When the Dow Drops, Go Shopping!

07/01/2013 7:45 am EST

Focus: STRATEGIES

Keith Fitz-Gerald

Editor, High Velocity Profits and Total Wealth

Forget about panicking when the Dow has an hiccup, says Keith Fitz-Gerald of Money Morning. Instead, get out your wallet and shop for bargains.

Nancy Zambell: My guest today is Keith Fitz-Gerald, the Chief Investment Strategist with Money Morning. Thanks, Keith, for joining me.

Keith Fitz-Gerald: My pleasure to be here Nancy. Thank you for your time.

Nancy Zambell: You're quite welcome. You're regularly on Fox, and I love listening to you and also reading your columns. This morning, your column basically said, "Buy when blood is in the streets." Would you talk about what the market did, and what you think investors should be doing?

Keith Fitz-Gerald: I'd be happy to, and thank you for the kind words. Obviously, yesterday's action in the market was traumatic for a lot of people. They didn't see it coming.

On the other hand, I think it's only natural. I viewed it with great enthusiasm, and the reason is very simple: Down days like that—while they're viewed as a hazard and sort of an occupational cost of investing—are actually a sign that the market is working the way it should. It's a sign that risk is being bled out of the system; things can't go up forever.

So, rather than running for the hills and sticking my head between my legs with a sign on my rear end that says kick me when it's over, we went shopping. And we encourage clients around the world to look for investments in energy, technology, and big US Nationals, because clearly the dollar is the last, most attractive horse in the glue factory, and we want to be a part of that.

Nancy Zambell: You also mention in your article that you like small regional banks right now.

Keith Fitz-Gerald: Small regional banks are very different from the big banks that are making everybody's life difficult at the moment. They don't play in derivatives. They don't have a lot of capital exposure. They're not trading for their own account. They're doing banking the way it was intended to be.

Banking—if you remember, 100 years ago or 150 years ago—was designed to be a boring business. It was designed to fuel local economies. It was designed to provide lending and support for the community.

These small regional banks are doing very well at that right now. They don't have a lot of overextension. On the other hand, the big banks have got huge problems with capital reserves, their trading derivatives investments, and customers have become irrelevant to them.

To me, that is a significant problem. I think in the next quarter, maybe two, there will be realignments such as capital reserve adjustments. They'll have further shenanigans with regard to the Fed and the derivatives. The big banks are going to have problems with their profitability. Regional banks—on the other hand—are just going to tick right along, and are very attractive to me.

Nancy Zambell: I came from banking, so I love the small regional banks. One of the reasons is because other bigger banks buy them, and you get a nice premium. And while you're waiting on that premium, you get a nice little dividend too. Do you see any kind of M&A activity in the regional banks coming up?

Keith Fitz-Gerald: That's an interesting question. I don't see any signs imminently that that's coming. However, the big banks are sitting on trillions of dollars of cash.

When they decide that the cost of capital has gone up and they'd rather grow through acquisition than trading, I think we'll see that. But for now trading is very seductive, and the allure is simply too high, which is why they're investing their time there.

Nancy Zambell: Absolutely. Now I'd like to change gears. You wrote another article on the five key traits to investing success. I think in the kind of market that we're in now—which has definitely become a lot more volatile—investors probably need to review some of those keys, because many people will be pressing the panic button.

Keith Fitz-Gerald: I understand that impulse. It's very powerful, especially on days like we saw yesterday, where the Fed just sends everything haywire.

Really, you should remind yourself why you do this. Most investors I know want to build a successful financial future. They want to hold onto the capital. They're most concerned with the return of that capital than the return on that capital. That speaks to the need to do a couple of things consistently, particularly if you want success.

No. 1, I think you've got to get out of your comfort zone. A lot of investors invest and they get trapped in methodologies or certain types of stocks. They fall in love with their assets. That is a huge mistake.

The most successful investors I've met all over the world—whether it's George Soros or Richard Branson or Jim Rogers, or any of half a dozen other names—these guys read voraciously. They're always looking to get outside their comfort zones. They're the ones that have stacks of magazines and books all over their house.

The second thing I think investors need to do, is they need to understand that persistence is key, particularly in today's market. They often will take one shot at a transaction. If it doesn't work, something is wrong.

The pros take four or five swings at the same investment before they settle into a position that they like. It is not uncommon to hear them say, "I tried to buy XYZ but I got bounced out, so I bought back in later," because they're trying to get settled.

Nancy Zambell: Yes, because they know that's a good investment. It may just be that the timing is not exactly right.

Keith Fitz-Gerald: And that's the thing. That speaks to a healthy skepticism, which is the third trait I identified. You've got to form a hypothesis when you're investing, in my opinion. If the hypothesis remains intact and you have the expectations, you've simply identified something that the rest of the market doesn't see.

That's not the same thing as making the wrong decision. You need to be just simply skeptical, because you need to understand what it is you're getting into, and you need to look at it every single day.

The other thing that I think is really unique, in particular, and Richard Branson is an example of this one...they need to make decisions that benefit others.

One of the things that is very surprising about this, is that if you make decisions in today's world that are geared toward the benefit of other people, I think the profits will follow. Many times, I've seen the most successful investors in the world gather information, make these decisions for the benefit of other people, and they connect the dots later. That's interesting to me.

Then finally, the fifth trait that I identified is that you've got to have the freedom to fail. What I mean by that is that our society lionizes the notion of high-powered people climbing the ladder of success and never stumbling.

Today, we like to believe that legendary investors are infallible, but if you talk to Warren Buffett, Richard Branson, George Soros, or Jim Rogers, these guys understand that making mistakes is part of the game. George Soros said the reason he's successful and fabulously wealthy is that he's capable of recognizing his mistakes.

And that's something that individual investors habitually get wrong, because they're so focused on being right that being profitable is almost an afterthought. I personally, as a professional with 33 years in the market, would rather be profitable than right anytime.

Nancy Zambell: Amen to that. You know it's the same principle, whether you're investing or whether you're starting a business. I've heard people like Ross Perot, for example, who said he failed so many times before he ever latched on the right idea.

But it makes you learn and it makes you more flexible and I think that's the key. And I'm sure that you're going to agree with that, that investors really need to stay flexible. There is no longer really any buy-and-hold.

Keith Fitz-Gerald: No, there really isn't. There is buy and manage now. To me, buy and hold has always been a significant problem, because it is predicated on the notion of the greater fool theory—that you're going to buy it, that you're going to hold it, and somewhere down the line some greater fool is going to come along and pay more for what you're selling than you paid to buy it.

In today's market, where the Fed is manipulating everything, where we have Washington out of control and the butt of its own jokes, and we have a complete abdication of adult responsibility in the world's central banking community, investors need to buy and manage.

Now that sounds complicated, but it doesn't really have to be. If your investment hypothesis is good, you've identified something that's important that provide dividends, has a good product—whatever the variable is that you use for your personal risk tolerance—then managing is actually not that difficult, because you can use profit targets and something as simple as trailing stops, to insure that you capture profits and minimize losses if the markets roll over.

I would rather go that way and remove all of the emotion, or as much emotion as I can, so that way when big days do come along like yesterday, I have the intellectual freedom and a lack of pressure, and I can actually look at the market positively. I can go shopping, and I can focus on those things I want to buy, as opposed to playing complete defense.

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