Investment Witnesses

Investment Witnesses

Blue Line Investing, Article 6 of 12

 

When playing poker it can be advantageous if you can learn the “tell” of your opponent. A tell is defined by Wikipedia as “a change in a player’s behavior or demeanor that is claimed by some to give clues to that player’s assessment of their hand. A player gains an advantage if they observe and understand the meaning of another player’s tell, particularly if the tell is unconscious and reliable.” We believe the stock market has its own tell, but how can its reliability be determined? We believe the answer is to look at witnesses!

When money moves in the stock market it typically flows out of one sector and into another. These changes in the bid and ask price for an investment are what causes prices to rise and fall over time. For instance, historically, when stocks have a price correction, symbolized by more selling than buying, you may observe other sectors like bonds rising as they become the recipient of that money (at least in the short term). While these historical relationships are not absolutes, they help illustrate the concept.

In recent weeks we have observed the stock market from the Daily perspective, which suggested a negative outcome (at least in the short term). The resulting price correction led to a successful “test” of the price breakout which we observed when looking at the Weekly perspective (the intermediate term). With the successful test, we believed the market was suggesting a further rise in price. But the Monthly perspective (long term) seemed to suggest caution. So where else can we look for two or more witnesses in hope of correctly determining the potential reliability of the markets tell?

One witness may be observing the price action and behavior in other sectors, like U.S. Government Bonds. As mentioned above, when investors become concerned they typically seek safety. A second witness may be observing another type of investment within the same sector, like high-yield, or “junk” bonds. Since they behave more like the stock than bond market, their behavior may shed more light on expectations for the next potential move in the stock market. A third witness may be observing a volatility investment like the exchange-traded fund (ETF) VXX. After all, when knowledgeable investors begin to get nervous, they might buy put options and sell call options as a defensive strategy. Some of this behavior can be observed by monitoring the VXX ETF.

By monitoring all these witnesses in unison we are better able to evaluate the reliability of what we perceive to be the market’s tell. It is important to keep in mind that when prices make dramatic moves in the stock market, it doesn’t typically happen in isolation and without advance notice. If you can learn to read the market’s tell, then we believe over time you are likely to make more profitable than unprofitable investment decisions.

In our next article we will revisit the concept of diversification.

 

Disclaimer:

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

The iPath® S&P 500 VIX Short-Term Futures™ ETNs (the “ETNs”) are designed to provide exposure to the S&P 500 Index VIX Short-Term Futures™ Index Total Return (the “Index”). The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the “VIX Index”) futures.

TIME from the Monthly Perspective

TIME from the Monthly Perspective

Chart courtesy of StockCharts.com

Blue Line Investing, Article 5 of 12

 

In our previous two articles we learned how observing the short and intermediate-term time periods can provide helpful clues as we attempt to identify the primary trend of an investment from a technical perspective. In this article we will explore what can be observed when looking at the same investment in the long-term from the Monthly perspective.

When viewing a Monthly chart there are 2 things we like to keep in mind. First, the rate of change is very slow, so relying on this perspective in isolation could prove detrimental. For example, the charts above represent almost 3 years of price activity and each vertical line in the first chart represents one entire month of price variation for the investment. Second, we have found this perspective can be helpful as a witness to assist in identifying the underlying primary trend within the Daily and Weekly perspectives.

As a quick recap, in our Daily article, we identified a Head-and-Shoulders formation that suggested a potential change in trend before the S&P turned down after the recent breakout. In our Weekly article, we identified what appeared to be a successful “test” of the breakout. So what additional information can we observe from the Monthly chart above?

We can observe a potential divergence. A divergence usually occurs when the price of an investment (the left-hand side of the chart above) and the price momentum of the same investment (the right-hand side of the chart above) are going in opposite directions. In other words, they diverge. We have found that price momentum  tends to lead price, such that the price of an investment should be rising along with price momentum. While it is possible for price to rise as price momentum is consolidating (as it may be doing above), we believe it is important that price momentum remains above the zero bound.

The chart above is of the S&P 500 Index (S&P). It formed a temporary “price top” back in early 2015 (labeled “1a”). After a corrective phase, prices rallied to a new high during this calendar year (labeled “2a”). But while prices have been rising higher, you can observe that it has been with declining price momentum. Price momentum peaked during 2015 (labeled “1b”) and now, even with the markets making all-time highs, continues moving lower (labeled “2b”). So what could this suggest?

The divergence could be warning of a correction that may occur soon, or within the coming weeks or months. If so, we believe close attention should be paid to the Daily and Weekly charts, along with other investment witnesses, in attempt to implement proactive investment decisions in advance. Alternatively, if prices rally sharply over the coming weeks and months, the divergence may be negated altogether. Again, since Monthly charts develop over long periods of time, an investor shouldn’t draw any concrete conclusions from this particular divergence in isolation in our opinion.

Now that we have identified how to use 3 different perspectives for viewing any publicly-traded investment, in our next article we will explore the concept of usingwitnesses.

Disclaimer:

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is one of the most commonly followed equity indices. The volatility (beta) of an account may be greater or less than the index. It is not possible to invest directly in this index.

TIME from the Weekly Perspective

TIME from the Weekly Perspective

Chart above courtesy of StockCharts.com

Blue Line Investing, Article 4 of 12

 

In our previous article we explored some of the benefits of using Daily charts to view how attractive or unattractive the S&P 500 Index (S&P) may appear in the short-term. In this article we will explore what can be observed when looking at the same investment in the intermediate-term from the Weekly perspective.

When viewing a Weekly chart there are 2 things to keep in mind. First, it represents a broader picture of what may be happening with an investment, at least from a technical perspective. Second, the rate of change is slower, so even if you believe a technical formation is in the process of forming you must be patient for the market to bring it to completion. You should not make investment decisions based on what you think is going to happen – you must wait until the market confirms it is happening.

In the previous article, we identified the Head and Shoulders (H&S) technical formation and how that typically suggests a change in trend to the downside. When looking at the Weekly chart above, we want to look for evidence that supports or invalidates how significant that H&S formation may be. Specifically, could it be warning of a major price top or just a short-term price correction?

The chart above represents the past 2 years of price behavior of the S&P. The blue dashed line labeled “Support” identifies where buyers have overwhelmed sellers and prices have “bounced” at that price level. The red dashed line labeled “Resistance” identifies where sellers have overwhelmed buyers and prices have “turned down” at that price level – until recently. In early July there was a “Breakout” through resistance. The next expectation was for the market to “Test” the breakout. So interestingly enough, when the market formed the Head-and-Shoulders it turned down and effectively “tested” the breakout around the 2,125 price level. That’s the good news. The potentially bad news is the market has not rallied strongly to the upside.

So how can observing this help you with your investment decisions? First, as we wrote in our previous article, if you are looking to make new purchases you may want to wait to observe if the “test” is confirmed. If so, it might provide you with a greater level of confidence that your decision to take risk may be rewarded – at least in the short-term. Second, if you are currently fully invested and price breaks down through the 2,100 price level, you may consider adding some protective hedges in attempt to help protect against what could become further price decline. Finally, aggressive investors could attempt to profit from any price decline by using Inverse Exchange-Traded Funds or other similar types of investments.

In our next article we will explore the S&P from the longer-term or Monthly perspective.

 

Disclaimer:

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

Past perfrmance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is one of the most commonly followed equity indices. The volatility (beta) of an account may be greater or less than the index. It is not possible to invest directly in this index.

TIME from the Daily Perspective

TIME from the Daily Perspective

 

Chart above courtesy of StockCharts.com

Blue Line Investing, Article 3 of 12

 

If you are familiar with the game of chess, the winner tends to be the player who thinks several moves ahead. Since you can’t read your opponent’s mind, you always have to modify your next planned moves as your opponent moves in order to remain ahead. This article, along with the two that follow hereafter, will provide examples of this concept using Daily, Weekly, and Monthly perspectives of the U.S. stock market.

The Daily chart (pictured above) can help an investor in 2 primary ways. First, it provides the opportunity to evaluate the short-term primary trend of an investment which helps evaluate the risk of owning it. If the trend is positive, prices will predominately remain above the blue line and rise for an extended period. If the trend is neutral, prices will predominately oscillate above and below the blue line without making any significant advancement. And if the trend is negative, prices will typically remain below the blue line and decline for an extended period.

Second, it provides the opportunity to observe technical formations that can coincide with potential changes in these trends. For instance, while it is positive that prices in the chart above of the S&P 500 Index rallied back above the blue line earlier this calendar year, and has so far been able to remain above the blue line, a technical formation recently formed called a “Head and Shoulders.” This formation, identified above with “LS” as the left shoulder, “H” as the Head, and “RS” as the right shoulder, warned that prices might correct in the short-term. Sometimes this formation results in a short-term price correction (as it did in 2011), and sometimes it can warn of a major stock market top (as it did in 1929).

So how can these short-term technical formations help you with your investment decisions? First, if you are considering adding new money to your investments, wouldn’t you rather do so after prices decline rather than right before? Second, if you are already fully invested, wouldn’t you prefer to have the choice of placing some protective hedges in your portfolio if the market may be warning of a pending correction? Third, for the aggressive investor, wouldn’t you like the opportunity of making some investments on the short side of the stock market in attempt to profit from the correction? These concepts will be discussed further in future articles.

In our next article we will explore the Weekly perspective.

 

Disclaimer:

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is one of the most commonly followed equity indices. The volatility (beta) of an account may be greater or less than the index. It is not possible to invest directly in this index.

 

 

 

Redefining TIME in the Investment Decision Making Process

Redefining TIME in the Investment Decision Making Process

Blue Line Investing, Article 2 of 12

The saying goes that when you are younger, say 25, that you should take as much risk as you can since you can afford to. But doesn’t this age typically coincide with having a smaller amount of financial resources? So if you have $10,000 to invest and earn a 10% profit, you make $1,000. Not bad. But the saying also goes that when you are older, say 60, you should take less risk, since you can’t afford to suffer a big loss. But doesn’t this age typically coincide with a larger amount of financial resources? So if you have $1,000,000 to invest and earn that same 10% profit, you make $100,000. That’s substantial. So how can these seemingly backwards concepts be turned right-side up?

In our previous article titled “Age-Baed Investing: Logical or Illogical?” we raised the question of whether investment decisions should be made based on one particular factor of time, specifically your age? We suggested the focus be redirected at the main constant that matters most regardless of your age, specifically, the stock market itself (or any other publicly traded investment), and how attractive or unattractive it may appear for investment at any moment in time. If the stock market appears to be in a topping process, should your age be a factor of consideration? If the stock market appears to be in a bottoming process, likewise, should your age be a factor of consideration? If you are a profit-seeking investor, shouldn’t your only concern be taking risk when you expect to be rewarded for taking that risk?

But how can this be accomplished? After all, no one can time the market, right? But aren’t you able to observe trends? And don’t trends form over days, and weeks and months? One of the tools that can be used to monitor trends is technical analysis. And one of the tenants of technical analysis is to look for repetitive price patterns in attempt to anticipate a possible future outcome based on past price patterns.

By utilizing technical analysis, time is effectively redefined from being your age to being how you view an investment from 3 different perspectives; specifically, a Daily perspective, a Weekly perspective, and a Monthly perspective. In our next 3 articles we will provide an example of each perspective, beginning with Daily.

 

Disclaimer:

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.

Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principal office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.

Age Based Investing – Logical or Illogical?

aging-licensed-and-sized-502x282

Blue Line Investing, Article 1 of 12

Have you ever been told that based on your age you should make certain investment decisions? For instance, if you are younger, have you been told you should take as much risk as you can since you have a long time before you need to use that money? Or, if you are older, have you been told you should take less risk since you don’t have time to recover from a stock market decline? If you have personally experienced this during your lifetime, we believe you should ask yourself whether this is logical or illogical advice?

History has shown that stock markets typically go through 3 primary trends at different points in time, and these trends can last from several quarters to multiple years. The trends are typically called Positive, Neutral (or Consolidating), and Negative. An example of a Positive primary trend would be the U.S. stock market from the mid-to-late 1990’s where prices rose steadily for about 5 years. An example of a Neutral/Consolidating primary trend would be the U.S. stock market from the mid 1960’s through the early 1980’s where the stock market failed to make new highs for over 15 years. And an example of a Negative primary trend would be the U.S. stock market from 2000 into early 2003 where prices primarily declined for over 3 years.

Consider, for instance, the stock market rally during the late 1990’s. If you were older, and someone recommended in 1995 you take less risk because of your age, you may have missed out on additional profits by being too conservative when the stock market was suggesting higher prices may be forthcoming. And this could have been at a time in your life when you had amassed a good sum of money during your working lifetime. Likewise, consider the stock market decline in the early 2000’s. If you were younger should you have participated in the losses just because of the logic “you can afford to” or “time is on your side?” We believe the answer should be a resounding “No!

Since the stock market does not revolve around us as individuals, then why should we make investment decisions as if it did? We believe considering another option could be advantageous: centering investment decisions around a process that focuses on one constant – the stock market itself – and whether it is perceived as either attractive or unattractive for investment based partly on the 3 primary trends.

In our next article we will begin to explore what we believe could be a better way to approach investing, especially from the context of TIME.

 

Disclaimer:

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principal office of GAM is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703. Past performance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

THE MARKETS ARE TALKING. ARE INVESTORS LISTENING?

 

Stock markets may not be as random as many investors think. Believe it or not, the market has its own way of “speaking.” Sometimes its speech can be elegant, and other times crude, but nevertheless, it does speak. The stock market has spoken in the past and may be speaking at present. For illustration I have provided the chart above showing the price fluctuations of the S&P 500 Index – one of the most commonly followed equity indices, and considered by many to be one of the best representations of the U.S. stock market. What might the stock market be saying?

Using gray lines on the chart above I have illustrated a Head-and-Shoulders technical formation (#1). This negative pattern warned of a possible selloff in the short-term, which ultimately came to pass. I have also illustrated a potential Ascending Wedge technical formation using blue lines (#2). This is another potentially negative pattern that warns of a possible price correction in the short-term. Time will tell if it comes to pass. Finally, I have illustrated a much broader technical formation called a “Rounded Top” using a red line (#3). Like the previous two formations, this also is a potentially negative formation, and if it comes to pass, may result in additional price corrections in  the weeks and months to come. Do any of these formations guarantee a specific outcome? Unfortunately, no. So what are they good for?

First, if an investor is going to make a new investment in the stock market, these patterns may help them evaluate whether doing so at that moment in time could prove beneficial or detrimental in the short-term. After all, even if they consider themselves a “long-term” investor, wouldn’t they rather buy prices “on sale?”

Second, if an investor already has some or all of their money invested in the stock market, knowing these patterns may allow them choice. If they are a profit seeking investor, they have choice of implementing strategies that could help protect their portfolio against possible loss. Alternatively, they have choice of ignoring the potential warnings and hope for the best. Either way, investors always have choice.

I believe as investors become more knowledgeable of the market’s “language” they will begin to implement proactive investment decisions for their portfolios rather than taking a “wait and see” approach.

 

Disclosures:

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained at no charge, by calling (866) 216-1920. Registration does not imply a certain level of skill or training. The principal office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be construed a recommendation to purchase or sell any particular security. This information is intended for educational purposes only.

 

SEEING THE FOREST THROUGH THE TREE

Seeing The Forest Through The Tree

 

I believe it is important to understand the psychology of the stock market to become a more learned, and hopefully, successful investor. Many investors focus only on price as the sole variable when making their investment decision. But by doing so, are they missing the forest by looking only at one tree? Let’s consider the psychological aspect of different groups of market participants so we can try to reduce investment mistakes that can result from only focusing on one variable, in this case, price.

The stock market is comprised of many participants, each with their own self-serving agenda. Some of these participants are day traders, some are long-term passive investors, some are institutions, and some are short sellers. For purposes of this illustration, we will consider two specific groups – institutions and retail investors. Institutions, such as pensions and endowments, are sometimes referred to as the “smart” money, because they are considered to be experienced and well-informed, and most likely don’t make investment decisions based on emotion. Retail investors however, are sometimes referred to as the “dumb” money, because they many not have the same level of experience, and may invest based on emotion. So if the “smart” money wants to sell some, or all, of their stock holdings, can they do it all at one time? Not likely. Pensions and endowments typically own thousands or millions of shares of a companies stock. If they sold all at one time, they could crash the price of the investment they want to sell. As a result, they have to sell their shares over time. They need the retail investor (or other market participants) to think all is well with the stock market, so the retail investor will continue to buy the shares from the institution who wants to sell.

Remember, at all times, someone is holding on to the shares of outstanding stock. If I want to sell my shares to you, I want you to give me your cash in exchange for my stock. It may be unlikely you will buy my stock if share prices are falling. So I need a rising market – even if only for the short-term – to get you to buy. Once I sell you my shares I’m happy to be out of the market. If the market thereafter declines, it’s to my advantage and your loss. I now have cash, and may be patiently waiting for prices to go “on sale” so I can buy them back from you when your emotions change from “Buy! Buy!” to “Sell! Sell!”

Once investors begin to understand this psychology they can begin to remove their emotions from the investment decision making process. The question to consider for today is, “Which group of market participants do you believe is currently in control of the primary trend of the stock market?” If you can answer that question, then you are more likely to be making unbiased, unemotional investment decisions.

 

Disclosures:

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. Registration does not imply a certain level of skill or training. The principal office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any products. The information contained herein should not be construed a recommendation to purchase or sell any particular security. This information is intended for educational purposes only.

CASH IS AN ASSET CLASS

Cash Is An Asset Class

With continued uncertainty and volatility in the stock market, I thought it timely to revisit a concept that may help many investors, especially at this time: cash is an asset class. If you are an employee of a large company or other institution, you may recall that besides stock and bond mutual funds that are available for investment within your company retirement plan, there is usually a third option that is often overlooked – a money market fund (sometimes called “cash” or a “cash equivalent”). The question for today is, “how many investors actually consider using a money market fund, or other cash equivalent, either inside or outside their retirement plans, ever?” For the past 20 years my experience has been many investors fail to use this asset class, and sometimes to their own financial detriment. Let’s revisit two very simple, yet crucial, investment concepts to keep in mind.

First, sometimes it is more important to get the return OF your money, rather than a return ON your money. Remember, stock markets rise and fall. One thing I learned from the late Richard Russell, Author of Dow Theory Letters, was when the primary trend of the stock market turns negative, the resulting decline usually retraces one-third to two-thirds of the previous stock market advance. During such circumstances, investors could do themselves a great service if they have a process to move a portion, or even all of their stock investments into cash or cash equivalents, before the selloff, as a strategic, short-term investment move. Even if the interest return on the cash equivalents in the short-term is close to zero, it might be preferable to the loss OF your money.

Second, if someone considers themselves a “long-term” investor, is it written anywhere that they should remain fully invested in the stock market at all times? For an investor who does, how can they take advantage of periods when stock markets decline and go “on sale” without having to add more money to their accounts, or do some rebalancing? As a case in point, consider Warren Buffett, one of the world’s most successful investors. Does he keep all of his money invested at all times? Or does he hold on to cash as it accumulates, patiently waiting for opportunities when stock prices decline to provide him a better, long-term buying opportunity?

Remember, cash is an asset class and exists for a reason. I believe it is important to realize that no matter what an investor’s age, their time horizon, or what they consider their “risk tolerance,” the one constant to all investors, at all times, is the stock market. When the stock market provides warning of potential future loss, do investors choose to listen and make proactive changes to their strategy? Or do they ignore the warnings, and hope things work out for the best? That reminds me, another topic for another day may be “Hope is not a strategy.”

 

Disclosures:

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. Registration does not imply a certain level of skill or training. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be construed a recommendation to purchase or sell any particular security. This information is intended for educational purposes only.

Potential Perils of Passive Investing

Potential Perils of Passive Investing

 

According to Standard and Poor’s (S&P), nearly 89% of active mutual fund managers underperformed their benchmarks over five years, and 82% did the same over the last decade ending in 2014. When reading statistics like these, why would any investor consider an investment strategy outside of passive index investing? In other words, why not just use mutual funds that mimic the index that also happen to charge a low internal fee? After all, “if you can’t beat them, join them,” as they say. There are few reasons to be unhappy as a passive investor when stock markets are rising, but what happens when stock markets are falling? Remember, passive index investing is like a ball floating on the ocean going wherever the tide takes it. Before embracing passive index investing you might want to consider some of the invisible costs which include: (1) the Relative Cost, (2) the Time Cost; and (3) the Opportunity Cost.

The Relative Cost

I recently met a gentleman who uses a well-known mutual fund family for all of his investments. The primary reason for using such a strategy is the “low cost” of the index mutual funds. But I asked him if he ever compared the internal cost of the investment in relation to the gain or loss during different stock cycles?

For instance, if he had originally invested $100,000 in a specific US stock market index fund, the annual expense would be 0.15%, or $150 per year. Seems cheap, right? But is it cheap relative to the result from being invested from the peak of the market in 2000 until the bottom in 2003? The result from such a passive indexing strategy would have been a loss of more than 48%, or a decline in dollar terms of more than $52,000 on a $100,000 initial investment. Would you consider that a “low-cost” investment when considered in relative terms?

The Time Cost

Have you ever heard the comment “the market always comes back?” Throughout history, that statement tends to bear true, but not always. Consider a passive index investor who bought into the Japanese stock market near the peak in 1989. At the time, the Nikkei Index was above 30,000 on its way towards 39,000. But fast forward to today, and it’s slightly above 20,500. After 26 years, a passive index investor is still waiting to get his or her original investment back. Could you afford to wait for over 26 years to get your original investment back if you made your initial investment at the wrong time?

The Opportunity Cost

The third cost, also related to the time cost, is the opportunity cost. Specifically, what an investor could have done with his or her money to be better off as an alternative to being passively invested in the stock market. For this reason, many investors “diversify” into other investment categories. Whether using certificates of deposit (CD’s), bonds of various types, gold, real estate, collectibles, or other investments, diversification can help investors put some of their money in areas that are rising in an attempt to ensure they don’t have all of their money in one area that is declining.

But can too much diversification be a bad thing? I believe the answer is yes. I believe this investment approach may diminish in future years as investors become wiser and more knowledgeable. I believe they will actively seek out strategies that focus on allocating more money towards investments that appear to be in positive trends while learning how to avoid allocating money towards investments that appear to be in negative trends just for the sake of “diversification.”

Whether you are an investor currently using a passive indexing strategy or one who is considering it, I hope you have a better understanding of some of the unseen costs and how they may negatively impact your long-term financial success. But before concluding this article, I have to say one thing I have always found curious. Besides statistics, many proponents of passive index investing say it is because no one can successfully “time” the market? But isn’t it ironic that one of the prime factors for why one passive investor is successful compared to another is due solely to the “timing” of when each makes their initial investment?

Jeffrey D. LINK

Disclosure:

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. It is not available for direct investment. The Nikkei 225, more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a stock market index for the Tokyo Stock Exchange (TSE).

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Guardian Capital Advisors, LLC (GCA, LLC) reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable.

GCA, LLC is a registered investment advisor. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.GuardianCA.com or in its Form ADV Part 2 which is available upon request.

IMPORTANT DISCLOSURE NOTE: At the time this blog entry was published, Mr. Link was an Investment Adviser Representative with Guardian Capital Advisors, LLC (GCA, LLC). In December, 2015, GCA merged with Gordon Asset Management, LLC (GAM) a registered investment adviser, at which time Mr. Link’s registration as an Investment Adviser Representative was transferred to GAM. More information about GAM, including its investment strategies and objectives, can be obtained by visiting www.WealthQB.com, or in its Form ADV Part 2, which is available, at no charge, upon request, by calling (866) 216-1920.

Why 2008 Was A Great Year in the Stock Market

Why 2008 Was a Great Year in the Stock Market

 

There are times in life when the greatest learning lessons come from the harshest experiences. And the lesson learned only arises in hindsight after you have gone through trial and tribulation. I learned my lesson during 2008, and while it was a painful year for most from a financial perspective, in hindsight it was one of the most rewarding of my entire career.

My story begins around August 2008. For 13 years I had worked as a Financial Advisor when a colleague suggested I begin reading a daily newsletter to learn what the industry fails to teach most financial professionals – the technical aspects of the stock market. While I believe our industry does a good job educating most professionals on product knowledge, I believe it does a poor job of educating most on the technical characteristics that can help identify turning points in individual investments and the stock market as a whole.

For several weeks I had been reading Richard Russell’s daily comments leading up to the market selloff in September 2008. I’ll never forget when he wrote one day, “the Dow Jones Industrial Average has violated the 50% principal. If the Dow closes below 10,750 all subscribers should be out of common stocks.” On September 17th, 2008 the Dow closed at 10,609. Over the following days the Dow dropped an additional 4,062 points until it bottomed on March 9, 2009 at 6,547, or 38% lower.

It was during those few months that I realized there was a fundamental problem with our industry. How could a subscription service charging $300 per year provide more accurate and timely advice compared to the multi-million dollar research department of the publicly traded firm I represented at that time? Was Richard Russell just “lucky” that day? Or did his comments reflect an expertise that I, along with many others, failed to possess? My vow that day was to learn how to identify the warning signs the market tends to provide before major declines occur. To do so required me to challenge every preconceived notion, idea, belief, and philosophy I had learned over the preceding 13 years. Needless to say I am thankful I did because as a result Blue Line Investing™ was founded.

Blue Line Investing™ is a disciplined investment process designed to identify and monitor a recurring behavior pattern found in most publicly traded investments. By understanding and monitoring this behavior pattern an investor can make proactive investment decisions. They can decide to either protect their money during negative stock market trends or to remain invested during positive stock market trends, while the news, their emotions, and general anxiety might normally cause them to make a poor investment decision.

In hindsight, you might be surprised to learn:

The stock market gave warning of problems months before it sold off in September 2008.
The behavior pattern leading up to and through 2008 was almost the same as from 2000 through 2003.
The broad stock market, individual stocks, bond market, commodities, and economic sectors follow a similar, if not same, behavior pattern over time.
It is said the definition of insanity is doing the same thing over and over and expecting a different result. While 2008 may have been painful from a financial perspective, it turned out to be one of the most rewarding financial lessons of my entire career. I hope you learned something rewarding from it as well.

Jeffrey D. LINK

Disclosure:

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. It is not available for direct investment. The Nikkei 225, more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a stock market index for the Tokyo Stock Exchange (TSE).

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Guardian Capital Advisors, LLC (GCA, LLC) reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable.

GCA, LLC is a registered investment advisor. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.GuardianCA.com or in its Form ADV Part 2 which is available upon request.

IMPORTANT DISCLOSURE NOTE: At the time this blog entry was published, M.r Link was an Investment Adviser Representative with Guardian Capital Advisors, LLC (GCA, LLC). In December, 2015, GCA merged with Gordon Asset Management, LLC (GAM) a registered investment adviser, at which time Mr. Link’s registration as an Investment Adviser Representative was transferred to GAM. more information about GAM, including its investment strategies and objectives, can be obtained by visiting www.WealthQB.com, or in its Form ADV Part 2, which is available, at not charge, upon request, by calling (866) 216-1920.