Why Bearish Short-Term, Still Buying Stocks Long-Term

Some of you do not understand how I can be bearish on the markets for the rest of this year yet continue to recommend going long equities. The answer is that there are three time horizons for investors. There is the short-term, which to me is the next month or so; the medium-term which could be two months to as long as a year, and then there is the long-term, which is one year through whenever.

I do not see any inconsistency between being bearish both short and medium-term, and buying a selected few stocks for the longer term. My main business since 1995 has been to predict short and medium- term trends in the overall stock market. And although I do think that the US stock market is significantly overvalued, I still personally am long stocks and sometimes even buy more for the long term.

And if I were smart enough, or perhaps psychic enough, to know the exact day when the stock market will start to collapse from current prices, obviously I would become leveraged short at that point, and then if I knew the exact day of the bottom, yes obviously I would go 200% long on margin then and only then.

But I do not know when stocks will start to collapse nor when stocks will bottom. Nor does anyone else. Hindsight makes market tops and bottoms obvious to all. But before the fact, no one really knows. That is why dollar cost averaging is the only way to invest for the long-term and by long-term I mean a multi-year time horizon.

I remember a report that said you would have made money during the 1930s if you had invested a constant amount in the Dow Jones Industrial Average each of the 120 months of that decade, after reinvesting dividends. That is despite the fact that the Dow dropped 50% from the end of 1929 to the end of 1930s.

So yes the current stock market is being manipulated and stocks are higher than they would be without the Feds actions. However, for those of you with a multi-year time horizon I would recommend each month you buy certain stocks and not the market as a whole.

There are two types of stocks I personally invest in. One are the market leaders in the most rapidly growing sectors of the economy. And the other kind are cheap in terms of stock price in relationship to revenue growth and balance sheet strength. That is why Apple (AAPL), Amazon.com (AMZN), Saleforce.com (CRM) and Whole Foods (WFM) are in the Bidermans Market Picks model portfolio. They are cheap both in terms of rate of growth of earnings and cash flow. And they have pristine balance sheets loaded with cash.

Another sector I like are companies with positive free cash flow who use that cash to shrink the overall numbers of shares outstanding. Free cash flow means companies grow cash after all expenses including R&D, capital expenditures, dividends, everything. Shares shrink when stock buybacks are greater than all the new shares sold such as by option exercise, secondary issuance etc.

For the near-term I suggest not only buying selected stocks on a regular basis, but also three ETFs that go up when the underlying stocks go down. The three are EUM, which goes up if emerging market stocks go down; EFA, which goes up if Europe goes down and SEF which trades inversely to big bank stocks.

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