Quarterly Window Dressing - A Recurrent Wall Street Scam
"The time has come the walrus said, to talk of many things": Of
corrections-
wizards--- and reality.
Quarterly portfolio window dressing is one of many immortal Jaberwock-like
creatures that roam the granite canyons of the Manhattan triangle, sending
inappropriate signals to unwary investors and media spokespersons. Many of
you, like the unsuspecting young oysters in the Lewis Carroll classic, are
responding to the daily news nonsense with fear instead of embracing the new
opportunities that are surely right there, cloaked, just beyond your
short-term vision field.
Older and wiser mollusks who have experienced the cyclical realities of the
markets tend to stick with proven strategies that are based on a solid
foundation of QDI (quality, diversification, and income production). They
know that corrections lead to rallies, and that rallies always give way to
corrections. If only the corrections could elicit patience instead of fear;
if only rallies didn't produce greed and excess. There's a lot of confusion
in a world that considers commodities safer instruments than corporate
bonds.
Long lasting investment portfolios are consciously asset allocated between
high quality income and equity securities. Each class of securities is then
diversified properly to mitigate the risk that the failure of a single
security issuer will bring down the entire enterprise. Simply put, a
portfolio with 100% invested in the absolute, hands-down, best company on
the planet is a high-risk portfolio. There is no cure for cyclical changes
in security market values--- diversified portfolios thrive on it, in the
long run.
The differences between a correction in either a market (equity or debt) or
a market sector (financials, drugs, transportation, etc.), and a fall from
grace in a specific company are important to appreciate. Corrections are
broad downward movements that affect nearly all securities in a specific
market. This particular one has impacted prices in both investment markets,
while creating rallies in more speculative arenas. Ten years ago, the
dot-com bubble began under very similar circumstances. Ten years earlier, it
was interest rates--- and on, and on. When all prices are down, opportunity
is at hand.
There are approximately 450 Investment Grade Value Stocks, and at least half
are down significantly from their 52-week highs; fewer than ten per cent
were in this condition just over a year ago. But very few companies have
thrown in the towel, or even cut their dividends. Closed end income fund
prices are still well below the levels they commanded when interest rates
were much higher, yet they provide the same cash flow as before the
financial crises. The economy and the markets have been through much worse.
Why aren't the wizards of Wall Street assuaging our nerves by explaining the
cyclical nature of the markets and pointing out that similar crises have
always preceded the attainment of new all time highs? Right, because the
unhappy investor is Wall Street's best friend. Why can't politicians
address economic problems with capitalist-economic solutions? Fear, and the
panic it evokes, creates an easy market for walruses, oyster knives in hand.
Wall Street plays to the operative emotion of the day--- greed in the
commodities markets and fear in the others. Once per quarter, they trim
their holdings in unpopular sectors and add to their positions in areas that
have strengthened. Under current conditions in the traditional investment
arena, don't be surprised by larger than usual cash holdings (certainly not
"Smart Cash"). Window dressing pushes the prices of your holdings lower, in
spite of their continued income production and sustained quality ratings.
How have the wizards managed to re-define the long-term investment process
as a quarterly horse race against indices and averages that have no
relationship to investor goals, objectives, or portfolio content? Why do
these proponents of long-term investment planning and thinking religiously
conspire to make short-term decisions that prey upon the emotional
weaknesses of their clients? The "art of looking smart" window-dressing
exercise accomplishes several things in correcting markets:
The things you own are artificially manipulated lower in price to make you
even more uncomfortable with them, while the things you don't have positions
in stabilize or move higher. The glossies from the new fund family your
advisor is talking about show no holdings in any of the current areas of
weakness. It's easy to make fearful investors change positions and/or
strategies. Sic 'em boys. Brilliant!
Value investors (those who invest in IGVSI stocks, and income securities
with an unbroken cash flow track record) may lapse into fearful thinking as
well, and this is where the Working Capital Model comes to the rescue. By
focusing on the purpose of the securities you own, their enhanced
attractiveness at lower prices becomes obvious. Higher yields at lower
market valuations and more shares at lower prices equal faster realized
profits as the numbers move higher during the next upward movement of the
cycle. That's just the way it is. A reality you can count on.
Surprisingly few investors have the courage to take advantage of market
corrections. Even more surprising is how reluctant the most respected
institutional walruses are to suggest buying when prices are low. The
instant gratification expectation of investors combined with the
infallibility expected of professionals, by both the media and their
employers, is the cause. Gurus are expected to know what, when, and how
much. Consequently, they prefer to manipulate their portfolios to create an
illusion of past brilliance, rather than taking the chance that they may
actually be in the right position a few quarters down the road. There is no
know in investing.
The stock market yard sale is in full swing--- add to your retirement
accounts, buy more of IGVSI stocks at bargain prices, increase your
dependable income and increase current yields at the same time. Apply
patience, and vote for economic solutions to economic problems.
Perge'
Steve Selengut
http://www.sancoser
http://www.kiawahgo
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall
Street Does Not Want YOU to Read", and "A Millionaire'
Strategy"
BigGains !!
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