Being Selective - Is Critical for Consistent Profitability

By: Steve Bauer | Sun, Oct 7, 2012
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Conservative & Low Risk Company Selection - Increases Your Profits by (6% to 12%) per Investment / Company. Add to that a similar (percent range), if you are competent in Identifying - Bullish and Bearish Inflection Points.

Believe me it is worth the hard work and dedication!

Want some proof? Check Out this URL: http://www.safehaven.com/article/27142/update-investing-wisely-performance

Being Selective

I post this article from time to time to emphasize the importance of "Being Selective." In today's Marketplace this is a key reason -- Why Most Investors and Nearly All Traders Lose Money. Poor or Emotional Company Selection is always a costly mistake.

The Stock Market has changed (Big Time!) just since I came out of retirement in October 2007 and started posting in several financial blogs and managing assets and consulting again. My postings here in SafeHaven.com offers a clear path to a My Methodology for "Investing Wisely" that I developed over 40 years ago. (Click on My Methodology and perhaps read my series of articles here in SafeHaven.com).

One of those article is on My Rotation Model that tells the story of how I go about profiting using conservative and low risk Companies. (Click on My Rotation Model to read this article). I invite you to send an Email with your thoughts and questions.

My Email Address: senorstevedrmx@yahoo.com

There is No Doubt in my mind each day when I do my (Company by Company) Fundamental Valuation work and my Technical Analytics that "things have changed." "Things" being the Marketplace and those Companies that were in favor just a few months ago are no longer in favor and vice-versa. It is fickle and I call it "Rotation."

You will note in my article on My Rotation Model that I use a similar Bell-Curve, to the above, to hopefully make this aspect of Investing Wisely a strong point. You must work within your universe of securities to identify the Top "A" Companies to Buy as well as the Bottom "F" Companies to Short that are currently and clearly prospective candidates from which you will profit. Those Companies that are in between / neutral (Bs, Cs, Ds) are either moving into or out of favor and must be avoided for the time being. It is rather easy to tell which direction they are going (and will go) with simple Valuation and Trend analytics. It is that simple, but many Investors and Financial Analysts persist in Buying and Recommending those "In Between / Neutral" Companies (that have much lower probabilities of profit) and Investors unfortunately take their advice. I suggest that many Financial Analysts and Asset Managers just do not have a perspective of what has changed in recent years. But that is not to excuse them, they should know better.

The above (Top) graphic makes to note that it is the Top 10% and the Bottom 10% of your universe of securities that must be focused upon. Those percentages come from my teaching days in the University where 10% and above 90 were A's and 10% and below 60 were F's! Actually, my list for Investing Wisely has a much tighter range. I seek Companies to recommend Buying to Clients that are approaching 100 and recommend Shorting Companies that are well below 60. (See my Report Card in many of my articles).


Another View of My Very Special - Bell-Curve

Bell Curve

Notes for the above Bell-Curve: The blue line or Bell-Curve has only three important areas of consideration. #1. The far left is where the very best (Top) Bullish Companies / Candidates for Buying currently reside at a given time. #2. The far right is where the very best (Bottom) Bearish Companies / Candidates for Shorting currently reside at a given time. #3. The Top of the Curve and between -2 and +2 are where most Companies are most of the time. This area can be called Neutral, because ALL of the Companies are just Churning along.

It is vitally important that you understand that ALL Companies are constantly Rotating and Cycling into and out of favor over time. That means that at one point of time, say the period of one year, there are only about 5% or less of all the Companies in a given universe those are "Top Bullish - or - Bearish candidates for investment.

Therefore, consider the bottom line (axes) also as a time line. This offers you an analogy or perspective for understanding how the Rotation of Companies can have a marked influence on your annual performance.

Remember in school that in every single class of students there were very few A's and very few F's, many more B's ,lots of C's and some D's. It's the same with "Investing Wisely." Buy only the "A's" and Short only the "F's" is my advice.


Let me offer You a Query: Let's assume for this query that you 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 equal amounts in just 10 Companies.

Which ten 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".



I Offer the Following Observations about "Being Selective"

Being Selective Adds to profit

* There is no doubt from my years of Managing Assets that "Being Selective" and doing your homework well can add 6% to 12% greater profit per each investment you make. In other words if for example if you Buy a Company that is not in the Top 10% or Better as represented by the above Bell Curves - A Company with a current grade "A" that you are throwing away a meaningful percent of your profit potential. That can mean that your assets invested have been badly under utilized. Over a year or more that can be significant.

The below graphics and narrative may help in your understanding of how I go about "Investing Wisely" for myself and my Clients.

Risk/Reward

* If you want to avoid losses and invest in the companies with the Lowest PossibleRisk and the Highest Possible Profit -- you had better start to "Be Selective." Lowering the Risk can be computed quite accurately. Each Company can be Fundamentally - Valuated and receive a quantitative score. The Divergence of that Positive or negative score provides a Ratio. Obviously, a Negative Ratio of say 2:1, 3:1 or more means you are considering making an Investment in a very High Risk Company. If this Ratio is coupled to a Technical very Over-Bought Chart you have a very high probability of losing money on that investment.

Weed Your Portfolio

* I often use the term "Weeding Your Garden" -- that means - have a long hard look at what you are holding currently in you Portfolio and what companies you are currently considering for investment. And it also means having a long hard look at the General Stock Market, the Sector and Industry Group of the Company you are about to take positions in (Buying or Shorting) before doing so.

I can only remind you that this is a manual job that requires hard work and diligence. I hope you are willing to invest the time or consider hiring a seasoned Professional so you can have both a beautiful Garden and a profitable Portfolio. "Being Selective" will make all the difference to your annual bottom line. I can help, if you will let me?

Exchanging a few Emails will quickly give you renewed confidence that My Methodology is both unique and profitable.

Inflection Points

* As you likely already know, within My Methodology I focus Technically on using Inflection Points be they Bullish or Bearish. This is yet another way to increase your Profitability by several or more percent per trade.

For more information on how I use Inflection Points to increase the performance of each recommended investment I refer you to My Methodology URL above. In that article there is a hyperlink to My Inflection Points.

When immersed in my analytics, it does not take more than an hour or so be know for certain if that Company is: Good, Bad, or Ugly!

The Good, Bad and Ugly

I can say quite confidently if you do your Selection of Companies well and use my Inflection Point methods well - you will increase your "profitability per trade" by at least 6% or more. "Being Selective" means using a predetermined list of conservative / low risk and high potential profitable securities when an Inflection Point (Bullish or Bearish) is anticipated. That means that the Companies in which you invest must be within a 10.0% (or often a much, much better) range, Bullish or Bearish, on the above Bell-Curves. My universe of securities is only about 1,500 Companies. I can hone my Buying or Shorting List to less than 20 - 30 Companies quite easily after doing all the fundamental and technical analytics in preparation.

* I warn about being "married" to any company at any time. "Being Selective" means your Company that you have "married" will disappoint you at some time or another. An expensive divorce will surely come along somewhere down the line. That includes Apple, Inc. (see my last published article on (AAPL) and the 20 historical chart. Twice AAPL has lost over 50% of its value. And it was not on my "List" when the DECLINE began).

Batting Average

* Your Batting Average of winners (profitable trades) vs. losers (losing trades) had better be 8-9 out of 10 or better. And, that pizzazz or a sales pitch to - "Buy XYZ" - you often receive from a financial planner, broker or even your friend is a sure way to lower your batting average and get kicked back to the minor league with a very poor performance record.

Obviously, this article on "Being Selective" is written to help you understand "How" my "Batting Average" is amongst the best in the major league. I am old but Accurate!

* Having the Investment Tools to Interoperate and Understanding MY Three Pillars of my Methodology of "Investing Wisely: a) Inflection Points -- b) Stock Market, Sector, Industry Group and Company Rotation -- c) Stock Market, Sector, Industry Group and Company Cycles is very important to Me and I hope it becomes important to You.

Using Your Logic and trying to Compete with the (Big Gun) Professionals is a Losing Proposition! Your Psychology and Emotions will also be strained.

My Forecasting has produced profits for over 50 years and is a major support for the formula that I so often Publish. F (plus) C (equals) R.

Stock market Cycles

Accurate Forecasts (plus) clear Conformations (equals) Results (Profits). There is no Greed or Fear in a well-designed Methodology. All the Theories and Systems: (Dow Theory / Elliott Wave / Pure Technical Indicators / Dart Boards / Etc.) Don't Work -- Consistently, yet their proponents keep up the Hype.

* "Bubbles Always - Break" - You might want to remember that remark!


Bubbles Always - Break!

Stock market Cycles

Be it the strongest of Companies such as Exxon Mobil Corp. or even a Super Star like Apple, Inc. - Etc. (they all can and do ) "Break." (Click on the above Companies for my 20-Year Charts of each one.) Or - (Click on any of the 13 Companies listed immediately below for my 20-Year Chart of each one.) Or - (Click on the following URL and you can wade your way through all 30 Dow Companies for my 20-Year Chart of each one.) http://stockcharts.com/public/1616666

I emphasize your studying my above referenced 20-Year Charts - they ALL make my point very clear. Repeating, eventually even the best of the best "Break."

If you will follow my Methodology for a time, asking and sharing your questions and thoughts with me by Email, I am confident I can provide you with the credence and trust you may be seeking. "Investing Wisely" is a very special and unique Methodology. I hope how you will permit me to share more.


The following are the thirteen Companies that I providing Articles and Alerts / Warnings. Remember, these are only my Bellwether Companies as a partial guide to use my Rotation Model to Identify the Currently Most Favorable Companies and ETFs to consider at the time of the above mentioned Inflection Points.AA, AAPL, BAC, C, CMCSA, CSCO, F, GE, GOOG, INTC, MSFT, AT&T, XOM.

(To view my 20-Year Chart for any of the above Symbols - just Click on the Symbol).



Conclusion

So, I hope my sharing has made or will make a difference in your investment future. I would add that the good old days of nearly everything going up are gone are gone forever - you must "Be Selective."

Add to that the fact that the "Big Boys" / Professionals are playing Hard Ball. Unlike the Baseball graphic above these guys know what they are doing. Investors that choose to compete with the "pros" are just going to loose their money - literally giving it to those who will always take advantage of the little people.

Most importantly you, as a serious investor (if you are?) might well want to consider taking the time to read this article (more than once). It is my sharing with you something that is a very crucial and necessary part of making money in the stock market.

I hope you will permit me to share further and perhaps start an Email dialog.

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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