Stop!  Somebody somewhere just said to buy something!  What are you going to do?

Hopefully, you’re thinking ‘I have a good investment strategy in place, so I don’t pay much attention to all of the media chatter, full of conflicting investment recommendations’.  If so, good for you.  If not, read on.  Well…read on either way.

First, I’m going to introduce the lesson that you must never forget when making investment decisions.  It is a fundamental rule of markets that for every buyer, there is a seller.

For every buyer, there is a seller.  You’ve probably heard that before, but if you really take the time to think about it in regards to the endless stream of investment opinions you come across, it should be instructive in keeping you from making investments decisions just because you heard someone make a case to buy or sell a security.  Even if the media claims that this certain someone is an expert on the topic.

This fundamental rule of the markets can’t be broken.  If you’re buying 100 shares of XYZ stock, someone else is selling 100 shares of XYZ stock.  You both probably have good arguments to support your reasoning for the transaction, but the cold reality is that you can’t both be on the right side of the trade.

Every day, the financial media provides us with hundreds of predictions and recommendations about how to invest our money.  The opinions come from a wide variety of individuals, some of whom are quite knowledgeable about their recommendations, while others are more interested in just getting their names in the press, while others may be biased by a political view or other unknown factors.  It’s often hard to distinguish who is worth listening to and who isn’t.  Even then, what happens if you bought an investment based on the opinion of someone you consider reputable, but he later changes his mind and decides to sell?  Unless you have some sort of direct contact from that person (e.g., you subscribe to his research or he’s your neighbor), you can’t count on hearing about his re-evaluation through the same media channel.

Here is an example of the conflict investors face when trying to follow investment advice.  The following comments came from two well-respected investment practitioners, both with more than 40 years of experience, as stock market volatility rose during May.

Richard Russell, author of Dow Theory Letters newsletter:
“…I am now insisting, demanding, begging my subscribers to get OUT of stocks…and get into cash or gold.”  -- May 18, 2010

Steve Leuthold, founder and Chief Investment Officer of the Leuthold Group:
“FEAR IS HERE….. No Time To Panic, But Time To Buy!  Do not panic. I think this is a huge buying opportunity both for traders and long term investors.” -- May 20, 2010

Both of these individuals have made some good “calls” in the past, but it’s obvious with respect to this situation that they can’t both be right.  If you thought that both were pretty smart guys, how could you choose one recommendation over the other?

Let me remind you one more time that, regardless of what sort of views you hear from the media, for every buyer, there is a seller.  Every day of every year, no matter if the stock market is moving higher or lower, there are always two sides to every trade.  There is no reason to believe that any particular individual is always on the right side.  There is also no reason to believe that the dominant view portrayed by the media is correct.  In fact, media coverage tends to follow the direction of the market, encouraging you to buy stocks when they are expensive and the economic news is good, and sell stocks when they are cheap and the economic news is bad.  That may improve media viewership, but it pushes you to make poor decisions.

While the daily drumbeat of financial news is hard to ignore, you must overcome the temptation to act on it.  It is much better to be prepared in advance for financial shocks and not be required to try to jump in and out of the market based on the latest “gotta act now” idea.  At Modus Advisors, our response to this problem is to utilize an absolute return investment strategy that seeks to benefit from long-term growth opportunities while looking to protect your capital in adverse economic environments.  And we do it without any fortune tellers on staff.

* The market outlooks of Richard Russell and Steve Leuthold are for illustrative purposes and do not represent the views of Modus Advisors.
* Investing in either stocks or gold is subject to fluctuation such that, upon sale, units may be worth more or less than the original cost.
* There is no assurance that an absolute return investment approach will meet its objective of producing positive returns.  An absolute return investment approach may lose money and it does not guarantee a return of principal or a profit over any time period.