Speaking of Stock Market Rallies
By Steve Selengut,
Professional Investment Portfolio Manager
BA Business, Gettysburg College; MBA Professional Management,
Johns Island, SC, U.S.A.
sanserve at aol com
This morning's classic E-mail question wondered: "Is this
the real thing?" The reference was to the Media applauded five
month spurt in the Dow Jones Industrial Average (DJIA), an advance
to the highest levels in about four years, but still miles from
an All Time High (ATH). The meaning inside was much, much greater
--- speaking as it does to some basic misconceptions many people
have in their approach to stock market investing.
Investors seem to believe that (1) the popular averages (the Dow
and S & P 500) accurately reflect the direction of the entire
stock market; (2) that the Dow contains only the best of the best
US companies; (3) that most professional money managers are unlikely
to outperform the market averages; (4) that personal investment
portfolio market values are married to the market averages.
Actually, the market averages reflect what investors expect from
the economy, interest rates, politics, climate change, and many
other variables. They are also trailing indicators of what investors
actually know about things such as corporate earnings, tax policy,
unemployment rates, and regulation. The market averages report the
direction and show the trend of past prices of the limited number
of securities they contain, and are subject to massive short term
gyrations caused by all kinds of current events.
The DJIA contains just 30 stocks, twenty-seven NYSE and three NASDAQ.
The S & P 500 is much more diverse, but neither is designed
to reflect the price performance of any particular mix of securities
based on the quality of their earnings or the safety of their dividends.
The "Blue Chip" Dow average, for example, contains 17
stocks that are less than "A" rated and 13% of the companies
are rated below investment grade.
The Investment Grade Value Stock Index (IGVSI) is designed to report
the historical price movements of NYSE, B+ and better rated, dividend
paying US companies. At the moment, there are only 352 companies
that qualify --- so at least 30% of the S & P 500 cannot possibly
contain Investment Grade Value Stocks. The actual number is less
than half. Over the past several years, the IGVSI has outperformed
the popular averages significantly.
Most professional money managers are in charge of public-access,
open-end Mutual Funds. Their decision making is influenced by their
corporate investment committees, performance ranking agencies, and
the uninformed, ill-trained, investment public that is up to its
armpits in self directed IRA, 401(k), and other investment portfolios.
Most investors are required to use open-end mutual funds; the remainder
are encouraged to use passive speculation vehicles --- go figure!
When the lemmings head for the cliffs, managers must sell securities;
when greed infects the masses, managers must buy into the bubble.
It is not the managers who underperform the averages, it is their
bosses on Wall Street and on Main Street who are always push-pulling
in the wrong direction. Market Cycle Investment Management (MCIM)
users are likely to outperform the markets over the course of most
Personal portfolio market values are a function of their investment
plan, content, and management. Clearly, those that are passively
managed (an oxymoron) and/or managed by the mutual fund mob can
expect only to mirror the market averages. However, investment portfolios
can be self-directed for better results.
There is no reason for anyone to have had negative growth in market
values over the past dozen years --- as is the case with the market
averages. Wall Street wants you to accept mass produced mediocrity,
and they have fostered ancillary misconceptions designed to "make
Investors need "experts" to determine when it is safe
to enter or prudent to leave the investment markets --- without
distinctions regarding quality or purpose of the securities involved.
The stock market, you see, is the only place on the planet where
higher prices have become a "call to the mall". The higher
the market averages, the more furious the feeding frenzy becomes,
and the more IPOs and other exotic ideas that are brought to the
attention of speculators.
Another misconception is the notion that someday there will be
a market rally that never ends --- stock prices will go forever
higher. This predicted by the very same experts who, just five months
ago, were certain of a return to financial crisis lows!
Finally, and mainly because it is rarely even mentioned, there
is a between the lines wealth of conventional wisdom that reinforces
the myth that one's income needs can be dealt with later --- because
your portfolio will be at an ATH at retirement. Yeah, right.
There is more in those five little words (Is this the real thing?),
but the point of this message is not. "The Market" has
never and will never be a one way "ticket to ride" (everyone
in my generation should now be smiling) --- at first, and then thinking
about the dozens of times they neglected to take their profits in
None of the important aspects of the "ride" (length,
breadth, height, duration, sector participation, decline) are predictable
by anyone, no matter how overpaid or well credentialed. It has become
clear to me over the forty plus years that I've muddled through
the exercise, that most mistakes are made by people who either over
complicate the process or who seek to avoid the investment work
There is no real need for rocket science in investing --- no correlations,
standard deviations, coefficients, Alphas, Betas, or Zetas are required.
Similarly, passively managed, index derivatives are just a lazy
man's way of reinforcing the myth that active management is ineffective.
One can have science without creating complex, inexplicable monsters.
One can be creative without manufacturing hedges, swaps, games,
and probability scenarios. One can understand enough about investing
to figure out that he is being conned.
Successful investing requires some knowledge of business operations,
market, economic and interest rate cycles, management techniques,
a touch of retailing, some psychology, a dash of organizational
skills, and a pinch of rudimentary economics. It's also helpful
to be focused, decisive and disciplined.
Simply put, your portfolio is a shop with two businesses inside.
On the retail side, you inventory quality merchandise for later
sale at an easy to achieve target. On the office side, you accumulate
income producing instruments designed to pay current expenses and
to prepare for future income needs.
As the owner of the enterprise, you must have a disciplined plan,
rules, procedures, and controls. The only additional feature needed
is the time to guide your train to an actual and long predetermined
destination. You may just have to find a qualified conductor to
do this --- a direct decision-making employee, as opposed to a product
salesperson. But you need to understand the process.
So yes, this is the real thing --- a very high priced stock market
that will eventually correct. No one knows when, but there is no
question that it will. All decision making is done under uncertain
conditions, and no person ever became poorer by taking a profit.
During Stock Market rallies, when portfolio market values are at
or near all time highs, always, yes always, sell too soon.
Author: "The Brainwashing of the American Investor: The Book
that Wall Street Does Not Want YOU to Read"
Published - May 2012