Most people never forget their first love. I’ll never forget my first trading profit — but the 600 1970 dollars I pocketed on Royal Dutch Petroleum was not nearly as significant as the conceptual realization it signaled.

I was amazed that someone would pay me that much more for my stock than the newspaper said it was worth just weeks ago. What had changed? What had happened to make the stock go up, and why had it been down in the first place? Without ever needing to know the answers, I’ve been trading RDSA for over 40 years!

Looking at scores of similarly profitable, high quality companies in this manner, you would find that: 1) most move up and down regularly (if not predictably) with an upward long-term bias, and 2) that there is little if any similarity in the timing of the movements between the stocks themselves.

This is the “volatility” that most people fear and that Wall Street loves them to fear. It can be narrowly confined to certain sectors, or much broader, encompassing practically everything. The broader it becomes, the more likely it is to be categorized as either a rally or a correction.

Most years will feature one or two of each. This is the natural condition of things in the stock market, Mother Nature, Inc. if you will. Don’t take her for granted when she gets high, and never ignore her when she feels low. Embrace her volatile moods, work with them in whatever direction they travel, and she will become your love as well.

Ironically, it is this natural volatility (caused by hundreds of variables human, economic, political, natural, etc.) that is the only real “certainty” existent in the financial markets. And, as absurd as this may sound until you experience the reality of it all, it is this one and only certainty that makes Mutual Funds in general (and Index Funds in particular) totally unsuitable as investment vehicles for anyone within seven to ten years of retirement!

How many Mutual Fund investors have retired recently with more liquid financial assets than they had 12 years ago, way back in 1999? There will always be rallies and corrections. In fact, it is worthwhile to “go back to the future” to establish a realistic long term investment strategy.

In the last forty years, there have been no less than ten 20% or greater corrections followed by rallies that brought the market to significantly higher levels. The DJIA peaked at 2700 before its record 40% crash in 1987. But at 1700, it was still 70% above the 1000 barrier that it danced around with for decades before — always a higher high, rarely a lower low.

The ’87 debacle was followed by several slightly less exciting corrections, but the case was being made for the more flexible, and realistic, Market Cycle Investment Management Methodology. Modern Portfolio Theory was spawned by great minds selling future predicting snake oil; Mother Nature, Inc. is a much too complicated enterprise, even for them.

Call it foresight, or hindsight if you want to be argumentative, but a long-term view of the investment process eliminates the guesswork and points pretty clearly toward a trading mentality that keys on the natural volatility of hundreds of Investment Grade Value Stocks (Google IGVSI).

During corrections, consider these simple truths: 1) although there are more sellers than buyers, the buyers intend to make money on their purchases; 2) so long as everything is down, don’t worry so much about the price of individual holdings; 3) fast and steep corrections are better than the slow attrition variety; 4) always accept even half your normal profit target while buying opportunities are plentiful; 5) don’t be in a rush to fill your portfolio, and if cash dries up before it’s over, you are managing the process correctly.

Most of the problems with Mutual Funds and much of the increased opportunity in individual stock trading are functions of growing non-professional equity ownership. Everyone is in the stock market these days whether they like it or not, and when the media fans the emotions of the masses, the masses create volatility that rarely under-reacts to market conditions.

Rarely will unit owners take profits, particularly if they have to pay withdrawal penalties or taxes. Even more unusual are expert advisors who encourage investors to move into the markets when prices are falling. A volatile market creates opportunities with every gyration, but you have to be willing to transact to reap the benefits.

A necessary first step is to recognize that both “up” and “down” markets are forces of nature with abundant potential. The proper attitude toward the latter, will make you much more appreciative of the former.

Most investment strategies require answers to unanswerable questions, in an effort to be in the right place at the right time. Indecisiveness doesn’t cut it with Mamma — in or out too soon is not an issue with her. But wasting the opportunities she provides really ticks her off.

Successful investment strategies require an understanding of the forces of stock market nature, and disciplined rules of portfolio management. If you can transition back to individual securities, you will do better at moving toward your goals, most of the time, because the opportunities are out there — all of the time.

So let’s adopt some new rules for this investment game and learn to live with them for a few cycles: Let’s buy IGVSI stocks new and old at lower prices during corrections. Let’s take reasonable profits on those that go up in price, whenever they are kind enough to do so.

Let’s examine our performance based on the results of these trading transactions alone and at market cycle examination points for a smiley faced change of pace. And one other thing:

Let’s drink a toast to an uncertain and volatile Mother Nature, and, of course, to our first loves.
Author Steven Selengut

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.

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If you were to Google “Stock Market Volatility”, you would find a wide range of observations, conversations, reports, analyses, recipes, critiques, predictions, alarms, and causal confusion. Books have been written; indices and measuring tools have been created; rationales and conclusions have been proffered. Yet, the volatility remains.

Statisticians, economists, regulators, politicians, and Wall Street gurus have addressed the volatility issue in one manner or another. In fact, each day’s gyrations are explained, reported upon, recorded for later expert analysis, and head scratched about.

The only question I continue to have about all this comical hubbub is why don’t y’all just relax and enjoy it. Jon Methuen nailed it in his August 15, 2011 parody of the financial world’s ridiculous obsession with “volatility”. “A Reasonable Guide To Stock Market Volatility” is a must view — but only for mature adults with a semi-sick sense of humor.

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The “Bargain Stock Monitor” is one of three market statistics used as performance expectation analyzers for portfolios that are designed and managed using the Market Cycle Investment Management (MCIM) methodology.

It is derived from the month end Investment Grade Value Stock Index (IGVSI) “watchlist” screening program, which identifies IGVSI companies that are trading at least 15% below their 52-week highs.

The “15% down” break-point allows you to keep your eye on “Bull Pen” items. (You really need to be familiar with the selection rules to get the most from the BS Monitor – chuckle – and from the Watch List program.)

The fewer IGVSI equities at bargain prices, the stronger the stock market and the more “smart cash” you should be accumulating in the equity asset allocation “bucket” of your investment portfolio. As the list of bargain stocks grows (indicating market weakness), portfolio “smart cash” should be finding its way back into undervalued securities.

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George Washington Taxpayer owns 10 acres of land, four miles from the South Carolina coast, just a driver or two from the renowned Kiawah Golf Resort. Recent assessments (even in this dismal housing market) are solid seven figures, and the 25% or so of value mortgage has been overpaid every month for around ten years.

George and Martha have a totally clean credit rating, more than enough visible reported income, plenty of liquid, unencumbered assets, and a second building on their property that is used as an office for their very own, very private, very small business corporation.

The business has been “in the family” for more than thirty years, directly and indirectly employs about twenty other individuals and small businesses, and produces substantial, taxable income. It also pays rent and salaries to the Taxpayers.

George called Notquitesoquick Mortgage, LLC to re-finance his still barely “jumbo” loan — thinking, with a solid credit score, pretty impressive total documented income from all sources, a history of over paying, what could possibly go wrong?

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How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve our very own greed, fear, and unrealistic expectations?

Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic investment methodology — an ongoing security selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines.

If you are thinking of trying a strategy for a year or so to see if it works, you’re due for a smack up alongside the head. Viable strategies transcend cycles, not years, and viable equity strategies consider three or four disciplined activities, the first of which is selection.

Most strategies ignore one or more of the others.

How should an investor determine what stocks to buy, and when to buy them? Will Rogers summed it up: “Only buy stocks that go up. If they aren’t going to go up, don’t buy them.” Many have misread this tongue-in-cheek observation and joined the “buy anything that is rising” club. I’ve found that the “buy investment grade value stocks lower” approach works better.

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At least ten hands shoot into the air as the discussion turns to stock selection. The speaker smiles, responds to each, and observes: “You really need to know the depth of the water, its temperature, tides, and currents before you dive into the river — and then, what kind of predators are in there?”

Flying low over coastal South Carolina, I’m probably the only person on the plane who sees the meandering rivers and tidal creeks as a history of stock market cycles. How does one navigate these complex connections without getting lost, running aground, or being attacked by alligators?

How does one select equity securities in a manner that consistently avoids the risks of volatile markets, fickle investors, abusive regulators, regressive tax codes, and brainwashed investment gurus? Along with self-confidence and experience, it takes some management skills that most investors fail to sharpen before they launch their boat — planning, organizing, and controlling.
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About a year ago this week, just before the one-year anniversary of this market rally, there were about 45 IGVSs priced 15% or more below their 52-week highs. The market seemed to be entering a corrective phase, but it just never happened.

A year later, the market statistics, all of them, are shouting at the top of their lungs — the correction is coming! The correction is coming!

Portfolio “smart cash” is at pocket-hole-burning levels; less than 3% of all IGVSI stocks are even close to “bargain” prices; new 52-week highs have more than quintupled new lows; and issue breadth has been exceptionally positive.

Those of you who are “in the know” will recognize “smart cash” as the type that is created by targeted profit taking plus dividend and interest income. It reflects an Investment Grade Value Stock Index (IGVSI) that has surpassed its pre-financial crisis record high — in spite of the fact that all the other averages remain below theirs.

Most (equity heavy) Market Cycle Investment Management (MCIM) program portfolios are at all time high profit levels; income heavy allocations have fallen victim to the buying panic of stock market speculators, higher interest rate expectations, and overblown concerns about state and municipal treasuries.

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Most investors incorrectly think of “risk” as the possibility that the market value of a financial asset might fall below the amount that he or she has invested in the asset. OMG, how could this be happening!

Think about it. The harboring of these misconceptions (that lower market price = loss or bad and/or that higher market price = profit or good) is the greatest risk creator of all. It invariably causes inappropriate actions within the large mass of individuals who are uninitiated in the ways of the investment gods.

Risk is the reality of financial assets and financial markets: the current value of all securities will change, from “real” property through time-restrained futures speculations. Anything that is “marketable” is subject to changes in market value. It is as the gods intended, and portfolios can be designed so that it just doesn’t matter quite so much as you’ve been brainwashed into thinking.

What is abnormal is the hype surrounding market value changes and the hysteria such hype causes among investors. No way should a weak real estate market translate into near zero bank balance sheet entries — it just doesn’t compute, except when it is popular politics.
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Over the past 30 years Federal Tax receipts (Corporate, Personal, Estate, Excise, Gift, Social Security, Medicare, Medicaid, et al) have averaged less than 20% of Gross Domestic Product (GDP). Read that again, and don’t think for a minute that it’s not a large number.

But it’s not nearly large enough to pay the bills, reduce the national debt, grow the economy, and come to the aid of all of the people in the world who need us. Why, because nearly half of us (some legally, some not so) pay little or no federal income taxes at all— and because our elected representatives have no financial management skills.

The only taxes that always get paid are those that reduce the amount of spending money in our pockets and which raise the cost of the goods and services we purchase — thus retarding economic growth.

There is no doubt that a Federal Sales Tax on consumption by final consumers would produce more revenue than all of the other taxes combined — but how much, and is it OK to single out things like cigarettes and gas guzzlers for extra taxes?

We need to give it a try, and there would be added benefits: (a) we would be collecting taxes from all of those folk who earn incomes that are just not reported at all, (b) the products we try to sell in world markets would be more competitive, and (c) all of us would have more money to spend on stuff that could actually become lower in price.

There are no purely economic problems with making the shift to a consumption tax — just political ones. The legislation has been “on the hill”, and summarily ignored for decades. We need to apply cool economic sense to the elimination of the Internal Revenue Code and the Social Security Ponzi scheme.

First KISS: Create Jobs Right Now
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