SEPTEMBER 2018 DESERT OF THE REAL ECONOMICS INVESTMENT
NEWSLETTER
Since the DJIA low of about 6,200 in March of 2009, the beginning
of the first year of the Obama administration, the stock market has been in a
long bull market that leaves it at near record highs of 26,000. Damned
impressive. But before we talk about
markets, lets talk about us. Humans, the weak link in making and keeping money.
THE HUMAN FACTOR
To paraphrase Shakespeare in the play Julius Caesar, “the fault is
not in our stars, but in ourselves.”
Most people are not individual investors. Many people have
IRAs and/or 401ks, but they have these as long-term investments and rely on the
mutual fund or investment fund investment professionals. So these investments
are protected from the worst of human instincts.
But as humans, most of us are predestined to make investing
mistakes. The rational side of us says that we should “Buy low, sell high.” No
one would disagree with this, but not everyone can follow this maximum. For a host of reasons, chiefly fear and
greed, average people tend to buy high and sell low. When asset prices are
high, people want to flood in and “get in on it while the getting is good.”
(Greed). Eventually, asset prices fall and fear takes over. Investors’ bail and prices plummet. (Fear).
PRELUDE TO MARKET COLLAPSE
Well, to say the least, the prelude was ugly. On September 8, 2008 the market was around
11,500. In six months, it had plummeted to 6,600, in March of 2009. Nasty
business. But that is the way markets perform. Moves up take a while. Reversals
come in a relative blink of an eye.
Markets are primed for a 3-5% pullback at anytime. And a blowout
collapse is ever present. The US budget has an incredible amount of debt and a big
sell off would be bloody. Further, the next bubble is ever present. Student
loan debt is astronomic. And American market regulation is weak, making it
greatly susceptible to boom and bust cycles. For an interesting look at the
potential for another collapse, check out this article.
The good news is the market delivers good returns over long
stretches of time. You just have to be
in the market during the “right” long period of time. As an example, what would
have happened if you were one of millions of late middle-aged Americans fired
in the Great Recession of 2009? Out of a job with no chance of getting another
with a decent wage, let alone even getting another job. Your 401K or your IRA,
which you must now spend for living expense before retirement age, has fallen
by almost 50%. What has that 11,500 record stock market done for you lately?
“BUY AND HOLD” OFTEN MEANS “HOLD AND FOLD”
The dominant advice from most investment advisors is a “buy
and hold” strategy. The mantra is that is not “timing the market, but time
in the market” that is the best investment strategy. This “buy and hold” strategy has several
weaknesses:
1.
You need to be in the market over the right
period of time. Our middle-aged worked
fired in 2009 was in the market at the absolutely worst time. The value of her
account plummeted by half when she needed it most.
2.
We periodically have long term bear markets. The
value of the stock market before the Crash of 1929 did not comeback all the way
until 1955. Losses from 1965 until 1982 were brutal.
There are some solutions that can cushion your losses and
extend your gains in normal market environments. Here are some strategies:
1.
Use stop-loss orders on your extended positions
or to protect gains. Stop-loss orders are orders that are put in place to sell
the stock if it falls in price to a predetermined amount. This strategy can protect your gains. There
are several twists on stop-loss orders. They can be triggered by a fall in
dollar value or fall in percentage of the stock. Trailing stop orders can be
entered that are triggered by an increasing value, and subsequent reversal, of
a stock price. The Authors frequently employ percentage trailing stop-loss
orders. Since the Authors are traders,
money is often temporarily parked in Index funds. The Stop-Loss amount is 1%.
That level is not appropriate for most passive investors, however. You must do
your own research to determine your proper stop loss formula.
Percentage stop loss-orders rise are based
on a floating formula. Assume you have a trailing stop-loss order of 10%. The order moves as the stock goes up. Say
that you buy the stock at $50 and place a trailing stop-loss order of 10%. (You
will want to make the order “Good Until Cancelled”, “GTC.” This will let the
order run for approximately six months.)
As the stock increases in price, the
trailing stop will also increase. So if the stock moves from $50 to $75, the
10% floating value of the stop-loss order will increase from $5 to $7.5. Then
if the stock moves to $100, the value will continue to track upward. If the
stock falls to $90 from $100, your order will be pegged at $100 and your loss
will be limited to $10, or 10% of $100. Effectively, you will never lose more
than 10% from the highest stock value.
Not all brokers offer trailing percentage
stops. Also, some brokers calculate the high stock value trigger based upon the
previous day’s closing value. The trigger value will not float with the price
during the current trading day.
2.
Recognize that if you have a substantial drop in
the value of your investments, you will need an even higher rate of return to
regain your losses. This is another
reason to avoid a “buy and hold” strategy. You are making your hard-earned
money work even harder. Here is why:
I have $100 invested. I lose 25% and my investment falls to
$75. I want to get back up to $100. But because of the amount of my loss, a 25%
return will not bring me back to $100. I now have $75 and need an increase of
$25 to return to $100. But 25% of $ 75 will only bring me up to $93.75. ($75 + ($75
* .25=18.75).
To get to $100, I will need to get a 33%
return. $75 * .33 = $25. $75 + $25 = $100.
If you lose 50%, your $100 falls to $50,
you will now need a 100% return to come back up to $100.
3.
Take profits as you go. The inverse strategy of
dollar-cost averaging investing is dollar-cost average profit taking. * When
the positions in your portfolio reach what you determine are extended values,
such as under our current market conditions, periodically take money off of the
table. As the old saying goes (and there are plenty of old sayings in the
investment business), no one ever lost money by taking profits.
WINNING PRODUCTS JUST KEEP COMING
As our astute readers know, Desert
of the Real Economics Strategic Investments has released many investment
products and is now a licensed Broker-Dealer in the Cook Islands, Somalia, South Sudan, Mongolia and Yemen.
Our first few products were investment funds and other
financial products. This month’s offering is an economic and market direction
indicator. The product will be named the Black Box Barometer.
This a very crowded industry so Desert of the Real Economics
Strategic Investments spent an afternoon on Google and found some little known
and less reliable indices upon which to predict economic movements. We have also developed a few indices of our
own which expand on the underlying concepts of some of these indices. The Black
Box Barometer also incorporates some ways to manipulate economic signals for
fun and profit.
A 2013 article in “Business Insiders” lists 40 of these
indices. We will employ three of
these indices and three of our own. Because of space limitations, we will
unveil one of these indices and two similar indices we have developed in this
issue of the Newsletter. We will roll out the other indices in next month’s
issue.
PREDICTING THE TOP OF AN ECONOMIC CYCLE
Knowing when the economy may tank will help you with your
business and market decisions. Here are three market top indicators that should
provide accurate predictions.
1.
Curse of the New Headquarters Building. It is based upon the observation that when
a company’s CEO announces plans to build or move to a new headquarters, sell
your stock because it’s about to drop.
Companies decide
to build new headquarters when they are flush with cash and predict what is
likely unsustainable growth. It reflects
a common human condition, hubris that precedes
a fall. And similarly, based upon the
that heady feeling that the expansion will never end, consumers often buy
products with debt that their budgets cannot sustain when layoffs or hour cuts
occur.
a.
Beer
Belly and Boating Binominal Distribution. It has been observed that poverty and
obesity are strongly correlated. So the larger the beer belly’s’ of boat
owners, the more consumers of limited means have purchases them based upon
unrealistic economic growth predictions.
b.
Trailer
Park V-Twin Correlation. Just as consumers of limited means buy boats on
unrealistic predictions, residents of trailer parks aspire to Harley-Davidson motorcycles.
This wraps up another Desert of the Real Economics
Investment newsletter. We are moving into a market that is heavily overbought.
We are also in September, historically one of the worst months for the stock
market.
THERE IS NO ENDLESS SUMMER IN THE DESERT OF THE REAL!
*Dollar-cost
average is an investment strategy an investor invests a specific amount of
money each month or each week. This strategy allows an investor to take
advantage of swings in prices. Rather than investing $1,200 one time per year,
dollar-cost averaging would be investing $100 per month, allowing the smaller
investment amounts to come in at different current values
