Mike Lipper’s Monday Morning Musings
Survival First, Before Growth
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Historic Lessons
The increase in current money is mostly generated by
enthusiastic people who are likely to have difficulty surveying basic lessons
from the cyclical world. The trick is to know which horse you are riding. Very
few investors can seamlessly at once move from one horse to another without being
on uncertain ground at times. That is why I recommend a working transition plan
that starts with building a buying reserve capable of fluctuating in response to
your view of your own situation and the price levels of specific securities.
Where Are We Now?
I don’t know, but we seem to be much further along in the
development of the enthusiasm fueling rising markets. During the shortened
Labor Day week, more stocks were sold than bought during the first three trading
days. On Friday, we had a relief rally following a four-week period of small
declines. Using equity mutual funds as a useful indicator, at least 85% of mutual
fund sector averages fell through Thursday. There were only 15 sector averages that
showed gains. Six sectors rose over 5% during the four-week period: Energy
Commodities +12.80%, Agricultural Commodities +9.43%, General Commodities
+8.67%, Latin American Stocks +7.82%, Precious Metals +7.54%, and Managed
Futures Alternatives +5.04%. (As a group they gained from investors nervous
about currencies, including the US Dollar.)
Nevertheless, there was still more enthusiasm on the NASDAQ than
there was on the NYSE last week, which had 26% of its stocks rising compared to
22% on the Big Board. There was a similar patten for New Highs, with 4.1% on
the NASDAQ vs 3.7% on the NYSE. (Clearly, there are a greater number of “AI”
related stocks listed on the junior exchange.)
Building a Buying Reserve
Every investor likes the securities they hold, but unlike our
children, grandchildren, and great grandchildren, we can and should rank the
relative attractiveness of what we own. A position which has not recently risen
should be questioned, particularly if it is selling below the price paid by a
long-term corporate buyer. In terms of the rest, put what you own on a list to gradually
reduce by at least 30% and up to 50%. This is particularly true if you expect to
gain 10% or less over the next year from today’s price.
What To Do with the Reserve Cash?
Today, unless you are a skilled fixed income trader, do not
own any bonds longer than 2 years in maturity. Remember, the purpose of the
reserve is to give you buying power when the opportunity is right. It is
probable the sale of the fixed income buying reserve will lead to a small
acceptable loss when you sell to free up cash to buy future big winning opportunities.
Until the general market breaks, if any new name added does
not rise within the first nine months of ownership it should be sold. You can
use the tax loss to reduce the taxes you incur by selling some winnings to add
to your reserve. (You can repurchase the name 31 days later if there is a new
reason to buy it.)
Please let me know if you like this approach so I can
learn.
Did you miss my blog last week? Click here to read.
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