Most investors find it extremely difficult to reject the market's primary trend. The recent stampede toward defensive stocks is a case in point. Many professional investors and market commentators have maintained their institutionally bullish bias after Sept. 11. Yet their individual investment ideas focus on the wrong sectors and companies -- namely, on "safe" stock ideas. The general themes include health care, defense, utilities, staples and financials.
This preoccupation with defensive investing has occurred despite the significant outperformance and relatively high absolute valuations of the sectors in question. Even the most unabashed perma-bulls cannot find the courage to recommend "offensive" sectors of the market that would benefit most in a traditional late-recession/early-cycle bull market.
If the market and the economy have really found a bottom, what investors need now is more leverage. This includes both financial and operational leverage. Chest-pounding bulls should beef up positions in technology, basic materials, industrials, retail and consumer durables. Have I seen this advice on
? Hell no! Instead, I see recommendation after recommendation of
Very few self-proclaimed bulls are promoting
. If this market truly has bottomed in an anticipation of an economic recovery, investors will be chasing economic sensitivity for quarters to come.
My frustration with the bulls' defensive investment strategy doesn't mean I currently embrace a purely offensive strategy. I prefer to participate in both parts of the market. As my past two columns reveal, I have favored low-valuation "soft" cyclicals (
Black & Decker
( BDK) and
( TOM)) as well as defensive health care, staples and financials (
Diversification means always having some part of your portfolio in the "harvest" mode. Currently, most large-cap stocks have become overbought in the recent rally. They remain quite overvalued. I rarely recommend stocks after big price spikes.
Should you play offense or defense? Picking sides is less important than avoiding highly valued shares (even if they are safe), as well as highly valued cyclicals after a big rally. That said, I would still remind those listening to the defense-leaning bulls on TV that a defensive investment posture works best when it is most difficult to implement: in a strong but late-cycle economy. Purchasing safe companies after the cyclical carnage has occurred offers a dubious kind of "protection" -- that is, protection against participation in the first leg of a cyclical bull market.
Robert Marcin is the principal of Marcin Asset Management, a private investment firm. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). At the time of publication, Marcin was long Cendant, Republic Services, Black & Decker, Tommy Hilfiger, Health Net, HealthSouth and Washington Mutual. He was short Intel. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback and invites you to send it to