Riding The Bull

If bull riding were easy, we would all be rodeo stars and retired, pursuing safer endeavors with our prize money. No doubt bull riding is thrilling, but it is also fraught with ups and downs. One minute you’re up… the next you’re down, and so and so on until you’re too tired to go on. Or fall off. Not many riders make it to the bell!

To take the ups and downs without having a nervous breakdown, sleepless nights, or developing a sudden eye tic you have to obey one of the first rules of investing. Don’t (since I can’t seem to get around metaphors today) put all your eggs in one basket.

Sensibly diversifying your portfolio or your investments is the only way to go. Banks and other institutions that manage investments often publish the percentage of each asset class they hold in their funds and products (i.e. 33% bonds, 33% equities and 33% cash).

This asset mixture changes with the amount of risk you’re willing to assume and some so-called experts’ opinion on where the money is going to be made. But it is also important to examine your diversity within one asset class.

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Active investors tend to load up on equities. With the recent surge in the NASDAQ and the Dow, driven generally by a recovering Tech market, once again, people are putting a lot of eggs in one basket. It can be very profitable, but equally risky.

Most of us have seen the damage done by investing in one sector of the stock market. Don’t do it! The rule is particularly valid when it comes to bull markets. The nature of any bull market, be it in resource stocks, tech stocks or retail stocks is that it is accompanied by a corresponding level of volatility. For every two steps forwards there is one back, and those pullbacks can scare the daylights out of the most seasoned investors.

The impact of those pullbacks can be mitigated by diversity. Instead of all your equity holdings pulling back only a percentage do and the others remain the same or move forward in response to the pullback.

It has come to our attention at PROFIT CONFIDENTIAL via some reader feed back that some of you are getting a little antsy about the recent pullback in gold stocks. The bull is trying to shake you off. Often the shake off occurs just before a solid rise. In the a.m. of January 27, 2004 gold was down hard in London… down to the lowest price we’ve seen this year. But by noon it had rallied almost $5.00. With conviction.

Someone was selling at $405 in the morning because he/she couldn’t handle the ride. Others saw it as an opportunity to get in. Sellers were crying in their cups that night.

Gold stocks have had a good run. Pullbacks are an inevitable part of the game. If you are well diversified a pullback is no big deal. Don’t forget how far the yellow metal has come.

In January 2002, gold was valued at $279 an ounce. January 2003 saw gold trading at $370 an ounce, and this January, gold is trading $410 an ounce after flirting with a decade long high of $430 an ounce. The economic and geopolitical environment that drove this 24-month surge has not changed. In fact, according to many, it has grown worse.

Central banks, bankers, the Fed and politicians in general do not want to see a golden rodeo. A golden bull is not in their paddock and can’t be controlled. By manipulating interest rates and money supply, markets within their control (read NASDAQ and Dow) can be “coerced” in their favor.

They will do whatever it takes to fight the golden trend, but they cannot fight forever. Most of us know the trend is our friend.