This blog post originally appeared on RealMoney Silver on Feb. 24 at 9:07 a.m. EST.
Yesterday's "Fast Money"
followed a tumultuous two days for Mr. Market.
The subject of the segment was how to develop a "correction protection plan."
How do we successfully navigate a market that is no longer a one-way market -- one that is more volatile and less consistent, one in which oil rises by nearly $8 a barrel in one day (and $16 a barrel in three days!) and has as many twists and turns?
I recommended employing four core yet simple principles to navigate an increasingly uncertain market.
Maintain above-average cash positions. Obviously, in an extended market, an investor should be more cautious than usual. Be less concerned with return on capital, and be more concerned with return of capital. Think less of lost opportunity, and be concerned more with loss of investment capital. To do this, keep an above-average cash reserve for peace of mind and for opportunistic buying during a more problematic investment backdrop.
Buy protection. Options are still cheap despite a rise in volatility this week. It is now a good idea to buy protection. If you are short, buy out-of-the-money calls; if you are long, consider buying out-of-the-money puts to hedge.
Diversify. Most investors are not as smart as Oracle of Omaha, Warren Buffett. It's a good idea to diversify along industry and sector lines. It's probably not a great idea to have more than 15% in any one S&P 500 sector (e.g., broadly speaking, technology or industrials), probably one should have no more than 10% in any individual industry or more than 5% in any one company investment.
Check your fundamentals, not the price action of stocks. Worshipping at the altar of price momentum is a profitable strategy in a bull market that moves higher on a consistent basis, but, in a two-way market that has had such a big move, is less predictable and subject to randomly changing swings in sentiment, I would avoid momentum plays (both in longs and shorts). After all, we have already seen Apple , Netflix and many other high-octane, momentum stocks reverse violently in the last week. This sort of action will become more commonplace. In other words, place your emphasis on fundamentals, not on price momentum.
Tim Seymour asked me a sector question: What should be our playbook on individual stocks? Clearly, he said, the companies leveraged to the industrial cycle had been hurt of late. I said that I would avoid industrials for now, and I suggested getting long consumer nondurables -- safe franchises with long global reaches such as
Procter & Gamble
. The stocks have underperformed, have relatively low valuations, generate large free cash flow and are defensive.
Brian Kelly asked me about my market thoughts. I responded by saying I still see a
. I continue to expect that the S&P 500 ends 2011 not materially different than it closed out year-end 2010 -- reminiscent of the flat performance in 1953 (-0.80%), 1960 (-0.75%) and 1994 (+1.10%), in which the accumulated yearly return was near zero. I ended the segment by saying that 2011 should be a great year for opportunistic and nimble traders but a poor one for the buy-and-hold crowd.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long CLX, CL and PG, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.