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How to Make Sane Investments in a Crazy Market

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RALEIGH — The last week on the stock market has, in the words of my good friend Tom Vass, been nuts. There's no other way to put it: Nuts!

The run-up and then the run-down in a slew of Internet stocks defies all the logic of fundamental, sane investing. In fact, this is trading -- not investing.

For example, consider a money-losing company called Onsale Inc. (ONSL/Nasdaq).

ONSL opened trading on Friday, Nov. 27, at $65 and closed at $97. On Monday, ONSL opened at $107, fell as low as $58 during the day and closed at $61.

Just look at those swings: On Friday, this stock gained $32. On Monday, this same stock lost $46!

I've scratched my head and asked around to get an answer to what's going on. The best I can get is that traders are playing these stocks like slot machines -- throwing in their quarters and hoping for a jackpot. Millions of dollars were won on these plays, but millions also were lost.

As I considered this insanity, I was preparing a presentation to the MBA Investment Club at theKenan-Flagler Business SchoolatUNC-Chapel Hill.

I offered them some of my thoughts about trading, and I'd like to share them with you -- and also review the past performance of some North Carolina companies.

First, I believe the definition of long-term investing has come into question. The traditional definition that your father and grandfather adhered to essentially called for you to invest in a good company and stick with it through the years, collecting your dividends and the occasional windfall of a stock split.

We're seeing less of that. Big-time investors are darting in and out of stocks to take their profits more quickly than tradition holds.

Fueling this change is what I call the democratization of the stock market, in which hundreds of new investors join the online trading revolution each day. They sit in front of their computer terminals and execute orders in minutes -- paying trading fees as low as $10 as opposed to the hundreds they once paid.

Long-term portfolios have taken on a new definition. Instead of years, long-term now might be defined as months, or even weeks.

And if you've taken a hands-off approach to your investing and allowed your broker to make all your calls, you might want to reconsider. It's possible through instant access to information to make a lot more of your own calls.

Two rules remain fundamental to wise investing, whether you're looking for a longer-term play or even a short-term, day gain. Buy fundamentally sound companies. Buy low and sell high.

I look for companies with the following characteristics:
  • Profit growth of 10 percent or more per year;
  • a dividend of at least 3 percent;
  • little or acceptable debt;
  • solid management;
  • a winning business modelWith those points in mind, I have recommended six stocks to readers of my newsletter since August 3. These stocks all have performed very well, and I give due credit to the momentum in the market.
  • But all of these stocks have three characteristics in common: They are fundamentally sound; they pay a dividend; and they are rated a "buy" by analyst consensus.

    These recommendations have proved sound, although current market conditions lead me to advise you to stay out for a few weeks. A correction is in progress, and the market is still digesting the volatility of the Internet stock madness.

    But, once the dust has settled, look at them again. Here are my six recommendations since August and the percentage gains:

    * Biogen (BGEN/Nasdaq) up 42 percent;*BB&T(BBT/NYSE) up 15 percent;*Medco(MRE/NYSE) up 17 percent;*Sapiens(SPNSF/Nasdaq) up 60 percent;*Family Dollar(FDO/NYSE) up 25 percent;*Midway Airlines(MDWY/Nasdaq) up 17 percent.

    So, is my point here to boast about my recommendations? No, it's to point out that gains can be made by sane investing -- and there are some mighty good choices right here in North Carolina.

    Have a prosperous week. Dale Gibson is a Raleigh-based journalist who publishesThe Gibson Report,a weekly electronic newsletter focused on North Carolina business. Questions or comments may be directed to him by e-mail at dale@gibsonreport.com or by phone at 919-834-1033.

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