When the market looks good and people feel as if it will do nothing but move higher, investors stray from what they know to be proper investment strategies and techniques. Unfortunately, only in times of trouble do investors revert to what they have been forced to do time and time again, and that is to engage in proactive risk controlled strategies.
Better timing would be for investors to engage in proactive risk-controlled strategies and refrain from straying from that strategy for at least the next five years. The problem is finding the time, or dispelling the emotion that often accompanies proactive risk-controlled strategies. What is a CEO, who manages hundreds of people, supposed to do- stare at a computer all day?
Undoubtedly, the answer is no, but neither should he give his money to a mutual fund or invest it in a stock, and just believe the market will go up forever. The economy and the stock market are in depressionary environments, and had it not been for QE2, deflation would be front and center. Bernanke is very effective at staving off deflation, and he should be commended. He is exactly why we are not in a defined depression right now.
However, that does not change the depressionary environment we are in today. This environment is fragile, and that means the market is vulnerable to aggressive and immediate declines at any time. The Buy and Hold techniques of traditional money managers, therefore, are equally vulnerable.
More importantly, in this environment, the ability of the economy and the stock market to materially grow beyond its highs is truncated.The demand side of the curve is also truncated, and without further stimulus it will stay that way. Real demand, and that means new investment dollars, are starting to decline measurably every year on a demographic basis. With less and less new investment money coming into the economy every year, recovery is much more difficult too.
Consciously, this needs to be accepted. Admitting that there is a problem is the first step to solving it. That means accepting the general weakness and the vulnerability of the market is the first step to avoiding the pitfalls that are inevitable. CEOs are doing this with their businesses, so it is important that they also do that with their portfolios, but this proactive approach should not be limited to CEOs: Everyone should adopt a proactive approach.
Notice that there is no mention of shorting the market and holding either. In fact, that is completely the wrong thing to do. The purpose is to never be one sided, but instead take advantage of extreme volatility, or even interim volatility over time. My thesis is that short term gains lead to long term success, and that, in my opinion, is the definition of proactive strategies.
For investors who are not interested in putting in the work other proactive investors do, we have a handful of options. We can demonstrate how they work, how to control risk, realize reward, and do it without sacrificing time or lifestyle, but before we can do that we need everyone to understand why proactive disciplines and risk control is important. If this past week does not prove it, regardless of what supporting evidence we have (and we have plenty) I do not know what does.
If you are close-minded and you only believe in buy and hold, and you refuse to consider proactive strategies, the good news is 30 years from now the market will be higher, but in the meantime, good luck making positive headway. For everyone else, we have viable options. Without any obligation, let us share them; It could change your life forever.
Here is an example of what we do:
Evaluate the Market
Invest in Market based ETFs
Buy near support, target resistance
Control risk if support breaks
We do not:
We never trade in the middle of a channel
We never allow emotions to get in the way
We never deviate from strategy no matter what happens to the market.
Capable of making money in any market environment
Most importantly, we can do it without sacrificing time or lifestyle.
We never look at stocks.
Our point of view is that individual stocks are much more difficult to assess than the market. Simply, there are too many variables when it comes to individual stocks, and market analysis is still required after we evaluate a stock anyway, so why not just focus on the market.
For example, when considering an individual stock we must evaluate the profitability ratios, product cycles, competitive landscape, growth estimates, margins, taxes, insider buying or selling, institutional interest, and the list goes on. Afterwards, we need to evaluate the market, just to see if the market is giving us a bias to increase or decline. If the market supports a decision to buy, and our stock evaluation metrics also tells us that a buy is warranted, we can take a position.
However, the metrics that go into stock evaluation are almost impossible to be sure of. Consider the questions surrounding Bank of America (NYSE:BAC) at this time and you will surely agree that meaningful questions exist, and not even the institutional investors are sure of the answers. Also, everyone stopped believing in Cisco (NASDAQ:CSCO) recently, but that stock has begun to shine. The corporate veils that surround individual stocks prevent normal investors from making confident decisions, and institutional investors have trouble doing the same.
Therefore, instead of allowing those variables to cloud our judgment, we remove them completely from the equation. Instead of including those, we only do the second part of the analysis process, and that means evaluating the market. Market evaluations are, by definition, much easier than evaluating individual companies. After doing that, we either get buy signals or sell signals, and all we need to do is trade market-based ETFs based on what the market is saying. We consider stocks like QID and QLD for the NASDAQ, DXD and DDM for the Dow, SDS and SSO for the S&P 500, and TWM and UWM for the Russell. Depending on which market we are interested in, we have instruments that allow us to make positive headway without the complications of individual stock selection.
The Golden Handcuffs
Keeping it simple is critically important, but this process does something else. Imagine going through the work of stock evaluation, you start to believe in management, and the stock is a good company in your opinion. Then, suddenly, the market gets slammed. You decide 'this is a good company so I am not going to sell'. This is what I call Golden Handcuffs. You are tied to the company, you refuse to sell before the going gets tough and the market collapses, which is what market analysis will warn you of, and instead of considering your investment, you continue to evaluate the company. Everyone who did this in 2008 was hurt badly, and most who did this recently were hit again. When we focus on ETFs, no one becomes tied to the ETF, the Golden Handcuffs are removed, and selling them when the market tells us to sell is a much easier decision.
Therefore, not only is our process more efficient to make buy decisions because it reduces the work, but it completely removes the Golden Handcuffs that have destroyed investors for the past decade. 'Keep it Simple Sweetheart', and this business is much less intrusive, far more efficient, and the proactive approach that many still refuse to consider actually becomes viable.
Remain proactive, remove the emotions, take off the Golden Handcuffs, and start taking advantage of market moves without sacrificing time or lifestyle today.
Disclosure: I am long UWM.
Additional disclosure: I may change this position without notice.