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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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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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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Risk is the probability of loss. It is best to estimate it and to adjust your purchase and sell strategies to it in order to control loss before the purchase is made. Correct timing of purchases, buying near support, limiting loss potential, and stopping the decline by using volatility stop losses are all ingredients of a good risk control system. Let’s look at a few of these loss control discipline components.

One method of controlling risk is by timing purchases so that they occur at or near support. That way, your stop loss can be a very small distance away from your purchase price. If you buy when the stock is 5% above its trendline, for example, it will mean little if the stock declines 5% to reach its trendline. Since stocks often return to support, why would you sell? You would sell only if it broke to the downside through its rising trendline. Therefore, your loss would be calculated by adding the distance the sell point is below the trendline to the distance the purchase price was above the trendline. Buying at the trendline instead of above it would eliminate that unnecessary 5% loss.

However, stocks often make a small temporary penetration through a support line and then resume their climb. When, precisely do you sell? Let us use the suggestions offered in Technical Analysis of Stock Trends by Edwards and Magee as an example. If you are using stops that are based on closing prices, they suggest a trendline penetration of 3% would warrant selling. If your stop loss is placed with a broker, they recommend that the stop be placed 6% below the trendline because of the possibility of inconsequential intra-day spikes. Therefore, if you buy when the stock is 8% above its rising trendline and place the stop loss 3% below the trendline, you will lose 11% before your stop is triggered. On the other hand, if you wait for the stock to return to its trendline before buying, you will lose only 3% if your stop is triggered. It is important to buy right so that you can sell right.
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The year 2008 has entered the record books for all of the wrong reasons; the Dow Jones had its worst year ever! So what about 2009, how will stock markets from around the world perform and which are the stocks to follow?

Well in reality you need a crystal ball to be able to answer these questions. 2009 may well be another tough year.

I am a person who enjoys investing on the stock markets and I have to say that I am a bit of a gambler; I am quite prepared to take a risk with my disposable income in the hope that I can increase it etc. Just a quick note however, I am a financial adviser and anything that I write or suggest in this article should not be seen as advice.

I personally believe in investing an amount of money (an amount that I can afford) on a monthly basis instead of investing lump sums. This way I am able to take advantage of what is commonly referred to as Dollar cost averaging in the United States. This is where when prices are high your monthly contribution may buy fewer shares or fund units but that when prices are low your investment buys more shares or fund units.

During these volatile times this method of investing may prove to be the most prudent. Even though stock markets had a very poor 2008 and is therefore quite low there may well be significant falls ahead.
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Some people consult astrologers and some don’t. Out of the ones that don’t, some believe that there aren’t any good astrologers around nowadays while others believe that it isn’t possible to foretell the future.

Out of the ones who believe that foretelling the future is impossible, some believe that the future can’t be foretold because there is no future yet. Meaning, the future is not preordained so there’s nothing to foretell. It happens when it happens.

Not just astrology, I find the equivalent of all these views among investment analysts. In investments, there are times when the one can forecast with some degree of confidence because the current trends can be expected to continue unchanged. There are often long periods when trends just extend themselves in a linear fashion.

There are other times, when there’s a break in the trend and the past stops being a good guide to the future. When trends are smooth, then these expectations are true and the forecasts are also true. However, when there’s a break then the future is not predictable. Which is exactly what is happening now.

Currently, there is no shortage of experts trying to predict when the economic crisis will end and growth will resume. I’ve seen predictions ranging from immediate (as in, the crisis has ended we just haven’t noticed yet) to one estimate that said it will ‘take a generation for things to be normal again’. Between the two extremes lie more frequent estimates like late 2009 or 2010 or early 2011. These ‘reasonable’ estimates occur with a greater frequency so they’ve started sounding reasonable.
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