Making Money Alert
Are We Ignoring Our Own Advice?
03/21/2007
Let's kick things off with an e-mail I received in response to last week's Alert:
Doug,
I found your review of the last several decades of good market calls to be interesting. If the model works so well, it certainly begs the question as to why you ignored its bullish signals last summer and continued to avoid the market, causing your investors to miss the excellent second half of the year. Your Dad just followed it mechanically as far as I can tell. Your overriding of the signals certainly didn't help.
Honesty dictates that you discuss this as well.
Rick
I agree with you Rick, honesty does dictate that I address this well-grounded criticism.
First, let me just get all of my Alert readers up to speed on this issue. Last year in my Successful Investing service we recommended that readers take a very cautious stance with respect to the market after the mid-summer correction. At that time we opted for more specialized sector allocations along with a heavy cash position to protect us from what could have been a much-overdue giveback in the broad market.
Well, the market did what it so often does after a correction, and that was to spring back. That return toward bullishness actually signaled to us to get back into equities based on our traditional investment plan of following the long-term trend in the market.
When we actually received the technical buy signal to get back into equities, I opted not to make an allocation to stocks at that time. Why? Well, consider all of the fear going on in the market right at that time. We were still way overdue for a correction of much bigger proportions than we had last summer. In fact, we are still way overdue for that correction and the recent downtrend in stocks may, in fact, be the correction we've been anticipating.
In addition to fear of a much more severe downturn, the latter part of 2006 brought with it such exogenous fear factors as nuclear threats from North Korea and Iran; escalating violence in Iraq; uncertainty about the outcome of the fall Congressional elections; the negative effects of the housing slowdown and a contraction in economic growth.
All of these factors, along with much of the technical indicators that showed the market was way overbought in the fourth quarter of 2006, forced me to err on the side of caution with respect to putting our serious money at risk. Was my cautious stance a bit too cautious? In hindsight, the answer would be, "Yes." However, as my father always says, "Investors can live with lost opportunity better than they can with lost money."
Remember that my first general order in the Successful Investing service is safety first. Before we can grow principal, we've got to make sure we don't lose it. In certain market environments, it's tough to say for sure whether a decline is real or not. But I would rather be safe than sorry. I will gladly accept the slings and arrows shot my way by people who rightly accuse me of protecting your money from a pernicious downtrend in equities.
So, are we ignoring our own advice? Absolutely not. Could we have made more if we would have taken the plunge and gotten back into equities last year? Yes, but as I said before, in my view the risks were just too great.
Finally, I assure you that the plan my father developed for getting our money in when things are good, and out when things are bad, is still the basis of our investment philosophy. Yes, I have made alterations to that plan based on this sideways market of the past six years, but those adjustments are always made with an eye toward safety first.
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Fed Hint Spikes Market
The market meandered within a tight trading range this morning, but after the Fed offered hints that the economy seems likely "to continue to expand at a moderate pace," stocks went right through the roof.
Let's take a look at the chart below to get a sense of where things are right now.
As you can see, we broke above the short-term, 50-day moving average on the S&P 500 (blue line) right after the Fed announced it was leaving interest rates at 5.25%.
This breaking of the short-term moving average could be the harbinger of more upside for stocks. Could this change be the end of the correction that started at the end of February? Possibly, but my gut feeling is that we are in for a bit more selling.
Before you get too excited about today's market spike, keep in mind that very often these post-Fed meeting surges don't hold. Many times you get a trading bounce on good news, especially when the market's been beaten up.
The next few trading days should tell us if this spike is for real, or if the bias is still in favor of the sellers.
Stay tuned.
FIRST-GENERATION FABIAN REFLECTIONS
All this month the Fabian family is celebrating three decades and three generations of helping readers build wealth with our Successful Investing advisory service. The following is an interview with my father, Dick Fabian, excerpted from our special 30th anniversary April issue:
It's hard to believe that it's been three decades since my father sat down at his dining room table and wrote the first issue of the Fabian newsletter. To help commemorate this achievement, I thought it would be fitting to go directly to the master himself for his reflections on a lifetime of helping subscribers build wealth.
Ironically, when my son David and I went to my father's home to get his thoughts, we actually all sat down together at the very same table where it all began. Talk about full circle! Three generations of the Fabian family chatted about three decades of wealth building at the actual table where the newsletter was launched. We started off the Q&A session by asking Dick what gave him the idea to first start an investment newsletter.
Dick Fabian: In 1969 up through the end of 1970, the market underwent a sharp decline. At that time I was selling mutual funds as a stock broker. What I realized after living through this decline was that the buy-and-hold method of investing just wasn't going to work. I knew I had to find another way to get my money to grow, so I did some analysis and I figured out that the stock market basically moves in cycles. I discovered that if you were able to get into the market at the right time, and if you were able to get out of the market at the right time, you could get much better performance than if you just left your money in the market throughout the entire cycle.
The tool I discovered to measure this market cycle was the 39-week average. When the major market indexes were above the 39-week average, it was time to be in stocks. When the indexes were below the 39-week average, it was time to get completely out of the market.
Doug Fabian: Why did you choose the 39-week average as your primary indicator?
Dick: One day I went to an investment seminar where the presenter was talking about measuring the market indexes in relation to the 39-week average. At that time, the various financial publications would come out with statistics on stocks and funds, and they would just arbitrarily include the 39-week average in their data. This gave me a statistical benchmark whereby I could measure the market and its performance in relation to this indicator.
Using this data, I was able to backtest my theories to see what the optimal time was to be in the market -- and out of the market -- to achieve maximum results. I went to my desk with my charts and my hand-held calculator, and I said to myself, "Hey, this system really works!"
Doug: What do you think are the most important lessons that you've learned in the past 30 years?
Dick: Most people don't ever have a real concrete goal for their investments. If you get into a car, you have to have a destination so that you can determine when to go straight or when to turn right or left. It's the same thing when you're investing. Unfortunately, most people just put their money into an investment and let it take them wherever it goes. This may have been okay to do in the past, but not now.
Doug: What's the significance of the statement that you've used many times before, "The investor is more important than the investment?"
Dick: When you go to the library and read about investments, there are hundreds and hundreds of books. But I defy you to find a single book in the library that concentrates on the investor. You could have the greatest investment scheme in the world, and you could have all of the documentation proving how good the end result of following that plan may be. But if it is too complicated and too time-consuming, people just won't follow it. Now, what value does something have if people aren't going to do it?
Doug: Something you've said to me on a number of occasions is that there are times when it is easy to make money, and other times when it's more difficult to make money. What advice do you have for somebody during more difficult times?
Dick: In a word, patience. If you take a look back at the market, and in particular certain fast-moving areas of the market like semiconductors, for example, you'll discover that there are certain periods where these stocks rise dramatically and where you can make big gains over just a few weeks. If you are in these stocks when this happens, then you really don't have to do anything the rest of the time.
Remember that patience is the key. Get in and make your money when things are good, and the rest of the time you can just take your money and go to the beach.
If you'd like to read more of the complete Dick Fabian interview, or if you'd like to find out more about how the Successful Investing advisory service has helped investors beat the market for the past three decades, then all you need do is click here.
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WISDOM FROM A REBEL
"Every man dies. Not every man really lives."
—William Wallace
The great Scottish freedom fighter's words should burn in the heart of anyone who wants to make his or her life the best it can possibly be. Really living in today's society means having the wherewithal to do so free from financial angst. If you want to really live your life to the fullest, you need to make sure your money allows you to do so -- and that's what we're here to help you do.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.