Its different this time. Those four words have cost investors billions when used to dismiss warning signs. When it comes to trading approaches, though, we must recognize that this economy bears no relation to any other most of us have experienced.

So why do the talking heads on CNBC pull out the same tired concepts again and again?  It probably has little to do with what is good for investors, and a lot to do with filling air time.   Individual investors don’t have to buy into it.

One of the biggest advantages that individual investors have over institutions is that they can change course whenever it makes sense.  With that in mind, here are four themes that I think will be important over the next two years:

1.  This is not the second coming of buy-and-hold investing. With so many formerly-blue chip stocks down 80-90% or more, a lot of investors seem sure that a portfolio of beaten down stocks will yield high profits over the long term.   The idea is to buy them now while they are perceived to be cheap.  Then, when normal markets return, the investor will have a portfolio for the ages that can be passed on to the next generation.

Maybe, but it sounds an awful lot like the same buy-and-hold mantra that has failed investors time and again.

Even if the portfolio is much higher five or ten years out, the road there could be brutal.  This is a market of sharp rallies and precipitous declines.  Trade them.  Buying into fear and selling into greed should outperform buy and hold.

2.  Expect volatility in liquidity as well as price. Over on RealMoney.com, columnist Alan Farley warns of the “illiquidity shock that’s about to hit Wall Street.”  I think he’s right.  Many stocks will see far less daily volume in 2009 than 2008.  Declining liquidity is especially dangerous for investors with concentrated positions in individual names.  They will face a much more difficult time getting out.

Of course, microcap investors have always had to deal with sharp variations in trading volume as well as share prices.  The charts below illustrate this phenomenon.  They are weekly volume charts from stocks discussed here.  The names and share prices don’t matter — the point is that high volume surges don’t last.

3.  Take advantage of illiquidity. Illiquidity doesn’t have to be a detriment.  Market makers take advantage of illiquidity every day to earn a spread between the bid and the offer.  When volume in individual names dries up, there should be opportunities for traders to do the same.  I’m going to take advantage of this by regularly placing limit orders to buy a small amount of dozens of stocks at far-below market prices.  Though most will never get filled, some will from time-to-time (mostly when another investor needs or wants to get out at any price).  When that occurs, I will immediately place a sell order, hoping to flip the stock 15% higher or more.  This will not be a huge payday.  However, if trading costs are carefully controlled, the strategy should grind out a small profit.  I’ll take that in this market.

4.  Everything is (re)negotiable. Businesses would rather keep valuable customers than force them into bankruptcy and fight other creditors for whatever remains.  For this reason, businesses often renegotiate unprofitable contracts.  The linked articles involve renegotiation of dry shipping contracts.  I expect that continues, but look out for renegotiation to impact many other industries.  Any industry with revenue coming from long-term (or even medium-term) contracts is vulnerable.

As a reader suggested, oil & gas drillers may be next.  Remember those high day-rate contracts for deepwater rigs negotiated when oil topped $120?  Are they still profitable with oil in the $30s-$40s?  Probably not. I also think solar stock polysilicon supply contracts will be renegotiated.

Commercial real estate REITs may take the biggest hit, especially mall REITs.  Many tenants are going out of business, and those that remain understand they have much more bargaining power than last year.   Pier 1 (NYSE:PIR), for example, has approached 125 landlords seeking to renegotiate rents.   Mall and strip-mall REITs like Kimco Realty (NYSE:KIM) may make good shorts (note: I have no position now but have traded bearish option spreads on Kimco for most of this year).

UPDATE: I forgot to include a hat tip to Saj Karsan of Barel Karsan.  His article on Build-a-Bear’s lease renegotiations helped clarify my thoughts on the vulnerability of mall REITs.

DISCLOSURE: No positions.

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