Investing Wisely -- Update with Recommendations & Personalized Follow-Up

By: Steve Bauer | Sun, Nov 21, 2010
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Update & Recommendatons:

In my last Update, I bemoaned the fact that I passed on investing in the current rally and said that I had obviously made a mistake in being too conservative. Well, I was correct in my forecast but my portfolio did not grow very much - holding cash.

Today is a new and refreshing story. The current rally is exhausted and you should either be in cash or on your way to cash.

The market is now seriously setting up for yet another Pullback, and I intend to do my best to 'participate'. My current forecast is that this anticipated pullback is perhaps a few of days, a week but not much more, down the line.

My Recommendations will be posted soon. An alert will be provided if I have you on my alert list.

I believe that specific Company - Short Sales - (Shorts) and Inverse ETF - Buys - Recommendations will be provided by me to SafeHaven rather soon, just like in my April 8th Update / Recommendations.

I posted a couple of articles here in SafeHaven using my valuation analytics for GE and the Indices of the marketplace over the last couple days. I hope you have a chance to read them.



Something to Ponder:

As we approach the time of my offering some formal recommendations for my anticipated bearish Inflection Point, I would like to share some information and statistics that are very timely and important to your "Investing Wisely".

Being Selective: You noticed in some of my postings that I have emphasized the importance of "Being Selective". I suggest that these words should become a key word in your vocabulary. In today's marketplace, it is an essential element of your avoiding losses. This refers to your future investment decisions for Companies and ETFs and both Buying and Shorting.

In the old days when most everything was going up - the old "dartboard approach" worked quite well. With the quote page from the WSJ pinned to the wall - all you had to do was throw a dart (an exaggeration, yes1). I do not have to tell you that "everything" is no longer going up, and if I was to guess, currently more securities are trending down rather than up! That is with respect to trends over the past six - eight months or so. It is also very true for the past decade. (See my company articles and there are many more, high profile companies, that fit this situation - trending down!)

Let me offer a query: Let's assume that we have completed all of your analytics and homework and have a select list of 20 Candidates for Investing. That can be in either a Bullish or Bearish environment. In addition you have determined that these Companies all have about the same risk factor. (Risk / Reward = Sleep or no Sleep at Night). And your profit projections for the different Companies range between 5% and 25%. Finally, your Asset Allocation Model calls for investing in just 10 Companies. Which ones (Companies) would you choose? I trust my point is clear to you, if not, please feel free to let me know. This is important! Hint: If the risk factor is the same - go for the highest projected profit - I stress the words "risk factor is the same".

For me, "being selective" means - that when I feel the stock market is approaching an Inflection Point, Bullish or Bearish, that is when my analytics process begins a very comprehensive review of all sectors, industry groups and their component companies. Up and until that point (about 1 - 2 weeks ahead of an anticipated inflection point is about right) doing a lot of analytics and research is just spinning your wheels and a waste of time. Things change too fast in this marketplace to try to start working on the detailed analytics very much sooner. However, as a financial analyst and portfolio manager, I often already have a very good idea of where the highest probability for profits is going to be. That also means you must have a rather complex computer-assisted methodology in place that can thoroughly cover your entire universe of sectors, industry groups, companies and ETFs in a very short amount of time.

I also have shared before that if you look at the charts of all the Companies in a given sector or industry group, they (the different companies in those sectors and industry groups) price profile is often scattered all over the charts. Above I called them a mess and many and sometimes most are definitely unusable due to the implied risk. Simply said, that means that some are going up, some are going down and still others are doing nothing. Once I have a large enough and comprehensive list of Candidates for Investing, Bullish or Bearish, I go back to fine-tuning the Fundamental and Consensus Analysis for a long and hard look at each one. That is very time consuming but is absolutely necessary.

I am constantly "weeding the garden" so if you are interested in having a profitable investment program, I suggest you learn to weed, fertilize, water and cultivate your garden. (I use this term when I do a portfolio review for a prospective client) I call it: "nurturing". Remember, a good part of my analytics is a process of having the tools in place to "compare" a large number of Candidates for Investing and "selecting" those with that will produce the best profits, at the lowest risk in that particular market cycle.

Let me share some numbers. My company universe is made up of only about 1,500 quality companies. Most of these companies come from the S&P 500, 400 and 600 Indexes - large, mid and small cap companies, which also happen to add up to 1,500. However, I do not restrict myself to the S&P Indexes. Understand that in balancing a portfolio (diversification) into a proper asset allocation model seldom requires more than 12 - 15 securities, even for large portfolios. Therefore, my "selection" of securities for investment, are less than one-percent (1.0%) of my universe. I'd call that "selective".

You might ask: if I have your best one percent, why when we complete a transaction (sell or cover my recommendations) other securities in your universe out performed the one's your recommended?

For me the answer is quite simple, but many investors / clients like to point out what they consider to be the true case or facts. Remember, the "true case" is both an - after the fact way of thinking and claiming no 20 / 20 hindsight - that's impossible! However, I would like to remind you that within my fundamental valuation and technical cycle analysis - analytics it is focused first on the risk / reward formula. The goal is to: reduce the risk, increase the profit potential and have a very high percent of the companies selected for investment to be profitable. I would like to stress all three, but I have proven, without a shadow of doubt, that if 90% of my selected / recommended securities for purchase or short sale is profitable -- I will continue to have a consistently annual positive bottom line. That's a fact!

Saying it another way, I am sharing the importance of being highly selective and that principle means, identifying just those Companies that have the best projected profit projections and a reasonable risk/reward ratio, again depending upon my focus, Bullish or Bearish. ETFs have a very different and special treatment for being selective and that's another story for another day.

A little more math might help you to understand my sharing. Hypothetically, if we invest in 10 different securities, and we have 9 out of 10 profitable investments, by doing some quick math you will see that it's a - can't lose formula. Another important consideration is -- if you do have 9 / 10 investments profitable and average 10% or better, 3 - 4 times per annum, most people would be very pleased.

I would also like to share that reading a glowing article, that claims spectacular fundamentals, from even the highest ratings of some research firm, and many of my peer authors, is just plain worthless these days. I'm sure you have your favorite research sources, but have you ever tracked their recommendations? Furthermore, I know of very few who ever tell you "when" to sell or cover their recommendations.

For example - often the best Companies to Buy when I believe the marketplace is approaching a Bullish Inflection Point is often a Company that does not have all that much pizzazz. In fact, when I read articles, a blog / posting with information and data packed with pizzazz -- I often don't even check it out. Remember, I'm set up (computer wise) to check stuff out with a very little effort, but I don't often - waste my time. Hype and sales pitches do not make money for Investors! They never have and they never will. I'm a lucky guy, the harder I work at my trade, the luckier I seem to get.

Many have asked - how to you determine if a Company or ETF is going to have a high propensity to be profitable or have a propensity to be a loser? Said another way - how do I identify those "one percent" candidates for investment?

First just a quick remark before giving you a brief insight into the answer of that question. Remember, my objective is to identify Companies and ETFs that project to be profitable (winners) at the lowest possible risk. This may sound like double talk but -- when I have a Bullish mindset, and I am looking for Companies and ETFs that project to be profitable (winners) and when I have a Bearish mindset I am looking for Companies and ETFs that project to be profitable (winners). That sentence should provoke a few Email questions or at least cause you to scratch your head just a bit from at least a few of you guys and gals. "Winners" are profits from both Long and Short investments. It is often difficult for some Investors to understand that we make profits on the Short side, during a Bearish market condition, when the price of the Company goes down. This is strange for some folks, but true.

Now, regarding the above question, obviously I am not able to share the explicit details, of how I determine the winners from the losers. Or, how I use My Rotation Model to identify the best possible prospects for profit. For me 'My Rotation Model' is mostly fundamental in nature. You have likely noted that recently, I have for the first time in years, been writing articles on Indices, Sectors, Industry Groups and Companies. These articles are intended to share my heavy concentration on fundamental - Valuation. This has always been the case, but I have, for some reason, not written much about it. So, the fundamental answer to the question is that by going through the valuation analytics for many companies, it is quite easy to identify the best candidates for buying and candidates for shorting. This is where I begin and then from that list I work on the technical aspects of those companies.

There are three conventional technical analytic answers that at least will give you a simple answer the question. They are: I look at the relative strength, momentum and the trend of the Company and, perhaps equally important, I look at those same indicators in that Company's respective Industry group very closely. I do so rather differently than the textbooks suggest, and I believe differently from the way most other financial analysts describe or work with these three indicators. For me, the different technical "theories" and "charting systems" both in the text books and currently used big time by financial analysts have not, over the years, and do not today produce consistent profits. For me, it is a puzzlement why Investors and financial analysts who have not and are not doing well continue to follow the same path of analytics.

Conclusion: So, I hope my sharing has made it quite clear that in today's marketplace the old dartboard is of no value any more, other than for enjoying a game of darts. I might add that the good old days of nearly everything going up are gone and gone forever.

Having doctorate and teaching many classes of finance and economics, I also suggest that the textbook systems for investing and most newsletters - are not worth a damn - either. I believe that you must do as I have, over a number of years, develop your own methodology and skills to the point that it works well for you. Your money is not something others should use to learn their trade.

You all know that when we take classes and go to school or university, we do so - to learn. If we are lucky we find those mentors who are willing to offer advice and help to shorten the learning curve and that is great. With regard to the stock market, a good mentor can greatly lessen both the time spent learning and the number of losses you must take, over the coming months and years to finally learn how to be consistently profitable.

I can tell you from both personal experience and many long studies, specifically on this subject, if you continue to read a large amount of the junk that is flowing so freely in today's cyber world, and if you invest in the manner that Wall Street, mutual funds, the media, salespeople and most financial analysts do - you are in big trouble, and you will remain in big trouble as long as you stay in that realm. It's a whole new ball game, and I sincerely hope that my work / analytics will be of benefit to you.



My Current Bottom Line:

* I am holding 100% Cash.

* Patience and Discipline - waiting for my list of Fundamental, Consensus and Technical - "Conformations" to all fall into place is part of the necessary process for "Investing Wisely".

* Inflection Points historically have occurred historically about three - five times per annum. We have already had 5 clear and meaningful Inflection Points so far this year. Investing at or around the time of my Inflection Points has proven to be a profitable way to invest.

* In my late August posting, I said: "The Market is now (very possible) setting up for another meaningful but likely (short in duration) Rally!" It certainly did rally!

* Now it looks just the opposite. One of these days this choppy and bifurcated market (late April to date) will do something meaningful and the next possibility of that is a Pullback.

* High Volatility may not currently be showing up on VIX - lately, but it is clearly - alive and well.


If you would like to have:

* After my making specific Recommendations - An Email from me at the time I Sell / Cover each of my specific Recommendations.

* Information about my Work / Methodology / Services, or of my personal and professional background.

* A second opinion based on an article or something said on the financial networks.

* My performance record while contributing with SafeHaven.

* My on going Research / Analytics Commentary, 2 -3 times each week you may want to become a "Follower" of my personal / private Blog.

* And you are a -- Serious Investor ...

Just send me an Email, and I will respond promptly.


Thank you for your time in reading my "stuff" and continued interest in my work / analytics.

Smile, have Fun - "Investing Wisely",

 


 

Steve Bauer

Author: Steve Bauer

Steven H. Bauer, Ph.D.

Steve Bauer

Steve has several degrees, i.e. post graduate degrees and doctorate and a great deal of (too much) continued education. For seven years, he did a stent as a University Professor of Finance and Economics.

Dr. Bauer also writes for SeekingAlpha.com. His articles can be viewed at: http://seekingalpha.com/author/steven-bauer?source=search_general&s=steven-bauer

He owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

Professionally he is a financial analyst and private asset manager / consultant / mentor.

Steve can be reached at senorstevedrmx@yahoo.com

Copyright © 2010-2013 Steven H. Bauer, Ph.D.

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