Are We Ignoring Our Own Advice?

Let’s kick things off with an e-mail I received in response to last week’s Alert:

Doug,

I found your review of the last several decades of good market calls to be interesting. If the model works so well, it certainly begs the question as to why you ignored its bullish signals last summer and continued to avoid the market, causing your investors to miss the excellent second half of the year. Your Dad just followed it mechanically as far as I can tell. Your overriding of the signals certainly didn’t help.

Honesty dictates that you discuss this as well.

Rick

I agree with you Rick, honesty does dictate that I address this well-grounded criticism.

First, let me just get all of my Alert readers up to speed on this issue. Last year in my Successful Investing service we recommended that readers take a very cautious stance with respect to the market after the mid-summer correction. At that time we opted for more specialized sector allocations along with a heavy cash position to protect us from what could have been a much-overdue giveback in the broad market.

Well, the market did what it so often does after a correction, and that was to spring back. That return toward bullishness actually signaled to us to get back into equities based on our traditional investment plan of following the long-term trend in the market.

When we actually received the technical buy signal to get back into equities, I opted not to make an allocation to stocks at that time. Why? Well, consider all of the fear going on in the market right at that time. We were still way overdue for a correction of much bigger proportions than we had last summer. In fact, we are still way overdue for that correction and the recent downtrend in stocks may, in fact, be the correction we’ve been anticipating.

In addition to fear of a much more severe downturn, the latter part of 2006 brought with it such exogenous fear factors as nuclear threats from North Korea and Iran; escalating violence in Iraq; uncertainty about the outcome of the fall Congressional elections; the negative effects of the housing slowdown and a contraction in economic growth.

All of these factors, along with much of the technical indicators that showed the market was way overbought in the fourth quarter of 2006, forced me to err on the side of caution with respect to putting our serious money at risk. Was my cautious stance a bit too cautious? In hindsight, the answer would be, "Yes." However, as my father always says, "Investors can live with lost opportunity better than they can with lost money."

Remember that my first general order in the Successful Investing service is safety first. Before we can grow principal, we’ve got to make sure we don’t lose it. In certain market environments, it’s tough to say for sure whether a decline is real or not. But I would rather be safe than sorry. I will gladly accept the slings and arrows shot my way by people who rightly accuse me of protecting your money from a pernicious downtrend in equities.

So, are we ignoring our own advice? Absolutely not. Could we have made more if we would have taken the plunge and gotten back into equities last year? Yes, but as I said before, in my view the risks were just too great.

Finally, I assure you that the plan my father developed for getting our money in when things are good, and out when things are bad, is still the basis of our investment philosophy. Yes, I have made alterations to that plan based on this sideways market of the past six years, but those adjustments are always made with an eye toward safety first.