Fortune Watch

 “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”- Warren Buffet.

The right time to get back in the market may be just around the corner. With global economies sinking, sometimes dramatically, it can be a scary thought to put your hard-earned money on the line. However, a smart investor will realise that golden opportunities are appearing if proper research is done.

It has not dropped dramatically since the financial collapse of 2008-2009, but it is still in familiar territory. It may take another another year or more for a large upswing in the markets, but at least we hope that the Dow will not drop below previous lows. That may bring hope and some peace of mind about starting to invest again.

For investors, the operative question is simple, albeit very broad: In the midst of this crisis, what do we do?

A good rule of thumb: If a stock you are considering for investment depends upon a speedy return to normal, you should be looking elsewhere. Warren Buffett has often said that you should invest in businesses that you wouldn’t mind owning if the stock market were closed for an extended period.

Dollar Cost Averaging

The concept of Dollar Cost Averaging comes to mind in the current market situation. It is the process of buying stocks or similar investments on a regular basis, such as once a month, using a fixed amount of money. When prices are low, you are able to buy more shares. When prices are high, you buy fewer. In this way, you are able to take advantage of temporary low prices. This is especially helpful for long-term investments, such as retirement accounts. It may go against human nature to buy stocks when everything is falling and red but in fact it can lead to a bigger payoff if done correctly.
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Before Wall Street and the media combined to make investors think of calendar quarters as “short-term” and single years as “long-term”, market cycles were used as true tests of investment strategies over the long haul. Bor-ing.

There were four types of standard analysis used by most financial institutions, Peak-to-Peak, and Peak-to-Trough being the most common found in annual reports. There were also basic differences in purpose and perspective in the old days, and a focus on results vs. reasonable expectations for actual portfolios.

Even more boring, and not nearly as profitable for “the wizards” as today’s super Trifecta, instant gratification, speculative, mentality.

Portfolio performance analysis was intended to be a test of management style and overall methodology, not a calendar year horse race with one of the popular averages. The DJIA was (I believe) originally conceived as an economic indicator, not as a market-performance measuring device.

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I think it was the immortal Ben Hogan who quipped: I can put “left” on the ball and I can put “right” on the ball— “straight” is essentially an accident. Most amateur golfers would make a slightly different observation. We can hit the ball left or right with no problem; we just have no idea when either will occur.

As to straight, most of us refer to that phenomenon as “the dreaded straight ball”— and it’s this lack of straight that makes it so critical for us to master the art of working the ball. We need to understand how to move the ball left or right, consistently, on the golf course, under pressure, but without ever aiming out-of-bounds or into a lateral.

Yeah, sure, just like that.

It is doable though, and Ehow.com is a great place to start. There, at “work-golf-ball” is a simple five-step tutorial that anyone should be able to master with countless hours of range work. Of course it’s more difficult on an actual golf course, with those red and white stakes, trees, bodies of water, marsh grasses, and back yard barbequers.

To become a lower handicapper, work the ball we must— unless your name is Moe Norman. Making the shot go higher or lower than normal is another of those ball working skills that you need to master to save strokes. Mother Nature really appreciates it when you maneuver the ball below Live Oak branches and over environmentally protected “no search” zones.

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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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Is it luck or skill that gets us to the goals and objectives we set for ourselves— gimmicks and software programs or practice and understanding? How many golfers are still using the putter they started with decades ago at a nine-hole cow pasture? How many of you are still bouncing between investment gurus and hedges in your search for the investment holy grail?

The best athletes come to the competition with sound fundamentals, well thought out objectives, and the discipline to hone their basic technique with countless hours of practice. The most successful investors come to the process with sound fundamentals, realistic goals and objectives, and a consistently applied discipline that embraces the cyclical nature of markets and economies.

Discipline is an ingredient in most long-term success recipes— business, sports, relationships, politics, veal scaloppini, etc. Well, maybe not politics. There are “fundamentals” involved in each.

Favorite foursome conversations provide clues to the particular fundamental that just failed you, as your duck-hooked tee shot comes to rest at the base of the dead pine tree, and possibly, just beyond the white stake. “Have you weakened your grip?” comments Larry. “Nah, he was lined up that way; went right where he aimed it,” Curley offers.

“Might have worked out just fine if he hadn’t picked his head up so soon,” spouts Moe. “What are you guys talking about? I was set up to fade the ball but I swung way too hard at the bottom and closed down the club face,” you bark as you tee up a provisional.

Grip, alignment, focus, target, and tempo— some major golf fundamentals.

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A couple of days ago, I watched a short interview with the legendary investor Warren Buffett on an investment news channel. The interview was conducted shortly after the annual general meeting (AGM) of Buffett’s company Berkshire Hathaway. Buffet said many interesting things—as he always does—but the really educational part of the interview was the contrast between the world that Buffett inhabits and the world that his interviewer seemed to come from.

It was like listening to members of two different species talk. If a fly (which lives for perhaps a few hours) and a tortoise (who can survive for a hundred years or more) had a conversation, it would probably sound like Buffett and that interviewer.

At one point, the interviewer asked Buffett to comment on how his companies would cope with the downturn. Buffett replied that things were certainly down at the moment but he expected them to be OK in three to five years. I could see that the mere mention of a time scale like three to five years had derailed the interviewer’s thought process. Coming as she did from a world where three to five hours or at most three to five days is the standard unit of time, the idea of an investor talking in years seemed to have thrown a spanner in her works.

Next, she pulled out the day’s newspaper and drew the old man’s attention to a news item that US unemployment was up to 700,000. She wanted to know what he thought of the news. Buffett said that he was sure that five years from now, the employment situation would be much better than it was today. Again, this epic timescale put an end to that line of questioning.
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The Working Capital Model (WCM) looks at investment performance differently, less emotionally, and without a whole lot of concern for short-term market value movements. Market value performance evaluation techniques are only used to analyze peak-to-peak market cycle movements over significant time periods.

Security market values are used for buy and sell decision-making. Working capital figures are used for asset allocation and diversification calculations. Portfolio working capital growth numbers are used to evaluate goal directed management decisions over shorter periods of time.

WCM tracking techniques help investors focus on long term growth producers like capital gains, dividends, and interest— the things that can keep the working capital line (see Part One) moving ever upward. The base income and cumulative realized capital gains lines are the most important WCM growth engines.

The Base Income Line tracks the total dividends and interest received each year. It will always move upward if you are managing your equity vs. fixed income asset allocation properly. Without adequate base income: 1) working capital will not grow normally during corrections and 2) there won’t be enough cash flow to take advantage of new investment opportunities.

The earlier you start tracking your dependable base income, the sooner you will discover that your retirement comfort level has little to do with portfolio market value.
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Every correction is the same, a normal downturn in one or more of the markets where we invest. There has never been a correction that has not proven to be an investment opportunity. You can be confident that governments around the world are not going to allow another Great Depression “on their watch”.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets.

While everything is down in price, as it is now, there is actually less to worry about. When the going gets tough, the tough go shopping.

In this case, an overheated real estate market, an overdose of financial bad judgment, and a damn the torpedoes stock market, propelled by demand for speculative derivative securities and Hedge Funds, finally came unglued.

But it is the reality of corrections that is one of the few certainties of the financial world, one that separates the men from the boys, if you will. If you fixate on your portfolio market value during a correction, you will just give yourself a headache, or worse.

Few of the fundamental qualities that made your IGVSI securities sound investments just two years ago have permanently disappeared. We’ll be using credit cards, driving cars and motorcycles, drinking beer, and buying clothes twenty years from now. Very few interest payments have been missed and surprisingly few dividends eliminated.

Only the prices have changed, to preserve the long-term reality of things—and in both of our markets.
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Citigroup became the latest bank to post better than expected results for its first quarter. The bank on Friday said net income of $1.6 billion, compared with a loss of $5.11 billion in the quarter a year ago. Citigroup’s problems are far from over, but it had its best quarter since late 2007.

The bank reported a loss to common shareholders of $966 million after massive loan losses and dividends to preferred stockholders. But before paying those dividends, the bank had net income of $1.6 billion.

Overall, Citigroup’s results were better than expected. The company reported a loss per share of 18 cents, which was narrower than the 34 cents analysts predicted. A year ago, Citigroup suffered a loss of more than $5 billion, or $1.03 a share.

Citigroup’s revenue doubled in the first quarter from a year ago to $24.8 billion thanks to strong trading activity. Its credit costs were high, though, at $10 billion, due to $7.3 billion in loan losses and a $2.7 billion increase in reserves for future loan losses.

Citigroup has been one of the weakest of the large U.S. banks, posting quarterly losses since the fourth quarter of 2007. But in March, CEO Vikram Pandit triggered a stock market rally after he said that January and February had been profitable for Citigroup.
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