February 5, 2007: Investor beware (and a few stock tips)

Illustrations above include the occasional bazaar idea that works, the Kondratieff Wave Theory in action (sic) and an investor hearing the cacophony of "experts" and refusing to question the accuracy and intent of the information source.

There are four types of ideas that the investor may elect to act upon:

The VERIFIABLE: The investor may not understand all the ins and outs of the law of gravity, but can verify its central thesis at any time by dropping an object and watch it fall to the ground.
The REASONABLE: The investor hasn't actually tested the idea that one will drown if staying under water too long, but it is consistent with what one knows about water, life and breathing - and cannot imagine a way for the idea not to be true.
The AUTHORITATIVE: The investor never checked personally to be sure that Australia is located where the map says it is, but one trusts Google Earth satellite's pictures of the world because Google verified the accuracy and because seeing is believing in relation to other pictures on that website.
The SUPERSTITIOUS: A superstition is a belief that hasn't been verified (and probably can't be verified)for which no one has a reasonable explanation.what a reasonable explanation might be, and for which no authoritative source has claimed that there in fact is a reasonable explanation.

Investing isn't easy work. It draws more on judgment than on science. There is no skill or technique that can be relied upon to work unfailingly - no rules that provide consistent knowledge of the way a market is going to move. Because the principles of economics and investing can't be proven once and for all, there is a lot of room for pseudoscience and superstition to work into our investing habits.

For example, the investor had better be very skeptical of:

Evidence that is incomplete. The investor is shown that event B followed event A four times in a row, but the investor is not shown the seven times event A wasn't followed by event B. Or, the investor is not shown the nine times that event B occurred without event A preceding it. Or, the investor isn't told that events A and B are just two of a large group of events that seem to follow whenever event Z occurs.
Evidence comes from an authority. The investor respects the person or institution that is promoting an idea because of a previously unblemished track record. Or, the investor may simply be bowled over by the authority's credentials as an economist, scientist or famous person or organization. Even a confident manner will influence the investor willing to trust implicitly the authority.
Evidence that is wrapped in an authoritative package. It's claimed that the investment idea has been tested extensively and verified beyond question. Or, perhaps the promoter of the investment idea dazzles the investor with mathematical and statistical techniques that are useful in the physical sciences but have no place in economics.

In other areas of the investor's life, one or more of these components might not be enough to overcome a natural reserve and skepticism. But ideas that promise to make investing easy or simple generally are welcomed because most investors want so much to believe that they are true. In order to find something they can count on, many investors are willing to set aside their skepticism, to give any idea the benefit of every doubt, to ignore the exceptions or logical flaws that would scream at them if the subject were something other than investing.

Thus, fallacies wrapped in authoritative mumbo-jumbo backed by the confident manner of the presenter and contained within HOPE for the investor become a large part of the "common knowledge" of the investing world.

As Ken Fisher states most recently in his bestselling book, THE ONLY THREE QUESTIONS THAT COUNT, the individual investor needs to question almost every type of investment wisdom - because it may not be so.

Three stocks to begin looking at:

Domtar (DTC) This Canadian company is re-domiciled in the US. Domtar has shed some assets and has begun to focus and expand on its stronger business areas and in forest management for superior product. Trading at $7.93/share, Domtar way come close to doubling in price over the next two years. Also a potential buyout is possible, which may be the reason Domtar is cleaning up the balance sheet.

Hanesbrands (HBI) This stock has the potential to double as it outsources more of its production overseas (as has the competition). Stock is down now because of a recent earnings disappointment. There are a lot of opportunities for upside if management decides to take advantage of them. Trading at $25.32/share with a strong balance sheet that will be great if the outsourcing begins sooner rather than later.
Also could be an interesting speculation on going private in the $40.00/share range.

Sunoco (SUN) Sunoco is trading at a substantial discount to the rest of the independent refiners. Cash return to shareholders is strong, but overall business momentum is lacking in part due to recent significant cost overruns in several projects. Trust has been negatively impacted with Wall Street. However, the company has solid numbers and no new cost containment issues are on the horizon. Trading at $63.86/share, SUN may well hit the $80/share mark by the end of the year.

The fact that I am beginning to reach a bit on stocks tips should indicate that the market is trading quite high now. An ETF, ProShares Ultra Short QQQ (QID), which I have on limit order to buy when the market gets too high for my taste, may be another investment vehicle to consider to strongly short the market.