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TMFMmbop (37.74)

2006 Year in review. 2007 will be the year of the?

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January 03, 2007 – Comments (0)

I'm awash in articles making all sorts of predictions for the coming year -- often contradictory. The most prevalent thought is that 2007 will be the year of the U.S. large cap stock. After all, small stocks and emerging markets have been too hot for too long.

That makes some sense.

But I don't think macroeconomic predictions such as these should have any effect on investors whose bread and butter reside in areas that the so-called experts believe will underperform this year. Why? First, these experts are often wrong. They called 2004 the year for large cap growth, as they did for 2005 and 2006. None of that came true. Yahoo! and Intel were among the worst performing large cap stocks this year -- and the worst performing stocks overall.

(Whole Foods, a stock I love, also shared this dubious distinction. Fortunately, I was lucky enough to sell at the top (to buy a house this summer) and then buy back in near the bottom. Otherwise I would have gotten smoked by the drop.)

Second, short-term macroeconomic are much less rewarding than straying outside one's circle of competence is dangerous.

Despite the wisdom of the pundits, I'm going to spend most of 2007 again looking for select small cap situations, some interesting foreign picks, and a dash of smack-me-upside-the-head buys. This past year, ALDN, DWSN, MRH, OO, and PRAA fit the first bill, ALDN, WYNN, and ARTKX the second, and BRK and WTI the third.

This year, my first goal is to build out positions in PRAA and WTI. PRAA is a great company with some economic catalysts on the horizon. WTI, I think, will either be bought out this year or will rebound as natural gas prices stabilize.

Beyond that, I'd like to spend more time on foreign stocks and find some new inefficiencies among the tiny tots. We'll see how that goes.

So what will 2007 be? I think it will be an average year, with no one asset class outpacing another by a meaningful number. In other words, the best investors this year will be those who can identify great situations within their own circle of competence.

Good luck to all! And let's keep adding our best ideas to CAPS.

Fool on!

Tim

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