Thereís a rumor going around that the Mutual Funds
are broken and just canít work anymore, for a multitude of reasons.
They've tried index funds, but these, too, have been less than impressive
since they hit the street a few years back, and are now being enhanced...
what does that say? Here are some new and/or forgotten ideas that can get
your investment program back on track:
1. Abandon the popular averages: Over the past six
years, all of the major averages are grossly negative or just beginning to
get back toward their best past levels. At the same time, the NYSE
advance/decline line has been extremely positive. Additionally, the last
time the averages were up, issue breadth was totally negative.
2. And the basics of investing, again, are what?
Most investors confuse Quality with analyst expectations and think that
Diversification means getting one of every product type thatís out there.
In fact, they are basic risk minimization tools that every investor needs
3. Appreciate the power of income: Base Income just
has to grow every year, period, for a person to have any hope of keeping up
with inflation. Thatís right, growing Market Value is inflationary...
particularly with respect to hat size, and income paves the road to
4. Buy low (within reason), sell higher: Profitable
company stock prices fluctuate just like unprofitable ones. The difference
is that the former are much more likely to move back up again. Buy quality
at lower prices (just like any other form of shopping), big BUT, set a
reasonable (10% or so) profit-taking target... and pull the trigger. Re-load,
and do it again.
5. Embrace The Working Capital Model: For both
portfolio Asset Allocation and Performance Evaluation, use the cost basis
of your holdings as opposed to their Market Value. This is the only way to
use short time periods (a year being the shortest for anything at all
meaningful) for any kind of analysis. Also, as a bonus, youíll never make
another fixed income mistake.
6. Fall in love with Volatility, not with
securities of any kind: Market volatility is one of the few things (if
there are any at all) that you can be certain about. Use it wisely and it
will shorten your road to investment success. All too often, unrealized
gains on the loved ones become realized losses on the tax return.
7. Remember Peak-to-Peak and Trough-to-Trough:
There was a time when tests like these (and variations like P to T, or T to
P) where the only valid (Market Value) tests of a managerís ability. They
still are. I have never found a correlation between the calendar year and
any market, interest rate, or economic cycle.
8. Corrections are every bit as lovable as rallies:
In truth, profit taking is more fun, and much easier decision-making than
buying stocks while in the throes of a falling Equity Market. But one is
just the flip side of the other, and you need to learn the lyrics to Every
Day just as you knew Peggy Sue.
9. Understand The Investorís Creed: How did trading
get a bad rep? What is a stock exchange? Buy and hold just doesnít fit. The
key is timing (not market timing) and selectivity. In a rising market you
should be selling more than buying, resulting in a growing cash position.
This is a good thing. In a falling market you should be buying more than
selling, resulting in a smaller cash position... also a good thing. If you
run out of cash while the market is still falling, you are doing it right.
By the same token, if you feel stupid having taken your profits and the
market is still foaming, your brilliance will not be your only reward.
10. Investing is not a competitive event: Itís all
about you: your money, your risk tolerance, your goals, and your
objectives. It doesnít matter what the others are doing, why and how. Think
about this. There is no average, index, or benchmark that can be compared
to the Market Value changes of a properly diversified portfolio. Nadda.
11. Establish Rules and Apply Discipline... a bonus
idea. Just do it.