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Investing to Profit? What a Concept!

July 05, 2006

Dear Fellow Options Trader,

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." -- Warren Buffett

I knew I liked James B. Stewart, editor-at-large of SmartMoney, when I read "Den of Thieves," an absolute must-read for anyone interested in the markets. Stewart's take on Michael Milken, Ivan Boesky and Dennis Levine is entertaining and captivating, even if you've never heard terms like arbitrage or events like "The Predators' Ball." But it was Stewart's performance on CNBC's "SquawkBox" that really cemented him as my favorite financial journalist.

I was doing my daily cardio at 6:45 a.m. today, just after my CBS radio show, when Mr. Stewart appeared on "SquawkBox." He was detailing his strategy -- and as the quote above alludes, Mr. Buffett's strategy -- of selling when others are greedy and buying when others are fearful.

This strategy has served Mr. Stewart well, as he told his readers it was time to sell back on April 4, a time when many of his fellow journalists were more concerned about breaking out the pom-poms to cheer another record high for the Dow.

We all know what happened next.

So here was Mr. Stewart, proclaiming on June 13 that, given the slide and subsequent pessimism in the markets, it was time to buy! I'm sure he, like I, was encouraged by the fact that these same journalists who had been so intently focused on a record high were now focused on getting out of everything and into cash. Buy low and sell high -- isn't that the mantra?

But let's get back to Mr. Stewart's appearance on "SquawkBox." Keep in mind that SmartMoney is a Dow Jones publication, which is in a partnership with CNBC (a division of General Electric). Mr. Stewart had detailed his strategy of buying when the Nasdaq drops 10% and selling at intervals of 25% gains, which he said is the median decline and rise in bear and bull markets. Sounded like a simple, rational strategy to me, but not to some of the show's regulars.

They ripped into Mr. Stewart's strategy as though he were a carnie hawking snake oil to cure bursitis. "You're trying to time the market!" accused one panelist. Mr. Stewart replied that he absolutely was not trying to time the market -- rather, he was simply trying to use a disciplined approach to selling as well as buying, something that the average investor rarely does.

When the panel pushed him, Mr. Stewart said he makes no prediction for just how low the market will go, but he could say with absolute certainty that stocks were much cheaper in mid-June than they were two months ago!

As Mr. Stewart could tell you, investors don't get ahead by following the crowd, and neither do journalists. If the folks on the show think that someone's timing the market because they're buying on 10% sell-offs and selling after a 25% rally, then I suspect they are thankful their contracts don't allow them to invest as you and I do. It's one thing to talk the talk and it's another to walk the walk, and for my money, Jim Stewart does both.

TRADE OF THE WEEK UPDATE

Not much is hitting the HeatSeeker, as the market seems to be giving back much of Monday's gains. The North Korean missile tests are certainly viewed with trepidation, and the market's run on Monday was likely too much, too quickly and on light volume.

The systems are very light on any positive speculative paper at this time. As the volatility indices are spiking higher and the market sells off, we are not tempted to jump on any of the movement that's hitting the systems at this time. But stay tuned, and I'll let you know when I see something that looks like the real thing!

Good luck trading and remember -- pigs get fat, but hogs get slaughtered, so don't be a hog!


Jon "Dr. J." Najarian
Editor
ChangeWave Options Trader


P.S. THE D.C. MONEY SHOW IS TWO WEEKS AWAY

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