The reasoning is that the small investor is consistently wrong about when and what to buy, so if the little guy is buying, it’s time to sell. This unofficial rule has been painfully accurate during my 25 years in the markets.

The small investor consistently takes too little risk or too much risk or buys in after the market or an individual stock runs up. These are the only consistent qualities of this class of investor and they always result in losses.

Take a look at what the small investor has been doing lately.

A recent Wall Street Journal article, “A Taste for Risk-Again,” listed the activity of mutual fund buyers, the favorite of small investors, since last year’s sell off.  Purchases in emerging markets, China, and junk bond funds, sectors that have already seen big run ups and that are considered high risk compared to domestic large cap funds, have sky rocketed.

Investors in the first five months of 2009 have poured $4.9 billion into diversified emerging market funds compared to pulling out $2.6 billion in the same funds last year. Investments in the riskier junk bond funds are up 10 times over last year.

At the same time, large cap U.S. stock funds have had $11.2 billion withdrawn in ’09 in addition to the $52 billion withdrawn last year.

What’s the explanation for this surge? Small investors are trying to recoup their losses from last year by jumping in late on higher risk investments. See the pattern? Too much risk, too late.

At the other end of the risk spectrum, the risk adverse small investors who took their losses and ran from the market last fall have been hoarding cash. The savings rate in the U.S. is up from 0% of after tax income in 2008, to 7% in 2009. The cash sitting on the sidelines is gigantic and all of it is generating an after tax and inflation loss.

Despite the run up in the market since March of this year, the best companies in the world are still available for pennies on the dollar and are offering huge dividends. As always, the small investor wants nothing to do with these high quality, lower risk investments.

Merck for example is off about 55% from its January 2008 high. It has a dividend of about 5.7%, that alone is almost three times money market or savings rates, and it’s literally one of the best companies on the exchange.

Merck, and a hundred others just like it, is appropriate for just about everyone and could be a core holding in almost anyone’s portfolio. At a 55% discount it is essential.

Large cap, dividend paying stocks are one of the best places for small investors. It gives them income and stability they can’t get in any other investment and a risk level that is perfect for all but the most risk adverse.  But, as usual, the small investor is 180 degrees out of sync with what he should be doing.

The small investor historically will not be interested in a stock like Merck until it is at or near its 52-week high and the dividend is in the one to two percent area, exactly where you should be taking profits.

The Odd Lot Theory works. Use it to change how you are managing your money rather than being a victim of it.

Take a look at Sounds Profits. It’s a newsletter that focuses on using time proven investment techniques to help its readers use things like the Odd Lot Theory to their benefit.

Good luck.

Steve

Source: When Small Investors Buy, Big Investors Sell

I’ll believe that when I see it. When was the last time the government completed any project on budget?

And I’m not the only one with doubts.

Health Systems Innovations, a health care consultant that has worked with private health insurers, estimates that Senator Kennedy’s bill would cost $4 trillion over 10 years.

Ouch…

Should a health care plan be passed that even resembles anything like the current proposals, $2 trillion in final costs would be a minor miracle.

A trillion here, a trillion there. Pretty soon, you’re talking about real money.

As these health care reforms gather momentum, I’m going to explore a few more investments that should thrive in the face of a major health care system overhaul, regardless of any health care reform plan that may be passed…

Health Care Reform : Protecting Against Inflation With Bond Funds

Despite the President’s popularity, he’s not likely to get everything he wants. Some sort of compromise is to be expected. One thing we can assume is that the cost of any health care reform plan – regardless of whose it is – will be a 13-figure number (i.e. more than $1 trillion).

On a macroeconomic level, that would likely be inflationary and cause bond prices to decline. So if you’re a bond bear, here are two instruments for you…

• UltraShort 20+ Year Treasury ProShares (NYSE: TBT): This ETF is not for the faint-hearted. It seeks to perform at twice the inverse results of the Lehman Brothers 20+ Year U.S. Treasury Index. So if the Index drops 5%, TBT should rise about 10%.

• ProFunds Rising Rate Opportunity (RRPIX): This is a mutual fund that also seeks the inverse performance of the bond market. Its results aim to correspond to 125% of the inverse of the daily movement of the 30-year Treasury bond.

Profit From Health Care Reform with Biotech & Selling Put Options

Recently while researching stocks that would profit during the health care reform process, I discussed the attractiveness of investing in biotech companies that treat rare diseases.

One of the companies I’ve recently discussed, Genzyme (Nasdaq: GENZ), had a major setback when it disclosed problems at one of its manufacturing facilities. The stock price took an immediate hit.

I believe these difficulties are temporary and I still like the company. But if you’d prefer to reduce your risk further, you can look at selling put options on GENZ at a lower strike price. My colleague Lee Lowell just talked about a put selling strategy earlier this week.

I explained to Lee why I like GENZ, but wanted a good put-selling trade for investors who want to own the stock at a lower price. Here’s what he suggested…

• Sell the October 2009 $47.50 puts, currently trading at $1.50 on the bid. This means for every put that you sell, you will collect $150.
• Keep in mind that one put contract represents 100 shares.

• If GENZ never sees the $47.50 strike, you keep the $150.

• If the stock drops to or below $47.50 at expiration, you’ll be required to buy the stock for $47.50 (100 shares of GENZ for every put contract you sell). But remember that you collected $1.50 already, reducing your cost basis to $46 per share.

So if you like GENZ, but would prefer to own it at a lower price, this is one trade to consider.

Health Care Reform: Two Biotech Companies Set For Profits

I’ve recently suggested a few other biotech stocks to my subscribers, including:

• Best-in-class generic drugmaker Teva Pharmaceuticals (Nasdaq: TEVA).
• Another generic drugmaker to look at is Watson Pharmaceuticals (NYSE: WPI). Watson just announced its acquisition of privately held Arrow Group, a generic biotech drugmaker, with significant international operations.I like this move by Watson, as it broadens the company’s reach both in products and markets served.

The bottom line is that while health care reform could very well change the investing landscape within the sector, you can always find opportunities if you know where to look.

Good investing,

Marc Lichtenfeld

Source: Health Care Reform: Five Ways to Profit With Biotech Stocks & Bond Funds

We bought the Debt Strategies Fund (DSU), which held a basket of high-yield bonds and was paying a double-digit interest rate. From late 2002 to late 2003, trough to peak, the fund nearly doubled. In boring bonds!

We’re seeing a similar setup right now… So the question is, should we be buying high-yield bonds now?

Despite the big move back in 2003, bond funds aren’t supposed to double in a year. They’re not designed to…

The basics of a bond are usually something like this: You invest $1,000 in a bond paying 5% interest. You receive your 5% a year in interest. Then in five years’ time, you get your $1,000 back. No possibility of triple-digit returns there. But when we bought our high-yield bonds, some of those $1,000 bonds were selling for only $600. When the prices went up from $600 to $1,000, we made great money – plus the interest too!

Since late 2003, high-yield bonds haven’t done all that well. DSU is only up about 16% in four years or so. But now, DSU is paying more than 11% in interest. Is DSU a buy once again? Let’s see…

The last time we bought high-yield bonds, we were in the midst of the dot-com bust. Companies were going under. And investors were fleeing anything risky. Prices fell on high-yield bonds, as people sold. So bond yields shot up. That’s when we swooped in and bought.

We’re seeing a similar situation now… Investors have fled anything risky. And bond yields have shot up. Take a look:

This chart shows how much more interest you can earn from high-yield bonds than from U.S. Treasuries. You see, Treasuries are considered one of the safest investments out there… but you don’t get a big percentage yield. Right now, they’re paying less than 4%.

———- Advertisement ———-
The World’s Safest 9% Dividend

12% Editor Tom Dyson recently discovered an amazing income generating investment.

On May 30th, one company will pay out over 90% of its profits to shareholders. In fact, this company has reliably paid its shareholders EVERY month for the past 6 years.

No wonder Barron’s has called this investment “attractive to investors seeking income”…

Click here to get the full details.
————————————-

When high-yield bonds are yielding the same as Treasuries, investors don’t have much incentive to take on the extra risk to get a slightly higher yield. And when times get turbulent, like now, investors flee high-yield bonds… which pushes the yield up. That gets me interested.

One thing is different this time though… Take a look at the next chart:

Historically, high yields on risky bonds have coincided with high default rates. But default rates on bonds have not risen yet.

So one of two things will happen… Either the default rate will soar, or – if default rates stay the same – high-yield bond prices will soar, and you’ll make a mint in shares like DSU, starting now.

If you’re really bold, and really optimistic about the economy, you could buy high-yield bonds now, and possibly make a lot of money.

But if you’re not so bold, like me, and you believe that things aren’t different this time – that default rates will climb in this recession as they have in the last two – then you’ll wait.

If you look closely at the chart, you’ll notice we’ve seen something similar to this two times before…

In 1989, default rates were low, but interest rates started to spike. Default rates started to rise a bit late, but they didn’t stop rising until they hit double digits. And in 1998, the same thing happened, and default rates again started rising and didn’t stop until they hit double digits.

I expect defaults will rise – which would hurt anyone invested in a bond fund now. But will defaults get to double-digits? I don’t know.

The double-digit yields on funds like DSU are incredibly enticing. But when it comes to high-yield bonds, I’m not willing to bite, yet.

Good investing,

Steve