What We've Been Doing

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."  -Edwin Lefèvre, Reminiscences of a Stock Operator-the thinly disguised biography of Jessie Livermore.

This is one of the most quoted phrases on Wall Street.  The book, Reminiscences of a Stock Operator at one point was required reading in brokerage training classes.  The Patrician gave me a copy when I started years ago at Kidder Peabody as a welcoming gift.  I'll talk more about this book in a future post as the material it covers is as useful today as it was back in the 1920's.  Livermore believed in having conviction about his positions and also believed in cutting losses quickly when he felt he was wrong.  Livermore made and lost several fortunes during his life.  Notably his losses came when he violated his own trading disciplines.

We believe there are four disciplines to every investment.  These are determining where we are in the market cycle, fundamental analysis, valuation and money flows.  Money flows have until recently been indicative of an overbought state in the markets.  Therefore after doing some purchases of sector ETFs in June and investing some new money for clients in the early summer, we've been largely quiet on the investment front.  We really haven't been sellers or buyers, although as we've mentioned back in July we think that international ETFs are looking attractive at these levels.   One of the main reasons that we have been content to let portfolios ride is while the summer advance left valuations a bit stretched recently, we think that economic activity can be supportive of stock prices around these levels.   We have long believed that economic statistics indicate that the US is growing, although at a slower pace than most investors would like to see.  To us that means our market is supportive of stocks trading with a 15 or 16 PE.  US GDP grew at a 2.5% rate in the 2nd quarter.  That is a higher rate of growth than most economist were expecting and supports our believe that things are getting better and have been doing so for the past several years.

The current decline has started to change for us a bit in terms of our buying interest as we've seen prices come in some and our overbought readings begin to disappear.  We invested small amounts yesterday for certain new clients that have been underinvested relative to our strategies because of the timing of when their investment funds came to us.  Again these were small amounts and we took advantage of a few things that are starting to look washed up from a money flow standpoint.  We are not prepared to do more than this so far because our indicators haven't shown us that the coast is quite clear to do so.  While stocks haven't corrected all that much since their highs in July, stocks can correct by time as well as price.  

The sitting and waiting as Livermore attested is very hard to do.  This is largely because to the crowd things never look rosier than at the top and are bleakest near the bottom of the market cycle.  All during July and August the financial press beat the drums for higher markets.  They have only in the past week or so taken on a more strident, bearish tone.  Where they are right now is indicative of a market that while beginning to look more attractive is not completely out of the danger zone yet.  Also we are mindful of the seasonal factors that are in play in the late August-October period.  As such we're content except for some purchases with new money to sit on our hands and let our indicators be our guide.