Investment Strategy: The Investor’s Creed Revisited

Fascinating, isn’t it, these security markets of ours, with their unpredictability, promise and unscripted daily drama. But individual investors are even more interesting themselves. We have become the product of a media-driven culture that must have reasons, predictability, guilt, scapegoats and even that “four-letter” word, certainty.

We become a culture of speculators, retrospectively replacing the reality-based foresight that once poured into our now real-time veins. However, markets have always been dynamic places where investors can consistently achieve a reasonable return on their capital. If someone fulfills the basic principles of striving and does not measure progress too often with irrelevant measuring instruments, there is a good chance that working capital, market value and disposable income will grow … without taking unnecessary risks.

The classic investment strategy is so simple and hackneyed that most investors routinely reject it and continue their search for the holy investment grail (s): a stock market that is only rising and a bond market that can pay higher interest rates at stable or higher prices. This is mythology, not investing.

Investors who understand the realities of these beautiful (speculation-driven) marketplaces recognize the opportunities and enjoy them with an understanding that goes beyond the media hype and show “performance enhancing” barkers on the side. They have no problem with the “uncertainty”; they embrace it.

Simply put, in rising markets:

  • When investment grade securities approach the “reasonable” target prices you have set for them, realize your gains as that is the “growth” goal of investing in the stock market.

  • When your income effects rise in market value, the equivalent of one year’s advance interest, take your profit and reinvest it in similar securities; because compound interest is the safest and most powerful weapon investors have in our arsenals.

On the other hand, and there has always been a downside (more often feared as a “correction”), supplement your stock portfolio with now cheaper investment grade securities. Yes, even some that you may have sold weeks or even months ago.

And if the correction is made when allocating income to your portfolio, take advantage of the opportunity by adding positions, increasing returns and lowering the cost base in one magical trade.

  • Some of you may not really know how to easily add to those somewhat illiquid bond, mortgage, loan and preferred equity portfolios. It is time for you to get acquainted with closed end funds (CEFs), the major ‘liquidators’ of the bond market. Many high-quality CEFs have a history of 20 years of dividends that you can drool over.

This is much more than a “buy low, sell high” oversimplification. It’s a long-term strategy that succeeds … cycle, cycle after cycle. Wondering why Wall Street isn’t spending more time pushing its managed tax-free income, taxable income, and CEFs for equity?

  • Unlike mutual funds, CEFs are actually separate investment companies with a fixed number of shares traded on the exchanges. The share can be traded (in real time) above or below the net asset value of the fund. Both fees and net / net dividends are higher than with any comparable mutual fund, but your advisor will likely tell you they are more risky due to “leverage”.

  • The leverage is short-term loans and is absolutely not the same as a margin loan on the portfolio. It is more of a business line of credit or a financing instrument for receivables. A full explanation can be found here:

I’m sure most of you understand why the values ​​of your portfolio market rise and fall over time … the nature of the securities markets. Day-to-day volatility will vary, but is generally most noticeable in terms of changes in the longer term direction of market, revenue or growth target.

  • Neither your “working capital” nor your realized income need to be affected by the changes in your market value; if so, don’t build a portfolio “ready for retirement”.

So instead of rejoicing in every new stock market rally or complaining about any inevitable correction, you should take actions that improve both your working capital and income productivity, while simultaneously shifting towards long-term goals and objectives.

  • By applying a few easy-to-assimilate processes, you can chart a course for an investment portfolio that regularly reaches higher market value highs and (much more important) higher market value lows while consistently growing both working capital and income … regardless of what happens in the financial markets.

Left alone, an unmanaged portfolio (think NASDAQ, DJIA or S&P 500) is likely to experience long periods of unproductive sideways movement. You can’t afford to travel at an even pace for eleven years (the Dow, from December 1999 to November 2010, for example), and it’s foolish, even irresponsible, to expect an unmanaged approach to be in sync with your personal financial goals.

The Investor’s Creed

The original “Investor’s Creed” was written at a time when money market funds were paying more than 4%, so holding uninvested share bucket “smart cash” was actually a compound profit pending lower stock prices. Cash income is always reinvested as soon as possible. As the money market interest rate has become minimal, ‘smart cash’ in stocks has been placed in tradable stock CEFs with returns averaging over 6% as a replacement … not as safe, but the composition offsets the increased risk over money funds.

It lists several basic principles for asset allocation, investment strategy and investment psychology into a fairly clear, personal portfolio management guideline:

  • My intention is to fully invest in accordance with my planned equity / fixed income, cost-based, asset allocation.
  • Every security I own is for sale at a reasonable target price while generating some form of cash flow for reinvestment.
  • I am happy when my cash position in the equity bucket is low, which indicates that my ability is working hard to achieve my goals.
  • I am more satisfied when my cash in cash grows steadily, showing that I have activated all reasonable winnings.
  • I am convinced that I am always in a position to take advantage of new equity opportunities that meet my disciplined selection criteria.

If you manage your portfolio well, your cash + equity CEF position (the “smart cash”) should rise during rallies as you make a profit on the securities you bought with confidence as prices fell. And you could be full of this “smart money” well before the investment gods whistle on stock market progress.

Yes, if you go through the investment process with an understanding of market cycles, you will build liquidity as Wall Street encourages a higher equity weighting, while numerous IPOs take advantage of euphoric speculative greed, and while morning radio hosts and personally directing friends boast of their ETF and Mutual Fund successes.

As they increase their hat sizes, you will increase your income production by keeping your income target allocation on track and salting out the portion of your earnings, dividends and interest in a share-based alternative to de minimis money fund rates. .

This ‘smart money’, which consists of realized gains, interest and dividends, just takes a breather in the bank after a scoring drive. As profits increase at CEF stock prices, the disciplined coach looks for signs of investor greed in the market:

  • Fixed-income prices are falling as speculators give up their long-term goals and reach the new investment stars that will push stock prices higher forever.

  • Boring investment grade stocks are also dropping in price as it is now clear that the market will never fail again … especially NASDAQ, simply ignoring that it is still less than 25% higher than it was almost twenty years ago (FANG included) ).

And the rhythm continues, cycle after cycle, generation after generation. Will today’s managers and gurus be smarter than those in the late 1990s? Will they ever learn that the strength of rising markets 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 to the market. My working capital and income will continue to grow anyway, possibly even better when prices for income targets drop.”

Source by Steve Selengut