The year 2002 will end with all major indexes in the red. However even against this tough backdrop there were many successful strategies by investors to churn profits. By studying these winning tactics, one can construct successful strategies for 2003. Note that during 2002, students of investor psychology won the Nobel Prize for Economics. These two Yale doctoral students finalized a paper studying market timing acumen as evidenced by equity allocations of newsletter writers. Clearly, strategy is critical to investment returns. And one's assumptions about the market and economy are critical to strategy. So, lets explore some strategies that may help us in the year ahead.

What Strategies Made Money in 2002?

One popular concept in the investment newsletter world is the idea of Market Timing. Two doctoral students at Yale are currently circulating a working paper entitled, "Behavior and Performance of Investment Newsletter Analysts", which studied the performance of market timing newsletters based on their equity allocations. They found that there is a statistically significant number of newsletter writers who would qualify as "star" market timers; they beat the market in greater number, by a greater margin, and for a greater length of time than would be suggested by chance. For the purposes of this article, I define market timing a bit more simply. Market Timing basically means not having your money fully invested at any one time. i.e. Moving your money in and out of the market. Under the Market Timing umbrella are scores of sub-categories, but each of them is contrary to buy-and-hold investing.

Market Timing is investing in Gregory Spear's "New Market", or becoming like Adam Oliensis, the Agile Trader. It is analyzing scores of market data and then calling the market bottom on October 9th within minutes of the closing bell like Jack Schannep's Timing Indicator & TheDowTheory. Or trading seasonal phenomena and cyclical oil stocks with Tim Murray of the Briar Patch Stock Market Letter.

Yet, on the flip side, David Fried's Buyback Premium Portfolio is up 31% in 2002, placing him third among newsletters monitored by the Hulbert Financial Digest (whose database was the source used by the Yale students) in performance over twelve months. Fried's strategy calls for being "fully invested" in a 5 stock portfolio rebalanced once a month. David Fried is a value money manager whose performance buttresses his strategy that he would prefer over timing the market. Missing out on the bounce off of the October 9th lows, for instance, would sting a little. Chalk one up for buying and holding.

The GoldenBar Report's runs a portfolio of silver, gold bullion, gold stocks, crude oil, and a short against the dollar vs. the Yen was up 28% from October of 2001 to December 6th of 2002. That 28% return may be on the light side by now given that since December 6th oil is up nearly $5 per barrel and Gold is up $20 per ounce. Editor, Ed Bugos, is playing a different game than some of the previously mentioned editors, but doing quite well and has some incredibly insightful views on the geo-financial-political architecture as it exists entering 2003.

Timers, Cycles and Landau Expressions

Market timers scrutinize cycles in specific events. Price movements, and the human beings that drive those data points are why I have commented that the market is a perfect case study in human nature. It seems that I agree with the Nobel Committee given this year's award in Economics.

Since human nature is a part of broader physical phenomena, it seems that the most highly sophisticated of the physical and theoretical sciences can be applied to the market for a predictive look into 2003. Gregory Spear publishes The Spear Report and The Spear Report: Professional Edition , the latter of which is a daily, aggressive, active trading advisory service. He recently reviewed a book by a mathematician from UCLA named, Dr. Didier Sornette, called, "Why Stock Markets Crash - Critical Events in Complex Financial Systems."

Sornette had applied his systems theories to study everything from quantum physics to earthquakes. He functionally describes humans as sub-atomic particles at the most basic level of organization. Thus, each day of trading is the attractions and repulsions of other buyers and sellers. Bubbles come together because, "traders had to self-organize and that structure has within it the seeds of its own de-construction. The deconstruction pattern proceeds in a wavelike fashion according to certain mathematical laws... Once these systems reach a critical level of self-organization, these interactions can be described, and in certain cases predicted, by mathematical formulas; specifically, super-exponential log-periodic oscillations of first order Landau expansions."

Spear responds to this by providing a chart most of us have seen comparing the S&P 500 of the last few years against the demise of the Nikkei that is eerily similar. Sornette superimposes a predictive pattern from his work that fits them both nicely and portends of a few more up months before a decided negative turn that would take us into 2004.

Yet, Jack Schannep is quite certain the secular bear market is over. While he notes that the bull market move from the October 2001 lows to the March 2002 highs was the shortest bull market in history [the only one to be less than six months], it was a 29.1% move. I also received an e-mail from him within minutes of the close on October 9th that the bottom was in. He notes that a decade long bear market is unlikely, as the longest bears in the twentieth century was 5 years 1 month from, November 1909 to December 1914 and from March 1937 to April 1942. The capitulation he saw may not take us to an all time high, which is what it would take for some to agree the secular bear market is over, but should take us up a good ways.

[These last two pieces of random information should in no way be taken as definitive predictions. I just think they are interesting.]

A Few Stories About Investing

Obviously if one stays invested at all times, the question is what to invest in. David Fried looks at companies that have made large purchases of their stock on the open markets (i.e. buybacks). Companies will do this for a number of reasons. If they think their stock price is undervalued, want greater control of their company, want to improve shareholder value, etc. then they buy back stock. Many of them are positive harbingers for the stock price and are considered good uses of free cash flow. David Fried seems to have finely honed his skills identifying the most beneficial buy back scenarios for shareholders.

The GoldenBar Report's success has been derived through assumptions of a dangerous economic environment. Ed Bugos is concerned with fiscal irresponsibility, the huge amounts of liquidity pumped into the economy devaluing the dollar, massive consumer debt burdens and multiple scenarios for war and oil supply disruption. He is invested in hard assets and commodities, and has created the "Bugos Gold Index" discussed in my December 23rd about gold. While Adam Oliensis "trades the plan", he also is a keen student of the economy and shares Bugos' concerns of an inflation-happy Fed highlighted in recent speeches by Greenspan and other Fed Governors. Both also seems to be making money.

Uncertainty Ahead

Tim Murray is currently scrutinizing beaten down companies that have been or will be dumped for tax purposes before the end of the year. As in years past, he will scoop up several of these depressed stocks in a play similar to the "Dogs of the Dow", in which beaten up Dow components are bought because of extraordinarily high dividends. This is done in combination with the benefits of the "The January Effect" that Price Headley of Sector Trends Advisor finds significant in outperformance of small caps over large caps in January. Put them together and Tim is looking for another profitable January. Tim's motto is that "Cash is ALWAYS King" and says he's up about 6% this year. He isn't too excited about Iraq, North Korea, the Department of Homeland Security, Unemployment, the housing bubble he sees or much else, but it doesn't bother him. He expects to be able to make some cyclical oil trades and will keep building his portfolio "one trade at a time."

Unfortunately, no one has a crystal ball for what 2003 will hold. Obviously, we all hope the multi-year bear market will end as the economy strengthens and business begins growing profitability again. Dare to dream, right? Clearly, no matter the environment, finding and executing the proper approach for oneself can produce positive returns and grow one's wealth. We hope you find the right mix in 2003.

Happy Holidays!

Trace Johnson is an analyst and writer for Zacks.com and the Zacks Advisor. He is a regular on CNBC Europe with Simon Hobbs and co-hosts an hour each Thursday from 11:00-12:00 E.S.T. He can be reached at tjohnson@zacks.com