Investment strategy: the investor’s creed revised
Fascinating, aren’t they, these bear safety markets, with their unpredictability, promise, and unscripted daily drama. But the individual investors themselves are even more interesting. We’ve become the product of a media-driven culture that must have reason, predictability, guilt, scapegoats, and even that “four letter” word, certainty.
We are becoming a culture of speculators, where hindsight is replacing the reality-based forecast that once flowed in our veins now in real time. However, markets have always been dynamic places where investors can earn reasonable returns on their capital. If one follows the basic principles of effort and does not measure progress too often with irrelevant measuring devices, growth in working capital, market value and income to spend is very likely to occur … without a taking undue risks.
The classic investment strategy is so simple and so hackneyed that most investors routinely discard it and move on in their quest for the holy grail of investing: a stock market that only rises and a bond market capable of paying fees. higher interest rates at stable or stable rates. the highest prices. This is mythology, not investment.
Investors who grasp the realities of these wonderful markets (driven by speculation) recognize the opportunities and enjoy them with an understanding that goes beyond media hype and “performance enhancement” heralds. They have no problem with “uncertainty”; they hug it.
In short, in rising markets:
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When investment grade equities approach the “reasonable” target prices you have set for them, make a profit, because that is the “growth” purpose of investing in the stock market.
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When the market value of your securities for income purposes increases by the equivalent of one year’s anticipated interest, take your earnings and reinvest them in similar securities; because compound interest is the safest and most powerful weapon that investors have in our arsenals.
On the other hand, and there has always been a downside (most commonly feared as a “correction”), replenish your portfolio of stocks with now lower priced investment grade stocks. Yes, even some that you just sold weeks or even months ago.
And, if the correction is occurring in your portfolio’s revenue purpose allocation, take advantage of the opportunity by adding positions, increasing performance, and lowering the cost base in one magical transaction.
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Some of you may not know how to add to those somewhat illiquid bond, mortgage, loan, and preferred stock portfolios so easily. It is time for you to meet Closed Funds (CEF), the great “liquidators” of the bond market. Many high-quality CEFs have 20-year dividend histories for you to salivate.
This is much more than an oversimplification of “buy low, sell high”. It’s a long-term strategy that succeeds … cycle, after cycle, after cycle. Wondering why Wall Street isn’t spending more time boosting its CEFs of managed tax-free income, taxable income, and equity capital?
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Unlike mutual funds, CEFs are actually independent investment companies with a fixed number of shares traded on stock exchanges. The stock can trade (in real time) above or below the fund’s NAV. Both fees and net / net dividends are higher than for any comparable mutual fund, but your advisor will likely tell you that they are riskier due to “leverage.”
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Leverage is a short-term loan and is not at all the same as a margin loan in the portfolio. It’s more like a business line of credit or accounts receivable financing tool. You can find a full explanation here: https://www.cefconnect.com/closed-end-funds-what-is-leverage
I’m sure most of you understand why your portfolio’s market values rise and fall over time … the very nature of equity markets. Day-to-day volatility will vary, but changes surrounding long-term market direction, income purpose, or growth purpose are generally most noticeable.
- Neither your “working capital” nor your realized income should be affected by changes in your market value; If so, you are not building a “retirement ready” portfolio.
So instead of rallying through every new stock market rally or lamenting every inevitable correction, you need to take steps that improve both your working capital and income productivity, while at the same time propelling you toward goals and objectives. long-term.
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By applying some easy-to-digest processes, you can chart a course toward an investment portfolio that regularly reaches higher market highs and (much more importantly) higher market value lows while constantly increasing both working capital. like income … regardless of what is happening in the financial markets.
Left to its own devices, an unmanaged portfolio (think NASDAQ, DJIA, or S&P 500) is likely to have long periods of unproductive lateral movement. You can’t afford to travel eleven years at a steady pace (the Dow, from December 1999 to November 2010, for example), and it’s foolish, even irresponsible, to expect any unmanaged approach to be in tune with your personal financial goals. .
The investor’s creed
The original “Investor’s Creed” was written at a time when money market funds were paying above 4%, so keeping “smart cash” in uninvested stocks was, in effect, a combination of benefits while lower share prices were expected. Income category cash is always reinvested as soon as possible. Since money market rates have turned trough, the “smart cash” from stocks has been placed in CEF of tradable stocks with average returns of more than 6% as a replacement … not as safe, but compounding pays off. the greatest risk on monetary funds.
It summarizes several basic principles of asset allocation, investment strategy, and investment psychology in a fairly clear personal portfolio management direction statement:
- My intention is to invest fully in accordance with my planned capital / fixed income, cost-based, asset allocation.
- All the securities I own are for sale at a reasonable target price, while also generating some form of cash flow for reinvestment.
- I am pleased to see that my cash position in the stock deposit is low, indicating that my assets are working hard to meet my goals.
- I am most satisfied when my box of stocks is growing steadily, which shows that I have been capitalizing on all reasonable earnings.
- I am confident that I will always be in a position to take advantage of new equity opportunities that meet my rigorous selection criteria.
If you are managing your portfolio correctly, your CEF cash + equity position (the “smart cash”) should increase during rallies, as you profit from securities you confidently bought when prices were falling. And you could be filled to the brim with this “smart cash” long before the investment gods denounce the advance of the stock market.
Yes, if you go through the investment process with an understanding of market cycles, you will be building liquidity as Wall Street encourages higher stock weights, while numerous IPOs prey on euphoric speculative greed, and as the morning drives broadcasters from Radio friends boast of their successes in ETFs and mutual funds.
While increasing the size of your hats, you will increase your income production by keeping your income purpose allocation on target and taking out the growth purpose portion of your earnings, dividends and interest in a stock-based alternative to fund rates. monetary “de minimis”. .
This “smart cash,” made up of earned earnings, interest and dividends, is taking a breather at the bank after a scoring drive. As earnings accumulate at CEF equity rates, the disciplined trainer looks for sure signs of investor greed in the market:
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Fixed income prices are falling as speculators abandon their long-term goals and seek out the new investment stars that are sure to drive stock prices forever higher.
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Boring investment grade stocks are also falling in price because it is now clear that the market will never fall sharply again … particularly NASDAQ, simply ignoring the fact that it is still less than 25% above where it was almost twenty years ago. (FANG included).
And the rhythm continues, cycle after cycle, generation after generation. Will today’s managers and gurus be smarter than those of the late 1990s? Will they ever learn that it is the very strength of rising markets that eventually proves to be their greatest weakness?
Isn’t it great to be able to say, “Frankly Scarlett, I just don’t care about changes in market direction. My working capital and income will continue to grow regardless, possibly even better when the prices of securities for income purposes are falling.”
