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Why the pain isn't going to end any time soon and some Buffett wisdom05.10.2011

Last night, after being down for most of the session, the S&P 500 Index rallied 45 points in the last hour of trade to close up 25 points, while the Dow Jones rallied just shy of 400 points, or about 4 per cent in the same period.

This kind of activity highlights that it’s a bear market, where there are sharp bounce backs on thin volumes.

In order to make money in any market, timing is everything, but it is particularly hard to pick the direction in the absence of concerted volume.

Make no mistake, there is more negativity to come. What you have to wait for is when the serious money comes in, and that’s when you’ll see some big falls. The true direction emerges when volume trades and that happens when there are big margin calls.

Often the big money in bear markets is made when an investor sees such falls on volume and is prepared to stick his or her neck out and buy up big. A classic case of this is arguably the most famous investor, Warren Buffett and his Berkshire Hathaway insurance group.

Buffett’s big bets have involved famous bailouts of Goldman Sachs and General Electric during the height of the financial crisis; and more recently the purchase of US$5 billion Bank of America.

"It’s the guys like Buffett who sell when the man on the bus give them advice and step up and buy when everything looks to be going to the dogs that make the big money,” says my trader friend Todd Gilmore.

We don't claim to be disciples of Buffett, but Under the Radar Report does follow his example in certain ways.

And that is by taking advantage of uncertainty and investing in good companies, which means strong management and a niche in a fast growing industry.

You will find two such companies in tomorrow's newsletter - in our Aussie small caps tips section.

You will also find an article which explains why gold has fallen 20 per cent after reaching record highs, and ways to take advantage of this.

Our portfolio manager, The Idle Investor, gives some insight into how he achieved his 20 per cent a year returns in 20 years.And it will be well worth your while to read our interview with Karl Siegling of Cadence Capital - he explains how he has achieved gross returns of 21 per cent a year for almost six years.

Feed back is always welcome. We love hearing from you. Either comment here or my email is r.hemming@undertheradarreport.com.au.

 

Best wishes

 

Richard.

About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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