How to Rebuild Your Portfolio
A Quote That is as Valid Today as Ever - by Abraham Lincoln
Your own resolution to succeed is more important than any other one thing
Many investors have seen their portfolios punished in the last year. The big Mutual Funds tell you that you should measure your returns against the norm, or against the Index, or the Sharpe Ratio, rather than try to figure out if your assets increased in value or decreased in value. But the only important measurement is whether your portfolio increased or lost value. Following all that you believe to be correct, and then seeing the value of your portfolio diminish is disheartening. At times like this, remember that your own resolution to succeed is more important than any other one thing.
It is disheartening to have have used care and diligence in choosing the stocks in your portfolio, and then to see them decrease in value. There is an old adage that is often repeated - "Buy and Hold". Unfortunately, this is not a good policy. The market moves with great speed and always overshoots reality. Investor emotion and Program Trading makes the market rise too far and fall too far, in every economic cycle.
The End of This Cycle
The former Fed Chairman Mr Greenspan, came up with a new theory that was applauded and supported by the politicians. After all, what politician would not support something that brings prosperity? He decided that after the tech bubble burst, he would stop the relentless cycles of economic growth and then economic pain, by injecting more money into the system. Every time some economic clouds appeared on the horizon, he would print money and create government debt, in order to bring liquidity and smooth the economy.
A good intention. But it was something like the little Dutch Boy sticking his finger in the dyke to stop the leak. That leak was stopped, but the pressure behind just kept increasing. In due course, the resulting explosion would dwarf in severity any small downturn. All it needed was a spark.
The spark was provided by do-gooder politicians like Barney Frank, who by trying to help people buy their homes, created new laws mandating the financial markets to give assistance. This gave Wall Street an opportunity. They immediately jumped on the bandwagon and turned a modest effort into a massive economy altering event. Debt was created for everyone in copious amounts.
As an aside, the debt creation policies started long before the Obama Administration. It was promoted by Greenspan, supported enthusiastically by both parties, expanded under the Bush Administration, and continued under Obama. Contrary to the current rhetoric of the Republicans, there is nothing new here.
In due course, the inevitable happened. In 2007, the money markets realized that much of this new and grade AAA debt, was supported by junk. The resulting panic froze the markets, and then the subsequent stock market crash of 2008, the housing crisis, the employment picture, and everything else crashed over the next few years. Mr Greenspan's foolish attempt to control the economy and the markets failed in disastrous fashion.
How to Value a Stock
As Warren Buffet has remarked, why is the stock of Coca Cola or any other company, not the same over time, if the underlying business remains just as strong and profitable over the same time frame. However, the stock rises and falls dramatically. In each cycle, depending on when you buy a stock, will largely determine whether you make money on that stock. The timing of the purchase is one of the most important factors.
When to Buy a Stock
If you only bought a stock at the start of an economic cycle, and always sold it 4 or 5 years later, and never bought another stock until the end of that cycle, you would do very well in the market.
If you wish to make money in the stock market, you have to start thinking about where the market is going. Today, it seems that the general feeling has swung to an optimistic viewpoint. Perhaps the economy and market is improving or perhaps it still is a bit too early.
An examination of your portfolio will show winners and losers. If the underlying value of the losers remains, if the actual business activities of that company has survived the downturn and is prospering, have patience. As the next cycle starts moving, that stock will start moving also. On the other hand, there are a great many really good stocks that are beaten down. If some of your holdings are suspect, perhaps you could consider replacing those with really good beaten down stocks.
The USA will again show prosperity. It is inevitable whichever party gets into power. There are basic strengths in the USA that are unstoppable forces for economic movement; the rule of law that applies to everyone; the basic belief in the right of every individual; the entrepreneurial spirit; the belief that every person can succeed; and as much as we dislike them - Wall Street which is an unstoppable economic force. So the next cycle is coming. Maybe soon. Maybe next year. But it is coming. The good stocks will be good. Patience is required.
It should be your resolve to succeed that makes you wealthier in the coming economic cycle.