Do You Have Proven Rebounders in Your Portfolio?

      I was staring off into space as the market took another nosedive last year.

     "What are you thinking about?" my colleague Andy Obermueller asked as he passed by my office.

     "Houses of ill-repute," I said and smiled knowingly.

     "Excuse me?" Andy sputtered. Although the Government-Driven Investing editor fashions himself to be a hardened and bloodthirsty investor, I do believe Andy blushed. In truth, I was thinking about investment advice my dad had given me when I was young.

      The raids on Ploesti were perilous but paramount. Brigadier-General Uzal Ent said, "If nobody comes back, the results will be worth the cost." My father came back. But the U.S. lost 286 B-24 and B-17 bombers, and 2,829 crewmen were killed or captured in the bombing raids over Ploesti.

    (My dad at bottom right.)

     My father never glorified the war or his role in it. But he was always proud that when it came to making the ultimate risk vs. return decision, he chose well. And I suspect this was one reason why he took to investing at a time when few working-class people did. I should also mention that along with a penchant for risk taking, my dad also expanded his somewhat "colorful" vocabulary during his war years. 

    Every Saturday morning, my dad and I would sit at the kitchen table. He would tell me the name of a stock and I would look up the closing price in the newspaper. Armed with a clean sheet of paper and a sharpened No. 2 pencil, he would tally up the week's gains and losses.

     We rode out good markets and bad at that kitchen table. During market corrections and economic downturns my father would always say the same thing:

     "Amy, when they raid a house of ill-repute, they take all the girls to jail, even the piano player and the cook. But if they get a good judge, the piano player and cook will be out in no time."

What Dad Meant

     In my Investment Theory class at the McCombs Business School, I studied the Efficient Market Hypothesis, whereby all investors are rational and investments are always priced correctly. But I also learned about Behavioral Market Theory, which explains those times when the market seems less rational -- when shoddy stocks are lifted by "irrational exuberance" or when good stocks are flushed along with the bathwater during a market correction.

     My father's pragmatic viewpoint was that both theories were correct. There are times when the market sends all its investments to jail. But ultimately, investments would be judged fairly and sound investments would rebound.

     It was advice that served me well when I was a Board of Trustee for a non-profit educational organization. Picking solid "piano players and cooks" allowed me to safely navigate the organization's $5 million in assets safely through the 2001 recession, unscathed.

     My dad died in 1993. But when Andy passed by my door in the summer of 2008, I was thinking about his market analogy -- of houses of ill-repute and judges. And as I watched solid investments tank, day after day, I held out hope that the piano players and cooks would ultimately emerge. I am my father's daughter, after all.

     We all learned the hard way that a diversified portfolio doesn't immunize us from all market risk. As much as the pundits claimed the rest of the world had "decoupled" itself from the U.S. economy, every stock market, the world over, fell as we fell. Bonds fell. Preferred stocks fell. Aside from Treasuries and investments designed to short the market, the vast majority of investments were taken down during "the raid." But some "piano players and cooks" served much lighter sentences and have rebounded, while the broader market is still attempting to regain what it lost.

     The market has enjoyed quite a good rally this year -- maybe too good. A market correction is a clear possibility for the near term.

     So as I searched for a recent pick for my Stock of the Month newsletter, I wanted to be sure it had a track record as a "piano player or a cook" -- an investment that had proven its ability to bounce back.

     The market has stayed relatively calm since then, but that didn't stop my pick from returning a total of +6.6% in roughly a month in a half. But the best thing about this investment is that I know if the market eventually ends up in jail, this pick will be one of the first ones out from behind bars. 

P.S. If you'd like to learn more about Amy's rebounding pick and her Stock of the Month newsletter, click here.