Inflection Points! -- A Short Explanation
Initially written: 06/1973 and Updated: 08/2011
This is my 4th Article in an old series I call: "Why Most Investors and Nearly All Traders Lose Money." It is also expanded in one of the chapters I have in my (un-published) book. The title of my book is: Decoding Wall Street.
An Inflection Point is: "An event that changes the way we think and act." Andy Grove, Founder of Intel Corporation.
It is one of the Three Pillars of my Methodology of "Investing Wisely". (for and over-view of my Methodology - please see my Personal / Private Blog): http://twitter.com/InvestRotation/
The term Inflection Point was first introduced to me in University, in a math class called Differential Calculus / Equations. It was at that time, and for over a year, I was hand charting about 100 Companies per day for some wealthy Investors. The lights came on and I have enjoyed remarkable success by simple taking this mathematic concept and applying it to managing assets. A couple years later while in Graduate School, I was reintroduced to Inflection Points as part of course on Behavioral Economics and Behavioral Finance. I have since honed this knowledge into a tightly woven investment tool that has become one of the several conventions that I use to make wise and timely investment decisions.
It is (or should be) clear to most everyone who sooner or later, something if not a lot of things are going to change, often it seems it happens, too fast and all at once. On the other hand, my security's work / analytics can be quite boring, because the marketplace can also move very slowly. Yes, it can move very quickly, too quickly sometimes too. My answer for this problem is: Patience and Discipline - some Investors have it and others never will. As an old professor of economics and finance, I have arrived at the point of firmly believing that "few" will ever see the Truth and the Light of Investing Wisely. Oh, it is very profitable, by the way.
My use of the words "Inflection Points" in this Article could be converted to the word "Change". These two words have been good to me (financially and in my overall life) besides, I like the sound, of "I. P.". So please don't misinterpret my rather strong focus on these words. After all, this Article is to share with you my favorite couple words for making money!
The following two Charts / Graphics illustrate how Inflection Points are applicable to securities analysis and are quite compelling to say the least.
You hopefully will recognize from these two charts that just when you think the trend or path is upward, there is a split and quite clearly the trend or the path can move upward, as expected - But - you will also note that it is equally possible for the trend or the path to do the unexpected and move downward. That's the snafu that the stock market presents to all, Investors, Financial Analysts and Asset Managers alike. The stock market has a mind of its own, and if you are relying on logic and sound reasoning you are destined to be a loser in the realm of Investing Wisely and profitable.
It was over 40 years ago that I began to completely understand what these graphic shares and how they could be employed to make money. It is pure mathematics and requires considerable knowledge of math to work through the various formulas. When the light came on, I was determined to be able to differentiate when the probabilities were to continue moving upward and/or when the probabilities were to reverse and move downward. My Inflection Points are not perfect today but they as accurate as anything you, or I will come across and have produced many profits and very few losses over the past 40 years.
As I said, the above is a mathematical and fancy graphic and it is perhaps my favorite. It is identical to what I learned in differential calculus / equations and it is the graph / chart that I have used to develop my Inflection Point tool for managing assets.
In differential calculus an inflection point is a point on a curve at which the curvature (second derivative) changes signs. The curve changes from being concave upwards (positive curvature) to concave downwards (negative curvature), or vice versa.
Putting this in more simple terms, imagine driving your car along a winding road, inflection is the point at which the steering-wheel is momentarily "straight" when being turned from left to right or vice versa.
These changes can signal the beginning or the end of both economic and stock market prosperous times, and they are the forerunners of either a new period of growth, resulting in profits, or a downturn that can, in a short period of time, wipe out a business or investment capital gains that have taken years to build. I remain conservative, yet proactive in my approach to "Investing Wisely".
The lesson here is (or should be) clear - sooner or later, change (business, technological, financial or otherwise) is going to affect every company and every Investor. If you manage a business or invest your money, you must plan for change despite the fact that no amount of education, research or analysis can accurately anticipate what those changes will be. Remember, no one can predict the future, but some of us still try and are more than reasonable successful. Like in most all things in life, some people / investors are more successful than others and that is often because they use tools like Inflection Points. The best we can do is size up our chances, calculate the risks involved, estimate our ability to deal with things, and then make our plans with confidence. Timidity does not produce growth or profits, so I carry on my work quite enthusiastically.
Before continuing, I would also like to make clear that my use of the term Inflection Point is neither, Fundamental Analysis or Technical Analysis in nature. It is an analytic process or methodology that takes into account a wide assortment of conditions and factors that I have experienced (both good and bad) over many years.
For several decades I have accurately warned investors that sooner or later there will be a lifestyle-threatening change, a "Negative Inflection Point." I have offered continuous alerts that emphasized that hyper-vigilance is a necessity for successful investing, both in choosing the WHAT (a Company / ETF) and in turn deciding WHEN to make your investment decisions. This fine tool also offers the important - WHY !
The best and perhaps the only way to avoid disaster is to be hyper-vigilant. Work hard, do your homework, and be mindful. If you're not always on guard, something will come up and bite you in a place that makes it difficult to sit down. One would think that all financial analysts and asset managers are, by default, 'hyper-vigilant.' You should already have had sufficient experience with stock brokers and the mutual fund financial analysts / asset managers to know that very few do have this quality. Very few!
You will not ever be able to know why the old rules are no longer working, and you won't know what the new rules are. Believe me there are "new rules" up the "kazoo-ie" in today's stock market for you and I to deal with.
Another way to avoid disaster is to stop reading so much of the stuff / crap that is published in the many political, business and financial blogs today. I used to enjoy reading 10 or even 20 every day. However, I have found that the quantity of negative added to the wide spectrum of unqualified opinions makes for very poor assimilation of facts and in turn poor investment decisions. I suggest you follow just half a dozen (or less - one or two) authors that are: first positive and second are focused on making you a profitable Investor. I believe that most financial books, newsletters and blogs are worthless to the on going quest of making money - most of the authors information and data will never help you make money. You may want to consider / ponder this point that -- reading and collecting a great amount of information and data -- does not make for profitable investing. I learned that after much education, and it took nearly 10 years for me to figure out that the education and books on investing were of little value in my pursuit of making money.
Personally, I tend to be more hyper-vigilant about getting wrong information and data than trying to find something that makes sense. I can read, interpolate and understand correct information and data, but when it's wrong or skewed by Wall Street, mutual funds, stock brokers, financial analysts, asset manager, bloggers or the damned media, I tend to worry. And, or course, I also worry about how / what my Clients will read, interpret and understand from these often incredible poor sources. I spend much time - one-on-one - with Clients and Followers trying to teach and share a correct mind-set. I fear "few" are good listeners.
More recently I have added yet another old indicator that is both unique and exciting. It is wrapped up in the areas of (a) repeatability, (b) specific changes from the old set of rules to the new, (c) creation of a new equilibrium that allows for significantly lower risk when investing and (d) provides a lead time to important Inflection Points. With this tool, the only risk comes when an Inflection Point is missed or perhaps passed on purpose. (Remember, inflection points are general in nature and are simple an expression of on going change.) Simply said, if you or I totally miss a buying opportunity, or you and I miss a shorting opportunity, there is only one solution. Hold Cash until the next one come along. More recently they are coming along more often than in past years but the percent of profit per investment opportunity has also been reduced. Just last year a 20% profit was rather easy to attain, but in the last several months 20% has almost become an impossible objective. Take heart, I do not think the past several months of mini-moves will last.
We have all heard the expression and I still sees my job as simply to "Buy Low and Sell High" (vice versa in a Bear Market) while being sure that my risk/reward ratio is in focus. I also believe that most individual Investors, as well as professional money managers, try way too hard to hit home runs. I have always been most content with hitting a lot of singles and doubles. If you have just a few - 10%ers and/or 15%ers per year and you can certainly smile, unfortunately few have had that experience in the past decade (2 or 3 10%ers or 25%ers provides a 20% - 30% year quite easily). (Key: single 10% net profit, double 20% net profit, triple 30% net profit, home run 40%+ net profit.)
I have researched and analyzed decades of information and data on many sectors and industry groups that have proven to me that by examining their current impact on most areas of investment that Inflection Points are real and a fact of life for "Investing Wisely". I would add, that it is through this research and analysis that you can recognize pretty much exactly where the General Market, Sectors, Industry Groups are at any given time. Once you see and Inflection Point coming, you can begin to respond to it. Every Inflection Point is triggered by a common change. I call it "Repeatability." Inflection Points, both Bullish and Bearish, repeat themselves over and over and over again. All you have to do is be Patient and Disciplined enough to wait for the next Inflection Point - I helps to have the tools / methodology working for you too!
Recognizing change, according to me, requires "separating the majors from the minors, the wheat from the chaff." To distinguish one important change from another and then eliminating the surrounding noise or chatter, I have developed a "Conformation" methodology that does this job quite well. I start with the old "silver bullet" question: "If you had just one bullet, how would you use it? When the answer is obvious, then decisions are easy. It's when the answer is not clear that we have a very different set of conditions and at times like (it's not clear) I recommend taking no chances, baring no risk and staying in Cash. Be patient and disciplined, and wait for a clearer set of conditions before committing your capital. Sometimes no decision for a month, or even several months, is the best decision over the term of a year. It is at these times that Cash is your safe harbor. I can tell you from experience that it won't be long before new investment opportunities will present themselves to you. Remember they come in cycles just like many other things in life.
I recommend that you wait for several or even the 5th, 8th or even 10th level of analysis to be the trigger for your investment decisions, and certainly not the first or second wiggle on your charts or listen some "Trader" or other jerk beating his or her drum.
Remember, untested decisions that cannot be "Confirmed" by repeatability often lead to disappointing results. Instead of complacency, be on guard to avoid a wrong decision. This is what causes me to do my homework well and I recommend that you do the same! I use the work "Conformations" in my Blog quite often, I hope you understand what that word means for me.
It has been clear to me that top business leaders and portfolio managers accept the reality of the changes causing an Inflection Point, then and only then they take prudent and decisive action. They make buy/sell decisions without much anxiety because they know, over the long-term, it is the correct thing to do. Lesser 'leaders' always seem to stumble and often never seem to recover. You don't have years to waste trying to fix - past non-productive and profitable decisions.
I believe that confronting an Inflection Point is one of the biggest challenges, in today's marketplace that an Investor, Financial Analyst or Portfolio (Asset) Manager has to face.
For me -- This is serious Stuff -- exclusively for you folks that are Serious Investors and are truly interested in making money in the Stock Market ...
For Me and perhaps For You -- The Good News -- is ...
I have figured out how to make money despite the endless flow of Washington's way of running the Economy, Wall Street, and the damned media. (this statement is at least, in part true for all governments and of all countries around the world. I do this without insidiously depleting your assets like (Wall Street and Mutual Funds - DO/DOES ! ). It's the uninformed Investor and the little people that are being hurt by these powerful machines, often called a Democracy. That is suppose to mean - "for the people." It Isn't!
Keep Smiling, have Fun - "Investing Wisely",