Risk/Reward Vol. 342
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Eleven straight days of record highs for the Dow Jones Industrial Average. It sounds like a broken record---but one stuck on a very pleasing note . Both major indices are up nearly 5.5% year to date. This week's impetus was a statement by Treasury Secretary Mnuchin that he foresees a very significant tax reform package from Congress before it recesses in August. Will the Trump Rally last? Should one buy? Hold? Sell? How is one to know?
I spent time with a subscriber this week who is in search of answers to these questions. He hopes to find them in technical analysis. Technical analysis is a method of forecasting the direction of future prices through the study of past market data, primarily price and volume. In its simplest from, it looks for signals to buy, hold or sell from historical stock charts. Technical analysis is available to anyone with a computer these days. Allow me to illustrate. One classic technical trading strategy is to track both the 20 day and the 200 day simple moving averages of a stock or exchange traded fund. One buys when the 20 crosses above the 200 and sells when it falls below. So open up Google Finance, type in SPY (the exchange trade fund for the S&P 500), adjust it to show the past 10years and add the 20 and 200 simple moving averages from the "technical" section. Voila. Note that had one followed this simple rule, one would have sold before the major dip in 2008 and would have brought back in mid 2010. In other words, one would have averted a major loss and would have reaped most of the gain achieved over the past seven years. Not bad.
As you know, I find my buy/hold/sell signals from movement in the 10 Year US Treasury Bond. This week, movement in the 10Year was influenced by the release of Fed's February meeting minutes. Phrases in the minutes such as "participants generally indicated that their economic forecasts had changed little since the December FOMC meeting" and rate increases could occur "fairly soon" led a consensus of Fed watchers to conclude that the odds of a rate hike in March are unlikely (30%), and that no more than three hikes can be expected this year. As a consequence, the yield on the 10Year came to rest at 2.315%, decidedly lower than last week. Concomitantly, my portfolio which is dominated by bond-like, interest rate sensitive securities (preferred stocks, preferred stock closed end funds, REIT's, etc.) rose this week. (Remember as interest rates decrease the prices of bonds and bond-like securities increase.)
No matter what strategy you follow, remember Warren Buffett's two rules of investing: #1 Never lose money; and #2 Never forget Rule #1. The importance of minimizing loss by selling losers sooner rather than later is stressed by every investing guru from William O'Neill (8% loss limit) to Chuck Hughes (5% loss limit) to all of the Market Wizards profiled by Jack Schwager (see Vol. 243 Riskrewardblog ). Yet, I bet almost everyone reading this email rode his/her stocks all the way to the floor during the crash of 2008-2009. If I am wrong please email me immediately. Why did you suffer those 25-40% losses? If it was inertia---that is a terrible reason. If it was adherence to a buy and hold strategy I suggest you rethink it---especially if you are a senior citizen such as yours truly. The next time you may not have the luxury of time to recover.
I read Warren Buffett's letter to his shareholders this weekend. Google and read it. As always, it is time well spent.
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