Editor's Note: A linebacker for the Chicago Bears, Hunter Hillenmeyer is pursuing an M.B.A. at Northwestern University, and his columns focus on how he's investing to prepare for life after his football career.
The crazy volatility in the market thus far in 2008 has been particularly problematic, especially for those of us who cannot sit at a computer screen all day. Timing trades properly, whether buying or selling, has been hard to manage.
Whenever I come across a story on "consumer confidence numbers" or some equivalent measure of psychological factors in the market, I cringe to think that such news can so drastically affect my carefully considered investments. I sat this week in my managerial economics class at Kellogg and heard about the dramatic effects of herding behavior even in mostly rational economic models. The gist of the lesson centered around the tendency to follow the masses when you have limited resources to fully evaluate a given problem.
Take this dilemma in the context of our current market.No one person has enough information or resources to accurately predict what will happen next. Indeed, the large and dramatic swings, even within a given day, may very well just be this game of follow the leader, where everyone assumes someone else has found that priceless nugget of knowledge that tells them when to buy and sell. Obviously, macro factors like the subprime mess or oil prices will move markets, but I wish this herding instinct was not such a driver of where the market ends up at the end of a given day or week. Investing for the long term in today's market takes discipline to not just sell off and wait for clearer signs the market is headed up. Ironically, my first pick today copies a herd of sorts. Kraft Foods (KFT) is the second-largest packaged food company in the world. The stock came on my radar when Warren Buffett started accumulating large chunks of it in late 2007. If you only heed one line of investment advice, "Copy Warren Buffet," might be as sound a bit of knowledge as any. Buffett is a value investor, more interested in his and his coworkers' information than the fad investment trend of the day. If you have to be part of a flock, the least you can do is make sure you have a very smart shepherd. But beyond Buffett's stake, Kraft has a very strong presence in some key overseas and emerging markets. They have a very unleveraged balance sheet so investments in new products in promising areas will flow smoothly, and I also expect them to continue a buyback strategy that they have followed since 2000. One last bullish sign for Kraft is their international business. Companies with a significant portion of sales outside the U.S. will suffer less from the weak dollar. Another company the weak dollar will not hurt is Transocean (RIG - Get Report). From an industry perspective, Transocean is nearly ideally situated. Having completed its merger with Global Santa Fe and exited the shallow water drilling market (by selling three rigs in the Gulf of Mexico), RIG is the leader in an industry with good concentration and steep barriers to entry. Deep-water drilling requires both huge capital expenditures and very specialized expertise; the coupling of these two necessities gives RIG a sustainable source of competitive advantage in this industry. It also has contracts already in place to guarantee steady cash flow for at least the next several years. While Transocean will fluctuate with oil prices, count on this company to offer more value than most in the rigging industry. (RIG jumped 9% Wednesday, the day after I drafted this column.) My final pick of the day is Goldman Sachs (GS - Get Report). While it may be risky to jump into any of the financials right now, this industry leader has been oversold simply because of the business it's in. Goldman has navigated the subprime crisis as well as any financial services company, and the stock price already reflects the potential announcements of writedowns in the first quarter of 2008. Even if its underwriting fees decrease in the short run, the company simply makes money in too many different ways not to come out of the current market well positioned. Its P/E ratio is as low as you will find in the industry (currently around 7), so I say buy this stock if it drops below $170. I think Goldman has a better chance to be at $250 than $150 by year's end with this sector hopefully already having bottomed out.