Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
11/04/2005 12:00 am EST
"The biggest problem with ‘buy and hold’, is that so many investors tend to ‘buy and hope’," cautions Neil George. Here, he offers exceptional, common sense advice for investors, as well as an overview of one of his favorite sector plays – water.
"One thing that too many people do is that they get a tip, buy a stock, watch it go down, and then decide to hold until it gets back to where they bought, hoping that they will then be able to sell without taking a loss. Instead, one of the crucial things we try to teach investors, and what we do with our own holdings, is to look at every stock we own and continually ask, ‘Would we buy this all over again today?’ If we can’t say we would, then we sell and move along.
"You always want to look forward, rather than back. Every time you get your statement, whether once a month or once a quarter, go down each and every line. If you can’t explain to yourself why you would buy that holding all over again, then it is time for it to go. If you use that discipline on a regular basis, I think you’ll have a much healthier portfolio. It may take a little more work, but it will pay off. Always look forward. Don’t just hope things will get better.
"Meanwhile, oil certainly has been gold for many investors over the past year, and we’ve made a killing over the past year as oil markets have gone up dramatically. But that’s old news. Again, the crucial thing is what is going to happen going forward. I want to caution investors that the energy markets are undergoing a transition, and what has been a very buoyant market, now has a lot of potential risk. Remember the 1970s? We thought oil was going to the moon. Remember the late 1990s? Oil was around $11, and you couldn’t give away shares in oil stocks.
"There is a lot of emotion in these markets, and investors get caught up in the mania on the upside and downside. I would say that a move to the downside from here is more likely than oil continuing to rise to the moon. On the other hand, there is another 'resource' sector that is near and dear to my heart. Water is a problem. In fact, when you look at the statistics, water appears to be much more scarce than oil. Around the globe, we have 300,000 cubic miles of water, but only 10,000 are actually fresh water. Most of the water on the planet doesn’t help us.
"On average, at any given time in the US, there are 60 municipal water services providing water that you should not be drinking. In the last three years, over 300 of these systems have been in violation of bacteria standards, lead standards, and other heavy-metal problems. It’s bad for you and bad for your kids. In Washington DC, we don’t turn on the tap. We have lead and bacteria. On Capital Hill, Senators have to use bottled water. Yet at the same time, the amount of money we are spending on the water industry is pathetic. And the US is supposed to the first-tier world. You can just imagine what the water is like around the world.
"When looking at the water industry, investors need to be very careful about the stock they choose. Within the industry, there are many companies that are providers of water distribution systems, but don’t actually have water. They simply have leasing rights to pump or process the water. If you invest in these companies, you will not be investing in the ‘scarcity of water’. To do that, we recommend a different approach, which is to invest in the companies that actually own water. These stocks haven’t yet soared, because nobody really cares enough about them or is spending the time to really figure this situation out.
"One of the leading companies is RWE (RWEOY Other OTC), a German titan in water, power, and communications. RWE is the sine qua non of the essential service sector. Over the last five years, investors in this stock would have nearly doubled their money. However, this is still a stock that is trading at a discount to its trailing sales. The company is the third largest water owner on the planet. It has acquired rights to water throughout parts of the world. It’s also a significant provider of water purification systems, and constructs water facilities for other entities.
"Suez (SZE NYSE) is the company that built the Suez Canal. That’s how long this company has been around. Depending on how you classify it, Suez is the number one or two owner of water on the planet. Like RWE, the company has acquired rights to water throughout parts of the world. The company is also unloading some of its assets in order to become a more pure, essential-services play. As they have been doing this, the share price hasn’t done well over the last four years. Some don’t like investing in a French company, despite it being listed on the New York exchange. Nevertheless, for the long-term, we consider this a great play on water.
"Another interesting play is Veolia Environment (VE NYSE). You might remember a company called Vivendi, which went through a transformation from an old-line European utility into an entertainment company. The company was involved in a scandal and its CEO is on his way to prison. During this changeover, the company split off its ‘dull and boring’ water operations into Vivendi Environmental, which has since changed its name to Veolia. With a clean slate, the company is now starting to get more recognition. Meanwhile, the stock is trading at a huge discount to its trailing sales. It’s a great bargain if you want to be in the water business."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...