Investing Approach

 Investing Approach

The stock market is fascinating, is not it, with all its potential and unscripted drama that happens every day? However, what really piques my curiosity are individual investors. The media has shaped our culture to demand explanations, predictability, scapegoats, blame, and—gasp!—certainty. As with downhill skiing, grouse hunting, and the Super Bowl, our culture of investors is fast letting hindsight supplant reality-based vision.
As long as they stick to the project's fundamentals and do not use arbitrary metrics to evaluate their success, investors can reliably earn respectable returns on their money in the ever-changing stock market. Due to its obvious simplicity and triteness, the classic investment approach is often disregarded by investors. Instead, they continue their quest for the holy grail(s) of investing: a stock market that never goes down and a bond market that can pay higher interest rates while keeping prices flat or going up! Clearly, that will not take place...

Investment is not this, but mythology. Aside from the media hoopla and side show performance improvement barkers, investors who understand the reality of these fantastic marketplaces see the chances and jump on them. The point of investing in the stock market is to profit, so when investment-grade assets increase in price (as they are right now, thanks to the DJIA's successful assault on the 11,000 barrier), you should do just that. Restock your portfolio with investment-grade securities on the flip side (and there is always been an opposite, more generally feared as a "correction"). Including some that you might have sold during the recent rise. This is not just an oversimplification; it is a successful technique that spans several cycles, not just one or two years. If you ask me, it sounds a lot like Buy Low, Sell High. Wall Street obviously will not tell you that it is that easy!

It should be noted that the last time the Dow Jones 11,000 was surpassed was at the turn of the millennium, and that the last time this average—which is far too often followed—reached an All Time High was at the end of 1999. Repositioning the DJIA banner on that historical top of 11,700 or so will signify at least six years of stagnation in this highly esteemed Market Indicator! If the media had known that this stock market icon had done the following in the same time period: (1) The number of equities seeing daily price increases far outnumbers the number seeing daily price decreases. Over 66 percent of the last 68 months have really been favorable. The number of positive days in NYSE issue breadth has exceeded the number of negative days by 120 since April 2000. Three hundred fifty percent more NYSE equities set new highs than lows. The number of favorable issue breadths we have had in a row is approaching six!

Keep in mind that the values shown on your portfolio statement will fluctuate over time; instead of getting excited or worried, focus on ways to increase your "Working Capital" and the portfolio's capacity to reach your long-term objectives. If you follow a few simple guidelines that are easy to remember, you can steer your investment portfolio to consistently higher highs and, even more crucially, lower lows! A poorly managed portfolio, like the DJIA, is prone to lengthy stretches of fruitless sideways movement. Expecting any unmanaged or passively led technique to be in line with your particular financial needs is dumb and reckless; you can not afford to travel at a break even speed for six years.

"The Investor's Creed" is a great way to summarize five basic ideas in asset allocation, investment strategy, and psychology:

(1) I intend to have all of my assets invested in line with my planned allocation of equity and fixed income. (2) Contrarily, all of my assets are tradable, and the income from them is not readily available for further investments. (3) I am pleased when my cash balance is close to zero since it means that all of my money is putting in its maximum effort to achieve my goals. As soon as I become aware of any fresh investment opportunities that suit my standards, I am able to take advantage of them right away. (4) However, I am happy when my cash position approaches 100% because it implies I have sold everything at a profit.

Your cash position should have been increasing recently if you have been managing your portfolio well. This is because you have been taking profits on the assets you bought when prices were decreasing a few months ago... and (this is a major but) you can find yourself flush with cash before the market even announces its progress! Yes, if you are investing correctly, you will have a boatload of cash in your pocket about the same time. As soon as Wall Street sees the rally, they start advising investors to put more of their money into stocks. Initial public offerings (IPOs) begin to soar; morning drive radio DJs begin to make jokes about their stock market successes; and soon enough, everyone you know will be talking about their new investment guru or the 30% gain in their growth mutual fund. Tell me what you are doing with cash!

I refer to this as "smart" cash because it stands for dividends, interest, and realized profits that are simply taking a break after a successful drive. The disciplined coach tracks the market for telltale signs of investor greed as gains compound at money market rates. Fixed income prices fall as speculators ditch long-term goals for new investment stars, driving equity prices higher. Boring investment grade equities also fall in price because it is now obvious, for the scadieighth time, that the market will never fall again. This is especially true of NASDAQ, which could double its value and still be nowhere near where it was six years ago. And so it continues, generation after generation, cycle after cycle. Do you think the coaches of today will have any more intelligence than their late-90s counterparts? Have they realised that a rising market's strength can also be its worst weakness?

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