Does it make sense to buy a large number of stocks when staunch experts are negative about the economy?

Stock investor and author Ken Fisher thinks so. In his new book The only three questions that countFisher preaches against listening to the pack of claws who complain that America is on the brink of monetary self-immolation.

Instead, Fisher uses collective voices as a kind of technical indicator: loud and strident warning statements mean buy, buy, buy.

In short, the message from Fisher and Forbes editor Rich Karlgaard, whose column in the January 29, 2007 issues of his magazine features Fisher’s book, may be this: Don’t listen to what could happen. See what the markets are actually doing.

Fisher and Karlgaard may have good reason to brag, if the all-time highs in the Dow Jones index mean anything. Despite mounting deficits and an inflated war budget, the stock market closed strongly in 2006 and has started the New Year in style. Who can argue for success?

I.

I also think it makes more sense to observe price action rather than being swayed by the opinions of market savants.

But what should long-term investors do when dramatic events suddenly reverse market gains? Resist panic, yes. However, the crash in tech stocks in 2000 is a bitter reminder of the risk inherent in stubborn buy and hold strategies.

There is an investment method that allows you to enjoy the long-term gains of a trending market, while at the same time having the flexibility to liquidate short-term positions without serious tax liability. (If you buy and sell a stock within 12 months, you will be taxed at a higher rate than shares that are liquidated after a year or more of ownership.)

The method I am referring to is the managed futures method.

Managed futures are not new. Investment managers have been using managed futures for more than 30 years to diversify and stabilize portfolios. In recent years, this practice has spread to pension funds, endowments, trusts and banks.

Managed futures have grown as portfolio managers have become more acquired with futures contracts. In addition, investors have insisted on greater access to global markets, with greater exposure to non-financial sectors such as agriculture and precious metals.

Managed futures are estimated to have reached around $ 150 billion in the second quarter of 2006, a 17.62% increase in assets over the previous 12 months. One reason for this incredible growth is independent studies showing that managed futures offer too many benefits for savvy investors to ignore:

–
Reduced risk of portfolio volatility

–
Possible improved portfolio returns

–
Profit opportunity in any economic environment, and “tough” times are often very good for raw materials.

–
Easy access to global markets

Perhaps one of the most important studies on managed futures was published in 2004 by the Yale International Center for Finance. Authors Gary Gorton and K. Geert Rouwenhorst wrote Facts and Fantasies About Commodity Futures after creating their own yield-based commodity index between July 1959 and March 2004. The authors found that between 1962 and 2003, “the cumulative return of futures has been triple the cumulative return on ‘equivalent’ stocks. “

The term ‘matched’ equities refers to stocks related to commodities. Many investors buy oil and food companies, for example, instead of futures assuming stocks are the safest vehicle.

But that fantasy is just one of many that Gorton and Rouwenhorst debunk with facts:

–
The volatility of the futures they studied was slightly lower than that of the S&P 500.

–
Stocks have more downside risk than commodities. An action can be reduced to nothing very quickly. But staples like corn, sugar, and oil, for example, will always retain their value.

–
Commodity returns were “negatively correlated” with equity and bond returns. This means that commodities can perform very well in the event of a stock market downturn or low interest rates.

Finding the right managed futures fund can be tricky for hobbyists, because there are so many to choose from and many claim to deliver excellent returns.

To help investors who are eager to improve their portfolios, George Mahshigian, a 30-year veteran of the markets, founded Lions Futures Management, Inc., a research and advisory brokerage firm in Van Nuys, CA.

Mahshigian has developed a system for analyzing professional money managers known as Commodity Trade Advisors (CTAs). Their system is designed to prevent investors from making a common mistake: choosing a money manager based solely on annual returns.

Mahshigian believes that it is much more prudent to focus on risk management because investors are more likely to stick with a fund that does not have dramatic drops on its way to big returns.

Also, knowing that people often don’t do their homework, the Mahshigian firm does it for them: Lions Futures Management makes CTAs jump through the hoop by proving that their business records are accurate and that administrative management techniques they are solid.

Copyright 2007