In this week’s edition of Two-Minute-Tuesday Roger gives his two-cents on the Employment to Population indicator. Is it a harbinger of good things to come?
The Old Two-Step
In this week’s edition of Two-Minute-Tuesday Roger gives his two-cents on the state of the markets.
Out With the Old, In With the New: Themes For 2015
Out With the Old, In With the New: Themes For 2015
The question I’m most often asked at the beginning of each year is, “Where do you seen the Dow Jones Industrial Average heading this year?” The new year always brings wild predictions from “experts” who have allegedly figured out what this market is going to do.
Some people have developed theories that the Dow Jones Industrial Average will close the year above 20,000, while others are positive that the market is doomed to fail, so it would be better to pack up and pull out. And the financial pundits and news media appear to be trying to tell the market what to do as opposed to listening to what the market is telling us.
I understand that all of this can leave you with knots in your stomach, unsure of which way to turn. In situations like this, it’s easy to throw in the towel, dump your entire portfolio and sit with the cash. However the idea that buying nothing, or standing on the sidelines playing it “safe” is completely misguided.
Listening to all the predictions can leave your head spinning. It’s why I don’t make predictions on where the market is going. In truth, I’ve embraced the words of a great American financier, John Pierpont Morgan, who, when asked what he thought the market would do — prompting people to move to the edge of their chairs in anticipation — simply responded, “It Will Fluctuate.”
The cold hard truth is I have no idea what the market will do in 2015. Santa did not bring me a Magic Eight Ball for Christmas much less a crystal ball. But the best gift I’ve been given is a set of indicators that tell me whether supply and demand is in control of the overall market, sectors and individual stocks. Using these instruments one can navigate just about any type of market. And while I’m hard-pressed to make market predictions, these indicators allow me to piece together a helpful list of “themes” for the coming year.
Develop a Discipline
In the past 29 years I’ve learned to follow the “Point and Figure” methodology, which is entrenched in the irrefutable laws of supply and demand. While the idea of charting price changes each day may seem simplistic, it reminds me of a quote from George Washington who opined, “Discipline is the soul of an army. It makes small numbers formidable; procures success to the weak, and esteem to all.”
With all of the financial data available at our fingertips, the daily high and low is a “small number.” The same is true of a relative strength calculation. But the self-discipline to apply these principles makes them very formidable. For instance, those small numbers let us know that the U.S. housing industry was beginning its recovery back in November, 2011. The numbers let us know the healthcare sector demand was coming back in July of 2012. More significantly they signaled to us to divest our portfolios of all stocks in November, 2007 and not reinvest in U.S. equities until March, 2009. It always was and always will be the power to understand — and the ability to act — that turns information into profits.
You Must Remain Agile
In 2001 I advocated that we were in a “Structural Fair Market” in which there could be several periods where the market could run up 20% and several periods when the market could drop 20%. And when the dust settles you’re usually right back where you started. And that is essentially what happened. If you’ve were a buy-and-hold investor you made no progress toward increasing your portfolio’s value and yet you are twelve years closer to the day when you will need the money.
In March of 2013 our stance changed and we entered a “Structural Bull Market.” This does not mean the market will move straight up. What is does mean is that the emotional sell-offs will be followed by terrific rallies.
For the investor who is prepared to move with the tide, you’ll be able to take advantage of big up-moves in the market and avoid the pitfalls that really put an account behind the eight ball.
Leadership Will Change
Just as produce in the supermarket rotates in and out of season, so do trends in the markets. There is a reason you feast on corn on the cob and fresh watermelon slices at your July 4th picnic and have pumpkin pie for Thanksgiving. In your portfolios you must be prepared to rotate as well.
One example of the influence that sector rotation can have on your portfolio is a hypothetical study. In this study four different equity strategies were used: Buy and Hold, Perfect Market Timing (each year), Buying the Best Performing Sector (each year), and Buying the Worst Performing Sector (each year).
The first investor is Mrs. Buy and Hold. She just buys the Standard & Poor’s 500 and keeps her investment in a safe deposit box where it never changes. Our second investor, Mr. Perfect Market Timer, is only invested in the S&P 500 when it has a positive return. Our last two investors are sector investors, one of which is clairvoyant enough to know each and every year what the best performing sector is going to be for the year, and subsequently places 100% of their portfolio in that sector. The fourth investor is an unfortunate person as he manages to find the worst performing sector each year.
As you might imagine, each of the investors had markedly different results from their initial investment of $10,000 back in 1993. Mrs. Buy and Hold shows a portfolio value of $42,422 through 2013. Mr. Perfect Market Timer has a portfolio value of $1,495,760. Ms. Best Sector Timer has seen her portfolio grow to $2,671,726! All while Mr. Worst Performing Sector Timer’s portfolio plummeted to $908.
To put it another way, the average annualized return for the Buy & Hold strategy since 1993 has been 7.12%. Mr. Perfect Market Timing is 26.93%. Ms. Best Sector Timer is an amazing 30.49%. And on the other side of the coin, the average annualized return for Mr. Worst Performing Sector Timer’s portfolio is a -10.80%.
Please keep in mind I am not recommending that you put all your money in one sector. I’m just attempting to show you the gap between the best and worst performing sectors each year and the opportunities available if you utilize the tools available to rotate between sectors.
LOOK FORWARD NOT BACKWARD
We all make mistakes. I hate to make a mistake as much as anybody, but no one is perfect. However, we all become better people if we learn from those mistakes. Don’t worry about 2014 if your investment portfolio severely underperformed. If you made some mistakes with your account, look at it as a learning experience. Gain some knowledge from it. If 2014 was a good year for your portfolio, think about what you did different from the previous year to make it better.
Think of what you actively did to help make it a good year and try to do more of it. Try to ACT don’t REACT. Don’t let things happen to you; you should make them happen yourself. Be proactive, not reactive. THINK AHEAD. CNBC and Bloomberg Business will tell you what’s happened. You need to think a few moves ahead.
It truly does not matter what the market holds for us in 2015. As Yogi Berra, one of the all time great catchers in baseball, said, “You can observe a lot just by watchin.”
The market is the same way. There are so many sophisticated computers out there that can make hash out of any equation Einstein could think up, but it’s the investor who simply pays attention to a few basic indicators, keeps it simple, and adheres to a logical, organized plan that does the best.
Two Key Rules of Market Engagement
Rule #1: Don’t Lose.
Investing is truly not a business of hitting grand slams. It’s a business of avoiding substantial reductions in capital.
This is contrary to how most of us are stimulated by advisors and firms. Investment firms are always coming up with their lists of investments that will double or triple in value over a relatively short period of time.
All you need to do is align your portfolio to what Albert Einstein referred to as one of the mathematical mysteries of the universe. And we all know that Albert Einstein was a pretty fair mathematician.
The mystery that Albert Einstein was referring to was the power of compounding. And the only thing that destroys the power of compounding is the loss of principal.
It would serve you well to have in place a discipline to recognize and trigger action at “unacceptable levels” of capital loss.
Rule #2: Take Losses.
You may be thinking, “Wait a minute Roger, first you say don’t lose, now you are saying take losses.”
Why?
I will be wrong.
We live in a world of probabilities and possibilities.
That is the way it is.
The unsuccessful advisors assume they will never be wrong.
Successful advisors understand that they will be wrong.
We have as part of our investment strategy a discipline that keeps us from pursuing disasters over long periods of time.
That keeps us from having an emotional attachment to any investment. It allows us to say what is, is. I was wrong. Here is what we should do about it.
It is counter-intuitive.
###
Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com
Roger S. Balser
Two-Beers, One Napkin and a 401(k)
Two Beers, One Napkin and a 401(k)
What would you do if you found out your investment was earning 1% a year? Would you review your investment and make some changes or would you take a “wait-and-see” position?
The reality is that lots of good folks are sitting idly while their retirement plans wallow. The tragedy is that a good portion of these folks aren’t even aware of just how badly their plans are performing, or even worse, that they have the ability to alter their plans with some basic information.
Here’s a discussion I had in early 2013 with a close friend that proves my point.
Enjoying a couple of beers after a round of golf, my friend, Steve, boasted how much his retirement plan had grown over the past 13 years. Steve said he began with $50,000 in his plan and now his account was over $282,000.
Surprised at those impressive numbers, I inquired how my friend succeeded at his realized gain of $232,000.
Grinning from ear to ear like the Cheshire Cat in Alice in Wonderland, Steve told me, “I bought the Standard and Poor’s 500 Index (S&P500) at the end of 1999 and just left it there. I’m a ‘long term’ investor, you know.”
Being a veteran player in the investment game, Steve’s statement naturally peaked my curiosity. Since 2000 there have been a host of sharp downward movements in the market. From the Asian flu epidemic to the tech bubble, Enron fiasco, 9/11, The Great Recession, the 2009 Economic Recovery that never was, and finally the European Debt Crisis, I was struggling with the notion that my friend could have discovered gold in down markets.
So I grabbed a napkin and a pen and asked Steve if we could demonstrate just how he did it. I told him to write $50,000 in the top left hand corner of the napkin and $282,000 at the bottom right corner. Then I asked, “Steve how much did you add each year in contributions to your retirement plan?”
“$15,000 every year,” he proudly replied.
“For all 13 years?” I inquired.
“Yep.”
I instructed him to multiply $15,000 by 13, and write the total in the center of the napkin.
He jotted down $195,000, thought for a minute and shrieked (and it wasn’t a very manly shriek), “Wait! $195,000 of my ‘gain’ was my own money — from my paycheck? That makes my real gain just a measly $37,000 after adding my own contributions.”
And without my prompting, Steve then divided his $37,000 gain by 13 years, and sheepishly wrote down $2,846.
“Steve, I estimate you’ve earned a little over one percent a year,” I said, feeling kind of sorry that I had initiated this little exercise.
While my friend motioned the bartender over for another beer he looked down and asked, “Roger, there’s no way I can retire if I keep this up, is there?”
“It’s going to be difficult,” I answered. “In hindsight, you would have been better off in a money market account and experienced a lot less volatility.”
“So is there a way I can be smarter about what I buy and when I buy it,” he begged?
“I think there is, Steve,” I answered. “Are you aware that there are two Standard and Poor’s 500 indexes?
I was referring to the investment vehicles that contain the same 500 stocks, but are bundled differently, are traded differently and produce different returns. One is “capitalization weighted” and the other is “equal weighted.”
The S&P 500 Index (SPX) is capitalization weighted in a way that is similar to how the U.S. Congress is weighted. The most populated states have the most representation (Congressmen) and the smallest states have the least. California has more votes than Rhode Island. The capitalization weighted S&P 500 gives most of the votes to the biggest stocks like Exxon Mobil.
Conversely, the equal weighted S&P 500 Index (RSP), gives an equal vote to every stock in the 500, similar to the U.S. Senate. In the Senate every state has two Senators. Rhode Island has just as many as California and Texas. So they have equal votes in the Senate.
Back in 2000 I began to explore exactly how these two markets traded. I ran a calculation called Relative Strength, which basically compared the capitalization weighted S&P 500 (Congress) to the equal weighted S&P 500 (Senate), to determine where to place investment dollars.
For the first time in more than seven years it revealed that the Senate was the place to be. To me this was huge news. But oddly enough, the major business media like Fox News, CNBC, The Wall Street Journal, Investor’s Business Daily never picked up on the story. And still today the business media only talks about the capitalization weighted S&P 500. When this reversal occurred it signaled a major change in our investment posture.
To make Steve even more depressed, I pulled out my iPad and demonstrated that from the beginning of 2000 to the end of 2012, the SPX was down close to 3% while the RSP was up nearly 89%.
“So why didn’t the retirement guy at my company tell me about this?” Steve asked. “Isn’t he supposed to be helping us?”
“Because that guy’s not paying attention,” I explained. “Most investors and their advisors are just riding the train and staring out the window at the pretty scenery. If they were paying attention you’d be in a much better position.”
The moral to this sad story is that you shouldn’t assume the company guy or your advisor is keeping an eye on your investments. The moral to this sad story is that you shouldn’t assume the company guy is keeping an eye on your investments. You’re the best person for that task. You see, investors with advisors who pay attention to their investments generally are the ones who make out a little better.
###
Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com
Roger S. Balser
Ways to Sabotage Your Portfolio
Psst! Want to lose a lot of money?
While there are no foolproof ways to accurately predict the market, there are several foolish ways in which investors can successfully subvert their portfolios and reap big losses. Here are several examples of how unknowing investors can unwittingly sabotage an investment portfolio.
Neglect the Driving Force Behind Any Business: Supply and Demand
Business success (or lack thereof) boils down to two simple words — Supply and Demand. It’s that simple. It doesn’t matter whether you are talking about the oil market, iPods, golf courses, lemonade stands, or the stock market. Simply put, if there are more buyers in a particular security than there are sellers willing to sell, the price will rise. Conversely, if there are more sellers in a particular security than there are buyers willing to buy, then the price will decline. If buying and selling are equal, the price will remain the same. This is the irrefutable law of supply and demand. The same reasons that cause price fluctuations in produce such as potatoes, corn and asparagus cause price fluctuations on Wall Street. The “Point & Figure” methodology I use is just a logical, sensible organized way of recording that supply and demand relationship. It simply arranges the information in a way that makes sense to me. A telephone number is no different; it is just a way of organizing 10 digits in a way that makes sense to us and the AT&T network. A Point & Figure chart is just a way of organizing a series of prices into a pattern that makes more sense.
Attempting to Play the Game Without Knowing What Team is on the Field
Think about your favorite football team for a moment. If they play offense 100 percent of the time, they are going to be marginal at best and at times downright awful. There’s a time to have the offensive team on the field and a time to have the defensive team on the field. The problem with most investors is they don’t know what stadium the game is being played in much less which team has the ball. Before deciding on any strategy, you must know whether you’re in a wealth accumulation mode or a wealth preservation mode.
Arrogance. The Market is Easy to Figure Out — But Only if You Listen
The market teaches humility. The sooner you acknowledge the fact the market is going to do what it’s going to do, and forget about trying to tell the market why it must do something because the economic numbers came out a certain way, the better off you’ll be. A quick look at the sector bell curve from different time periods can provide you a clear picture of what the risk in the overall market is. In October 2011 the world was facing down a financial crisis in Europe, Occupy Wall Street protesters, and a war in Libya, none of which were positive indicators. It was a hard time to invest, but if you stopped coming up with reasons why the market shouldn’t do this or shouldn’t do that long enough, you could have heard clearly what the market was telling you. It was saying risk was low and money should be put to work. Case in point: The S&P 500 gained more than 17 percent from October 10, 2011 through March 29, 2012.
Making Stock Selection Decisions on Fundamentals Alone
General Electric (GE) is a company that has their hands into everything, from industrial manufacturing, aircraft engines, nuclear power, loans (GE Capital), land management/acquisition, and more. GE basically has a hand in the honeypot of pretty much everything you can dream of. For a while, the stock price tracked the earnings in a general sense, but then in the year 2000 that correlation ended. The earnings continued to head higher, and meanwhile the stock price was cut in half. As of this writing, GE is still more than 65 percent below its high, while earnings have more than doubled.
Buying a Stock Simply Because It is a Good “Value”
There are two problems with buying on value alone. First, the stock can remain a great value and not move. Second, the stock can become an even better value by continuing to move lower. I believe it’s great to buy value stocks, but only when demand starts to come back to the stock. The pharmaceutical companies Eli Lilly (LLY) and Bristol Myers Squibb (BMY) are stocks that many regarded as good value investments before their sheer sell-offs in 2000. They have become even better “values” as they have continued their downward decline.
Being Afraid to Buy Strong Stocks
Sir Isaac Newton said, “Things in motion tend to stay in motion.” There’s an old stock market cliché that says the first stocks to double in a bull market usually double again. This mentality would have kept you out of Apple (APPL), which was up 201 percent between January 2009 and August 2010, and rose another 137 percent by the end of March 2012. It also would have kept you out of W.R. Grace (GRA), which was up 201 percent between January 2009 and August 2010, and up another 137 percent by March 2012. These are only two examples, but there are many others.
More important than how much the stock is up is its supply and demand relationship. By assessing the Point and Figure chart, you can gain insight into this relationship to gauge whether or not the stock is likely to move higher. Stocks that double can easily double again. Don’t miss out on these great opportunities.
Selling a Stock Because It’s Gone Up
Have you ever sold a stock for a small profit only to watch it continue to move higher and higher? It’s upsetting for any of us to remember those piles of money we let get away, but we have to keep in mind that in the long run it’s the size of your winners that counts, not how many winners you can find. For that reason, you want to become very judicious at managing the position. When you have a stock with strong technical qualities, prune the position, but hold the core position. There are a number of strategies to retain the core position, from just holding the stock, to using the options market. Relative Strength is one of the strategies I use. It’s a great tool for keeping at least one leg in a position for long-term growth.
Holding on to Losing Stocks and Hoping They Come Back
Often referred to as “buy and hope” or letting your losses run, many people are still holding stocks from the go-go years that have no possible chance of ever regaining their stardom. Just as the size of your winners matters, the size of your losers counts just as much or more. You need to make sure that you always come back with the ability to play another day. If you have a stock that declines 50 percent, then you’ve backed yourself into a corner because now you need that stock to double just to get back to even. It’s a fourth- down-and-forever situation, which is not desirable for any coach.
For example, the person who bought Cisco Systems (CSCO) at $82 in 2000 is reeling from its current price of about $20. That stock would have to quadruple just to get back to even! If you remember the early 2000s, investors were not beginning to sell stocks, this is when the average investor had just gone on margin to buy more. Will energy and gold become the next technology bubble? I don’t know. What I do know is the charts will give us sell points along the way and keep us from holding positions into the abyss.
Making Moves Based on a Magazine Cover
Following the hot news that appears on a magazine cover or a TV show is a shortcut to the poor house. Why would you follow the advice of an editor who has just moved from the society pages to the business section?
For instance, in October 2004 The Economist came out with a cover that said, “Scares Ahead for the World Economy” which would have made you think investing globally was not the correct play. Instead the International Markets’ returns dwarfed the U.S. from 2004 until late 2011. Their October 15th cover headlined, “Nowhere to hide. Investors have had a dreadful time in the recent past. The immediate future looks pretty rotten, too.” Since the then the S&P has gained 15 percent through the end of March 2012.
By staying far away from these money-draining traps, adhering to your pre-determined objectives, incorporating reasonable thought processes and using sound judgment, you can easily safeguard your investment portfolio and eliminate self-imposed losses.
###
Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com