Relationship Investing

by Jeffrey S Weiss

  Moral: You must keep your ego out of your investment decisions. As one of my market teachers told me many years ago, “The stock market teaches you humility.” I take this phrase with me to work each and every day. The way to try to cut down on your losing trades is to reexamine them and attempt to see why they occurred in the first place. This is not a business to learn by trial and error because by the time you become smart you can also be broke! Here’s the bottom line: Respect the market’s verdict, don’t make excuses when you are losing money, and realize that it is you—not the market—who’s wrong when your investments sink.

  Chapter 16

  Term Limits

  Another personal consideration that needs to be discarded on the path to improved investment results is the insistence by some investors that only long-term capital gains are acceptable in view of their lower tax rate. Unfortunately, strict adherence to this view leaves one’s portfolio vulnerable to potentially large risks. Look, we’d all like to achieve long-term stock market gains in our portfolios if possible. While we’re on the topic, one of the big fallacies concerning technical market analysis is that it’s primarily a shorter-term, trading-oriented tool. Nothing could be further from the truth! I’ve used this discipline as an intermediate- to longer-term approach for decades, and continue to do so today.

  Obviously, if someone is holding an equity position that has only a few days remaining to qualify as a long-term capital gain (however long that holding period is defined at the time), it often pays to retain the shares, since even if they drift lower over those few remaining sessions, the after-tax gain from the sale is usually going to yield a greater benefit. But the real problem with stubbornly refusing to take a shorter-term gain if you deem it to be the correct choice is that it could eventually become a long-term loss. Large sums of capital have been surrendered by not taking short-term gains prior to extended price declines.

  Witness sharp, scary setbacks like the August–October 1987 period when the Dow Jones Industrial Average shed approximately 41 percent, or its March–October 2002 decline that consumed nearly a third of its value. Then there’s the March 2000 top in the Standard & Poor’s 500 Index, following which it suffered a 50 percent slide in the thirty-one months ending in October of 2002. That’s a period during which the NASDAQ Composite Index collapsed 78 percent. The Standard & Poor’s 500 Index also suffered an approximate 57 percent fall in the seventeen months following the market’s major peak back in October of 2007, a span during which the NASDAQ Composite Index slid 55 percent. These are but several of the many southerly market periods that could have transformed shorter-term gains into long-term losses—and large ones at that.

  It’s a gamble to try to stretch a short-term market profit into a long-term gain by using the calendar as an investment vehicle. Would you defer a necessary new tire purchase for your car because you wanted to try to stretch some additional mileage from the existing worn ones? Heaven forbid!

  In your investments as well as relationships, dynamics sometimes change along their respective long-term paths that lead them to be cut short. It happens, even though that wasn’t the original intent when entering into those arenas. Sometimes a serious relationship or marriage is ended simply because, as we’ve all heard before, “we’re two different people” or that “we grew apart.” You had some “profitable” times, but needed to part in order to avoid a negative longer-term outcome. You focused on the relationship itself and didn’t allow external influences to invade that decision. I believe the same principle applies to investing.

  When I purchase a stock, the length of my holding period is determined solely by a technical analysis of the shares themselves and not some silly time span based on tax considerations. It’s simply not monetarily healthy to allow external factors, unrelated to the merits of the investment itself, to infiltrate the decision-making process. Aren’t short-term market gains preferable to long-term market losses anyway, no matter what your tax bracket is? The way some market participants act, you’d think they’re in the 100 percent bracket. If taxes are your primary consideration, then why be in the stock market anyway? It’s simply too risky to use holding periods as a reason for investing in the stock market.

  Moral: You’re not an accountant; you’re an investor! It’s hard enough to achieve stock market success without worrying about whether a gain is short term or long term in nature. The goal of investing is to make money—period. Stop letting personal considerations get in the way of making sound investment decisions. We should all be so fortunate with our investments that we pay capital gains taxes every year, no matter how long the shares were held. If tax considerations are your primary motivation for entering the stock market arena, I’d seriously consider waiting outside.

  Chapter 17

  I Don’t Need the Money

  If I hear “I don’t need the money” again when I suggest that a stock is vulnerable and should be sold, I’m going to scream—and I’m a pretty loud guy to begin with. Let me ask you a question. When the NASDAQ Composite Index peaked above the 5100 mark in March 2000 and proceeded to plunge to 1108 in October 2002, what would have happened if you held on to those stocks that mirrored that index simply because you didn’t need the money? You would have been financially crushed, and for a ridiculous reason. And what if it turns out that you did need the money near the end of that treacherous slide—for college, the down payment on a home, a car, a wedding, a vacation, or everyday living expenses? Sadly, most of it would have been gone. That can put a strain on your lifestyle, as well as on your relationship with your spouse and family. Remember, investment difficulties have the potential to spread beyond the financial realm.

  We’ve already mentioned the 1973–1974 market drubbing. And back during the 1929–1932 span, the Dow Jones Industrial Average sank from above the 380 level to the low 40s—a nearly 90 percent setback. What about the countless other southerly market moves that have claimed substantial sums of capital that “weren’t needed” at the time? Or the waterfall-like tumbles in so many household-name financial shares during the 2007–2009 period known as the “subprime mortgage crisis”? Some of those names are no more, others at mere fractions of their former share prices. Remember Bear Stearns and Lehman Brothers? What about Federal National Mortgage Association (commonly referred to as “Fannie Mae”) and Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”)? These are just some of many examples. As I remember these instances and others like them, I think about all those hardworking, wonderful folks who’ve seen their money either evaporate or significantly diminish in these and other names.

  It takes only one severe bear market period to destroy your capital no matter how much money you’ve made previously, and in stock market parlance, that’s one too many. Think about it. You can make money year in and year out over a long span and then, in a single big bear market lasting only a fraction of that lengthy period, lose the bulk of it. Remember, it only takes one! Some would say that isn’t fair, but that’s the stock market for you. In life, a single mistake can also have severe consequences, like crossing against the light or driving too fast on a slippery road. You need to plan and think ahead.

  I can remember 1987 like it was yesterday. In just eight short weeks, ending with the October 19, 1987, “crash” as it came to be called, the Dow Jones Industrial Average surrendered approximately 52 percent of its December 1974–August 1987 gains! To give up, in less than 2 percent of the time, what it took approximately 662 weeks to achieve over that span speaks for itself concerning the downside dangers of stock market investing and the importance of risk management. And don’t forget, a stock market that surrenders 50 percent of its value has to double in price just to get back to where it was prior to that fall. That’s a humbling statistic to dwell on.

  There’s no limit to how much a stock can rise, but we know that a complete loss equals 100 percent. Because the former’s northerly potential is so much greater in percentage terms, there has to be a counterb
alancing factor. That factor, my friends, is that stocks fall faster than they rise. An object needs force to push it up, but that same object can fall of its own free weight—and picks up speed as it descends. And so it is with the stock market. That’s why large losses can occur on relatively light trading volume. So don’t fall for that oft-mentioned market line that says that it’s always a bullish sign when stocks decline on light trading volume. Not for one second. There’s a lot more to it than that.

  The same principle holds true for a stock that rises on heavy trading volume. It’s not necessarily a bullish occurrence. For instance, what if that visibly increased volume fails to lift the shares above a key northerly region on my charts (referred to as “resistance”)? That wouldn’t be a favorable sign. In fact, I’d probably use an occurrence like that to do some selling if confirmed by some of the other gauges I use.

  If a thorough analysis of my price charts suggests that a position needs to be reduced or eliminated, it needs to be done—regardless (I said regardless) of whether or not I need the money. That’s not even a remote consideration.

  A friend recently remarked to me that saying “I don’t need the money” is like saying, relationship-wise, that “I shouldn’t break up with my live-in girlfriend who I’m not getting along with because I don’t need the extra room in my closets.” One has nothing to do with the other. And not needing the cash isn’t relevant to whether or not a stock should be sold. Are we clear on that?

  Moral: Personal considerations such as a present lack of need for capital should not be part of the investment decision-making process. It’s difficult enough to achieve success in the stock market without basing important decisions on flawed thinking. Remember, in the stock market there is never a time when you don’t need the capital if an investment should be sold. In fact, being able to conserve capital at the proper market junctures (this is especially true in bear markets) is a cornerstone of investment success.

  Chapter 18

  It’ll Come Back

  “It’ll come back” is often uttered after a stock has slid a visible distance from its highs. Along with “I don’t need the money” and other thoughts that have no place in the investment arena, this type of thinking is hazardous to improved investment performance. Whenever I hear someone say, “It’s a good company; it’ll come back,” I bite my lip—and hard. The chances of some former favorites returning to the vicinity of their prior price peaks are similar to someone’s chances of getting back together with their ex-spouse. It just doesn’t happen that often. Remember, you’re not buying the company; you’re buying the stock. To reiterate, they are not one and the same, so don’t confuse the two. Good companies do not necessarily translate into good stocks. Commit that line to memory. Take a look at companies that report record financial results. Are their shares trading at or near record highs? Often not, especially in a lackluster or declining market climate.

  Once a stock has peaked in price and begins to decline amid a deteriorating technical analysis picture (this is especially true in bear markets), don’t think that that you’re going to see those highs again anytime soon. In fact, you may never see them! Don’t dismiss this latter thought. It can happen. You need to acknowledge that the best opportunity to dispose of the shares has probably passed you by and deal with where the price is at the moment. It’s the same in a relationship where you determine, after careful consideration, that there’s little hope of that union regaining its former luster and you need to part ways and move on. It’s not easy, but it’s necessary.

  Have you ever noticed that when you think it’s too late to sell a stock it usually goes lower anyway? Time does not heal all wounds when it comes to investing in the stock market, nor does it always repair a damaged relationship. Stop thinking that stocks will always come back, even if the underlying company is a good or seemingly great one. Go back in market history and check it out. Many a small loss has turned into a large one because of the mistaken belief that shares of good companies will always recover to their original purchase price or close to it. Take a look at some of the largest losers in the Standard & Poor’s 500 Index in recent years and you’ll see what I mean. No stock is immune to the potential for downside peril.

  Since the stock market often goes to extremes, stocks in decline will often fall far steeper than the investor believes is possible. It’s the same with a relationship spiraling downward, where pinpointing how bad it will get is impossible to predict. On Wall Street what goes up goes down, but what goes down does not necessarily go back up. Consider these numbers; a stock that falls 15 percent needs a 17.6 percent rise to return to its break-even point, and a stock that slides 20 percent requires a 25 percent rally to return to its original price. Shares that decline 25 percent need to rebound by a third of their value to achieve a break-even result, with a 35 percent fall requiring the shares to gain a hefty 53.8 percent toward that end. That’s why bear markets put you in such a deep financial hole.

  Expecting that a former market favorite will usually regain its lost luster is like believing that the Miss America or Mr. Universe winners from years ago have a legitimate shot at repeating their respective titles now. True, these folks probably look great for their age, but returning to their former “star” status—I don’t think so.

  Moral: The “it’ll come back” type of thinking is no substitute for addressing the fact that you may have missed a significant opportunity to sell your shares in question. It’s your money that’s at stake. Don’t ignore it, and don’t make excuses. Things don’t often return to how they once were, whether it is in life’s journeys or in the investment arena. Not all endings are happy ones, either in the market or in life, and you need to face that reality.

  Chapter 19

  Don’t Yield to Yield

  What investor doesn’t like to receive a dividend on their investments? It’s what many market participants search for. It represents a return on your invested capital. Countless articles have been written on the subject, which is a cornerstone in the investment objectives of many investors and mutual funds. While I’m certainly not arguing with those who may use dividend considerations as a partial basis in their stock selection, I hope they’re not overemphasizing this investment aspect at the expense of the far more important disciplines of capital preservation and risk management. They deserve the front-row seats in that regard; dividend considerations may be in the mezzanine or the bleachers.

  For instance, I’m bothered by the fact that some investors are more concerned with the dividend payments they receive on a particular equity than with the hard-earned capital that they’re investing in those shares to achieve that yield in the first place. They’re putting “the cart before the horse,” so to speak. The latter is a far more important consideration.

  Look at it like this: A $25,000 investment in a stock that is currently yielding 4 percent will earn you $1,000 annually. Is anyone going to tell me that if your $25,000 starts to evaporate that you’re going to hold on to it solely because of the far smaller $1,000 yearly payout being received? What good does it do, for example, to get an attractive yield on a particular stock during a primary bear market if the stock in question loses a third, half, or more of its value? If the stock fails to rebound smartly in such a case, not only could it take many years to recoup your original investment based on maintenance of the dividend payments alone, but more troubling still is the fact that the nasty decline in the stock price could be signaling trouble in the underlying company—and possibly that the dividend is in jeopardy. Look no further than recent market history to see some examples. I cringe when I hear someone who’s losing money in a particular stock use its dividend yield as the key or sole reason to hold a poorly performing issue with a needy chart pattern. It’s like remaining in a deteriorating relationship by focusing on a single aspect of a person who otherwise lacks the characteristics you desire in a mate. Don’t be distracted by emphasizing singular traits relative to the more important larger issues—in the
se cases the underlying investment and the overall relationship.

  Think about this: did the seemingly generous yields in many well-known banking and financial stocks during the period that has come to be known as the “subprime mortgage crisis” provide any price support whatsoever for most of their respective shares during the 2007–2009 bear market? As it turned out, selling shares in many of these well-known banking names when their yields seemed attractive was actually the better market move. What about the rout in energy-related indices from their respective 2014 peaks? And dividend cuts in a number of those related names? It’s a scary sight. Take no comfort in thinking that simply because you hold shares in some well-regarded corporate names with above average yields you’ll be better protected in a market slide.

  I learned that lesson in the early 1970s, when the relatively higher yielding Dow Jones Utility Average fell 53 percent from its November 1972 peak through its September 1974 trough while the Dow Jones Industrial Average surrendered approximately 45 percent from its January 1973 peak through its December 1974 low. More recently, the 2007 through early 2009 bear market witnessed a 48 percent setback in the former versus a 54 percent setback in their Dow Jones Industrial Average counterpart.

  The “outperformance” from the Dow Jones Utiilty Average is nothing to brag about. Don’t be lulled into a false sense of comfort by thinking that a good yield should make for an easier night’s sleep during a down-trending market.