One way to invest in uncertain times....

Recently, there's been some discussion here of the state of the stock market....

If you think the market may be lurching up and down, there's still an investment strategy that could help.... It's known as a "market neutral" strategy....

Here's how it works.

Let's say, for example, that you want to invest in pharmaceutical companies, and you think that Pfizer (PFE) stocks will do better than Merck (MRK) stocks.

(This is just an example to illustrate the investment technique - I haven't actually done any analysis of these companies....)

If you think Pfizer will do better than Merck, then you can buy Pfizer stocks, and short sell Merck stocks.

Short selling means that you, in effect, borrow some stocks of Merck to sell at the current price.... You may then have to buy Merck stocks later (if you get a margin call), at the price it's at on that date, to return the stocks you "borrowed"....

If the price of the stock goes down, then you make money (since you sell the stock high, and buy it low), but if the price goes up, then you lose money by short-selling (since if the price goes up, you end up selling low, and buying high)....

Anyhow, by using this combination of buying one stock (the stock you think will do better), and short-selling the other stock (the one you think will do worse), you have a market-neutral strategy. That means, you'll make money based on the relative performace of the two stocks, and how the market behaves overall won't affect your return....

For example, let's say that the stock market crashes, and both Pfizer and Merck stocks go down by 50%. Well, you'll lose money on Pfizer because of this (since you bought the stock), but you'll make money on Merck (since you short-sold it) - so it will have no effect on your total profit.

Similarly, let's say the market soars, and the prices of both Pfizer and Merck double. In that case, you'll lose money on Merck (since you short-sold it), but you'll make money on Pfizer (since you bought the stock). Again, the total effect of the market has had no effect on your profits.

The only thing which will affect your profits is how the two stocks move relative to one another.

If Pfizer goes up more than Merck does, then you'll make money - since you bought Pfizer stock, and short-sold Merck.

But if Merck goes up more than Pfizer does, then you'll lose money overall.

This is one way you can invest in the stock market using a "market-neutral" approach.... If the market swings up and down - as long as it affects your two stocks about equally - it will make no difference to your return. (Thanks to my brother Thomas, who I learned this from....)

I hope that helps someone.... Just because you're worried about the fluctuations in the stock market, doesn't mean you can't "protect" yourself from them, and still come out ahead!

- Dien Rice