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Attention Wall Street Shoppers: Always, Yes Always, Sell Too Soon

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Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me! print

This is not going to be a technical analysis either of MPT statistics or of chart formations that have supernatural predictive capabilities. Instead, it is intended to be a clear reminder that you need to fear the top of rallies just as surely as you need to embrace the opportunities provided by corrections.

The next correction will always arrive sooner than Wall Street thinks, and you won't take it seriously until its far too late to harvest your profits.

An early morning caller wondered: "Why so much cash?", referring to the 25 month profit taking spree that has been playing out in Market Cycle Investment Management (MCIM) portfolios.

Wall Street seems to be saying that it's safe to return to the stock market. Here's the sales pitch: "Attention investors - stocks are at the highest prices we've seen in years, a tremendous opportunity to pay far more for these securities than you have for more than a decade. Buy now at the highest prices ever!"

Should you be interested? Would you be in any other aspect of your life? Are higher prices a safety indicator?

There is more to "Why so much cash?" than meets the eye, and too many investors share the misconceptions that lie beneath the surface. The market has never been (and will never be) a one way "ticket to ride" (smile Beatles fans) and neither the DOW nor the S & P 500 are clear reflectors of the Investment Grade Value Stock (IGVSI), stock market.

None of the important aspects of the voyage (highs, lows, volatility, or duration) are predictable, by anyone, no matter how overpaid or well credentialed. It has become clear to me over forty years of muddling through the investment exercise, that most mistakes are made by people who over complicate the process.

Investing is just not the rocket science based brain freezer that is portrayed by Wall Street product vendors. The only science(s) that are helpful are economics, management, and psychology --- mostly management. The cyclical realities are clear.

Smart portfolio management would have you seeking quality (equity) additions to your portfolio inventory during corrections. MCIM management includes the disciplines, rules and procedures needed to implement an investment plan. It requires an environmental understanding that produces rational, rather than emotional, reactions.

If you take losses during broad corrections, or if you have been buying the popular, but inherently speculative and misguided index products of the moment, you are totally on the wrong track. Indexed speculation is a bandage on a wound that doesn't actually exist. The stock market has always gone up and down --- most humans invariably position themselves on the wrong side of the current inertia.

The duration of stock market corrections will vary with the nature of the events that cause them --- a market top is nearly always caused by speculation and greed. Selling occurs for many reasons, but there are only two (possibly three) types of buying. 

People buy stocks either to hold them for profit taking, donating, or bequeathing in the distant future, or to trade them in a more businesslike manner for profit taking ASAP. Securities are not purchased with the hope that market values will diminish nor should they be purchased because an upward-only-market-forever scenario (the third reason) is expected. 

During corrections, sellers create large pools of money while MCIM buyers accumulate larger and larger stock holdings. And since the buyers have no interest in selling their positions at a loss they wait for the inevitable upturn to come along so they can take another round of profits, well before the Wall Street brain trust feels comfortable with the new trend lines. 

Recent all time highs and far too many days of positive market numbers have created itchy-trigger-finger short-covering and other forms of speculation that may spiral the equity markets into a new feeding frenzy, gobbling up even the memory of past corrections. But sooner or later, some gutsy financial gurus will declare the stock market overbought and fraught with danger.

Thus the markets cycle onward, decade after decade, consistently setting new highs, as the IGVSI has been doing since early 2011, and also establishing ever higher lows. There's no right or wrong here people, no good or bad --- just some simple truths that experienced decision-makers learn to accept and to thrive upon.

No person ever became richer by selling at a loss during a correction or by waiting for the market to achieve new high ground as a signal to get new positions started. You must always have the discipline to:

Always, yes always, buy too soon during corrections --- and, even more important, take profits too soon during rallies...

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