The Return of Missionary Position Investing

I have to admit that since I first heard of the unraveling of the Bernard Madoff Ponzi scheme last week, I have been totally obsessed with the whole story on a variety of levels. I don't understand the logistics of pulling off such an enormous swindle for decades involving billions of dollars invested by some of the most successful people in the world.

What I really don't understand is how a person can wake up in the morning knowing that he has been robbing his very closest friends and charitable institutions and has left many of them destitute.

But for all of the questions that remain about the Madoff meltdown, some things already seem quite clear.

Even before this episode, investors were clearly losing their appetite for the esoteric and exotic investment approaches of hedge funds. The massive redemptions that have taken place were actually the cause of Madoff's demise. He had to come up with $7 billion by the end of the year and, as we now know, he didn't have it.

Investors have been moving to the sidelines to a record extent and piling up cash like firewood by the stove. Opportunities are being created and the next bull market will benefit from people chasing performance again. The big question is whether that will take place during our lifetime.

But my sense is that we're going to see a lot more "missionary position" investing going forward and less demand for the manufactured strategies that made Wall Street such a fortune and have now undone many people who really never understood what they were buying in the first place.

I view this as very good news. My investment philosophy for years has been "buy good stocks, live a long time." When I started in the business almost 30 years ago, my role models were people like Warren Buffett and Peter Lynch who advocated buying good companies that you understand and holding them. Over the last 10 years, the traders, arbitrageurs, and manufacturers of synthetic investments and strategies have taken over. It was like they gave the market a face lift and a boob job.

Over the last 10 years the stock market has provided a negative return. None of the major indices is up over that period and the NASDAQ has lost more than 70 percent of its value. Many of my younger colleagues--and a few contemporaries--are now saying that "buy and hold" is a dead strategy and it will never work again.

My feeling is that they are wrong about that and a lot of other things. What the last three months have truly taught us is that money that is going to be needed over the next couple years should be in the bank or a money market fund--not in stocks.

The other great lesson is that leverage is a two-edged sword. That is true whether you are borrowing 95 or 100 percent of the value of your home or if you are investing in "ultra" exchange traded funds (ETFs) which do provide diversification but which can provide up to four times the volatility of a "missionary position" index fund. Instead of getting the performance of the broad group you get four times that. It's sort of like buying a car that will go 240 miles and hour in a state where the speed limit is never above 75. It's a prescription for trouble.

It's hard to ignore the crumbling economy or the staggering losses that investors have absorbed in recent months.

My advice is to try to stay focused on the well-managed companies with strong balance sheets, good management, solid business models, and no need to raise capital in the foreseeable future. Add to that cocktail a chunk of investment grade bonds and preferreds and finish it off with a larger than normal exposure to gold, oil and other hard assets. After all, we will eventually pay a price for running the dollar printing presses 24-7.

Then, instead of day-trading it, put it in a crock pot and let it cook for five years. From these levels, the results are likely to be very tasty. It is not time to be bullish or bearish. It is time to be smart.

Call me old fashioned. Actually, going forward, old fashioned should look pretty good.