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Are you worried about your investment portfolio because of last
year's poor returns and are you now wondering what to do going forward? If
you are concerned, you are not alone. Investors are so terrified of the
markets they are willing to put their money into bonds and receive next to no
interest, just so they don't continue to lose their investments principle. In
today's investing environment fear and confusion is understandable; but is it
necessary? We don't think so. At investmentscore.com we do our best to
simplify our investment strategy to increase our probability of success. How?
In our opinion, timing the major, multi-decade market moves is
everything!
We recognize that markets are cyclical and not linear. We do not favor or
prefer one major investment asset class over another. In our eyes,
Commodities are not better than Stocks and Stocks are not better than
Commodities. What asset class is relatively undervalued and what asset class
is relatively overvalued is of significant concern to us. The chart below
illustrates how one investment purchased in 1970 followed by one trade in
1980 and one trade in 2000 could grow that initial investment by 173,214%.
Example:
This 173,241% return did not require an outrageously lucky stock
pick but instead we simply calculated our return from the price increase of
gold and the value of a stock index. To better illustrate this growth we
created the charts below.
The next chart illustrates the difference between a 'buy and
hold' strategy versus our 'two trade' strategy. An investor who traded their
original $1,000 investment between asset classes two times in thirty eight
years turned their capital into a whopping $1,733,410. An investor who bought
and held a $1,000 gold investment ended up with $25,900 while a $1,000 Nasdaq
investment turned out to be worth $19,523. This means that an investor that
managed to avoid the multi decade bear markets by making two trades in thirty
eight years did as much as 88 times better than a "buy-and-hold"
investor.
Key
Questions:
1. Is it realistic to expect to trade the major trends perfectly?
No.
2. Does it make sense to try to catch a portion of these multi
decade mega trends by taking profits in an overvalued asset class and buying
into an undervalued asset class? We think so.
3. Knowing that markets are cyclical, does it make sense to try to
time a mega bull market trend instead of riding a market through a multi
decade bear market? We think so.
4. Is it possible to identify, within reason, when one asset class
is undervalued or overvalued relative to another asset class? We believe it
is and this is exactly what we try to do.
It is our opinion that indentifying and timing a major bull
market move of a major asset class is one of the most important strategies of
investing. We believe the saying, 'A rising tide lifts all boats' is very
fitting for the financial markets. We believe that when money is flowing
towards an undervalued major asset class, the majority of securities within
that asset class will rise and some will rise significantly. Of course there
will be ups and downs along the way, but in our opinion picking the major
asset class that has money flowing into it is more important than picking the
correct stock.
For example, in 1995 Nortel Networks was a technology stock that
rose from around $60 per share to over $1,200 per share by 2000. After
Nortel's peak it fell earlier this year to a low of $0.09 as it headed into
bankruptcy. Now investors who bought Nortel at $60 and road the stock to
$1,200 probably thought they were brilliant investors who bought a solid
company. Many of those same investors probably believed so strongly in their
stock picking abilities that they bought more shares of Nortel all the way
down its path to bankruptcy.
So the question we ask ourselves is, 'did the share price of
Nortel rise to extreme levels because it was a fundamentally solid company or
did Nortel's shares appreciate because it was benefitting from the capital
flowing into that sector?' Of course the answer is probably more complex than
our simplified version, but we would argue that like many baseless 'dot com'
companies around that time, Nortel's stock appreciated to extreme levels
because of the money flowing into that asset class.
We would also ask the question: In the years leading up to 2000
were there signs of a market top that Nortel investors could have responded
to? Could investors have seen evidence of the bubble building in technology
stocks or more recently could investors have seen evidence of the housing
bubble? We think there were signs of a growing bubble and we think investors
should learn from these turning points in major markets.
So how does this knowledge affect our investments today? These
major bull market moves will fluctuate up and down but overall they tend to
gradually trend higher. As an investor, knowing if your investments are
within a long term major bull market trend may help you weather the uncertain
and confusing volatility. Recognizing when you are investing within a
cyclical market that is in a bull market trend can help you identify and
anticipate the signs of a start, middle and end. Looking for signs of an end
of a bull market will help you see signs of a bubble. Having this new sense
of awareness will help you plan for an exit strategy which will not only help
you to hang onto your profit, but it may also multiply it in a new bull
market. As we wrote earlier, we believe that 'Timing the major, multi-decade
market moves is everything!'
Currently we believe commodities are in a major bull market
trend and we believe stocks are in a major bear market trend. At
investmentscore.com we have developed some Proprietary Long Term Monthly
Timing Signals that help us identify long term trends by weighing major asset
classes against one another. We are constantly monitoring the markets for any
sign of a long term trend in a major asset class starting or ending. Once we
identify a long term trend we then try to determine lower risk opportunities
to add to or lighten up on our positions. Although it is outside of the scope
of this article, in future writings we plan to explain how an investor may
identify a market bubble in more detail.
If you found this article interesting we encourage you to visit
our website at www.investmentscore.com to learn more about our strategies and sign up for our free
newsletter. We also ask that you forward our article on to others that you
think could benefit from this information.
Michael Kilbach
Editor
Investmentscore.com
Michel Kilbach is
the President and Editor or www.investmentscore.com,
an online publication designed to show investors how to make profitable entry
and exit trading decisions in high growth potential investments. Investmentscore
uses a unique scoring system as a visual guide to assist investors in making
lower risk / higher reward trades.
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supplied by sources believed to be reliable, that the calculations herein are
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Copyright
© 2006-2007 Michael Kilbach
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