September 18, 2016 Timing

Risk/Reward Vol. 322

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

Earlier this week, I enjoyed a glass of wine with a subscriber. He told me that at the time I first published Risk/Reward (2010) he began investing in index funds (e.g. SPY or DIA). So far he has doubled his investment thus exceeding my performance by a good measure. I congratulated him as I do all who have stayed the course and held index funds since that time. As I reflected further upon his accomplishment, I was reminded of two painful lessons that I have learned. First, no gain is achieved until the underlying security is sold. And second, TIMING is everything. Allow me to elaborate.

In 2000, I was heavily invested in tech stocks (the so called dot com world). On paper I had more than doubled my invested capital in very short order. I had no intention of selling---even when the dot com world began to crater. I was convinced that I was smarter than Mr. Market. Each day I awoke believing that "today, he would see it my way", and that the tech world would recover. He didn't, and the stocks I owned never did recover. (Indeed it took the tech index, NASDAQ, 15 years to reach year 2000 levels.) Things got so bad that I stopped looking. My paper profits eroded and became huge, crushing losses. I swore that if I ever got back "on top", I would not ride the market down again. This oath (and a few strokes of dumb luck) helped me recover and kept me from losing money in the 2008-2009 market swoon. As I have written previously, my approach today is informed first and foremost by the dot com fiasco and the Great Recession. I do not know when the next crash will occur, but history tells me it will. Every move I make is in anticipation of that event. At age 65, I could not withstand what happened to me in 2000-2001. That is why I mitigate loss and take profits---two things one cannot do unless one sells. It's true that I have not caught the full measure of the 2009-2016 "buy and hold" flood tide. But I missed the 2008-2009 ebb tide and am preparing to avoid the next tsunami. Are you? If so, please let me know how.

The obvious rejoinder to my approach is the fact that over the past 20 years the S&P 500 Index (available for purchase via the ETF, SPY) has averaged, with reinvested dividends, an 8.2% annual return. This is true, but leads to the second lesson I have learned. One's return is dependent upon one's starting and ending points in TIME. For example, if one had invested in the S&P 500 in December, 2007 (when it was at 1500) one would not have seen a profit until February, 2013, more than five years later. Worse, for more than 16 months of that TIME one's investment would have been down more than 33% and for a short TIME would have been worth half. With the luxury of unlimited TIME, buying and holding equities may make sense. But I am 65. I don't have the TIME to wait out another stock market crash. Thus I am a trader. I may be running out of TIME. But, I'll be damned if I am going to run out of money.

Did you notice the impact of Fed member Lael Brainerd's speech on Monday? As mentioned in last week's edition, several market participants feared that she was becoming a rate hawk. Any such concerns were put to rest on Monday. In advance of her very dovish speech, the S&P 500 was in the negative. Afterward, it rose 2% as the odds for a September rate increase fell sharply. The companies comprising the S&P have a total market capitalization of $20 trillion so her soothing words resulted in increasing Mr. Market's net worth $400 billion ($20 trillion x 0.02= $400 billion). Now that is market power my friends---exercised by just one junior member of the Federal Reserve. And you say that this is not a Fed dominated stock market? Remember, what Janet Yellen gives, Janet Yellen can take away.

As usual, my focus remains on the 10 Year US Treasury, the security against which most other income securities are measured ("spread"). Its yield continued to hover around 1.7% which tells me that Mr. Bond believes that a September rate increase is off the table, but a December one is more than likely. Indeed, the odds of a December bump now are at 60%. Keep your eyes on the Fed meeting this week. It should be illuminating.

Barb and I are on assignment in Paris next week. We will be assisting Mr. Draghi in his attempt to spur European economic growth