Assess Your Source of Investment Advice

Physician's Money Digest, April15 2005, Volume 12, Issue 7

One of the realities of the late 1990s was thatpeople were getting their investment advicein chat rooms, from taxi drivers, on thegolf course, at the tennis court, and whenthey went to the barber. It's important every now andthen to evaluate where you are getting your investmentadvice from and make sure the source is both asound and an honest one.

Winner's Tale

One of the basics of human nature is that peoplelove to tell you about their winners. Just as they love tobrag about the fancy new car parked in the driveway,they aren't likely to tell you that they drove the previousone into a tree or had a serious fender-bender and it washauled away to the junkyard. They will tell you abouttheir great putt on the 18th hole but fail to mention allthe balls they hit into the water hazard on 15. They maytell you about the slot machine that paid them $150 butnever mention that they dropped 3 times that amountplaying blackjack in the same casino. That's why yourbarber will only report his winners.

Think about it:

If your barber were the world'sbest stock picker, he wouldn't be cutting hair for aliving. Maybe he's got inside information; if so, youdon't want to trade on the information he gives youor you might find the SEC banging on your door andasking where you heard it from.

Not a Bull Market

In case you haven't noticed, the averages are havinga tough time of it in 2005, and 2004 wasn't a grand yeareither. The Nasdaq ended 2003 at exactly 2003. Atpresent levels it is up about 2% over the past 5 quarters.The Dow hasn't done much better. That means most ofyour friends, if they are honest, are losing money onmany of the stocks they own. Just remember that theaverages bottomed in 2002 and came back down for aretest as President Bush was about to launch the war inIraq in March 2003. Everyone was afraid of the stockmarket, so the mutual fund companies and most brokerswere pushing bonds and bond funds just whenequities were most attractive. Coming off a bottom assolid as that one, most stocks did well.

More recently, that has not been the case. Stockgains have not been very widespread. This year therehas been a lot of rotation from one group to another,creating a very choppy environment. A handful ofindustries have prospered and others have fallen by thewayside. Blue chips haven't been immune from struggles.Major drug companies such as Merck and Pfizerhave lost 30% to 40% of their value. Technology andbiotechnology have also suffered. Small stocks are punishedfor the slightest disappointment.

Home builders, mortgage lenders, and financial institutions that prospered with low interest rates were bigwinners last year. However, as interest rates rise, companiesthat benefited from the very low rates are starting tocome under pressure. Internet stocks that were flying inthe 4th quarter are in the doghouse now.

Energy Points

The energy sector has been strong, reflectingrecord high prices for crude oil. With so many otherstocks faltering, investors have been flocking to buyExxonMobil (XOM) and other energy-related securitiesjust as they were flocking to technology at the endof 1999. XOM actually surged past Microsoft recentlyto become the largest market value stock in theUnited States. However, even as the commodity hassoared higher in recent trading, many energy stockshave not been going up. Instead, the smart moneyseems to be taking profits and moving away fromenergy-related securities.

Last summer, the price of crude spiked up as manyhedge funds, unable to make money in stocks, startedspeculating in commodities. The same thing appearsto be happening now. XOM recently stated that it wasusing $40/barrel oil as its price point for future planning.That's far below the current mid-50s price. Theanalysis reflects decades of experience through manyup and down cycles.

Realistic Expectations

Remember:

When times are tough, it is unfair to expect highreturns on your portfolio. If the averages are flat ordown, examine your statements to see if your advisoris protecting you by raising your cash position tocushion your portfolio for the bumpy ride. If you ridethrough down markets in a fully invested position,your portfolio will snap back faster when things doimprove. However, you need to have the stomach forit, and not everyone does. A good amount of cashallows you to take advantage of stocks that suffer inthe downturn along with everything else despite solidfundamentals. Timing the market is a very difficultundertaking and is not often executed well.Timing requires two correct decisions—when to get out and when to come back in. Not manypeople can do that well, and your barber is not likelyto be one of them.

is the chairman and chief investment

officer of Gramercy Capital Management

Corp, a NYC-based registered investment advisor.

Gramercy develops personally managed portfolios

tailored to individuals'investment goals.

Ms. Lappin has been featured in several prominent

publications, including BusinessWeek. She

welcomes questions or comments at 212-935-6909.

Joan E. Lappin