Picture this: I am at a cocktail party chatting with three people about investing. The first person says, “I could be a really successful investor if only I could emotionally tolerate a bit more risk.” The second person claims, “I could be a world-class investor too if I had access to the same information as big institutional investors.” The third person believes that his market timing model is the last missing element holding him back from consistent profitability. I have known all three of these part-time investors for well over a decade. I’ll try to be gentle just in case any of them read this blog. If they do, label it “tough love”.
Imagine a football coach who has the best eleven quarterbacks in the NFL altogether on the same team and puts them on field at the same time. This “dream team” would get clobbered. Without tight ends, tackles, guards, wide receivers and a center there to present a balanced attack, there would be no hope of victory. So why do so many investors build a team of assets that does precisely the equivalent of a team with 11 quarterbacks? With this sports analogy and some further elaboration, I’ll prove to you the importance of diversification and strategic correlations.
Most investors will admit that they have at some point been guilty of chasing yield. This is not surprising with the ultra low yields on money market accounts and the expanding Baby Boom generation’s needs for income. It’s a common refrain.
The Public Relations industry has crisis simulation firms that actually come into corporations and compress a hypothetical month-long disaster into a few stressful hours in order to see how management responds. I’d like to do something similar, but in the family financial arena with parents and children. Sadly, however, I don’t think many parents would hire me.
I attend investment seminars as half-monk, half-hit man. My time is a precious commodity, so if you are a speaker and see me in the audience, be prepared. My hot button is when speakers show a few elaborate slides, “share” their four favorite tenets to successful investing and then launch directly into their marketing pitch. They act as if they’ve given you the keys to the kingdom, proving their brilliance and justifying your attention. And those four tenets are invariably the same:
History matters because markets do indeed repeat themselves. John Kenneth Galbraith was interviewed in the PBS documentary, The Crash of 1929, and he observed that every 30 years or so we predictably have a major market correction because that seems to be the length of time it takes each generation to forget the lessons of the previous generation.
Upfront, it’s important to note that unlike most investors who hear asset allocation and conjure up three asset baskets (stocks, bonds, cash), Tensile Trading presents an exhaustive all-inclusive buffet of 59 different asset classes from which you choose. Our book also shows to what extent each of these various assets classes is correlated to the S&P 500.
Straight from the pages of my own trading journal. These are my charts from all the market corrections since 1981. Here’s why I want to share these with you.
The beauty of technical analysis is that it represents human emotions expressed by the buying and selling behavior of investors – emotions which are predictably repeated in times of crisis and have not changed over time. In the midst of the present correction, I find that looking back at these charts stops me from doing anything rash or stupid.
The reality is that markets operate within the law of groupings. This is precisely why I have formatted my unique chart view in a pull-down menu under ChartStyles. You simply click on “Gatis Roze” at the bottom of “Predefined Settings” and up pops the Tensile Trading analysis format that clearly shows the following:
This phrase is most often heard in reference to lawmakers and bureaucrats in Washington, DC, but I think it’s an appropriate reflection of what many investors struggle with as well. As an investor, you’ll seldom be destroyed by outside forces. If you falter and lose your assets, more often than not it will be because you ignored your own rules and disciplines, thereby destroying yourself from the inside.