Sat 8 Dec 2012
Fascinating, isn’t it, this stock market of ours, with its unpredictability, promise, and unscripted daily drama. But individual investors are even more interesting. We’ve become the product of a media driven culture that must have reasons, predictability, blame, scapegoats, and even that four-letter word, certainty.
We are a culture of investors where hindsight is rapidly replacing the reality-based foresight that once was flowing in our now real-time veins — just like in basketball, golf, and football.
The Stock Market is a dynamic place where investors can consistently make reasonable returns on their working capital if they comply with the basic principles of the endeavor AND if they don’t measure their progress too frequently with irrelevant measuring devices.
The classic investment strategy is so simple and so trite that most investors dismiss it routinely and move on in their search for the holy investment grail(s): a stock market that only rises and a bond market capable of paying higher interest rates at stable or higher prices — just not going to happen.
This is mythology, not investing. Investors who grasp the realities of these wonderful marketplaces recognize the opportunities and embrace them with an understanding that goes beyond the media hype and side show performance enhancement barkers. Simply put, when investment grade securities rise in price (as they did from March 2009 through April 2010), take your profits — because that’s the purpose of investing in the stock market.
On the flip side (and there has always been a flip side, more commonly dreaded as a “correction”), replenish your portfolio inventory with investment grade value stocks. Yes, even some that you may have just sold days or weeks ago during the rally.
This is much more than an oversimplification. It is a long-term strategy that actually succeeds without the ajeda — cycle, after cycle, after cycle. Sounds an awful lot like Buy Low/Sell High doesn’t it? Obviously, Wall Street can’t let you know that it is quite so simple!
You need to understand that your portfolio market values will absolutely rise and fall throughout time, and rather than rejoice or cry, you need to initiate actions that will enhance both your “Working Capital” (whatever that is) and the ability of your portfolio to accomplish your long term goals and objectives.
Through the application of a few easy to memorize rules, you can plot a course to an investment portfolio that regularly achieves higher market value highs and (much more importantly) higher market value lows.
Left to its own devices, an unmanaged investment portfolio (like the, still below where it was a decade ago, DJIA) is likely to have long periods of unproductive sideways motion. You can ill afford to travel ten years at a break even pace, and it is foolish, even irresponsible, to expect any passive approach to be in sync with your personal financial needs.
Five simple concepts of Asset Allocation, Investment Strategy, and Psychology are summed up quite nicely in what I call “The Investor’s Creed”:
* My intention is to be fully invested in accordance with my planned equity/fixed income asset allocation.
* On the other hand, every security I own is for sale, and every security I own generates some form of cash flow that cannot be reinvested immediately.
* I am happy when my cash position is nearly 0% because all of my money is then working as hard as it possibly can to meet my objectives.
* I am ecstatic when my cash position approaches 100% because that means I’ve sold everything at a profit, and that I am in a position to
* take advantage of any new investment opportunities (that fit my guidelines) as soon as I become aware of them.
If you were managing your portfolio properly, your cash position was rising through April, as you pocketed profits on the securities you purchased when prices were falling just a few months earlier — and (this is a big “and”) you were chock full of cash well before the market blew the whistle on its advance.
Yes, if you are going about the investment process properly, you will be swimming in cash at about the same time:
Wall Street discovers the rally and starts encouraging people to weight their portfolios more heavily into stocks; the number of IPOs coming to market starts to rise exponentially; morning drive radio DJ’s start to laugh about their stock market successes; and all of your friends start to talk about their new investment guru or the 30% gains in their growth Mutual Funds. What are you doing in cash!
This embarrassment is what I call the holding of “smart cash”. It represents realized profits, interest, and dividends that are just catching a breather on the bench after a scoring drive.
Patiently you watch, without letting that smart cash burn a hole in your portfolio pockets, while it compounds at historically low money market rates — but safely. The disciplined coach looks for sure signs of investor greed in the market place.
And the beat goes on, cycle after cycle, generation after generation. What do you think: will today’s coaches be any smarter than those of the late nineties? Of 2007? Have they learned that it is the very strength of a rising market that proves to be its greatest weakness?