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Investment Strategy: The Investor’s Credo Revised

Fascinating, aren’t they, these stock markets of ours, with their unpredictability, promise, and unscripted daily drama. But individual investors themselves are even more interesting. We have become the product of a media-driven culture that must have reasons, predictability, blame, 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 through our veins now in real time. Still, markets have always been dynamic places where investors can earn reasonable returns on their capital on a consistent basis. If one sticks to the basics of the effort and doesn’t measure progress too often with irrelevant measuring devices, growth in working capital, market value, and expendable income is very likely…without taking any risk. improper

The classic investment strategy is so simple and hackneyed that most investors routinely discard it and continue in their search for the holy grail of investing: a stock market that only goes up and a bond market that can pay rates. higher interest rates at stable or stable levels. the highest prices. This is mythology, not investing.

Investors who grasp the realities of these wonderful markets (driven by speculation) recognize the opportunities and relish them with an understanding that goes beyond the media hype and “yield-enhancing” hawkers. They have no problem with “uncertainty”; they hug him.

Simply put, in rising markets:

• When investment grade equities get close to the “reasonable” target prices you’ve set for them, take your profits, because that’s the “growth” purpose of investing in the stock market.

• When your income securities increase in market value by one year’s worth of interest up front, 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 flip side (more commonly feared as a “correction”), replenish your stock portfolio with now lower-priced investment-grade securities. Yes, even some that you just sold weeks or even months ago.

And, if the correction is occurring in your portfolio’s income purpose allocation, seize the opportunity by adding positions, increasing yield and lowering the cost basis in one magical transaction.

• Some of you may not know how to add to those portfolios of somewhat illiquid bonds, mortgages, loans, and preferred stocks so easily. It’s time for you to learn about closed-end funds (CEFs), the big “liquidators” of the bond market. Many high-quality CEFs have 20-year dividend histories for you to be excited about.

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 stocks?

• Unlike mutual funds, CEFs are actually separate investment companies with a fixed number of shares traded on stock exchanges. The share may trade (in real time) above or below the net asset value of the fund. Both the fees and net dividends are higher than any comparable mutual fund, but your adviser will likely tell you that they are riskier due to “leverage.”
• Leverage is a short-term loan and is not the same as a portfolio margin loan. It’s more like a business line of credit or accounts receivable financing tool. A full explanation can be found here: https://www.cefconnect.com/closed-end-funds-what-is-leverage

I’m sure most of you understand why the market values ​​of your portfolio go up and down over time…the very nature of the stock markets. Daily volatility will vary, but is generally most noticeable around changes in the long-term direction of the market, revenue intent, or growth intent.

• Neither your “working capital” nor your realized income need be affected by changes in your market value; If they are, you’re not building a “retirement ready” portfolio.

So instead of rejoicing at each new stock market rally or lamenting each inevitable correction, you should take steps that improve both your working capital and income productivity, while at the same time propelling you toward long-term goals and objectives. term.

• Through the application of a few easy-to-understand processes, you can chart a course toward an investment portfolio that consistently hits higher market value highs and (much more importantly) higher market value lows while consistently growing both working capital as income… regardless of what happens 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 sideways movement. You can’t afford to travel eleven years at a breakeven 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 sync with your goals. personal financiers. .

Investor’s Creed

The original “Investor’s Creed” was written at a time when money market funds were paying more than 4%, so holding “smart cash” in an uninvested bucket of stocks was, in effect, a win-win mix. while lower stock prices were expected. Cash from the income bucket is always reinvested as soon as possible. As money market rates have become rock bottom, stock “smart cash” has been placed in CEFs of tradable stocks with average returns of more than 6% as a replacement…not so sure, but compounding makes up for the increased risk on money funds.

He summarizes several basic principles of asset allocation, investment strategy, and investment psychology into a fairly clear personal portfolio management direction statement:

• My intent is to be fully invested in accordance with my cost-based fixed income/capital planned asset allocation.
• Every security I own is for sale at a reasonable target price, while generating some type of cash flow for reinvestment.
• I am pleased that my stock deposit cash position is low, indicating that my assets are working hard to meet my goals.
• I am most pleased when the cash in my capital deposit is growing steadily, showing that I have been capitalizing on all reasonable gains.
• I am confident that I will always be in a position to take advantage of new capital opportunities that meet my disciplined selection criteria.

If you’re managing your portfolio correctly, your CEF position of cash + shares (the “smart cash”) should increase during rallies, since you profit on stocks you confidently bought when prices were falling. And, you could be flush with this “smart cash” long before the investment gods blow the whistle on the stock market rally.

Yes, if you enter the investment process with an understanding of market cycles, you’ll build liquidity as Wall Street encourages higher stock weights, as numerous IPOs prey on euphoric speculative greed, and as friendly radio hosts and staff brag of his successes in ETFs and mutual funds.

As your hat sizes increase, you will increase your income production by keeping your income purpose allocation on target and removing the growth purpose portion of your earnings, dividends, and interest in a stock-based alternative to fund rates. “de minimis” money. .

This “smart cash”, made up of realized earnings, interest and dividends, is taking a breather on the sidelines after a series of points. As gains accumulate at stock CEF rates, the disciplined trainer looks for sure signs of investor greed in the market:

• Fixed income prices fall as speculators abandon their long-term goals and search for the new investment stars that are sure to boost stock prices forever.
• Boring investment grade stocks are also falling in price because it is now clear that the market will never slump again…particularly NASDAQ, simply ignoring the fact that it is still less than 25% above where it was nearly twenty years ago. years (FANG included).

And the rhythm continues, cycle after cycle, generation after generation. Are today’s managers and gurus smarter than those of the late 1990s? Will they ever learn that it is the very strength of rising markets that eventually turns out 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 income security prices are falling?” .