Fortune Watch

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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A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if this brief little hiccup becomes considerably more serious, new investment opportunities will be abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:
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During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher market values during the next advance— particularly if they focus on Investment Grade Value Stocks (IGVS).

IGVS valuations have been trending upward for nearly a year; Market Cycle Investment Management portfolios are eclipsing the all time highs achieved in 2007, and income Closed End Fund values have risen with surprisingly high yields still intact. The investment gods are smiling once again— but not on everyone.

Corrections are as much a part of the normal market cycle as rallies, and they can be brought about by either bad news or good news. (Yes, that’s what I meant.) Investors always over-analyze when prices become weak and over-indulge when prices are high, thus perpetuating the “buy high, sell low” Wall Street lunacy.
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From the end of 1999 through the end of 2009, all of the popular Wall Street market performance measurement tools were in the red. The average bloodletting level of the DJIA, the S & P 500, and the NASDAQ was a disturbing-to-some minus nineteen percent.

Most of the investment community is either open-mouthed in shock or strident in blame about the somethings or someones who must be responsible for such horrific performance. Never again they swear to their clients— without ever a hint that they might themselves be the problem.

It won’t be long before the Wizards of Wall Street announce that they have studied the situation, and readied their sales minions to switch the shattered investment public into yet another fail proof (fool-magnet?) portfolio of hedges, gimmicks, signal responders, and panaceas for whatever the new decade brings.

Once again they will attempt to debug the market cycle and create an upward only future for the masses. Try not to be abused again— the markets aren’t broken, just the market shakers. Your portfolio should be up in market value— and not by just a little for the “dismal decade”.

These are the same geniuses that created the dotcom bubble by cramming valueless securities and speculative IPOs down your throats. They are the same charlatans who created the derivative markets and fraudulently hid their gaming devices in innocent looking rolls of tissue paper.

Wall Street thrives on the boom and bust scenario — because it doesn’t really matter to them how many of you win or lose. The evidence is clear; a boring-but-winning approach has been out there (and ignored) for three equally productive decades. The investment gods are outraged!

The past decade was a fabulous decade for old-fashioned value investors, particularly those with a reasonable selling discipline in their methodology!

It was a fabulous decade for those who understood that quality, diversification, and income generation are principles as opposed to media placating buzzwords.

It was a fabulous decade for those investors who were able to see over, beyond, and through artificial time constraints to find the long-term opportunities within every beautiful market cycle undulation. There were plenty of gyrations to gyrate to if you only knew how.

Investing is no longer a passive enterprise; and it never really was. If you can’t manage your portfolio throughout the market cycle, without succumbing either to greed, to panic, or to artificial and complicated hedging strategies, just stop. Right now. Listen and learn something old.

The only market cycle hedges needed are quality, diversification, and income— all classically defined. Throw in some disciplined selection and selling guidelines, a cost-based asset allocation formula, and a non-calendar year perspective and success will follow— cyclically.

You may miss a speculative spike or two (i.e., bubbles), but in the long run, Market Cycle Investment Management (MCIM) is a proven methodology for long run investment success.

You just can’t replace market cycle reality with calendar year gimmickry. Do better. Google investment grade value stock and request the ten-year MCIM numbers.

Change is good.

Steve Selengut

Actually, hindsight and the Investment Grade Value Stock Index (IGVSI) Bargain Level Monitor tell us that it died early in March 2009. More realistically, however, corrections don’t die quite so abruptly. They are supplanted by rallies— and vice versa.

The IGVSI Bargain Stock Monitor tracks the price movements of an elite group of New York Stock Exchange equities. Their “eliteness” is earned by a B+ or higher S & P rating, a history of profitability, and the fact that they pay dividends to their shareholders.

Unfortunately, they are the same companies whose boards of directors allow senior executives to pillage treasuries with obscene salaries and bonuses— and elite does not mean invulnerable to the whims of markets and governments.

But, for Working Capital Model (WCM) equity investments, they are just perfectly less risky (historically) than the others.

An IGVSI equity becomes a bargain stock (or “OK to add to your portfolio if it meets strict WCM diversification and price standards) when it falls at least 20% from its 52-week high. From 15% to 20% down, it is held in a mental “bull pen”, getting ready for the “bigs” after a few more down-tics.
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September is fewer than three weeks away. Feeling nervous? Maybe you should be. For investors, the period between Labor Day and Halloween is proving an annual fright show. And no one knows why.

It was, of course, in September last year that Lehman collapsed and everything fell apart. But then it was also September-October 2002 that the last bear market plunged to its lows.

The 1998 financial crisis? It began late August, and rolled on for two months.

The famous crash of 1987 came in October. But most people have forgotten that the market actually started sliding downhill in late August.

That’s almost exactly what happened in 1929 too. The big crash came in October, but the market peaked just after Labor Day. Prices began falling through September, then tumbled further still.

The worst month of the Depression? September, 1931, when the Dow fell about 30 percent. It was also in September, 2000, that the bear market really got going.

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Investment markets got you down, Bunkie? Been blown away by derivative stun guns? When will portfolio market values move back to 2007 levels— and then what will you do about it?

It’s time to overthrow the evil Masters of the Universe and deactivate their weapons of financial destruction. Let’s outlaw the brainwashing that has changed how average investors look at and value their investment portfolios.

It’s time to exorcize the Wall Street demons and return to stocks and bonds— and to QDI, “the Force” for long-term investment portfolio security.

Speculating is complicated, even for financial rocket scientists. What most of us want (or would certainly settle for) is simplicity, stability, and reasonable growth in our productive working capital.

A return to plain vanilla investing strategies with operating procedures that minimize risk and encourage understanding of the financial markets needs to become part of our financial force field.

As bad as things have been since this black hole appeared, investment models true to fundamental concepts, simple strategies, and disciplined operating rules have probably bettered the market numbers in at least six important ways:

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I’m not a professional tennis player. I’m not even a tennis player. The last time I touched a tennis racket was 5 years ago. But I did read about how a professional tennis player aims to hit as many balls to the opponent to make him miss, in order to win. An amateur , on the other hand, aims to try to catch as many balls as possible, aiming not to make any mistakes till his opponent eventually makes a mistake and causes himself to lose. That’s defensive playing.

I’m not a professional stock investor either. I admit neither I have the time nor the patience to go through every financial report, visit the companies I’m interested in buying and whatever else it takes to be really confident enough to put a huge chunk of my hard-earned money into the stock. So I have to invest defensively. I aim to minimise my losses while riding the general upward trend of the stock market, rather than maximising my gains on the individual hot stocks. It may limit my gains a little, but in the event of a crash, I hope to come out relatively intact. I basically expect a crash, even in the longest bull run ever. It’s like having a Plan B even though you hope you never have to use it, or buying insurance though you don’t really want to die or get a critical illness just to make the most of it.

So how do I play my defensive game ? I protect myself the following ways.

1. I stick with what I know. It’s easier to figure out that maybe the market has over-reacted when you are familiar with the industry. For example, I bought Bank Of America at $4 and Citigroup at $1. The prices were crashing as people anticipated a further crash and that didn’t happen. Today they are holding at $13 and $3.5 respectively. Do the exact opposite of what the average investor is doing. I bought Merck when it was being sued for one of its drugs , Vioxx. The price crashed as people anticipated huge lawsuit payouts, which never happened.

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Expectedly, after the resounding victory by the Congress Party in the general elections, markets skyrocketed as soon as the opening bell was sounded; eyeing a windfall in terms of government spending in a host of sectors to pump-prime the economy.

The sentiment was so strong in the trading community and the going was so good on the BSE Sensex that it reached the 17.24 per cent gain mark in no time, forcing the authorities to temporarily halt trading, when the circuit breaker* kicked in.

The same story repeated itself on the National Stock Exchange where the trading was also halted with the Nifty up by 17.33 per cent.

Within seconds of trading, the Bombay Stock Exchange’s benchmark Sensex vaulted 2,110.79 points, or 17.3 percent, to 14,284.21, triggering the historic shutdown Monday. Infrastructure, banking and real estate companies led gains. Trade was forced to close for the day, after the Congress Party’s definitive victory in national elections set the scene for long-delayed economic reforms

“The big question – is it a game changer? Can India get back to the high growth, high valuation of recent years? This event probably does open up meaningful possibilities, but there’s a lot to do, and there could be a lot in the way,” she said in a report.

Trading has never before been halted due to an upward swing in stock prices, according to the Bombay Stock Exchange.

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