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Smart Investing


I have had the pleasure and honor of teaching thousands of individual investors, Registered Investment Advisers, Representatives, and even a few 9th graders over the past 32 years, on how to design, enhance, and manage their respective investment portfolios. I would like to share our investment philosophy that has been tested through multiple market cycles and is based on the rock-solid principles.

An Unbiased and Objective Investment Strategy

Successful investing requires a clear and consistent investment strategy. Numerous studies have shown that investors tend to achieve sub-par performance because they allow their emotions to take control and fail to adhere to a consistent set of rules. By having a clear and effective strategy, it is possible to achieve superior investment returns.

Fundamental vs. Technical Analysis

There are two types of securities analysis – fundamental analysis and technical analysis. Fundamental analysis is what most of us are familiar with and it focuses on earnings, sales, financial ratios, management, etc. When you see an analyst on CNBC, Bloomberg or read comments in a magazine or news story, most often, their comments come from a fundamental analyst. However, there are an ever increasing number of technical analysts appearing on these same programs, and their analysis is based on the technical attributes of a particular stock or sector or how it looks on a chart.

A fundamental analyst attempts to answer the question “what” to buy or sell. They will study the company’s balance sheet, evaluate the management team and attempt to understand the quality of the company’s earnings.

A technical analyst tries to answer the question of ”when” to buy or sell. A technical analyst wants to determine the trend of a chart – is it trending higher or trending lower. Is the stock outperforming the broad market? How high, or in some cases, how low can the stock fall?

Unfortunately, there are very few on Wall Street who effectively blend fundamental and technical analysis in their overall investment process. In a sense, they are playing the piano with only one hand. While that may be a way to play a simple melody, you can play much better music if you play the piano with both hands. Smart investing is about stacking as many factors in your favor as possible.

Causes of Price Movement

Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals.

Most people, however, spend 80% of their time on stock evaluation and only 20% on sector and market evaluation. In other words, they ignore where the greatest amount of risk lies – the market and sector forces. When the markets are "blowing up", there isn't any place to hide and your favorite stock, ETF, or mutual fund can drop in value very quickly, just like they did a few years ago. The S & P 500 Index fell 53% from the October 7, 2007 peak to the March 9, 2009 lows. The fundamentals on many of these stocks were stellar, but it did not prevent a massive drop in the prices of these stocks.

The Five Step Strategy we use to Manage Risk in the Market

We look at the market to determine whether it is supporting higher prices. If it is, then we move to the sectors and determine which sectors are supporting higher prices. From there, our inventory of stocks or Exchange Traded Funds (ETFs) is determined by those deemed fundamentally sound in the strong sectors. Then, from this inventory we choose those that are technically sound and controlled by demand. Finally, all the stocks in our master portfolio are updated each day so that we see changes in the supply/demand relationship and we make adjustments, as needed. Here is our five-step process:

  1. Market Analysis

  2. Sector Analysis

  3. Fundamental Research

  4. Technical Research

  5. Risk Management & Follow-up

Next, stick with a disciplined plan that is easy to monitor:

  1. Keep it simple

  2. Stack as many factors as you can in your favor

  3. What are the overall market conditions?

  4. Are prices rising or falling?

  5. Use Technical & Fundamental Analysis

Supply and Demand

Most of us understand the basic law of supply and demand and we have all experienced these forces at the supermarket. We know why in the winter, tomatoes do not taste very good and are expensive. We inherently understand why there are lemonade stands in the summer and hot chocolate stands in the winter. Stocks and sectors move in and out of favor just like produce in the supermarket and it is important to understand this point. There is a time to be on defense and a time to be on offense. Imagine for a moment that a professional football team was always on offense with no defense. It would be difficult for them to win any games, and they would be a mediocre team at best, yet many investors think they should always be on "offense" in the market. There is a time to be in the market and a time to be in cash, in other words, there needs to be a time when the defense team is playing and another time when offense team is on the field.

Economics 101

If you have taken Econ 101 in college, you may remember the overall theme of the class is revolving around supply and demand. This is what ultimately drives the price of virtually every commodity, stock, automobile, home or widget in the land. If you have more buyers than sellers, prices will rise. If there are more sellers than buyers, the prices will fall. If you have an equal number of buyers and sellers, the price will remain the same. This is the irrefutable law of Supply and Demand. This methodology will not tell you what to buy, but rather it is an extremely helpful tool in letting you determine where you are on the "playing field" and how you should position your investment portfolio and whether you should buying, selling or holding.

Managing Stock Market Risk

In order to have a successful risk management investment strategy, market timing does not have to be perfect. Despite belief to the contrary, market timing does not target getting in and out of the market at the absolute tops or bottoms. It does, however, strive to get an investor’s funds out of the market before a major bear market devastates the portfolio. Market timing’s first and foremost priority is the preservation of capital.

One of the most important considerations when investing is determining whether to take an offensive or defensive position. When market movements indicate significant risk, defense is suggested, we encourage you to you to protect your existing positions.

Let Your Profits Run but Cut Your Losses Short

The cornerstone of our investment approach is blending the best features of technical and fundamental analysis. By doing so, we can cut through the day-to-day market action, identifying meaningful patterns in daily share price movements.

This methodology can be applied at the country, sector, or individual share level, and across a wide variety of assets classes. The goal is to manage risk and concentrate investments in those areas of the market with the highest probabilities of future performance.

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