Relationship Investing

by Jeffrey S Weiss

  Moral: Spend the lion’s share of your time on the analytical portion of the investment process, not on your trading fees. Sure, you’ll want to pay the lowest trading cost possible consistent with competent execution. But those fees pale in comparison to the hard-earned investment capital you’ll be committing to the market. Remember, your financial fate won’t be decided by trading costs, but by performance.

  Chapter 31

  One in a Million

  When a rare event occurs, it’s often labeled as a once-in-a-lifetime happening or an occurrence so infrequent that we may never witness it again.

  When it comes to investing in the stock market, it’s almost as if this rare event is so unpredictable and impossible to foresee that it somehow excuses the fact that many market strategists and money managers don’t have a plan to deal with or respond to it. Some will argue that the historically reliable yardsticks of the past are no longer valid in these instances, while others will proffer that the market is in unchartered waters. What good is that? The fact is that the event is occurring! So while this all may be true, the bottom line is that the reasons why your portfolio is worth what it’s worth, after all is said and done, really don’t matter. The results are the results, whether good or bad. The market doesn’t care. This is the cold reality of the investment business, like it or not.

  Still, I can’t help but think about all those folks who worked so hard for their money and watched the value of their portfolios sink substantially during a nasty bear market span, not to mention other instances that I have painfully witnessed over the decades. That’s the reason I wrote this book.

  I heard former Federal Reserve chairman Alan Greenspan on the radio on September 14, 2008, commenting to the effect that the (then) current financial crises was a once-in-fifty-year occurrence and the worst he had ever seen. Look, no matter how rare a market event is—whether it’s a once in fifty year, once in a hundred year, or once dating back to the Paleozoic period—you always need to be prepared for it. You don’t get a pass. There are no exceptions, despite whatever highly unusual circumstances may exist.

  That’s what capital preservation is all about. That’s why we’re willing to sell on the way down to prevent financial cuts from becoming financial hemorrhages in our risk management approach. It’s why we listen to the language of the market and respect its verdict, and realize that capital preservation considerations should precede capital appreciation ones. This is done in case good turns into bad or bad turns into worse or worse turns into who knows what. The excuse that an event is a once- or twice-in-a-lifetime occurrence means nothing if that occurrence happens in your investment lifetime. In fact, you need to assume that it will! Already in my lifetime I’ve witnessed:

  • The big bear market of 1973–1974, among the worst since the Great Depression at the time, with a Dow Jones Industrial Average loss of approximately 45 percent.

  • The 1987 stock market crash, which claimed approximately 41 percent from the Dow Jones Industrial Average in less than two months.

  • The technology stock bubble of 2000, and the NASDAQ’s 78 percent plunge from March 2000 to October 2002.

  • The subprime mortgage crisis starting in 2007. The market punishment inflicted during this period was particularly brutal, with the Standard & Poor’s 500 Index plummeting approximately 57 percent and many big-name companies becoming little-name stocks.

  • The flash crashes in 2010 and 2015.

  I also remember some notable events that captured Wall Street’s attention at the time, including:

  • The jitters preceding the pre–Gulf War major market low in October 1990, when the Standard & Poor’s 500 Index sank below the 300 mark.

  • The Long-Term Capital Management crisis of 1998. LTCM was a highly leveraged hedge fund whose bailout had to be coordinated by the Federal Reserve.

  • The late 1994 Orange County, California, bond crisis. The county was the largest municipality in American history ever to file for bankruptcy at the time.

  You can see how these rare events are occurring with more frequency. And that’s just a start. One of the things I like about using technical analysis is that you don’t necessarily have to gauge the extent of a market move. Once you’re out of a stock, you’re removed from whatever downside (or upside, to be fair) movement that remains—whether that downside is in the context of a common market correction or a once-in-a-lifetime bear market collapse. Divorce detaches a couple from further downside in their relationship, just as liquidating a home or a business extricates the seller from future difficulties in those areas. The key market challenge is to try to discern when a change in the supply-demand dynamic has occurred. My attention is always primarily focused on the downside part of the investment equation. I don’t worry about the upside part; that’s not what’s going to hurt me. Your stock market objective is always the same: trying to be invested in winners during bull moves and be out of the market during sustained bear moves. I realize that “selling short” is also an option in the latter case, but my first consideration when my technical gauges and charts suggest that a bearish market climate may have started is to be increasingly out of weakened positions and maintaining a risk management discipline. The fact that there may be a “perfect storm” of forces at work or an extremely rare event occurring is that much more reason to always have some sort of well-thought-out exit plan.

  I want to take you back to early 2007, ahead of the subprime mortgage crisis. As with major market moves in general, rarely do the experts see it coming. If you took a look at the action of the Standard & Poor’s 500 Index and Dow Jones Industrial Average, you’d be noting fresh all-time highs as late as October of that year. But underneath this surface strength the popular banking indices were telling a different story with their refusal to follow suit during that upswing. Most peaked in the first quarter of that year, and by the time the aforementioned duo were achieving their fresh fourth-quarter peaks, many popular banking indices had been trending lower for months. Their charts were telling a story. In technical jargon we refer to that as a divergence. We all know how the market performed following the October 2007 peak, as the “500” plummeted from a high of 1576 that month to its trough of 666 in March 2009, and the Dow Jones Industrial Average sank from approximately 14,198 to 6470.

  Who knew the extent of that devastating financial period? Certainly not I. But something seemed technically amiss in the banking indices, and when that happens you need to wait on the sidelines for as long as it takes the stock or market to rectify the supply-demand situation. That wait can be a long one, but when the tide is against you, don’t swim.

  Moral: You need to plan for the unexpected in both investing and life. Regarding the former, when all is said and done, your portfolio is worth what it’s worth, whether a rare and totally unexpected event occurs or not. Remember that markets go to extremes. And while scarce events may occur once over many years, a risk management strategy should always be front and center on an ongoing basis.

  Chapter 32

  Pursuing Perfection

  I’ll save you the trouble—don’t try to pursue perfection! Perfection doesn’t exist in either life or the stock market. There was a time in my life when I was pretty tough on myself with my investing decisions and outcomes, and it never helped me become a better investor or a more accurate forecaster. All it did was put additional pressure where there was pressure enough in making my investment determinations.

  It’s the same for marriage, dating, close friendships, and business partnerships. Mistakes will be made despite the most carefully laid plans. When they occur you’ll need to be able to shift to a more flexible mode in order to deal with them and not beat yourself over the head, so to speak. Doing so will only make you less effective in dealing with the issue at hand. Can any relationship realistically stand a chance at long-term success if one or both partners has expectations of perfection or close to it? Can having such a rigid standard endure over time? It has to drain your en
ergy and possibly affect your health. Sometimes forgiving one’s faults, if the parties agree, allows for a far longer-lasting and happier relationship.

  Many of the misguided investment axioms discussed in this book cannot be successfully addressed by being a perfectionist. Forget about it. Approaching the market in this fashion is like already having two strikes against you before you reach the plate—that is, if you even get up to bat in the first place.

  Putting more pressure on yourself in any circumstance, whether it’s in life, investing, business, or romance, can cause you to make bad decisions under the increased stress and anxiety of the moment. Often, you’ll act and not react. You’ll be so immersed in the situation that it will control you. It elevates the potential for even more errors in judgment.

  Being set in your ways and overly precise are negatives when it comes to competing in the stock market arena. To me and my “market technician” crowd, investing is an art. There’s room for flexibility. Even bridges are constructed with room for some sway, and airplane wings are designed to have some leeway for movement during flight. A twenty-four-hour news cycle, dizzying market volatility, and millions of investors with differing investment and psychological profiles investing billions of dollars across a broad spectrum of issues demands that you be flexible in your investment approach. The market will teach you that lesson eventually if you don’t already know it.

  Believe me, I know about pressure. It can indeed be a helpful and motivating force in achieving your goals. However, there’s a limit beyond which you shouldn’t go—one that transforms it into a negative influence with your investments, your family, and your friends.

  Moral: I always like to say that there are only two guarantees in this business: hard work and losses. Accept it. You’re going to make errors in all aspects of your life. That includes investing. You won’t buy a stock at its low or sell it at its high. Thinking you actually have a chance to do so isn’t only unrealistic but adds another layer of pressure on yourself. While rigidity may serve you well at times outside of the stock market arena, flexibility will serve you better within it. Don’t aim for perfection. This is yet another psychological aspect of investing that can have a major impact on your investment performance, so it needs to be addressed. Don’t neglect it.

  Chapter 33

  Dangerous Phrases

  I was thinking about some of the investment phrases that cause me to cringe when I hear them uttered. While they’re mentioned often and may sound sensible, beware. They may seem innocuous enough but often make little market sense, especially in the midst of a bear market. Employing them in your investing philosophy has the potential to cost you dearly in financial terms. On Wall Street, the frequency with which a saying or phrase is uttered often bears no relation to its accuracy or applicability.

  As much as it pains me to think of them, it would bother me more if I didn’t include these phrases in this book. Some of them serve as excuses and defensive verbiage to rationalize the retention of losing equity positions. Others identify with the underlying company and not the stock. Some may represent a detachment from investing reality. I’ve addressed these lines in one form or another in the book, and in some cases devoted a full chapter to a specific one in cases where I thought it was needed. Here goes:

  1. How much lower can it go?

  2. It looks cheap.

  3. It pays a good dividend.

  4. It’s a good company.

  5. It’ll come back.

  6. I can’t afford to sell it (for tax purposes); I’m making too much money.

  7. I can’t afford to sell it; I’m losing too much money.

  8. It’s not a loss unless I take it.

  9. If it goes lower, I’ll just buy more.

  10. I’m in it for the long term.

  11. I don’t need the money.

  12. The company’s not going out of business; it’s not going bankrupt.

  13. I just read a good article about the company.

  14. My brokerage firm is recommending it.

  15. It’s a “blue chip.”

  16. This is a $___ (name a price) stock in five years.

  17. I like their products.

  18. They have a great franchise.

  19. It’s at its low (for the year; a reason not to sell).

  20. It’s at its high (for the year; a reason not to buy).

  21. The bank pays me next to nothing on my money.

  22. Where else am I going to put the money?

  23. I’m “dollar cost averaging.”

  24. It has good management.

  25. It’s for my kids.

  26. It’s in my individual retirement account.

  27. I need the income.

  28. My friend has a friend who got a recommendation from another friend.

  29. I’m putting it away and not looking at it.

  30. They’re making money.

  31. They just received a large contract.

  32. I’ll sell when it gets back to what I paid for it.

  33. It’s already had its move (up; a reason not to buy).

  34. It’s “oversold” (and due for a bounce).

  35. How much higher can it go?

  36. I’ll buy it back when it comes down.

  37. I’m not worried.

  38. It has been in my family for years.

  Some of these excuses can just as easily be applied to a troubled relationship by changing only a word or two, like “How much worse can it get?”, or “If it continues to worsen, I’ll just deal with it,” or “I’m in it for the long haul,” or “It’ll improve—eventually.”

  When reviewing the list, be candid with yourself and assess whether you’re making some of these same arguments. In a bear market they can be a route to financial ruin. To elevate personal and other considerations above the investment itself is like deciding to buy a home just by looking at the siding and windows and not its structure.

  Moral: Just because an investment phrase is uttered often doesn’t mean that it’s correct. I hope a bell will go off in your head when you hear phrases like these, and take time to realize their potential for steering you down the wrong path. That’s because they don’t directly apply to the investment itself. What’s more, they often serve only as excuses for not taking investment action.

  Chapter 34

  Buy Low, Sell Lower

  How often have you heard that oft-spoken phrase, “Buy low, sell high”? Sounds sensible, right? Wrong! The problem with this statement is that no one knows what low is, especially in a bear market. The mistaken investment belief that this phrase can actually be defined in stock market terms has cost investors dearly over the years and allowed their losses to grow.

  How many times have we heard that a particular stock “looks cheap,” only to see it dive further in price? How many times have we heard the experts (there are none in this business except, as we’ve already said, the market itself) opine that a specific equity represents “great value”—only to see it represent even “greater value” at visibly lower quotes thereafter? And how often do we hear it said that the market is mispricing a certain stock with strong underlying financial credentials, only to witness continued shrinkage in its share price? The opposite can also occur: shares in a stock with few bullish followers that look either fully (or overly) priced may continue to rise smartly over a sustained period.

  When someone tells me that they aren’t going to sell a stock because it’s at its low, I ask them how they know that fact. And they invariably respond that the share price is at its low based on its fifty-two-week or yearly price range, or other metric. The problem is that just because a security has had a range of, let’s say, thirty to fifty over the past year and the stock is presently trading at thirty-one, there’s nothing that says the stock can’t fall another 20 percent, 30 percent, even 50 percent or more from there.

  What you think is low and what the market thinks is low are two different things. Whenever I hear someone say that the
ir stock is at its low, I can usually assume that it’s going lower. It’s like a troubled relationship that the couple believes can’t get any worse because it’s been so bad for so long. That makes it attractive? The same thinking can be applied on the northerly end, when the investor feels that a share price has reached a peak just because it’s at or near its yearly or historical high. In a primary bull market, you’ll have hundreds of stocks recoding new highs for months (some for multiple months or possibly even several years) on end. A characteristic of a bull market is that what looks high can still go smartly higher, despite views that the share price looks high, extended, overvalued, or overpriced, to quote some overused and misleading terms. So when I hear someone say that a stock should be sold because it’s at its high, I usually think it’s headed higher. On what kind of analytical basis is that to make investment decisions with your hard-earned capital, anyway?

  Let me state this clearly and firmly: it’s not what you or I or anyone else says or thinks that determines what high or low is. It’s what the market says, as determined by supply and demand factors.

  One last thing: I’ve noticed a contingent of investors who, when faced with a substantial gain and a substantial loss in two different securities, worry more about the former. That’s the wrong approach. My motto is “always worry,” but do so more with those stocks that have moved against you—in other words, the losers. Worry more about what has the greater potential to hurt you. While the “buy low, sell high” slogan is far more popular, I am more comfortable (as long as my chart analysis and risk management discipline support it) with a “buy high, sell higher” mentality. Remember, that first high can actually seem quite low in retrospect during a primary bull market.

  Moral: What you think is low and what the market thinks is low are two different things. The fact that a stock has fallen substantially from its high does not mean that it can’t relinquish significantly more ground. Relationship-wise, just because you think that your partner’s problems have reached a point where they can’t get any worse doesn’t mean they won’t. Action needs to be taken, in both financial and personal affairs, beyond thinking that a particular situation has reached a nadir just because of the extent to which it has already deteriorated. Don’t ignore a problem just because you think it can’t worsen.