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Winning investors know their way out of the sand trap

Like elite golfers, even the best investors make mistakes. This advisory sees 10 reasons it may be time to think about getting out of trouble.

Some people don’t get the appeal of golf at all.

But if you understand how to succeed at golf, you will understand how to succeed at investing.

That is the contention of Mr. Bob Carlson. It’s all about making mistakes and getting over them.

And this is a good time to think about getting over things, he writes in Bob Carlson’s Retirement Watch. He sees 10 indicators that suggest the economy is overcoming at least some of its troubles.

Mr. Carlson took these thoughts from the renowned Masters Tournament in Augusta, Georgia. The first big event of the professional golf season, it takes place in a bucolic setting of blooming azaleas and rustic stone bridges.

And here’s what this stern test of golf has to do with investing. “Unlike other sports, the best performers are not those who do everything right.”

Golf legend Jack Nicklaus once said he might not hit more than three shots the way he wanted to in 18 holes.

“The winners in golf are those who make the best of and recover from mistakes and bad breaks,” says the editor. “Accepting and dealing with adversity distinguishes the winners from the rest of the pack.”

Get over it

No one would deny that the late Sir John Templeton was a winner. One of the wealthiest investors in history, he estimated that he was wrong on at least a third of his stock selections.

The antidote — get over it. Everyone has bad investments (the ones that were stinkers from the start) and bad breaks (good investments that got pulled down by a bad market).

Mr. Carlson has this to say. “How we respond to the mistakes and bad breaks determines whether our net worth rises over time. Recognizing and taking losses early is one important step. Another step is to adapt our outlook and strategies to changing circumstances instead of clinging to portfolio strategies that worked in the last decade.”

There have been a lot of bad breaks lately. But there appears to be some light shining through the doom, so we should be ready to adapt.

10 promising indicators

“The optimists on the economy finally have something more than hope and forecasts to support their bullish views,” says Mr. Carlson, who has consistently taken a cautious and pragmatic approach to the market.

Some data supports the notion that the economy may be reaching bottom and that some level of growth may be on the horizon. This observer sees 10 promising indicators.

First, if the stock market is a forward-looking indicator, the recent rallies may be a signal of growth to come.

Second, mergers and acquisitions are taking place, which means business executives see values and opportunities.

Some companies have been able to issue new debt or re-finance old debt. Ford convinced some bondholders to turn debt into equity.

The Economic Cycle Research Institute’s long-term indicators suggest the economy will hit bottom in 2009.

Retailers are reporting higher sales.

Industrial commodity prices are rising, so manufacturers may be looking at increased demand.

The yield curve has been positive, with long-term rates higher than short-term ones, an occurrence that usually precedes economic growth.

Changes have been made in the mark-to-market and short selling rules that many thought were aggravating the financial crisis.

Inventories are falling, which means business will have to increase production to meet future demand.

The spreads between U.S. Treasury interest rates and those on investment grade and high yield corporate bonds are below their extreme levels of last fall.

The “wait and see” phase

This is not an “all-clear signal” for investors, warns Mr. Carlson. This is the “wait and see” phase.

“The good news is likely a temporary result of the economic stimulus program and mortgage refinancing triggered by lower interest rates,” he states. But the economic stimulus program is a one-time event.

Consumers are still carrying too much debt and most of the economic news is still negative. Asset prices are still declining and unemployment is still rising. That keeps consumer income down.

Things may be getting better slowly, but patience is still required. Many investors, eager to restore their portfolios, are eager to interpret not-so-bad news as good news.

“I recommend waiting for unequivocal positive signs,” concludes Mr. Carlson. “There is no reason to rush into riskier assets.”

In short, the economy’s still in the sand trap. Don’t try to put the ball in the hole with one crazy, risky shot. Play the safe recovery shot. Put yourself in position to win.