So... Where are we again?

June has come to pass with the swift speed that only Father Time could attain, and here we are still watching as the tumultuous markets work through their innate differences in a most vexing fashion. The famous "sell in May and go away" adage did not apply, and as we look back from our semi-annual perch piecing together the sparse similarities of historical precedence to some how map our way in an effort to gain some long-desired foresight, we need not be afraid. For the markets ALWAYS have this stubbornly magical, yet preordained habit of moving from the lower-left to the upper-right. From morning to noon and into the night... (*This rhyme is best served with a recent Andex chart. Feel free to scroll down to a recent post of mine in which you will find a wonderful reminder of what markets tend to do)

Asset selection is very very important from this point going forward. Easy to say, difficult to apply. There are many different theories on what a portfolio should look like... How to "learn from this one and finally build something that will guarantee principle value retention." It seems to me that all of these sudden preservation and V&L shaped recovery strategies are an explosive way to market a short-term reaction to the problem. Whereas, I am really interested as to what those select few who have stayed to their original investment policy in the face of adversity are up to. As they tend to be the ones skating to where the puck will be, where the rest of those "reactionaries" are busy adjusting course to where the puck is going.

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years. The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow. Think about your future…

Moving on to a side-note.

In 2008, for the first time in human history, the majority of the world’s people lived in cities. And cities for the foreseeable future will continue to grow faster than the countrysides surrounding them. Globally, the number of people living in cities of 1 million or more will grow from about half a billion in 1975 to almost 2 billion in 2025. As a result, cities have assumed a central role in the urbanized world of the 21st century. They are wielding more economic power, developing greater political influence and increasingly employing more advanced technological capabilities to enhance their operations... This is an absolute and finite and indisputable reason why Globally competitive markets will continue their march from these lows. The continued urbanization of exisiting economic powerhouses, along with the creation of a middle-class in developing countries, will put a strain on supply and add to the demand for natural resources, services, and pretty much all industries across the board.

So, if the words of financial Armageddon have not pierced your heart and left you frozen in a state of asset-shock, then where do we begin? What story do you believe in? Look into your own portfolio and ask yourself these 2 questions:

- What investments do you want to own in the next 1,3, and 5 years?

- What are you concerned about for the next 1,3, and 5 years?

Alternative Energy? ♦ Municipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up? ♦ Monthly income? ♦ The dollar?

As the old guy next to me used to say: "A car could look sporty, but if it don't got it under the hood, then all that exterior jazz will just get blown off when the race starts..." So to should a portfolio need to have the best underlying story driving all the other parts, to not only finish the race, but to win the darn thing. It's the least you could do for yourself. Honest.

You're not as smart as you think you are... Investing Wisdoms.

The following is from an email a colleague sent to me. It has great rhyme and reason, and I feel it is a great reminder for anyone who invests in the stock market.

Our emotions are our biggest enemy, at least when it comes to investing. We should all know this. If you don’t, stop making your own investment decisions right now.

Our emotions lead us to do the opposite of what we should be doing. They lead us to buy high and sell low. They make us excited when we should be scared, and scared when we should be excited. They make us slaves to the stock market; they let the market become our master.

The market is there to serve us, and not the other way around. It is okay to have emotions; we’re human, after all. But what we really need is an investment process. This is system of rules that we follow that keeps emotion in check.

Now, I hate republishing old articles. But a few, the ones that focus on the process, I’ll recycle (and improve upon) for a long, long time. I wrote the following article, in 2007. I included it in my book. I’ve shared it with readers in the past. And I even wrote the flip side of it in October 2008, addressing the impact of a cyclical bear market on out psyche by cyclical bear market.

I’m not offering it now to provide a hidden message that I think the current (cyclical) bull market is over. I don’t know that. I just want to remind you (and me) that a rising market has an impact on our psyche, our analysis and our decisions, and we need to be aware of it.

You are not as smart as you think you are; psychotherapy for (cyclical) bull markets
Lately I’ve been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret way to follow Will Rogers’ advice: Buy stocks that go up, and if they don’t go up, don’t buy them.

No, I didn’t get much smarter, and my stock-picking skills haven’t improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are the same way a bear market makes you feel dumber than you are.

Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make us careless. We forget about risk since we haven’t seen it in a while and focus only on the rewards. You have to actively make yourself aware of the four-letter word R-I-S-K!
How do you do that? My favorite way is to remind myself how dumb I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my errors.

We all have these stocks, the ones we lost a lot of money in because we were overconfident. We tend to forget about them during a bull market. But I suggest you remember them now, so you’ll have fewer of those names to remember in the future. Risk is still there; it is just hiding under the joyful sentiment of the bull market.
Believe me, it will show its ugly face. It is just a matter of time.

Discipline counts

In a bull market, it is easy to forget about selling discipline and then turn into a “buy and forget to sell” investor. Every time you sell a stock, you look dumb because it usually goes up afterward.

I recently sold several stocks. Shamelessly, paying absolutely no attention to the fact that I sold them, they went higher. I don’t feel smart about those sell decisions. However, when I bought those stocks, I set valuation targets. When they approached the targets, I quickly reviewed their fundamentals. They had not changed much. The decision was obvious — sell.

Cyclical bull markets teach us not to sell, while cyclical bear markets teach us not to buy. If you let the market tell you what to do, you have no process.
But the bell doesn’t ring when bull or bear markets are over.

You cannot worry about marking the “top” in every sell. My objective is not to buy at the “bottom” and sell at the “top.” My objective is to buy a great company when it is cheap and to sell it when it is fairly valued! I suggest you do the same.

-Courtessy of Vitaliy Katsenelson.