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Investment Update |
September 2003
In the investment business, it is critical to match a buying and selling strategy with the length of time you are measuring. If you are a day trader, then you use very small movements in security prices. If you are a long-term investor, you base your decisions on cycles that play out over longer periods of time. Doing the reverse poses the risk that a full trend will not be followed. Hence, gains are smaller than they would otherwise be. It may or may not be true that losses are minimized by using short-term principles to manage risk. This is because once something is sold, there is a natural reluctance to buy it back.
The same principle applies to clients of investment advisors. Great care should be exercised at the outset of an advisor/client relationship to provide the advisor with enough information by which to manage client accounts. This means that tolerance for risk, which we’ve discussed many times, must be assessed. Equally important is an accurate measure of how long a particular account is to be held before full or partial liquidation.
Most of you are investing for the long term, at least five years. This means that we should be using one or two-year cycles as we make our investment decisions. Thus, what a particular market does in a day, week or even six months does not matter if a longer-term trend is in place. This is precisely why checking accounts daily is folly and even analyzing monthly statements for evidence of a trend is probably not constructive.
We have incorporated trend analysis into our work, with good results. Thus it was that we called the market bottom last July, far before most of you were ready to come out of bear market hiding. Though it took almost a year for the bottoming process to play out, the vast majority of stocks were higher at the final low in March than they were in July. We saw a trend forming and jumped on it when it matured in March.
Using short-term cycles to base long-term decisions are a natural response after a bear market. People are skittish. However, a long-term plan may be severely truncated by inappropriate defensive action. The trick is to buy low and sell high – not the reverse. There is a certain amount of discipline involved in investing. If your risk tolerance is accurately employed in investment selections, not much will happen to get you “outside of the box”. If not, you will be prey to every emotion from extreme fear to extreme greed.
Investing for the long term does not mean to blindly hold on to a losing investment. It does mean, though, to let one go when its positive trend is clearly broken. Doing this will seldom get you the lowest or highest price, but it will reduce the amount of trading and will guarantee that you receive most of a move in a cycle.
Note: The cycles we refer to are measures of price and nothing else. Security prices are a function of other cycles, however, most commonly called the business cycle or economic cycles. Thus, if we get our strategic work right, we will manage your accounts with tactical aplomb. In our business they say, "The trend is your friend”. The wisdom of this saying is without question.
Thus, both client and advisor have serious responsibilities to understand what
each other needs. If there is any reason for you to believe that we are not
“getting it”, or if you feel at all queasy about what we are doing
for you, let us know. There are always adjustments that can be made without
going to extremes like moving 100% to money market or leaving our management.
Unless addressed, the problem will likely repeat elsewhere.