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Don’t Knock Opportunity


The Daily Diatribe: How does one recognize an opportunity in the stock market? I actually think that it is pretty easy to do, but equally hard to capitalize on. The opportunity would exist when nobody wants to buy a stock. For example, with all of the problems going on in Greece, it would be hard to pull the trigger on the National Bank of Greece, at 3.27 per share, but it might be a handsome investment in the long run.

The problem is going to be overcoming investor fear. You all probably think with the stock price at $3, it would be going directly to zero.  I don’t think that is logically the case given the facts of the recent bailout by the European Union, said to give Greece financial stability for a couple of years. That ought to buffer the stock on the down side and give the bank time to right its fiscal ship.

Contrast that with the recent hit on Goldman Sachs. Even though the stock fell almost 15 dollars on Friday and is well off of its highs, I don’t think there is anybody who believes that a long-term investment in Goldman is a bet on Red 21. In short, there is not much trepidation concerning Goldman.

There you have the best examples of how fear and greed dominate stock market action.

You also have to pay attention to the “noise.”  Over the weekend and continuing this morning, Warren Buffet of Berkshire-Hathaway fame, has been warning about the pending global inflation that is destined to come. I think he’s right. So, where is the opportunity in that rather glum forecast? Well, traditionally, the first thing to do is to look to commodities; specifically gold as an inflation hedge.

I would own some gold here but as a hedge;  not a speculation. By that I am suggesting that you hold the gold position throughout the next business cycle; make certain that there is no more than 5-10 percent of your portfolio represented and be prepared for the decline in your other stock market holdings given the rise in interest rates that will have to occur to combat the pending inflation.

I would, for certain, avoid long-term bonds. With rates sure to rise, those prices will get decimated, falling roughly 12% for every 1% move up in rates.

The important thing in today’s diatribe is to understand that for every move up in anything, there is a corollary to a decline someplace else. Diversification would dictate that your portfolio, as a result, will have something going up and something going down at the same time. The trick in financial management is to have your assets properly positioned percentage-wise as a result of your economic forecast. Easy to say, but the homework is tough.

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