About a dozen years ago, I found myself having a stimulating conversation one sunny day in San Francisco with the great economist Milton Friedman.
It's a conversation I'll always remember.
I studied economics in college – in fact, I'm the recipient of an honors degree in that subject – and the tireless free-market advocate was and remains one of my big heroes.
We were standing on the balcony of his spacious Nob Hill condo taking in the sweeping Bay views and talking about economics and Washington politics – as I eyed the huge portrait of him standing in a corner that Friedman's wife hated and wouldn't let him hang.
Then he looked me in the eyes and said, "You know, Michael, I'd like to see the Federal Reserve replaced by a computer."
As the 1976 Nobel Laureate in Economic Sciences explained it, he felt the Fed had become too obsessed with micromanaging the nation's economy. Remember, this was a dozen years ago, before the Fed started quantitative easing and heavily manipulating interest rates.
Of course, I'm not suggesting we replace the Fed chair with a robot.
But I always recall Friedman's thought experiment whenever the markets get choppy, as they have in the past few weeks. And when I see the markets become volatile because of the Fed and the news, I know it's time for defense…
Rounding Up Profits
I've shared with Strategic Tech Investor readers my five "Choppy Market Tools." But today, I want to share with you a classic investment strategy that I've given a brand-new nickname to reflect our focus on the "New West" of Silicon Valley tech stocks.
I call it the "Cowboy Split."
And today I'm going to show you that when employed properly the Cowboy Split will protect you from volatile markets.
But that's not all.
If your stocks go down, on the recovery, you make more money…
Back on June 27, I told Strategic Tech Investor readersI believe we are still in the early stages of a generational bull market. That's one that could run for up to two decades.
The U.S. economy continues to gain momentum.
Cars and light trucks are selling at an annual run rate of 16.3 million units. We've had the best five-month stretch of job gains in several years. And we just learned gross domestic product (GDP) expanded at a 4.0% annual rate in the second quarter.
Tech is again leading the way with high corporate profits, strong cash flow and great operating margins.
However, in that report, I also said that we would see setbacks along the way. No bull market advances without occasional corrections and sell-offs.
Indeed, the markets have recently become more news driven than usual.
Fed Chair Janet Yellen's remarks about "stretched" small-cap, biotech, and social-media stocks spooked the market for a couple of days. And investors are also concerned about Argentina's second bond default in 13 years, Israel's offensive in Gaza, and Russia's connection to the downing of a Malaysia Airlines passenger jet in Ukraine.
And with the Dow Jones Industrial Average fluctuating, many investors are getting just plain scared (falsely, I believe) that another major correction could occur any day.
On top of all that, I've spotted a depressing trend this second-quarter earnings season – companies with the slightest hint of trouble see their stocks quickly sell off.
But I'm not worried. This is a great time to take a defensive approach to investing in tech stocks.
In fact, I think I'm getting a reputation for my defensive splits.
I have regular late-night strategy sessions with my good friend – and Money Morning's Executive Editor – Bill Patalon.
When I phoned the other night to discuss market conditions, Bill came on the line and said, "Hello, Mr. Cowboy Split."
If that sounds a bit silly, that's because my defensive strategy – the Cowboy Split – is hardly academic. However, it is a very effective approach. And my readers through Nova-X Report and Radical Technology Profits have used it to make some good money in recent months.
Let me explain how the Cowboy Split works. In a nutshell, you make "split entries" when you acquire shares of a great tech stock.
With this process, we buy a one-half or one-third entry at market, and then put in a lowball limit order to pick up the rest should the market or the stock itself retreat.
To help you better understand the Cowboy Split, I'm going to mosey through two examples… and then we'll watch together as your profits rise.
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.