Investing & Economy

Predicting changes in stock market direction

I’ve been thinking about starting a stock market prediction business. Clearly, there is a huge market for timely information of this type, and just as clearly, predicting the future must be much easier than dealing with the realities of what is actually happening at the moment.

If investors could know what’s likely to happen next, they could develop a plan to deal with it NOW; maybe Wall Street will help me get this new business up and running. What’s that?

Wall Street institutions already spend billions predicting future price movements of stock market individual issues & indices, commodities, and hemlines.. Really? Is it also true that economists have been analyzing and charting global business activity for decades, showing clearly the repetitive cyclical changes and their upward bias? Funny, or strange would be more accurate, that the advice generated by the oracle of Wall Street always assumes that the current environment, good or bad, will be everlasting. Isn’t it this kind of thinking that prolongs the downturns and “bubbles” the advances-- in all markets?

If it were true that our favorite pinstriped product pushers can actually predict the future, why would investors do what they do in response to the predictions? Why would financial professionals holler: “sell” at lower prices, and “buy at any price” when market valuations surge upward? Don’t they realize that change is coming?

Shouldn’t lower prices be the “call to the mall” that they are elsewhere in our lives? Most Wall Street soothsaying has a short-term focus that dwells upon today’s market conditions; most Wall Street glossies emphasize the long-term nature of investment programs. Why the dichotomy of advice and emphasis?

The reason for the emphasis dyslexia is simple: it’s easier to play to the emotion of the moment than it is to look beyond --- even though we all know that a change will be along eventually. Where ever we are, Wall Street advice will always fuel the current operative emotion, be it greed or fear.

At the moment, we have greed seeping out of every market orifice... particularly in 401k and other “retirement” programs. Possibly because the misguided regulatory “gestapo” emphasizes Total Return instead of Total Revenue, herds of sheep are pushed into retirement, forced to spend capital in addition to a minimal stream of investment income.

Wall Street’s retail representatives rarely go against the grain of the consensus --- particularly the one projected by their research department. You cannot obtain independent thinking from your Wall Street contact; such impertinence doesn’t pay the lease on the new Benz.

Here’s some experienced advice that you will not find on the “street of dreams”: Sell into rallies. Buy on bad news. Buy slowly; sell quickly. Always sell too soon. Always buy too soon.

No self respecting guru would ever refute the basic truth that the market indices, individual issue prices, the economy, and interest rates will always move in both directions... unpredictably and forever.

small moneyThis is where you need to focus your attention if you want to get through the investment process with your sanity. You must expect and plan for directional change and learn to use it to your advantage. Tranquilizers may be necessary to get you through the first few cycles, but if you have minimized your risk properly, you can thrive on the long-term, and very predictable, volatility of the markets.

The risk of loss cannot be eliminated. A simple change in a security’s market value is not a loss of principal just as certainly as a change in the market value of your home is not evidence of termite damage. Markets are complicated, and emotions about one’s assets are even more so.

This seems particularly hard to understand in the land of income investing, where changes in market value typically have no impact whatsoever on income production. Using Income CEFs, lower prices become opportunities to build portfolio income and to prepare for profit taking later... like right now (April through June, 2017), for example.

Cyclical changes in all markets are predictable conceptually, just as knowing approximately where you are within a cycle is knowable actually. The key is to understand what your securities are expected to do within the cyclical framework.

Now there’s a knowledge business with surprisingly few practitioners!

Predicting individual stock prices is a totally different ball game that requires a more powerful crystal ball and an array of semi legal and illegal relationships that are unavailable to most investors. There are just too many variables.

Prediction is impossible, but probability assessment has enormous potential. Investing in individual issues has to be done differently, and with rules, guidelines, and judgment. It has to be done unemotionally and rationally, monitored regularly, and analyzed with performance evaluation tools that are portfolio specific.

This is not nearly as difficult as it sounds, and if you are a shopper who looks for bargains elsewhere in your life, you should have no trouble understanding the workings of the stock market. There are only three decision-making scenarios that investors need to master if they want to predict long-term success for their portfolios.

The “Buy” decision has two important steps: Step one allocates the available investment assets, by purpose, between equity and income securities, based on the goals of the investment program. It is done best using a “cost” based model. Step two establishes strict selection quality measures and diversifies properly within each security class.

Investment Grade Value Stocks (IGVSI) are the low-risk equity champions; long-term, non-gimmick, managed CEFs produce the best income/diversification mix available in readily tradeable form.

The “Sell” decision involves setting reasonable profit taking targets for every security in the portfolio. Loss taking decisions must not be undertaken out of fear, and must be avoided during severe market downturns. Understanding the forces causing market value shrinkage is important and a highly disciplined hand at the emotion control button is essential.

Market Value is a decision making assistant... buy lower & sell higher than you buy. There is no such thing as a “smart” loss of capital, and generally no good reason to take losses on IGVSI companies.

Equity CEFs and high dividend paying Sector ETFs are particularly useful tools during extended market rallies (i.e., “bubbles”). These can be used to maintain a diversified equity asset allocation, with securities that can be added to periodically for cost basis reduction.

The key is to start with unusually small positions, in anticipation of a correction. (In 1999, all high quality securities lagged, while speculators pushed technology sector prices into the stratosphere... sound familiar? NASDAQ today is up just 25% from March 2000 levels, 1.45% growth per year.)

Closed End Tax Free Income Funds have delivered approximately 6% per year spending money during the same time period; taxable CEFs even more!

The “Hold” decision is most common, and it regulates and moderates the process, keeping it less than frantic. Continue to hold on to fundamentally strong equities and income securities that are providing their normal cash flow. Hold weaker positions until the appropriate cycle (market, interest, economy) changes direction, and then consider whether to sell or to buy more.

Wall Street spins reality in whatever manner it can to make most investors unhappy, thus increasing new product sales. Your confusion, fear, greed, impatience, and need for a quick panacea fuels their profit engines, not yours.

Learn how to deal unemotionally with Wall Street events and shun the herd mentality... that’ll fix ‘em.

 

 

steve3smallAbout the Author

Steve Selengut has been in the investment Management Business since 1979 through Sanco Services, Inc., an international company he owns and manages. His career as an investor started in 1970, at age 25. He developed the unique Working Capital Model for Asset Allocation Management then (decades before the concept became popular) and still uses it today to in supervising personal and other investment programs for other professionalss and to educate countless individual investors.

Before his 34th birthday, he retired from his full time management position in the Pension Investment Department of a major New York Life Insurance company to pursue his new career. He was able to start fresh, build a new home, and keep both children in private schools strictly on the income produced by his investment portfolio!

Mr. Selengut has been interviewed frequently by The Wall Street Transcript (most recently in January, 2003 as a result of his achievements during the "Dot.com Bear Market").

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