What to do in volatile markets - Less is More

By Howard Lindzon
Globe Investor Magazine Online, December 21, 2007

Howard Lindzon is a Canadian hedge fund manager based in Phoenix, Arizona. He also is the founder of wallstrip.com, a video website about momentum stocks.

Beating or matching the returns of the S&P 500 is hard. When markets are volatile, noise from the media and "talking heads" increases. If you do too much, you can miss the real opportunities . That's why you should simply do less.

Sometimes you only get a few great entry points for stocks you want to own each year. If you are overtrading in a difficult market, you will likely miss the great opportunities. For example, in the last 18 months Apple could have been had for $50 and $113 after 30 per cent drops. Not bad. It's trading at $202 now.

I don't time the market and I don't think the average investor should, either. I do believe in buying the fastest growing companies - found on lists of stocks that have hit all-time highs - as well as great brands on weakness. You get the best chances during times of market volatility.

Building wish lists builds discipline. By carefully watching the all-time high lists, I can have a sense of the strongest stocks in the market, which have the most institutional support and are stocks of companies most likely to come back fast when the market starts moving up again.

It pays in turbulent times to know the companies you own and potential risk in your portfolio. Use the downtime to assess those companies and ensure you do not own too many or have too much of your portfolio dedicated to one stock.

Since I hunt for stocks in my portfolio in the all-time high list, I am generally confident the company behind the stock is growing extremely fast. I prune for story stocks, stocks that I can't really grasp and stocks with no revenue. Those can show up sometimes, but I just say no.

The 'talking heads' will tout defensive stocks for defensive times, but I don't believe in defence in the market. I want all my stocks to be growing like weeds. I want to own the best or I want to be in cash.

What matters in good times and bad is money management. You need to leave ego at the door. When stocks go straight up, it's not because you are smart. When momentum stocks turn and the market goes down it does not make you stupid.

The market goes through periods of steady activity, violent activity and easy money activity. If you own the strongest stocks you will make tons of money in strong markets.

A word about the broad market indexes. Lately the market has been at the whim of the financials sector, which makes sense since the financials have become the largest component of the S&P 500. Now that we have a credit crisis and the trends of financial stocks are broken, the market averages are at their mercy.

If you are focused on the index averages, you would think we were on the verge of a meltdown. But the leading stocks tell you a different story.

Apple hasn't budged much, Chipotle Mexican Grill is just off all-time highs, search companies like Google and Baidu remain near all-time highs. Oil and gold stocks fall but recover to highs quickly. If we are headed into deep market trouble you will learn more from watching the leaders than watching the downtrodden and out-of-favour stocks.

Special to the Globe and Mail