I DON’T NEED to see my stocks recommended in print or talked about on message boards to be confident about their prospects. If I’m bullish on XYZ, it doesn’t matter if the analysts haven’t heard of it or if my talk-show colleagues think I’m insane for venturing off the well-beaten path of the S&P 500.
The name of the game is making money, not making friends. So when I pick stocks in this column or on TV, I don’t need email kudos or pats on the back to reinforce my professional self-esteem. When something in my portfolio is working, the profits are my payoff.
The reason it’s called speculation is that, when it comes to the market, there’s no sure thing. Yet most people won’t put money in a stock unless they have a perfectly clear reason for doing so such as an upgrade, breaking news or investment hook. But that need for certainty and assurance often trips us up, because by the time the story is out, the stock’s real move is usually over.
That’s why my favorite investments aren’t found in the headlines or covered by every Armani-suited analyst under the sun. I look for persistently trending, under-the-radar names that don’t show up on the big brokerages’ Buy lists.
For example, consider the bank-loan funds I wrote about last fall. Although they’ve continued a steady upward climb, the herd hasn’t even discovered, let alone invested in, this exciting and relatively new asset class. Funds such as Van Kampen Senior Income Trust (VVR), ING Prime Rate Trust (PPR) and Nuveen Senior Income Fund (NSL) have risen high single digits in the last quarter alone. Problem is, nobody is sure why they’ve done so.
While the funds’ floating loans should excel in periods of rising rates, they’ve performed exceedingly well even though rates have fallen. Why? I don’t know, or really care. It’s not important for me to understand why a stock is moving, only that it is moving. That’s because markets don’t reflect the news, they anticipate it, and the relevant details usually come out after the fact. What matters is that I’ve made money in bank-loan funds, while most people have avoided taking a position in them because the reason for their strength isn’t readily obvious.
Or take foreign and emerging-market stocks, whose outstanding performance has been overshadowed by the recovery-led tech revival and the war in Iraq. The gains in many of these markets, such as Latin America, have put U.S. indexes to shame. But because “Merck” (MRK) stills rolls off the tongue a bit easier than “Compania Anonima Nacional Telefonos de Venezuela” (VNT), which we wrote about last year, most people have simply overlooked non-domestic stocks, a mistake that is costing them money.
As traders, we get paid to take risks. That’s why I’m finding value in a number of regions whose dangerous reputations are due for a makeover — just as the Turkish investments I wrote about a few months back have done well despite the country’s shaky economy. Israeli equities, for one, have been on a tear regardless of the country’s precarious position in the heart of the Middle East. The TA-100, Israel’s benchmark stock index, is up about 60% since February 2003. My favorite picks include supermarket chain Blue Square-Israel (BSI), conglomerate Koor Industries (KOR), cable company Matav Cable Systems Media (MATV) and the closed-end First Israel Fund (ISL), which, despite a 44% rise this year, still trades at a 15% discount to its net asset value.
Slightly less exotic, but equally intriguing, is Portugal, a growing but often ignored part of Europe. As regular readers know, I often look for group movement as confirmation that a meaningful trend is underway. A glance at Portuguese ADRs shows that a trend is clearly on the move. Companies such as Portugal Telecom (PT), Espirito Santo Financial Group (ESF) and Electricidade de Portugal (EDP) have all been strong despite the lack of an easily digestible news hook the herd can gasp on to. And while I don’t speak the language or eat salted cod (a staple of Portuguese cuisine), the price action alone is enough to hold my interest in this vastly under-owned part of the globe. The fact that nobody else seems to like these companies simply reinforces their appeal.
Sure, it’s comforting to pick stocks the analysts love or that message boards can’t get enough of, but I’m never afraid to venture off the beaten path in search of a profit. The market pays us for managing risk, not avoiding it. No investment is airtight, but with the appropriate position size and tight stops, unfamiliar investments like bank-loan funds or Israeli stocks are no more dangerous than the “conservative” blue chips of the S&P 500.
Most people wait for an obvious reason to buy a stock. The truth of the matter is that the market doesn’t reflect news — it anticipates it. To paraphrase the German philosopher Arthur Schopenhauer, the true challenge isn’t to see what no one else does, it’s to think what no one else has about what everyone already sees.
– Originally on Dec 22, 2003 by Jonathan Hoenig
