2008-05-03

The First Commandment of Stock Investing, According to Marcial — And How To Apply It

Gene Marcial's First Commandment of Stock Investing is “Buy Panic.”

Marcial is a longtime columnist for BusinessWeek; and he has a relatively new book out, titled, 7 Commandments of Stock Investing. At Amazon.com’s description of the book (unsponsored/non-affiliated link), there’s a blurb about Marcial:

Gene G. Marcial has been BusinessWeek’s “Inside Wall Street” columnist for the past 26 years, and is a former columnist at the Wall Street Journal. Marcial’s BusinessWeek column is one of today’s most influential stock columns, and is closely watched by investors and corporate executives alike. A favorable mention in his column often results in a rise in the stock price on the first trading day the magazine becomes available to the public. Marcial received an undergraduate degree in Journalism from the Santo Tomas University in Manila before studying law at the New York Law School and receiving a graduate degree in Political Science from New York University.

The May 12, 2008 issue of BusinessWeek includes an article titled, “Make Market Frenzy Your Friend,” which includes an excerpt from Marcial’s book describing his First Commandment.

Buy Panic.

When panic grips the stock market, waves of selling overtake practically every stock. There is panic on the upside as well, which drives up stocks in a frenzy. Just remember: Panic can be your ally. [¶] To take advantage of awesome declines, investors must plot a clear strategy to seize opportunities during a market panic, which usually comes out of the blue.

Well, that sounds all fine and good. How?

What I liked about the book excerpt in the article is that Marcial talks about the “how” with at least some specifics. Here’s my attempt at breaking down the specifics I drew from the article.

First, you have to have money available to take advantage of buying opportunities during a market panic. Marcial recommends having cash reserves of 10%-20% of your portfolio. And he advises having a list of stocks that you own that have already done well that you’d be willing to sell to increase your cash.

Second, have a list of stocks that you want to own long-term.

How do you know which stocks are solid enough to keep and buy more of? You'll rarely fail if you concentrate on major big-cap stocks. Start with the 30 components of the Dow Jones industrial average, or the most widely held stocks, including IBM (IBM), Boeing (BA), AT&T (T), American Express (AXP), Coca-Cola (KO), and ExxonMobil (XOM).

In a sidebar (in the print version of the article), Marcial also recommends, “7 Stocks For The Next 7 Years”: Apple; Boeing; CVS Caremark; Genentech; JPMorgan Case; Petroleo Brasileiro; and Pfizer. (For a blog discussion of Marcial’s recommendations, check out: Seven stocks for seven years from BusinessWeek's Gene Marcial (at BloggingStocks).)

Third, watch for specific sell-offs to trigger your buying those stocks. Marcial gives a few examples—though apparently referring at least in part to stocks that you own or have otherwise been following and believe are “being unjustifiably pounded”: a drop of 5%-10% (or more); a drop to near a 52-week low; and a drop to a price lower than or right around your original buying price. Marcial also suggests watching professional investment managers who focus on “distress investing”—noting one such manager is Martin D. Sass and that you can see what managers are doing from their Securities & Exchange Commission filings.

From there, however, this is a buy-and-hold strategy: “the Buy Panic maxim encourages building a long-term portfolio and, with ample cash reserve, fortifying it whenever panic hits the equity market.”

These are, at their roots, strategies for picking when to buy individual stocks—which are not for everyone. Investing as a market is falling gives rise to the adage, “Don’t catch a falling knife.” And it does of course require picking individual stocks. (Here’s a link to a post: Mutual Funds Versus Individual Stock Picking: Which Is Right For You? (at The Simple Dollar).)

I’m not that familiar with Marcial’s track record, though here’s a link to an older article discussing it: 2005 article on Marcial’s stock-picking performance.

If you’re interested in the full stone tablet, Marcial’s 7 Commandments are:

  1. Buy Panic
  2. Concentrate, Diversify Not
  3. Buy the Losers
  4. Forget Timing
  5. Follow the Insider
  6. Don't Fear the Unknown
  7. Always Invest for the Long Term

Some of these go contrary to conventional wisdom—and BusinessWeek even brands Marcial as giving, “Unconventional, insightful, and timeless market advice…”

Here’s a link to a some videos of Marcial explaining these commandments at the BusinessWeek website. I haven’t had a chance to read the book or watch the videos yet, but several personal-finance bloggers and stock-trading bloggers have reviewed the book: check out Book Review: 7 Commandments of Stock Investing (at Zen Personal Finance); Book Review: 'The 7 Commandments of Stock Investing' (at Seeking Alpha); and A must read book by Wall Street legend Gene Marcial (at Blogging Stocks). Several of them point out where Marcial departs from conventional wisdom and give their thoughts on whether it’s a good idea for the average investor—so they’re worth checking out.

For the full read of the BusinessWeek article including the book excerpt, check out: “Make Market Frenzy Your Friend.”

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