t know what to do about my holdings in CPST, ANR, GMXR, CRK, ACI or SM which have all had 60-190% increases since last New Years. It’s clearly beginning to look like, feel like and smell like an energy and commodity bubble. And we know how all bubbles end we just don’t know when.

We can try the “musical-chairs strategy” of selling those leaders (or at least portions of them) and reinvesting the money in what we hope will be new winners in the same field. New names that appeared in my scans over the past week or so include:

  • SJT (San Juan Trust)
  • CRT (Cross Timber Royalty)
  • MSB (Mesabi Trust)
  • GW (Grey Wolf)
  • SWSI (Superior Well Services)
  • TNP (Tsakps Energy Navigation)
  • NFX (Newfield Exploration)
  • NGS (Natural Gas Svce)
  • SGY (Stone Energy)

The list could go on an on. But you do notice the common thread — they’re all energy related. Bubbles are fun while they continue; it’s when they burst that it really starts hurting. I’m trying to both live by the rule “Don’t fight the tape – Rev 2.0” and respect the original Rev 1.0 which is that for the rest of the tape we’re in a bear market and, therefore, the oil stock bubble will end badly (as did tech, homebuilders and financials earlier). I’m interested hearing how your dealing with it.

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