Submitted by Steve Selengut
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Wall Street Wisdom vs. Market Cycle Investment Management
During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher market values during the next advance--- particularly if they focus on Investment Grade Value Stocks.
IGVS valuations have been trending upward for nearly a year; Market Cycle Investment Management portfolios are eclipsing the all time highs achieved in 2007, and income Closed End Fund values have risen with surprisingly high yields still intact. The investment gods are smiling once again--- but not on everyone.
Corrections are as much a part of the normal market cycle as rallies, and they can be brought about by either bad news or good news. (Yes, that's what I meant.) Investors always over-analyze when prices become weak and over-indulge when prices are high, thus perpetuating the "buy high, sell low" Wall Street lunacy.
Waiting for the perfect moment to jump into a falling market is as foolish a strategy as taking losses on investment grade companies and holding cash. Corrections in both equity and income securities produce the same kind of hysteria as a spring sale at Macy's--- but in reverse. Waiting for the perfect moment to bail out of a rising market is as foolish a strategy as buying the most popular stocks at 52-week and/or all time highs.
The fundamental quality of securities does not change simply because their prices rise and fall in response to market conditions. The investment gods work in surprisingly un-mysterious ways, and they get pretty annoyed when you don't pay attention to their teachings. When all value stocks are moving lower, it's an opportunity, not a problem. When all IGVS stocks are moving higher, it's also an opportunity--- an opportunity to capture reasonable profits.
During every correction, I'm amazed at the shocked reaction of the Media, the confused explanations from market gurus, and the poor advice streaming from Wall Street. It's no wonder that the average investor panics. If they could buy a new car, a new business suit, or a new house for half price, they would be ecstatic.
Only on Wall Street are lower prices villains and higher prices heroes. The Market Cycle Investment Management methodology understands the inevitability of both, anticipates cyclical changes, and takes advantage of market gyrations, big or small, and in either direction.
The equity securities in your portfolio are inventory, not fixtures. Inventory is best acquired at lower prices, marked-up a reasonable amount for quick sale, and replaced with new inventory--- and repeat the exercise as often as possible.
The income securities in your portfolio are fixtures--- and the highest quality ones last the longest and produce the best. Their purpose in your investment portfolio "business" is to generate the spending money needed for current expenses now, and living expenses later.
The calendar year has no particular investment relevance--- and if we tried hard enough, we could possibly do something about a tax code that rewards unsuccessful investments more than it encourages profits. Investment performance analysis should be an objective based program monitor instead of 365-day horse race with irrelevant market indicators.
Rallies and corrections could be looked at like children--- learn to love them equally and their parents (the investment gods) will reward you with stable long term market value growth within a balanced portfolio that produces annually increasing base income. (Can you tell me what "base income" is?)
There is an investment mindset solution for the problems that most people have dealing with corrections, recessions, inflation and the Red Sox. Bad news creates opportunities; so does good news. We have allowed Wall Street and the media to turn the process of investing into an endless series of circus sideshows.
The direction of the market isn't nearly as important as the actions we take in anticipation of the next directional change. Performance evaluation needs to be "rethunk" in terms of cycles. You need to overcome your obsession with calendar period market value analysis, and embrace a more manageable approach that centers on your portfolio's unique business model.
The Market Cycle Investment Management methodology seems to get people to where they want to be less stressfully and more consistently than the more "conventional wisdom" based strategies such as MPT--- and, you do want to keep the investment gods happy by appreciating their market cycle children equally.
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