Investment Strategy: The Investor's Creed, and "Smart Cash"
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!