The Deipnosophist

Where the science of investing becomes an art of living

My Photo
Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

15 November 2009

An investing conspectus

In God We Trust…
To invest requires faith: faith that the markets are fair for all, faith that company executives do not abscond with corporate assets, faith that share prices, in general, trend higher over time. A breach of any one of these beliefs can cause a rupture in systemic confidence, and, as a result, share prices would tumble. This is one reason that, in the wake of The Great Panic of 2008, the balance sheets and income statements of all companies are more closely scrutinized than perhaps ever before, which represents a positive change.

… All Others Pay Cash
Global security, in the form of lessened societal risk (not increased surveillance) is of paramount importance today. With the fabric of global society frayed, financial investments play the important role of canary in the coal-mine, warbling of increased risk. To purchase shares as price approaches or touches the drawn line of price support remains a buying opportunity; until, that is, the market averages break down beneath the circumscribed crucial line of support.

 volatility is the process of pricing in all known (current) and unknown (future) risk -- which notion includes financial markets woes such as declining earnings, high PEs, negative chart patterns, even exogenous events such as acts of terrorism, increased trade tariffs, or even World War III (as has been mooted elsewhere) -- until the moment the market averages and indices finally break out (up or down) from their high level consolidations. (Today's high level consolidation is now 12 years, and counting.) The news response syndrome would dictate financial market reaction: Buy on the rumor; sell on the fact. No market prediction inheres in that comment; certainly everyone is aware of the dire state of global affairs and financial markets.

That said, the US$ finds itself at a critical juncture. From an investor’s perspective a continued decline could usher in an increasing investment preference for big-cap consumer companies with a multi-national,  international, or global bias. I note the increasing strength of institutional blue chips such as Coca-Cola/KO, Colgare-Palmolive/CL, McDonalds/MCD, etc. For these companies’ shares, a lower US$ value equals potential and probable higher earnings; thus, a rising share price. As global buyers of last resort, American consumers receive the windfall benefit of lower prices via the greater purchasing power of a rising US$. (Americans who travel abroad would realize cheaper prices as well.)

Unfortunately, a falling US$, especially should that decline become precipitous, has the potential to create global financial havoc.

The United States and American corporations must provide global financial leadership today -- and embrace the relative domestic hardship that a strong US$ would present for American citizens. Yes, this would result in a continued lack of corporate competitive pricing power (a higher US$ means higher prices for US products when purchased in a native currency), and yes, the USA will import the products of other countries to the detriment of American employees. (Fewer jobs at home; more abroad.) Yet, the global community needs now, arguably more than ever, is the encouragement that a strong and strengthening US$ would provide. The global community looks today for overt, straightforward, reliable expressions of leadership; the USA and American citizens must say to the global community, “Export your ills, troubles, and products to us. We accept your hardships as ours.” This quality of leadership — the ability and willingness to assume hardship — is crucial, especially if Americans prefer the US$ to maintain its status as global reserve currency.

Heaven Can Wait -- But Will The Impatient Investor?
Price oscillations are a natural part of the investment process and create the investor’s opportunities. But the market marches to the beat of its own drummer. Self-doubt, self-recriminations, and the inability to trust his decisions finally leads to the investor’s inability to pull the trigger, to purchase shares, when the appropriate time is at hand. The responsibility of each investor is to make informed, educated decisions; to trust only his decisions. Always do the hard thing. The difficult decision is almost always the correct decision.

A perdurable source of amazement is how the many view the few. Quick to buy and slow to sell vs. slow to buy and quick to sell is an interesting paradox. The former is the perceived domain of the investor, and believed somehow preferable, even nobler, than the latter, the perceived domain of the trader. To know his investing objectives before purchasing portfolio positions is tantamount to the investor’s knowing himself. The investor who makes the deliberated purchase knows why he buys what he buys, thus he knows why he sells when he sells. To know less is folly.

Some claim to focus on a very small number of investment opportunities they “… really understand and believe in, and just buy and hold on, sometimes for dear life. I would guess that the ratio of my profits to the number of trades executed is about as high as it gets.” Well, of course it is: a portfolio structured in that fashion is one usually laden with losing positions (“Hold on for dear life…”) while the winners have been since sold (“ratio of profits to… trades executed…”). Where is the nobility in this process?

Syncretic Reality
No one right way exists to make money via investing. An investor can trade, speculate, or invest; he can buy breakouts or pull backs; he can day trade or swing trade; he can purchase value or growth; small cap or big cap, etc. To affix labels provides more salve for the person’s ego who brandishes the label than it does to further the true goal: to make money.

No investor is an island; no single investor has unlimited capital. To deploy his limited resources in loss-pocked investments — i.e., in the company’s sector, the economy, or the market — is to confuse fool’s gold for the real item. “All that glitters is not gold.” The reader, market student, and investor learn that volatility ultimately can beget trends, and those trends can become investments... but that trends finally die, across all periodicities; the trend is not always your friend. To recognize only true market patterns better enables the investor to align his portfolio objectives and personal goals with market oscillations. The high-level consolidation is one opportunity that recurs regularly, is readily apprehendable, and can generate many different techniques to generate profit.

Is any one moment better than another to invest? Recall that, because the investor is more appropriately concerned with time, his objective is to buy at moments rife with high reward and low risk, which, paradoxically, often appear to be moments of high risk and low reward.

Many investors prefer to purchase at or near the historic low price, or at symmetrically proved major price support lines; unfortunately, the investor must recognize that the investment behaves in accord to its own life cycle, not his. Is it trending down, sideways, or up, and in what periodicity? Does that periodicity conform to his?

Try to differentiate between the market’s cycle and that of the possible investment. If the company experiences corporate or economic difficulty, then recognize that it is captive to cyclical forces. To purchase shares in companies that experience this type of difficulty (bad or worsening corporate fundamentals, bad or worsening economic environment for this company’s sector, bad market conditions for this company’s sector), watch out, land-mines abound!

Sometimes, the investor learns of an investment opportunity too late to accumulate the investment during high-level consolidations or bear market declines. Perhaps the possible investment has already experienced a break out from its high-level consolidation. How, then, does the investor (not the trader nor speculator) treat the possible new portfolio position?
1) By realizing that former resistance becomes support, and renewed opportunity;
2) By re-sizing the position to account for increased risk due to a higher share price (price = risk);
3) By adjusting his time frame to match the incestments aging trend.

Declines often manifest as a low volume drift with little price concession because a company’s shares are aggressively, although quietly, accumulated. It is advisable to purchase some shares during moments, or episodes, of weakness. If the investor has properly identified the trend lines, the opportunity, and finds the moment true to his particulars, he will invest in a goldmine, not a land-mine.

Any particular breakout litters the trail with doubt as to how vibrant, how robust, it will be. You seek opportunities in which volatility can and will transmute to trend -- a healthy and enduring trend. The past 8 1/2 months prove my point.

Full Disclosure: Long Colgate-Palmolive/CL and McDonald's/MCD.

PS: For specific investment opportunities, price and timing included, please visit Investment Poetry.
-- David M Gordon / The Deipnosophist

Labels: , , , ,

who's online