Investment Strategy: “Risk verses Reward”
Betting indeed, as David Sklansky wrote in the book The Theory of Poker: “Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.”
So, as most of you know, Andrew and I attended, and presented at, the Raymond James’ national conference in Washington, D.C. It’s always good to get together with the Raymond James “family”, and last week’s gathering was no exception. Amid the presentations, lunches, dinners, cocktails, and general conviviality, we had the pleasure of talking to some of our financial advisors (FAs) and their clients. In one such repartee, the advisor asked me to talk to her client who continues to sit on mountains of cash and refuses to invest. His reasons were the same ones we always hear at events, so I related the points as to why we think this secular bull market will continue for years, but it was all to no avail. My parting shot to the advisor and her client was, “Call me and tell me when he decides to buy stocks, because then I will become a seller”, which got a big laugh from both of them.
“Risk versus Reward,” what an interesting topic and one that is extensively covered in Ben Graham’s book The Intelligent Investor. The operative quote from that book is this, “The essence of portfolio management is the management of risks, not the management of returns.” Dr. Graham closes that thought by saying, “All good portfolio management begins and ends with this premise.” Yet managing risk is one of the hardest things to get investors to do, and that is the sad reason many participants remain scared of stocks, because they didn’t manage the risk back at the beginning of 2008. Recall, there was a warning signal sounded by Dow Theory with the “sell signal” of November 21, 2007, just like the Dow Theory “sell signal” of September 23, 1999, but I digress.
As stated, there is little doubt in our minds that the secular bull market is alive and well with years left to run, but most do not believe it because only a few of us have ever seen a secular “bull market”. Indeed, like our example of the advisor and her client who think our conclusions are reductio ad absurdum, so they scorn the concept that stocks have years left to rally.
Unfortunately, many folks have felt that way for the last eight years and remain underinvested. Also unfortunately, many participants are more concerned with the short/intermediate-term directionality of the equity markets than the long-term, net-worth-changing implication of a secular bull market. To respond to those concerns, our intermediate-term model continues to flash bullish readings, while our short-term model suggests there is still the potential for some downside consternations this week. We think if that weakness arrives, it should be bought.
The call for this week: Last week, the S&P 500, S&P 400, S&P 600, Nasdaq Composite, and the Russell 2000 made new all- time highs. The exception was the D-J Transportation Average, which pulled back from its all-time high late in the week. When the S&P 500, the Dow Transports, and the Russell 2000 make new 52-week highs on the same trading day, (which happened last week for the first time in at least three months), the median return over the next three months has been
+3.95%, according to Bespoke. Importantly, Buying Power is rising and Selling Pressure is declining, and Buying Power is very close to crossing above Selling Pressure in the charts. All of this positive action is being confirmed by the Advance/Decline Line as breadth continues to improve (the NYSE A/D Line tagged new highs last week). These kinds of metrics are consistent with an equity market where the pullbacks are usually short and shallow. Meanwhile, 65% of companies reporting earnings have bettered the estimates and 67.1% have beaten revenue projections as the transition to an “earnings-driven” secular bull market continues to gain traction. At 5:22 a.m., the preopening S&P 500 futures are down 4.5 points because Japan’s Nikkei fell 1% on the 26% slide in Abe’s approval rating. Moreover, after an expiration (last Friday), U.S. stocks tend to open soft on position squaring. However, with this week’s FOMC and Yellen’s dovish flip, any weakness should be bought.
P.S. – We are doing a 4:15 p.m. call today with BlackRock’s portfolio manager Michael Fredericks, the PM for the BlackRock Multi-Asset Income Fund (BAICX)
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