March 13th, 2011 12:12 EST
Money Matters Radio Interviews Investment Guru Steve Selengut
Stu Taylor`s Twenty Questions of Professional Investor Steve Selengut
For nearly ten years now, Stu Taylor and I have been entertaining audiences throughout the country with a Q & A format program that consistently draws an hour full of interesting (and sometimes off-the-wall) investment questions. We have never, ever, gotten very far into the script --- thought you might be interested.
ONE - Steve, you`ve managed investment portfolios for about 40 years. What are the three biggest mistakes that people make?
: They don`t have a clear cut plan or a clear idea of what to expect from investment securities and markets.
: They get stuck in the fear and greed emotional cycle, always buying high and selling low.
: They rely on gimmicks, software programs, and predictions, ignore cyclical realities, and choke performance with unrealistic time constraints.
: They ignore the income generating portion of their portfolio --- the list is really much longer than just three.
TWO - OK, and just what is reality?
: Markets, the economy, and interest rates are cyclical entities. Their movements do not correspond with calendar time periods.
: Performance criteria used by most people today are portfolio growth destroyers, because they generate transactions that are based on short-term market movements.
THREE - So, this is where your Market Cycle Investment Management Methodology comes from?
: Pretty much, it`s no great discovery really. Years ago, professional investment managers and trustees always compared their performance with cycles. It`s clearly the best approach, if you study the charts.
: Today, novice investors control huge amounts of "self directed" money that didn`t exist years ago. Today`s investors/speculators are jumping into the cockpit of a jet plane, solo, after following a few blogs on the Internet.
FOUR " And there`s no reason to expect this to change?
: Well, I`m sure that Wall Street`s product and derivative proponents would argue that they can "smooth the curves" --- but I doubt that anyone who wants to preserve their "guru" status would suggest that cycles don`t exist or that they are ever going to disappear.
: But, who knows, the government may declare cycles illegal and make Wall Street refund people`s market losses --- I hope I`m just kidding.
FIVE " So when the market gets to a certain point, you just sell everything and wait for it to go back down and then, at the bottom, you buy everything and wait for it to go back up?
: Oh, if it were only so easy, and if market timing really existed. It`s not, and it doesn`t. You can`t time the market or really know the right time to buy or to sell.
: But you can understand where you happen to be within the cycle(s), right now, and have a set of realistic buying and selling guidelines that help you tune your responses appropriately.
SIX & SEVEN " So what have you been doing lately, what are you doing today, and why?
: Mostly taking profits, even on some stocks I bought just weeks ago --- and I`m also continuing to take a few profits within the income allocation of portfolios, although those prices have weakened recently. I`m always buying income securities, but I`m having trouble finding Investment Grade Value Stocks that I consider bargains.
: My goal is to never leave a profit of 10% (net/net) on the table, and that`s goes for income securities as well as for equities. I`m almost always buying and selling, every day --- there`s no inconsistency in that. The Glossary in "The Brainwashing of the American Investor" defines terms like "bargain" and Investment Grade Value Stock.
EIGHT & NINE " So how do you know where you are in the cycle, or is it plural, cycle(s)?
: Yes, clearly there are several inter-related cycles " Stock Market, Interest Rate, and Economic are the ones I focus on. I look at three separate "market stats" and one index to determine where we are. I analyze these monthly and publish the results on my Value Stock Index website.
: Once upon a time, the investment media used to analyze these stats thoroughly --- now they are pretty much ignored. The Index is my own creation, and it tracks only Investment Grade Value Stocks.
: The IGVSI established a new all time high February 18th. That means that the stocks I include in my portfolios have raced ahead far more quickly than those in either the Dow or the S & P 500, which are still well below their 2007 highs. And, by the way, the IGVSI didn`t fall nearly as far during the financial crisis.
TEN: And The Market Stats, what are you looking at specifically?
: The most important measure is "Issue Breadth", or how many stocks are up today vs. how many are down. Seems pretty basic, doesn`t it? Duh! But during the dot-com bubble, breadth was glaringly negative well before the meltdown, actually during most of the run up. The historical data is linked to from valuestockindex.com.
: The "bubblishousness" or depth of rallies and corrections, respectively (and the strength or weakness of various sectors) is zeroed in on by review of "New 52-week high and low" numbers. This one looks at the strongest and weakest issues on a daily basis. Guess which stocks were hitting new lows, even before the term "financial crisis" was introduced in the media.
: The third is another "homemade" measuring tool, invented by yours truly and showcased on the value stock index website. It`s called the monthly "IGVSI Bargain Stock Monitor" and it`s a really valuable tool for equity investing.
: It tells me how many stocks, out of the entire Investment Grade Value Stock universe, are within my buying range --- which is 20% or more below the stock`s 52 week high. There are a few other "recent price movement" tests that such stocks have to pass for me to develop an interest.
: The list shrinks during rallies (on March 9th, for example, only 5 issues met my buying requirements) and lengthens during corrections. In mid-August 2010, I had nearly 100 issues to choose from.
ELEVEN, TWELVE, THIRTEEN, & FOURTEEN: What`s an Investment Grade Value Stock? How many are there? Do you place market orders on all of them? How about a few examples?
: An investment grade value stock is rated B+ or better by Standard & Poor`s, dividend paying, trading below $90 per share on the New York Stock Exchange, and the issuer has a history of profitability. Right now, under 350 companies meet these requirements.
: I never, ever, place a market order; day-limit orders allow me to control the price that I pay. Even if a stock makes it to my buy list, I won`t place an order unless the price has moved even lower by a specific amount.
: Also I`ll rarely order more than one security per day per client or make more than three or four purchase orders for the same security on the same day. Additionally, if I buy a stock today, I won`t look to buy it again the next day.
: The object of the exercise is to control my enthusiasm. I buy slowly (imagine how nicely that worked out during the two year plus correction we just went through) and take profits as quickly as I can.
: Examples: Pepsi, Home Depot, Whirlpool, Medtronic, Exxon, and Martin Marietta --- and I`m not suggesting that any of these are something for you to purchase today.
FIFTEEN: So each of your separately supervised portfolios could wind up looking different from every other portfolio?
: Absolutely, and that`s right in line with what every investor should be seeking --- a portfolio that is unique to each individual. This is especially true if he or she is paying the going rate for private, personalized, investment management.
: Even with the MCIM "Mirror Portfolios" that are based on six different model portfolios that I supervise, each participant account will contain securities purchased at different prices than in the model. These are designed for people who don`t want to do it themselves, who like the Market Cycle Investment management approach, and who don`t have regular disbursement needs. They would also pay much less for both management and commissions than they would with a personally managed portfolio.
: For example, a person setting up a Market Cycle Investment Management "Mirror Portfolio" today, would have the same stocks and income securities, but at a different cost basis --- and more a third of the portfolio would be in cash, or "smart cash" as I like to call it.
SIXTEEN: Ok, I`ll bite. What`s smart cash?
: It`s cash that results from profit taking, dividends, and interest --- and from deposits made by the investor. It has nothing to do with attempts at market timing, but its ready to buy securities when they enter the "buying range" we talked about earlier.
SEVENTEEN: How long have the "mirror portfolios" been in existence?
: The first two (70% Equity/30% Taxable Income and 70% Equity/30% Municipal Income) are into their second year of operation. They gained over 18% in 2010, I believe. Listeners can contact me for a brochure.
EIGHTEEN & NINETEEN: What about income securities? How do you figure out what`s going on there?
: Notice how income investing has taken a back seat to all this discussion about the stock market! Surprisingly, this is the area where investors make the most critical errors. In any event, no investment portfolio should have less than a 30% commitment to income securities.
: Now`s as good a time as any to mention that I use another "homegrown" strategy to control and monitor both asset allocation and diversification within investment portfolios. I call it "The Working Capital Model" and it forces investors to make these critical income-generating decisions.
: The income "bucket" of securities must generate an annually increasing level of income for two reasons. Increasing income protects investors from inflation --- market value increases do no such thing. And income is what you need to live on in retirement (or unemployment).
: Income security prices most often move the opposite way of interest rate expectations --- most often. Higher interest rates (to a reasonable level) are good for investors even though they will decrease the market value of securities you already own.
: Lower interest rates are also good for investors, especially those who were cyclically confident enough to add to their holdings of "tradeable" income securities when their prices move lower.
TWENTY " How can movements in both directions be good for investors?
: Because investors can learn how to prepare for and to take advantage of movements in both directions, just like they can in the stock market.
: And that`s what Market Cycle Investment Management is all about, and why it should outperform the market averages, cycle after cycle, after cycle ---
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire`s Secret Investment Strategy"