Bollinger's Bets

01/06/2006 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

"The differences between gambling, trading, and investing are blurring rapidly," notes John Bollinger, who is not only an exceptional technical analyst but also one of the most astute observers of financial markets and investor psychology. Here’s his latest.

"For some reason gambling is considered to be bad and investing is considered to be good, yet the conscientious and objective observer may be hard pressed to discern the difference between the two. Both involve bets on an uncertain future, yet somehow the fate of a sports team is judged to be different from the fate of the hot new product of an industrial company. Odd that, both entities are run for profit, sell their products to consumers, are regulated entities, and you can bet on/invest in the future of either. Indeed, to blur the lines even more, some sports entities are public companies that are listed, or are controlled by listed public companies and thus can be tradedbet on via the exchanges.

"Care to see the state of the art? There are now online bookmakers that have morphed into ‘exchanges’ where you can bet on, trade, invest in, the Dow, the S&P 500, the NASDAQ 100, Gold, Oil, Fed Funds, and so on. In addition there are legal, political, and weather markets for your hedging, err betting, pleasure. Today's short-term stock traders pounding away at their Level II screens are vastly more active and have shorter horizons and more leverage than most ‘gamblers’. If you really want to have a wild ride, there is nothing wilder than the currency-trading outfits that are springing up like mushrooms.

"Today's investors may find themselves employing tools and techniques that would be unfamiliar to yesteryear's investors and that align them more closely with traders and gamblers. Examples include modern portfolio mechanics, quantitative tools, index funds with complicated value-added components, derivatives, statistical arbitrage, index-linked notes and, of course, hedge funds. The point is that trading, gambling, and investing are all about dealing with an uncertain future.

"Meanwhile, regarding the US stock market, we are at an interesting juncture; the one-year seasonal pattern and the four-year presidential cycle are now roughly in sync and will be so for the next four to six months. While we don't invest solely based on these ideas, when these patterns line up like this it gives us a little more confidence in our analysis of the basic trend and the potential for the market. This is a factor in what will undoubtedly be the last increase in our allocation for stocks this cycle. Normally we'd simply go the 80% US stocks, but strength abroad suggests a further commitment there as well.

"Therefore, we'll stick with 70% US stocks and add a 10% International allocation. Our initial focus is on Japan and we recommend two closed end funds, the Japan Equity Fund (JEQ NYSE) and Japan Small Capitalization Fund (JOF NYSE), as well as the exchange traded iShares Japan (EWJ NYSE). We view these positions as very long term holds based on the length of the patterns being resolved by the current rally. If you like you can buy one now, most likely the liquidity leader, EWJ, and pick up the other two on pullbacks when they trade at discounts to their net asset values as they did earlier this year. The idea is to accumulate a core position in Japan and then diversify as opportunities present themselves.

"Why Japan? Aside from all the obvious Japanese reasons like their car companies crushing ours, Japan is perfectly situated to service China as it makes its great surge forward. Yes, Japan is graying and has many well advertised problems, but they are also formidable, iron-willed competitors with a lot of global experience and expertise. We think they'll do well and that their stock market will reflect it. That doesn't mean we want to chase strength, but it does mean we'd like to accumulate a position."

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