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 downhill
racing, grouse hunting, and Super Bowls.
The Stock Market is a dynamic place where investors can consistently
make reasonable returns on their capital if they comply with
the basic principles of the endeavor AND if they don't measure
their progress too frequently with irrelevant measuring devices.
The classic investment strategy is so simple and so trite
that most investors dismiss it routinely and move on in their
search for the holy investment grail(s): a stock market that
only rises and a bond market capable of paying higher interest
rates at stable or higher prices! Just not going to happen…
This is mythology, not investing. Investors who grasp the
realities of these wonderful marketplaces recognize the opportunities
and embrace them with an understanding that goes beyond the
media hype and side show performance enhancement barkers.
Simply put, when investment grade securities rise in price
[As they are now, with the DJIA finally putting together a
successful attack on the 11,000 barrier], Take Your Profits,
because that's the purpose of investing in the stock market!
On the flip side (and there has always been a flip side, more
commonly dreaded as a "correction"), replenish your
portfolio inventory with investment grade securities. Yes,
even some that you may have just sold days or weeks ago during
the rally. This is much more than an oversimplification; it
is a long-term (a year or two is not long term.) strategy
that succeeds... cycle, after cycle, after cycle. Sounds an
awful lot like Buy Low/Sell High doesn't it? Obviously, Wall
Street can't let you know that it is quite so simple!
[Note that Dow Jones 11,000 was last breached during the infancy
of this century, and that the last All Time High in this much
too widely followed average occurred late in 1999. When the
DJIA banner is repositioned on that historical peak of 11,700
or so, it will represent no less than six years of zero growth
in this, the most respected, of all Market Indicators! Would
the media strip the gold medal from this Stock Market Icon
if it knew that during these same years: (1) There have been
significantly more stocks rising in price on a daily basis
than moving lower. In fact, more than two-thirds of the last
68 months have been positive. (2) Since April 2000, there
have been 120 more positive days in NYSE issue breadth than
negative days. (3) 250% more NYSE stocks established new high
price levels than new lows. (4) We are working on our sixth
consecutive year of positive issue breadth!]
So understand that your portfolio statement values will rise
and fall throughout time, and rather than rejoice or cry,
you should be taking actions that will enhance your "Working
Capital" and the ability of your portfolio to accomplish
your long term goals and objectives. Through the simple application
of a few easy to memorize rules, you can plot a course to
an investment portfolio that regularly achieves higher highs
and (much more importantly), higher lows! Left to its own
devices, like the DJIA for example, an unmanaged portfolio
is likely to have long periods of unproductive sideways motion.
You can ill afford to travel six years at a break even pace,
and it is foolish, even irresponsible, to expect any unmanaged
or passively directed approach to be in sync with your personal
financial needs.
Five simple concepts of Asset Allocation, Investment Strategy,
and Psychology are summed up quite nicely in what I call "The
Investor's Creed":
(1) My intention is to be fully invested in accordance with
my planned equity/fixed income asset allocation. (2) On the
other hand, every security I own is for sale, and every security
I own generates some form of cash flow that cannot be reinvested
immediately. (3) I am happy when my cash position is nearly
0% because all of my money is then working as hard as it possibly
can to meet my objectives. (4) But, I am ecstatic when my
cash position approaches 100% because that means I’ve
sold everything at a profit, and that I am in a position to
(5) take advantage of any new investment opportunities (that
fit my guidelines) as soon as I become aware of them.
If you are managing your portfolio properly, your cash position
has been rising lately, as you take profits on the securities
you purchased when prices were falling just a few months ago…
and (this is a big and) you could well be chock full of cash
well before the market blows the whistle on its advance! Yes,
if you are going about the investment process properly, you
will be swimming in cash at about the same time Wall Street
discovers the rally and starts encouraging people to weight
their portfolios more heavily into stocks; the number of IPOs
coming to market starts to rise exponentially; morning drive
radio DJ's start to laugh about their stock market successes;
and all of your friends start to talk about their new investment
guru or the 30% gains in their growth Mutual Funds. What are
you doing in cash!
This is what I call "smart" cash, because it represents
realized profits, interest, and dividends that are just catching
a breather on the bench after a scoring drive. As the gains
compound at money market rates, the disciplined coach looks
for sure signs of investor greed in the market place: fixed
income prices fall as speculators abandon their long term
goals and reach for the new investment stars that are sure
to propel equity prices ever higher, boring investment grade
equities fall in price as well because it now clear [for the
scadieighth (sic) time] that the market will never fall again…
particularly NASDAQ, which could double and still not be where
it was six years ago. And the beat goes on, cycle after cycle,
generation after generation. What do you think; will today's
coaches be any smarter than those of the late nineties? Have
they learned that it is the very strength of a rising market
that proves to be its greatest weakness!
