Tom Lyndon: Follow the Trends

Interviewed by Ian Wyatt, Chief Investment Strategist, NewsletterAdvisors.com

Tom, explain your investment process and criteria for investments.

We have several criteria we use to decide which funds to buy. We have a daily performance report of about 150 of the largest ETFs that cover each asset class, sector and global region. ETFs are added to this list based on trading volume and assets. From that list, we watch for those funds that move above their long-term trend lines. If the momentum is there, and we think we may want to buy it, we look into it a little deeper to see the fundamentals and determine if it's just a temporary spurt forward, or part of a larger overall uptrend. If everything lines up, we'll buy.

Once we buy the ETF, we hold it until the fund either drops back below its 200-day moving average or 8% off its recent high -- whatever comes first.

Who is your target audience?

We target high-net worth individuals with at least $500,000 in assets to invest. We seek investors who want the same things we all do -- security, a good retirement -- but either don't have the time, knowledge or interest in doing it themselves. We believe in our asset management plan and we know it works, and we target the investor who feels they need a disciplined investment approach and exit strategy.

What do you believe gives you an edge over other investment experts?

I think our strategy of trend-following and practicing what we preach is what sets us apart. Investors need to be stoic when it comes to the choices they make and not let their emotions guide them through the buys and sells. That's very difficult to do, and we're able to do it. Sticking to the strategy helps us be in for our clients when the markets are performing, and staying out and guarding against losses when they're not.

What are your short-term (3-6 months) and longer-term views (1-2 years) of the markets?

We don't make predictions about what the markets will do, that is why we follow the trends. The market will eventually make a recovery, and typically the first six to twelve months after a bear market are the strongest. In the short-term, I think we're in for a rough ride as financial institutions and our housing market assess the damage and begin to pick up the pieces. Much of what happens will depend on the actions the Federal Reserve takes in the coming months. The key in these coming months and years is to keep an eye out and look for areas that are performing -- it may or may not be here in the U.S.

What sectors do you think offer the most opportunities to profit today?

Commodities have been an exceptionally strong performer this year, and although many experts think we're in a bubble (and we very well may be), you can't deny that there's always going to be demand for food and energy. Perhaps it won't always cause the kind of prices that we're seeing today, but commodities have longevity simply because it's what we need to get by.

That being said, if these prices do come back down, investors need to learn the lessons of the dot-com crash and have an exit strategy in place. While it's fine to go with the uptrend and not fight it, it's not fine to stay in when things are rapidly heading south and hope that a turnaround will begin any second now. Staying in when they should clearly be out is how so many investors got burned in the early 2000s - don't become one of them.

What are your top three stock picks, and what attracts you to each company?

ArcelorMittal (NYSE:MT) is the world's largest integrated metals and mining company, and is responsible for 10% of the world's steel output. The company has a habit of acquiring big stakes in companies that produce raw materials used in the production of steel, such as coal and iron ore. Global demand for steel, particularly in emerging markets seeking to improve infrastructure, might help this company continue to be a strong performer in the global steel market. The company is 13.4% of Market Vectors Steel ETF (SLX), which is up 24.6% year-to-date.

Gilead Sciences Inc. (Nasdaq:GILD). As we look for ways to fight the global food problem and look for alternative fuels, as well as fight the growing spread of disease, the biotechnology sector could benefit. Gilead, in particular, has a strong focus on infectious disease, and about 75% of its revenue comes from HIV medicine. The latest statistics from the CDC state that as of the end of 2003, there were up to 1.2 million people carrying the virus that causes AIDS, and 24-27% unaware of it. Infectious disease is also gaining more attention as diseases develop antibiotic resistance. Gilead is 22.8% of the Biotech HOLDRs (BBH), which is up 4.5% year-to-date.

Chesapeake Energy Corp. (NYSE:CHK). Natural gas has been one of the top S&P performers year-to-date, and demand for this commodity has shown no signs of slowing yet. Some analysts think there's room to grow. Chesapeake is a producer of the commodity, and it is 4.3% of the iShares Dow Jones US Oil & Gas Exploration Index (IEO), which is up 29.3% year-to-date.