Yesterday, the Dow fell for the 14th trading day out of the past 18. The sharp downturn only caps off an already disastrous market downturn.
As we’ve been expecting, many commentators say it’s the nail in the coffin for “buy and hold” investing – a strategy which has worked for the past five decades.
As they write their eulogies, which undoubtedly contain numerous references to “worst since” factoids, buy and hold is not dead. Yes, it is the worst possible strategy for this market. And yes, anyone holding out through this downturn has certainly paid a high price.
However, buy and hold will have its time again. Chances are they’re not holding the right stocks and they’re not getting in anywhere close to the right time. Let me explain.
It’s no secret to Prosperity Dispatch readers we’re entering the early stages of a stem cell/genomics/healthcare technology boom and eventual bubble.
All the right conditions are in place.
The entire world is getting older.
The overall market is continually sliding and investors are searching for safety. Historically, the healthcare sector has been viewed as a safe haven.
The U.S. government seems bent on ensuring everyone has access to healthcare regardless of the cost.
The healthcare sector has it all. But not everyone will be a winner in this boom. Hospital management companies, health insurance companies, and long-term care providers which rely on government payments will get hit hard (most have already). The way things are shaping up, if Big Pharma isn’t careful, it will get swept away too.
In a time of change for an industry, the big winners will be the companies who bring the change. That’s why I’m always looking for healthcare innovators. The companies who will help reduce the cost, increase the effectiveness, and steal market share by introducing new business models in an industry which hasn’t changed much in the past 50 years.
They’re in prime position to benefit exponentially from the healthcare boom.
Doubling Up on Growth
In a way, the innovators will be the ones doubling up on growth. They grow in two ways. They will grow from growing market share – a good way to grow. They’ll also grow by taking market share away from competitors at the same time the overall market is growing. They’ll be experiencing the exponential growth which has created so many massive fortunes in the past.
Think of a company like Intel for example. It started out as a regular old processing chip company in the 70’s. It was one of a few hundred – all indistinguishable from the other.
The company was facing relatively average growth up until the 80’s. It wasn’t until it doubled up on growth the company became the multi-billion dollar, market dominating force it is today as the top microprocessor company in the world.
The key thing in Intel’s storied history is it was able to grow market share while in a growing market. This is the #1 strategy for making a fortune in growth stocks. It’s the time when companies experience exponential growth. It’s also when Wall Street, which always thinks the present conditions will go on forever (whether they’re currently great or horrible), values a strong performer at astronomical levels.
That kind of growth will come to healthcare innovators. And it’s coming around soon. We’ve just got to look at the bubble boom slowly taking form to determine when to start buying in.
Anatomy of a Bubble Boom
A bubble boom is a funny thing. When you see it coming, it seems like it won’t get here soon enough. When you’re in the middle of it, it seems like it will never end. It’s an extremely wonderful and dangerous time.
That’s why we’ve got to keep an eye on all the indicators a bubble is forming and the warning signs of one about to burst in order to get in and out (just as important!) at the right time. So far, we’ve already watched the first three indicators a bubble is forming in the anatomy of a stock market bubble.
1. A simple, easy-to-understand story is in place – aging population, healthcare is a genuine need
2. Shares in a sector move up faster than the overall market – in a bear market we look for them to hold up better
3. Big money backing – Pfizer, Corning, Merck, and dozens of other companies are starting to pile in research funds along with plenty of venture capital firms putting what little venture capital there is to use in emerging healthcare companies
It’s the next few indicators, which haven’t appeared yet, which we’ll see and know it’s time to go in big. When we start to see these, we’ll know we’re in the early to middle stages of a boom and a bubble lurks around the corner.
4. Mainstream media support – they’re just itching for the positive, feel-good stories of stem cell treatments, 60 Minutes is usually one of the “early adopters” of news media
5. Rockstar emerges – think Abbey Joseph Cohen for tech, T. Boone Pickens for oil, Nouriel Roubini for credit crisis – a “Rockstar” or “Face” for every big market story emerges
6. Hot new IPO’s of “idea-stage” companies – when you stand back and think about it, most of them don’t really do anything at all, but that won’t stop people from buying them up
7. “It’s different this time” – listen closely for this phrase, it could come from anywhere
8. Healthcare sector books – just look at how well all the crisis/depression/financial survival books have done and are on the shelves of your local bookstore now, the same will happen in a few years in healthcare – it always does
The latter few will mark the confirmation we’re in a period of extremes. Whether that is an extreme euphoria or extreme pessimism depends on the situation. Oil, agriculture, and alternative energy sectors were hitting euphoric highs over the past few years. On the flip side, we’re currently watching pessimism work its way to an extreme.
“Buy and Hold” is Dead?
First though, we have to wait for the overall market downturn to end. That’s a very important thing few investors realize. As we’ve gone over before, general market conditions account for about 50% of any move in a stock, sector-specific strength accounts for about 30%, and company-specific events and growth account for about 20%. That’s why it’s imperative to wait for the downturn to show at least some signs of slowing down.
When will this downturn end? No body knows for sure – yet. A lot of other questions have to be answered first.
When will Secretary Geithner tell us something we can go with? When will he find people willing to jump on his sinking ship? (This is the clearest sign of how well this administration’s financial team has handled the situation so far)
When will we see some sort of sweeping healthcare bill? When will dead companies be allowed to die? When will the government stop seeing this downturn as an opportunity to panic, increase taxes, and still manage set a record budget deficit? When will we learn who is going to get the raw end of the deal from the ballooning pension deficits – pensioners or taxpayers?
There are just too many uncertainties for any sustained recovery. As a result, the market continues to sell off. The market’s are in reset mode. Practically no sector has been immune from this downturn.
The days of growth companies sporting P/E ratios of 30 with no hope of paying a dividend anytime soon are going to be gone for a while. The valuation methods are reverting back to bear market times when yields, cash flow, and operating performance matter.
It’s a bull market short selling and there aren’t too many reasons to start buying in a big way yet. (Side note: be prepared short-sellers – your editor included – keep the stops tight because the SEC can change back to the “uptick rule” at any moment and send the markets rocketing upward).
Despite it all, healthcare has held up a bit stronger than a lot of other sectors.
The world is hunkering down for a long economic storm. That’s why I continue to recommend staying on the sidelines and slowly wading into the markets over the next two to three years until some form of certainty returns to the markets. There’s no doubt this is the best buying opportunity in a decade. But given the length of this contraction and the amount of “resetting” that needs to be done, it’s going to be quite a while until the economy recovers.
The old saying, good things come to those who wait. In a market like this, great things will probably come to those who wait.
By Andrew Mickey