I stumbled into a gift shop full of tchotchkes today. It was one of those retailers with endless trinkets and specialty items that encourage you to revisit your youth and marvel at someone else’s creativity. I became fascinated by one of those intricately detailed Russian “Matryoshka” – the wooden nesting dolls of decreasing size placed one inside another. Perhaps because the markets were particularly challenging today, I found myself getting pensive about the parallels of my life as an investor to my unbundling of these nesting dolls. I’ve always felt that investing is like peeling back the layers of an onion one-by-one, and therein lays the parallel. I realize that like all other investors, my journey has followed the path of the 5 enlightenments as I peeled back my personal investment onion over the years.
For those readers who embrace my CORE and EXPLORE approach (this is actually my version of John Bogle’s approach) with respect to Asset Allocation, you can see why I suggest considering country funds for a small percentage of your EXPLORE portfolio. Country funds fulfill the cardinal rule of diversification as their correlations to the USA markets are much lower. Over the past 30 years, the world’s top performing market has come from this group 100% of the time (outside the USA).
I personally believe that actively trading a few focused equities in one’s country fund global asset basket can provide the equity growth you seek and can improve your skill in investing in less volatile asset classes within your portfolio. Make no mistake about what I’m saying. This asset class is for active traders who have the discipline to keep a close eye on these volatile equities, with the additional caveat that it should represent only a small percentage of your total EXPLORE portfolio.
Here is how to tell if it’s a regular market pullback versus a serious bearish correction. I strongly disagree with those that claim market timing is toxic. Review this sample of eight of my charts. These types of tools have helped me side-step all the major corrections over the past 25 years. Focus on reviewing these charts at the major turns. You’ll see that you, too, can effectively separate a pullback from a correction.
At the risk of boring the thousands of subscribers who have already downloaded our Tensile Trading ChartPack and are familiar with these tools, I hope you’ll forgive me and let me indulge in a simple review. For those who have yet to download the ChartPack, go here.
“An investor’s methodology is inseparable from his or her emotional discipline. Both must be defended and reinforced whenever either is threatened.” — Gatis Roze
My trading is guided by a collection of beliefs and principles that direct my trading routines, actions and ‘Investor Self’ behavior. Over the years, it’s been a process of deconstruction — unbundling each element to better understand their respective strengths and weaknesses. This has been followed by a re-construction of the pieces to create the mosaic that I am today.
“I have heard many men talk intelligently, even brilliantly, about something – only to see them proven powerless when it comes to acting on what they believe. Investors must act in time.” -- Bernard Baruch
There is a fine line between embracing your methodology, trading it, trusting it, understanding all its nuances, strengths and weaknesses versus never truly trusting your methodology. Suspecting that your methodology is flawed and therefore constantly tinkering with it and needing to reinvent it will not lead to success.
In previous blogs, I’ve sermonized that Asset Allocation is the highest leveraged activity that investors can undertake. We produced an entire two-disc DVD on how to execute what we call our “Methodology Allocation” process which maximizes the benefits of a CORE & EXPLORE approach and then optimizes it by laying on top a “Best-of-the-Breed” technique.
I bring this up because the previous Action Practice #11 blog is ideal to use as an example. In our book, we present the correlations of 59 different asset classes. We invite investors to pick perhaps ten of these classes which are spread across the entire correlation spectrum so that you achieve diversification with a lower beta. In other words, when one asset class goes down, another is likely to go up.
After seventeen years writing an investment column for USA Today, Matt Krantz is joining a money management firm and leaving us with the top lesson he’s learned in all those years.
Coincidentally and nearly simultaneously, I ran into two former students at a local Starbucks who had attended my class a few years ago. They reminded me of three stocks we had in our class portfolio back then — Amazon, VISA and Mastercard. I was pleased for them since I personally invested in all three equities and was rewarded with exceptional returns. Then they sheepishly confessed that they had not actually invested in any of these three stocks. (But note how well they could recall them from class!)
In Action Practice #10, we applied the Tensile Trading methodology to the buy side of the six charts. This week, we apply the same price relative approach to the sell side and show that it works just as effectively there. We even recycle the CDE buy chart and now annotate the same chart with appropriate sell signals.
The point is that investors can use the power of the Tensile Trading methodology to both profitably get into a high probability position as well as get out of a position with fading probabilities. Please remember that there is no universal right or wrong placement of the vertical selling line. We each require a unique personal set of selling clues before being able to pull the trigger. What you should aspire to achieve is consistency in applying your sell discipline.
Yes, the fountain of youth really does exist, and academic research is increasingly proving it to be found amidst your investment portfolio. A growing body of scholarly research shows that, in many ways, life can get better as we get older, and being an active investor can contribute in significant ways. If this sounds familiar to some of you, it is because in fact this was how I began my blog about “Maintaining Mental Longevity” published on December 12, 2014. Check it out so you don’t fall prey to silly myths on aging.
Profits and Consistency — these should both go hand-in-hand and be goals for every successful investor. Profits are the result of a methodology that you can apply with clarity and understanding. Consistency is the result of being able to replicate your winning methodology in a recurring manner.
Action Practice #9 challenged you to draw a vertical line on six charts at a point you felt the probabilities most favored a profitable trade. Since we all require differing degrees of evidence before we are able to pull the buy trigger, the vertical buy line will no doubt vary significantly from one investor to the next. An aggressive trader may not wait for all four price relative graphs to show confirmation. Perhaps three is enough. The same with money flow. A conservative investor may require alignment of all five.