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"Q
& A" with Dr. Paul McEntire, |
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Hello Paul, and thank you for joining us. Are we at the beginning of a bear market? |
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Quite
possibly. By almost any measure, the current market is overvalued. Many
companies are now trading at prices that will be impossible to sustain.
Historically, the other times that the market has traded at such levels
have been followed by declines. With the price-to-earnings multiple of the
NASDAQ near 200 and the S&P 500 at nearly 30, there is a lot of room
below. |
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Why would an investor want to invest in a short fund when the market usually goes up? |
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To
lower your market risk or simply to profit from a market decline. The
allocation of some assets to a short fund will help to preserve assets in
periods when the market is falling. These preserved assets can then be
reinvested in the market to benefit from the subsequent advances. The
effect of allocation some assets to a defensive fund is to reduce the
overall volatility of your holdings, and to boost the long-term rates of
return. |
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What do you invest in? |
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BearGuard
Fund takes short positions in a diversified portfolio of stocks that we
feel are overvalued. Such stocks tend to underperform the market (good if
you are short-selling) and hence provide a hedge that is likely to do well
in weak markets. BearGuard Fund also earns substantial interest income
from its collateral holdings and from interest that is paid to the fund on
its short positions (rebate income). |
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Why is the market so volatile now? |
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For
several reasons. One reason is that so many stocks have advanced to prices
that are many times higher than they were just a year ago. Even a hint of
bad news can send one of these stocks into a nose dive. Some
macro-economic conditions also raise concerns, such as rising interest
rates, higher fuel prices, problems between China and Taiwan, and
deteriorating economic conditions in Russia. As the opinions fluctuate, so
do the markets. |
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How about the technology sector? |
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There’s
good news and bad news. The good news is that there are discoveries in
nearly all areas of science with the potential to improve our world.
Advances in bio-technology, communications technology, materials science,
and remarkable improvements in the performance-to-cost ratios of computers
will lead to a continuing growth in this sector. The bad news with respect
to investing is that many companies, with Internet companies leading the
way, have gotten ahead of their actual performance. One must tread
carefully in this sector, and the level of risk is high. Nevertheless,
there are still many companies with exceptional products and management
teams that will do very well in the next decade. The key is in assessing
their technologies. |
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What do you think about the "new paradigm" or the "new economy"? |
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Poppycock!
There are always new technologies. Over time, like it or not, every
company will be judged by its ability to produce profits for its
shareholders. If this principle seems to be violated, just wait. Recently,
a few Internet companies have begun running out of money, and the
shareholders have lost their confidence that the profits are coming. The
result – major price declines. In the upward rush it is hard to evaluate
management efficiency and profit margins. As time passes, however, the
true competitive positions of a company will inevitably express itself in
the bottom line. |
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How do you select your stocks? |
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We
choose stocks that are very expensive compared with their past performance
and growth rates. We also look for other factors such as excessive insider
selling, high levels of debt, exaggerated press releases, and
deteriorating margins. A diversified portfolio of such stocks is likely to
underperform the market and hence provide an economical hedge. |
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Why should investors use a short fund like BearGuard Fund rather than short-selling stocks in their own account? |
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Using a fund offers the benefits reduced transaction costs and broad diversification (BearGuard holds around 75 stocks). Short-selling just a few stocks in your own accounts can be extremely volatile and requires constant watching. Also, BearGuard Fund receives so-called rebate income on its short positions. Most retail brokerage firms do not offer this income to their clients. |
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For more information on the
BearGuard Fund, |
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