Isn’t our stock market exciting, what with its volatility, potential, and unscripted daily drama? Individual investors, on the other hand, are more fascinating. We’ve grown up in a media-driven culture that wants answers, predictability, blame, scapegoats, and even certainty. We are a culture of investors where hindsight is gradually replacing the reality-based foresight that once flowed through our now real-time veins, much like downhill racing, grouse hunting, and Super Bowls.
Fundamental Investing Strategy
The stock market is a dynamic environment where investors can earn consistent, fair returns on their capital if they follow the basic rules of the effort AND don’t over-measure their progress with inaccurate measurement instruments. Most investors ignore the fundamental investing strategy because it is so simple and boring, preferring to concentrate on their search for the holy investment grail(s): a stock market that only rises and a bond market that can deliver increasing interest rates at stable or higher prices! It’s just not going to work…
This isn’t a discussion about investing; it’s a discussion about mythology. Investors who grasp the realities of these fantastic markets realise the possibilities and embrace them with a degree of knowledge that goes beyond media hype and performance enhancement barkers. Simply said, take profits when investment-grade securities rise in price [as they have today, with the DJIA finally breaking above the 11,000 barrier], because that is the whole idea of stock market investing! On the other hand, restock your portfolio with investment-grade assets (and there has always been a flip side, most frequently referred to as a “correction”).
Yes, even any that you may have just sold during the rally a few days or weeks earlier. This is far more than a simplification; it is a successful long-term approach (a year or two is not long). cycle after cycle after cycle after cycle after cycle after cycle after cycle after cycle after cycle after cycle after cycle after cycle Doesn’t that sound a lot like Buy Low/Sell High? Obviously, Wall Street isn’t going to tell you that it’s that easy!
“Note that the Dow Jones 11,000 was last broken in the early years of this century, and that the most recent All Time High in this all-too-commonly followed index occurred in late 1999.] When the DJIA repositions itself around 11,700, it will end a six-year period of no increase in this, the most renowned of all Market Indicators! Would the media strip this Stock Market Icon of his gold medal if they learned that over the same years: (1) There have been many more equities rising in price than dropping in price on a daily basis. In fact, more than two-thirds of the time in the last 68 months has been favourable. (2) Since April 2000, there have been 120 more positive days in NYSE issue breadth than negative days. (3) There were 250 percent more new highs than new lows in NYSE equities. (4) We’ve had a positive issue breadth for the sixth year in a row!“
Accept that your portfolio statement values will rise and fall over time, and instead of rejoicing or grieving, concentrate on taking efforts to strengthen your “Working Capital” and your portfolio’s ability to meet your long-term goals and objectives. By following a few easy criteria, you may create an investing portfolio that continuously reaches higher highs and (much more importantly), higher lows. If left to its own devices, an unmanaged portfolio, such as the DJIA, is prone to extended periods of unproductive sideways drift.
You can’t afford to travel at a break-even rate for six years, and expecting any unmanaged or passively driven approach to be in tune with your particular financial needs is naive, if not irresponsible.
Five simple fundamentals of asset allocation, investment strategy, and psychology are summed up in what I call “The Investor’s Creed”:
(1) My objective is to be fully invested in my equity/fixed income asset allocation plan.
(2) Every investment I possess, on the other hand, is for sale, and every asset I own generates cash flow that cannot be immediately reinvested.
(3) I’m happy with a cash position of roughly 0% because it signifies that all of my money is working as hard as it can to help me achieve my objectives.
(4) However, as my cash position approaches 100%, I am pleased since it implies I’ve sold everything at a profit and am in a position to
(5) seize any new investment opportunities (that fulfil my criteria) as they come.
Smart Investing Ideas
If you’ve been managing your portfolio correctly, you’ve been expanding your cash position recently as you take profits on stocks you bought when prices were down just a few months ago… and (this is a big and) you may be flush with cash long before the market stops rising! Yes, you will be drenched in cash in roughly the same period of time if you complete the investment technique correctly. The number of initial public offerings (IPOs) coming to market increases dramatically; morning drive radio DJs start bragging about their stock market successes; and all of your peers start bragging about their new investment guru or the 30% gains in their growth mutual funds. What do you intend to do with your money?
This is what I call “smart” cash since it represents realised earnings, interest, and dividends that are just resting after a scoring push. When profits multiply at money market rates, the zealous coach looks for clear signs of investor greed in the market:
Fixed income lead to a downward as speculators abandon long-term goals in pursuit of new investment stars, which will likely drive equity prices higher; stable investment grade shares also fall in value as it becomes clear [for the scadieight (sic) time] that the market will never fall again. NASDAQ, for example, may double in value yet still be nowhere near where it was six years ago. Generation after generation, cycle after cycle, the beat goes on. What do you think about today’s coaches being smarter than those of the late 1990s? Have they realised that the greatest strength of a rising market can also be its greatest weakness?
