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Investing Lessons for 2010 and Beyond – A fresh start

Published on MarketWatch

Jan. 4, 2010 at 12:01 a.m. ET

By Alan Lancz

TOLEDO, Ohio (MarketWatch) — The decade we have left behind will go down as one many would like to forget, but for those who fail to realize that very powerful lessons from “Auld Lang Syne” still ring true today, it is clear now, more than ever, that old times and lessons learned should not be forgotten.

Early on in my career, I was fortunate enough to forge a relationship with one of the true legends of money management, Sir John Templeton, and still draw on the principles he taught me.

His philosophies toward investing never changed much while he was alive and they have been the foundation of both our money management firm Alan B. Lancz & Associates as well as [our] … research.

Sir John first taught me that managing other people’s money should be considered a sacred trust; something many money managers seemed to have forgotten over the past two decades. Proof positive is that 2009 was chock-full of scandals that grabbed headlines, telling tales of gross misconduct and theft.

Secondly, and this has been integral to many money manager’s success, is to always take profits when expectations and valuations are high, no matter where the “herd” may be thundering. Recent real estate and energy bubbles, along with what we faced earlier in this decade in the technology sector, should be more than enough evidence to remind today’s investor to take profits before everyone tries to leave through the door at the same time.

Don’t jump on the bandwagon:

Investors near or at retirement, gradually must become more defensive with new purchases. While many are touting treasuries and bonds today, we feel that due to the likelihood of higher interest rates into 2010 and 2011 and inflation woes further down the road, this will be the first big mistake of the new decade. Bonds and Treasurys were good performers back in 2007 and early 2008. For the New Year, seek safety and returns in quality dividend paying stocks instead.

Early last quarter we were recommending defensive total return type companies like Southwest Gas Corp. SWX, +0.82%, Verizon Communications Inc. VZ, +0.50%, and Exelon Corp. EXC, +1.26%, but all these stocks are now above our disciplined buy limits.

Investors should look at some foreign counterpoints like France Telecom FTE, +1.78% and China Mobile Ltd. CHL, +0.74%, which both are near new lows like their American peers were a few months ago.

Currently there is less risk in dividend-paying companies which will be a big part of 2010’s total return and provide a solid opportunity versus long-term bonds (especially Treasurys). For those with more of a risk appetite, commodities, emerging markets, and technology can be selectively accumulated particularly into any weakness. However, while it is important to ride the wave, you must take partial profits along the way.

Buy into panics:

We have always focused on the power of profit taking as not only a risk management tool but to also provide the necessary conviction to buy when there is panic on the street. For example, we recommended getting back into financials in November 2008 after warning about them 18 months prior.

One year ago we highlighted Google Inc. GOOG, +8.73% and Apple Inc. AAPL, +3.28% after warning about them at much higher levels one year earlier.

Both of these new purchase recommendations were considered bold at the time, but were much easier for us since we recommended profit taking in them before the major sell-off. Our more conservative nature comes out as prices rise and we plan to be much more selective with new purchases into 2010.

Reduce risk as values rise:

We’ll plan on riding the wave in technology and commodities as more and more investors jump on the bandwagon. Remaining disciplined will be critical as stimulus money dries up during the year. With that, some final considerations for 2010:

  • The time to buy gold was back in 2007 and 2008 or earlier, not after such a rise unless you utilize it purely as a hedge against another financial decline. Otherwise, investors are better off with industrial metals and other select commodities which can benefit from increased global growth particularly in the emerging markets.
  • Expect more merger and acquisition activity into 2010 which will help propel stock valuations further. Natural gas was an area we highlighted in September and Exxon Mobil Corp. XOM, +5.53% offer to buy XTO Energy Inc. XTO, +2.28% at a healthy premium is just one example of the importance in being in the right undervalued sectors.
  • Once commodities get out of buying range, seek out lesser known inflation hedges for the long term. Companies like Kroger Co. KR, -2.59% and Supervalu Inc. SVU are hitting new lows now, but their prospects will greatly improve once inflation rears its ugly head as grocery stores have more pricing flexibility during inflationary times.

Every investor should be wise enough to take what the market offers him and limit risk while participating on the upside. 2010 should hold an upward bias over the shorter term, but it is prudent to implement some defensive measure as valuations rise. As risk levels should rise in 2010, managing it will be paramount.

The stocks recommended in this column are owned by Lancz, his family and clients.

[Alan B. Lancz is President of Alan B. Lancz & Associates, Inc.]