Time to take protective action

The market is up 60% from its lows but the economy is still losing jobs. Its time to take some protective action.

By Ken Kam Oct 21, 2009 5:21PM

If we've learned anything from last year, it is that our economy is much more fragile than anything thought possible.

Our government’s policy has created strong incentives for the CEOs of financial institutions that are deemed “to big to fail” to chase opportunities with very large upsides no matter what the risk. If the risks work out, the CEO gets an unbelievably large bonus. If things don’t work out, the chief has to make do with a big severance package while taxpayers pick up the tab for the losses.

As things stand now, our system steers private capital into high risk, high reward bets and relies on taxpayers to provide public capital when the risks go bad. I think it is only a matter of time before one of the “to big to fail banks” makes a big bet that does not work out. When that happens, as we all saw last year, the stock market can drop almost 40%. If we don’t want to go through this again, we need to take advantage of this rally to prepare.

Going forward, there are going to be more times when we are going to have to take steps to protect our portfolios. Knowing when to take such protective steps is a type of investment skill that few people have.

At Marketocracy, our database of track records of thousands of analysts going back over 9 years has been enabled us to find the few who don’t just talk a good story, but who also have the track record to back it up. We don’t want analysts who are always defensive just as we don’t want analysts who are always fully invested. What we are looking for is a rare combination of performance and protection. You can look at analysts I selected, and how I selected them by clicking here.

When I look at the combined portfolio of this analyst team I see over 25% is in cash, with another 10% in double inverse the market ETFs — a very defensive posture. When you consider that the market is up more than 60% from its low point earlier this year, and that the economy is still contracting when you back out government spending, I have to say I sleep better at night knowing that we are beating the market even though we have a defensive posture.

It can be hard to find these articles after they scroll off the front page. So, if you would like to be notified via email when I post a new one, click here.

Ken Kam, Marketocracy Data Service's Editor in Chief, also is portfolio manager for mutual and hedge funds advised by a Marketocracy affiliate. Before relying on his opinions, always assume that he, Marketocracy, its affiliates and clients have material financial interests in these stocks and hold or trade them contrary to those opinions. Click here to continue reading for more detailed and important disclosures, disclaimers, limitations and material conflicts of interest.

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