What Level Heads Are Saying

07/21/2006 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

Jamie Dlugosch is the epitome of The Rational Investor, never losing his head when all around him the market naysayers are panicking. Here is his take on how investors should keep their cool in a volatile market…


“Good investors all have one thing in common: they know how to sit still; they always focus on the big picture; and rarely react to short-term negative news. A combination of stock-picking skill and stoicism results in their long-term success.

“Unfortunately, there is no magic formula that can be used to predict the future value of a stock. If there were, we'd all be following it. So forget the hype and the hocus pocus. All we need are the 'old faithful' strategies for beating the market: diversification, dollar cost averaging, and patience.


“Over time, markets tend to reward profit and growth. Oftentimes investing in capitalism means staring down fears and pessimism no matter how emotionally difficult that can be. Today, the majority of guru commentary and news coverage is quite negative, from the very real problems of budget and trade deficits, a weakening consumer, and rising interest rates, to the not-so-real speculation of world economic collapse and chaos. It is not surprising to see stocks struggle when the wall of worry is so great. Only the most diligent rational investor can see through the fog and recognize the current state as a phenomenal buying opportunity.

“The market cycle folks are proclaiming that the market will fall through the end of the October. Their reasoning: this is the fourth year of a bull market, and a mid-term election year tends to signal weakness for the market. They all pretty much figure 2007 will be a great year because interest rates will stabilize or fall and a new bull market can begin from the ashes. Hogwash. It really is a self-fulfilling prophecy that keeps buyers on the sideline despite attractive valuations.

“Valuations still matter, and in an environment of strong earnings, stocks are flat-out cheap. The longer this malaise continues, the more potential there will be for a strong rally in its wake.


“Let's stick to our guns here and know that our holdings will appreciate over time. Last summer I recommended OMI Corporation (OMM  NYSE) . This oil shipper lagged other selections in my model portfolio for most of the year, but have been quietly appreciating recently. Since the beginning of April, the stock has moved from $18 a share to its current price around $20–at a time when the market has gone haywire. Its valuation is still low in my opinion, and investors can expect more appreciation here. Shipping oil is in high demand, and the world economy is strong. With share buybacks and strong performance, we are well on our way now to my rational target of $36.”

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