Patriotism Proves a Poor Investment Guide

SAN FRANCISCO -- Just about anyone who bought stocks at the reopening of trading Monday is now sitting on losing positions, which may be patriotic, but isn't sound investing.

The Market

Dow Suffers Worst Point Loss as Market Somberly Reopens

Rate Cut a Small Bump on Market's Downhill Ride

Cramer: Surveying a Crestfallen Market

Calculating Potential Scenarios for the Dow

The Economy

Patriotism Proves a Poor Investment Guide

Tracking the Trendy Jobless Rate

Cramer: Five Bullish Wild Cards

Sector Watch

Airline Stocks Are Falling. What Next?

Some Security Companies Fly in Face of Selloff

Online Travel: Stocks Plunge, Wiping Out Much of 2001 Gains

Defense Equipment Firms, Security Specialists See Big Gains

The Networkers: Cisco Recovers but Buyers Remain Scarce

The Outlook for Biotech Stocks

The notion that investors should buy stocks for patriotic reasons was one of the most vexing aspects of the emotional resumption of trading Monday. One particularly cynical hedge fund manager wondered whether the top executives of the many firms that have announced corporate buybacks are simultaneously planning to buy with their own money.

A number of sources expressed concern that the industry may be viewed as callously using the Sept. 11 tragedy to dupe individual investors into buying for nationalistic reasons, while institutional investors are taking a more rational approach. Many Wall Street firms took a one-day hiatus from downgrading stocks Monday and there's an unwritten rule among traders not to profit from others' misery. Still, one wonders how long that gentlemen's agreement can last. Meanwhile, major strategists including Abby Cohen of Goldman Sachs, Douglas Cliggott of J.P. Morgan, Thomas McManus of Banc of America Securities and Ed Yardeni of Deutsche Banc Alex. Brown cut their earning estimates and/or price targets for the S&P 500 on Monday.

"All of this talk about investing for America and to show the terrorists off is very, very dangerous," Aaron Edelheit, president of Sabre Value Management in Boca Raton, Fla., said via email. "Investing should never be based on emotion [and] there is no such thing" as patriotic investing, other than, perhaps, investing in Treasury securities or war bonds.

Note, Edelheit is no raving bear. His (admittedly) small $5 million fund was up 19% year to date, and net long heading into this week. Monday, he bought some stocks hardest hit in the selloff, including J.C. Penney (JCP), AMR (AMR), Southwest Airlines (LUV) and Continental Airlines (CAL).

The point is he bought them because he believed them to be cheap, and because of the potential for government assistance in the case of the airlines. Not out of any sense of duty to country.

Speaking of duty, Ike Iossif, president of Aegean Capital Group in Chino Hills, Calif., observed that individuals encouraged to invest for patriotic reasons "have not been told there are lots of foreigners who have poured billions into the U.S. market who have a fiduciary responsibility" to prudently invest clients' assets, not to rally around our flag. Money managers here have a similar responsibility, which is binding by law.

Rather than urge clients to invest for emotional reasons, the fund manager said the industry should "step back for a second and inform the individual investor of the risks that currently exist."

Iossif, whose firm manages about $25 million, believes the risks have increased markedly from a week ago, when, in his estimation, economic fundamentals were already deteriorating.

Economically speaking, the Fed's easing/liquidity injection and Congress' approval of a $40 billion emergency spending bill are "more than sufficient to overcome what has happened up to now," he said. "My fear is this is not the end of it."

One reason Iossif came to my attention is that he's one of the few market watchers to have warned about possible terrorist activity against America.

"The continuous violence [in the Middle East] -- if unchecked -- will ultimately impact our financial markets, directly, or, indirectly," he wrote on April 6. "It does not matter whether the escalating violence results in a wider conflict in the area, or Islamic extremists bring the conflict to our shores. Either way, we will still be drawn into it with grave consequences."

On Monday he expressed concern that last week's tragic events could prove to be the opening salvo in a long cycle of U.S. retaliation followed by more terrorist attacks. Bush administration officials have repeatedly (and rightfully) stressed the campaign against terrorism is going to be a long one, which the fund manager fears could have profound consequences on consumers and the economy.

"War takes productive capital and invests in nonproductive ways -- it's not good for the economy or the market," Iossif said. "War is about erecting barriers and destroying things. The fact we had the biggest economic expansion after the Cold War is not a coincidence."

Another reason I'm quoting Iossif is the success of his market calls. He was named one of Timers Digest's top-10 market timers for the year ended July 13. Short-term, he went negative on the Nasdaq Composite and Dow Jones Industrial Average on June 10, followed by the S&P 500 on July 5.

Heading into this week, Aegean Capital was 93% in cash, with 5% in gold stocks and 1% apiece in Openwave Systems (OPWV) and Isis Pharmaceutical (ISIP).

On Monday, Iossif said he wasn't taking any action, save for buying a few more shares of Isis, which fell 13%.

In the coming days, however, he said he plans to adopt a "market neutral" stance by investing 25% to 30% of the firm's cash in S&P Depositary Receipts (SPY) and/or the Nasdaq 100 Trust (QQQ), and then selling covered calls against the long positions.

Writing (i.e., selling) covered calls is risky, because the writer/seller is obliged to deliver stock if the call buyer exercises his option. But Iossif believes the strategy will protect him from big market swings, in either direction, while generating a profit from the premiums he'll receive for taking the obligation.

It may sound cold, and frustrating to those who want to do something to show their pride and faith in America, but the bottom line is he's planning to invest for calculated, not patriotic, reasons.

Now more than ever we all need to consider what investing is all about, and what it's not.

P.S.

The absence of market participants (and observers such as myself) Tuesday in observance of Rosh Hashana could add to the emotional nature of trading. That being the case, I'll reiterate what I wrote Monday morning: Patience is a virtue for those who aren't compelled to trade by job title.

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