January 26th, 2011 10:24 EST
Investment Portfolio GPS
"Hey `Deep Pockets`, what were you doing on October 19th, 1987", the Wall Street Jungle reporter asked?
I was gritting my teeth, shaking more than just a little, palms sweaty but placing dozens of individual orders for the best NYSE, dividend-paying, companies --- at prices that nearly everyone thought would drop even further.
Looking around the room, I seemed to be the only one in the office that was actually buying! The other brokers were fielding phone calls from frightened clients. Sell! Sell! Sell!
The crash of `87 was the first significant test of an investment methodology developed in 1970 by an RIA client of mine. Two months earlier, many of his investment management clients were wondering why he had sold practically everything, and was sitting on mountains of what he called "smart cash" --- whatever that meant.
Now they knew, but why were they so quiet? Their cash was completely invested, the media was predicting the end of the world --- my phone was the only one not ringing! The investment manager had one call from a client that day --- the guy wanted to know how many calls he had received. Just that one call, he said, and that client is still on the books today.
Five years later, a smaller scale but similar situation rattled the markets --- we invested what we were then both calling "smart cash", fearlessly, never doubting that we would eventually be taking profits on the new positions established at levels well below the manager`s disciplined diversification limits.
Cycle after cycle, profits were taken systematically, sanguinely, and without hesitation --- with nothing save income securities purchased --- until individual equity prices retrenched at least 20%. Slowly the smart cash would find a new home.
The race toward the year 2000 brought with it a crazed worship of unproven, unprofitable, high potential companies --- but few "new economy" superstars met the manager`s stringent Quality and Income generation standards. Find me a "dot-com" that fits, and I`ll give it a chance was his challenge.
15% gains weren`t good enough for many of our shared clients and the greediest among them threw millions of municipal bond dollars under dot-com IPO busses and into hyper-inflated Mutual Funds. Nearly half of them were gone when the bubble burst.
The remaining stalwarts continued to grow at that snail`s pace 15% while the turncoats lost nearly everything. Working Capital grew steadily; the all-important "base income" grew annually; market values rose and fell with the cycles --- interest rates, economic conditions, and investment grade value stocks.
Not even the regulators could believe the manager`s claims that there was no dot-com crash for Market Cycle Investment Management users. But, there it was, a methodology with focus, discipline, and security selection rules like these: "No NASDAQ, No Open-End Mutual Funds, and No IPOs"; and these, for individual stock selection: "S & P B+ or better, dividend paying, NYSE and nothing else".
This discipline produced a risk defense mechanism that could be relied upon during market downturns big and small. But perhaps more important was a profit taking discipline that allowed no reasonable profit to go unrealized.
Over the years, this "portfolio positioning" methodology acted like a modern day GPS for our shared client`s portfolios. We willingly exited rallying markets, one stock at a time, as reasonable profit targets were achieved.
As the market cycle turned, cash was slowly reapportioned to investment grade value stocks, bit by bit, little by little. And with a cost-based asset allocation formula, the income portion of the portfolio was allowed a life of its own, to continue growing the income, irrespective of the where we were in either stock market or economic cycle.
Overall, and over three decades, what we now have recognized and relabeled a "Market Cycle Investment Management" methodology has proven its ability to get investors through the cycles with less risk, less pain and suffering, and a growing cash flow.
"Then twenty years later, `Deep Pockets`, where were you when the financial crisis hit the fan? Fully invested, or fully capable of taking advantage of renewed bargains in both equity and fixed income markets? And where are you today?"
Well son, I`m still standing --- and still smiling.
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read"