Don't Chase the Flavor of the Month

03/24/2011 8:00 am EST

Focus: STRATEGIES

John Carter

Author, Mastering the Trade

Investors who chase news and the hot market wind up being late to the party, says John Carter, who advises buying long-term trends like BRICs and commodities instead.

Are there perils to chasing performance?  Let's ask John Carter. John, we hear investors looking at mutual funds, the hot ones last year that they jump on and buy this year, or say gold, which has made a miraculous run. Maybe they want to jump in. Or trading off the news. What's the peril of chasing this type of performance?

The peril, the biggest peril is that by the time you hear about it, it's done. Even at shows where you interact with a lot of traders and a lot of investors, I hear a lot of questions like “Wow, with all this unrest in the Middle East, should I jump into defense companies?” That's not really the kind of trading that you should be doing. At this point, the unrest is already there. That news is already priced into the market, so you're going to be the last one to get in there.

If you're really looking at something where in terms of being in something kind of a long-term trend, you want to understand some of the bigger pictures at work. Some of the bigger pictures at work are things like the BRIC economies (Brazil, Russia, India and China) are going to outpace what's going on in the US and Europe in years ahead. There are ETFs, iShares Malaysia (EWM), there's Templeton Emerging Markets (EMF). There's actually a BRIC economy ETF [Editor: BKF, EEB, others], and these are ones where you'll actually have exposure to these economies. It's not a flavor of the month. It's something that should perform well over time.  I'm actually not a big buy and hold guy, but these are things that I buy and hold and own them and will stay with them because this is a force that's going to be there, okay? 

Shorter-term stuff, it's a little bit different. Yes, you are going to be kind of looking more for volatility, but again, instead of chasing what's happening in the news, you can use specific indicators such as Bollinger bands to find markets that are quiet and they're about to expand in volatility, okay? So it doesn't matter what the news is, all right? You're not dependant on the latest news release on a particular stock that you're following. You're just waiting for it to get quiet because when it gets quiet, it builds up energy and then it releases that energy and then you can participate in the move regardless of the news.

So I think if you’re chasing performance and you're switching mutual funds every week looking for the next hot thing, you're really going to be sitting on something where you end up even paying a lot of fees, in some cases, but you're really going to be sitting on something where you could essentially buy the top in a lot of these things because you're the last one to know and that's not something as an investor that you want to be doing.

So, what would you suggest right now? Take a look at the commodity markets and the grains particularly with the trouble that's going on in Australia and New Zealand, that is something that you're not necessarily reacting to because they haven't start with the planting here. Is there a way that we can play that?

Sure, for the grains, a good ETF is DBA. This is representative of all the major grains: Wheat, soybeans, and corn. When you see instances like this, right now corn and soybeans and wheat have continued to climb, climb, climb, and climb. At some point, they're going to break and they're going to have a decent selloff. That's when you want to step into it, okay? When you see something that is at its highs, you've kind of already missed the move. There's always going to be—especially in the commodities markets—there's going to be days where maybe China announces a rate hike or whatever the news is. There's going to be a big break, there's going to be a big selloff, and that's when you want to step in and do it, all right? So you want to be patient for things like that. For the grain markets, that's a trend that's going to continue.

There's an interesting stat: I was in China in December, and there were some city planners there. They're planning on building a city the size of New York City every 16 months for the next 20 years, okay? They are having to do that. They build these cities in advance. They don't wait for the demand and then build the city.  They are seeing migration from the countryside into the city.

If you build it, they will come.

Right, extremely so. If you think about grains here and it's not so much that when people come into the city, they eat more grains. What happens is they eat more meat, okay, and to raise meat, you need more corn. I've got a farm up in Nebraska, so I see all this, how it comes down like this. So this is one of those trends that's going to continue and you look for selloffs in those markets as buying opportunities. That's not chasing the news of the day. That's being positioned in something that's going to happen.

For the long term.

Absolutely.

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