November 17, 2012 R.E.M.

Risk/Reward Vol. 144

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

"Uncertainty is killing me/And I'm certainly not asleep
Maybe I've gone far too deep/Maybe I'm just far too weak"---lyrics from "Uncertainty" by The Fray

"It can happen too fast/Or a little too late
Timing is everything"---lyrics from "Timing is Everything" by Trace Adkins

"Consider this/The hint of the century
Consider this/The slip that brought me to my knees"---lyrics from "Losing My Religion" by R.E.M.

Notwithstanding the market's rise Friday following the Kumbaya moment at the White House between Republicans and Democrats, the Dow Jones Industrial Average (DJIA) lost 227 points this week and has fallen 7% since I began to exit October 1st. My portfolio, had I remained, would have suffered a similar percentage drop. The primary cause is the "Uncertainty" as to how or even if the Fiscal Cliff will be resolved. What our politicians do not appreciate is how much the stock market abhors uncertainty. "Uncertainty is killing me" and is causing other investors "certainly not to sleep." Moreover, prolonged uncertainty morphs into a lack of confidence, and when investors lack confidence they leave the market. Obviously, many have joined me on the sidelines. Once there, the doubts become "far too deep" for most to return quickly. Returning when others are "far too weak" can result in outstanding profits.

The above paragraph is a prime example of market timing. Most investing savants will tell you that no one can time the market. They say market timing "can happen too fast/or a little too late"---but rarely satisfactorily. Yet these same gurus (e.g. Graham and Buffett) preach that the first rule of investing is "Don't lose money" and the second rule is "Don't forget the first rule." How pray tell could one have avoided losing money over the past six weeks without selling? And how can one "buy low" if one has not raised cash? Thousands of pages have been written on when to buy stock; little has been written on when to sell.

"Consider this." As I wrote at the time, I sold in October because I anticipated that no matter who was elected President, a battle over the resolution of the Fiscal Cliff would ensue during this lame duck session and perhaps beyond. The most recent analogous circumstance, the July-August, 2011 debt ceiling crisis (brought about by this VERY SAME Congress and this VERY SAME President) resulted in a 16% drop in the DJIA recovery from which took months. Here we are, far from a resolution of the current crisis and already down 7%. What I did and what I wrote was not "the hint of the century"; it was common sense. Having attained my investment objective for the year, what was my downside? Paying some capital gains tax and foregoing one quarter's dividends--that's it. Yet, I am unaware of any market guru advocating that one should preserve one's gains by going all (or even overweight) cash---despite a clear warning from the Congressional Budget Office that failure to reach a resolution on the Fiscal Budget will result in a second dip into recession.

Can't time the market, they say. Undoubtedly they are correct, but right know believing that "timing is everything" is very comforting to me "Consider this." If you had purchased an S&P Index fund (which many gurus recommend as one's primary investment) any time between October, 2006 and January, 2008, you would STILL be in a loss position on your principal today---more than six years later, even after a triple digit gain from 2009 to 2012. That kind of investing would have "brought me to my knees". Lady Barbara would be forced to introduce me thus: "That's him in the corner/That's him in the spotlight/Losing his religion."