I cringe every time I hear someone say that they don’t have the time to invest on their own. There’s plenty of time in the day, week, or month, to do what is required to invest successfully on your own.—You just need to know what you’re doing.
All of the steps required and techniques needed to invest successfully are explained thoroughly in LOSE YOUR BROKER NOT YOUR MONEY. And as promised in the final chapter of that book, the objective for this blog commentary is to give investors Market updates in a clear, concise and understandable form. It is intended to plug investors into current market dynamics – especially when time is limited.
Contrary to popular belief, the act of successful investment can easily be worked into any busy schedule. The Wall Street establishment puts forth the notion that teams of “seasoned professionals,” with extensive “market experience,” and “24 hours” monitoring, are all required elements to investment success. So not the case. In fact, the complete opposite is true.
Unplugging from the daily grind of news and information is essential to success and sanity alike. I have unplugged for months at a time and never lost a step. I did so again last week.
Business took me out of town last week and I almost completely unplugged from “the market.” In that time I didn’t read one news story, watch one news program, or tap into one internet source. I did, however, keep tabs on the Dow’s movements (today’s smartphones make that easy) – because if I know what that portfolio is doing then I know what mine is doing.
Those following along with these blogs know that I expect to see a major stock market correction in the near future, some 20-25% down. The reason quite simply is over-valuation (more on that in a moment.) So I must say that Wednesday’s 217 point (1.4%) Dow drop caught my attention. I wondered if the drop was the beginning of said correction.
The next day, Thursday and day six of my unplugging, I checked “the market” three times: morning, noon, and night. In a sloppy day of trading the Dow ended up 80 points. That ended my wonder – “the market” wasn’t ready to correct. And since there was only one trading day left in the week, it wasn’t able to begin correction in earnest. At that moment I disconnected totally. It wasn’t until preparing this blog on Sunday that I reconnected.
The point with this front section is simple: when you follow my method it’s easy to stay way ahead of “the market.” As a result, one day, one week, or one month, cannot and will not, dramatically affect your investment performance. This makes unplugging easy.
To begin the demonstration, below is a chart of how each portfolio (the DJIA and my 15-51 Indicator) moved last week.
The Dow ended slightly up and the 15-51 Indicator ended slightly down for the trading week. My expectation before unplugging was that the 15-51 Indicator would continue its sideways move until the Dow commences its correction. While it might look like the 15-51 Indicator is trending down in the context of this one week, a year-to-date picture proves otherwise. See below.
With just over five months of activity, this chart purports a notion of “market stability” as both portfolios appear to be building bases at their current levels – albeit at very different valuations. The 15-51 Indicator is running a tighter base because it has already corrected. The Dow remains over-valued because it hasn’t corrected yet, and is therefore running a wider spread from its average trading value. This can be seen clearer in the chart below.
In this chart the action zone has been replaced with the average trading range for each portfolio during this period (just five months.) Once again the 15-51 Indicator looks scared to move away from its base while the Dow continues to tip-toe away from its average, now sitting 6 percentage points above it. Again, the Dow looks over-valued and the 15-51 Indicator looks fairly valued. But this five month span is just a short-term trend. More validation of valuation status is needed.
The next two pictures are one year charts that corroborate the same findings as noted above: the Dow is overvalued and the 15-51i is fairly valued. See below.
The action zone is a calculative multiple of stock market activity as it relates to GDP. In other words, the action zone is the Dow’s average price relationship to GDP. So from a price-to-GDP perspective, the Dow is overvalued and the 15-51i is fairly valued in the context of one year, as shown above.
The same findings hold true when these portfolios are compared solely to their recent stock market activity. The next chart compares these portfolios to their average annual trading values. See below.
Here the Dow is far beyond its average norm, and in a Market like this, can be considered nothing short of irrationally exuberant. After its correction, the 15-51 Indicator is on the low-side of its average, which is where it should be based on actual Market dynamics. That makes it fairly valued.
The same findings again hold true if the time period is stretched out over two years. See the series of two charts below: the first compares current values to action zone benchmarks and the second compares them to their average stock market self.
We could keep going but the facts don’t change: the Dow is overvalued and while the 15-51 Indicator is still a little high, it is much closer to its fair value. Remember, the action zones are defined by Dow to GDP multiples. The 15-51 Indicator is a better portfolio than the Dow and usually trades above it. As a result its “fair value” is closer to the action zone high than the mid point.
The second point to this blog is this: If you understand your portfolio as well as I know mine you’ll always understand your portfolio’s behavior and proper valuation. This kind of familiarity promotes comfortable investing, makes profiting easier, and affords the investor many opportunities to unplug without fear of financial disaster. Consequently, no single day, week, or month of unplugging can negate the benefits gained by a long-term approach using my method.
For instance, by now long-term investors should have already taken the vast majority of their stock market profits, rebalanced their portfolios, and positioned it to capitalize on the next major stock market sell-off that is sure to come – because, once again, “the market” is overvalued.
This brings the most popular question I hear to mind: When will that next correction arrive?
Of course, no one knows for sure. Fundamentally speaking the correction should have already commenced. But never before in history has “the market” been manipulated by such extreme monetary and fiscal positions. These are unchartered waters, indeed, and they are historic by proportion. That dictates the next correction to be a significant one; and the next crash even more dramatic. Events like these do not happen over night, in a single day, week, or even month. They develop over a period of time, with many ups and downs (a.k.a. volatility.) There is no better illustration of this than the 15-51 Indicator’s recent performance. Here it is again, but with gold activity and key dates shown.
As you can see, Friday, last week, or last month, had little impact on the 15-51 Indicator’s long-term performance. It can be said, then, that a long term approach produces not only superior performance but more free time.
Approach is key and unplugging is necessary – and both add value.