10-06-2020: If it is just common sense, then why...

Year-to-Date Strategy Stats as of today:

+ 37.68% : Turner Quant Advantage (TQA)

+ 13.05% : Tactical Growth (TG)

+ 1.84% : Diversified Income (DIS)

+ 16.41% : Leveraged Index (LI)

+ 5.18% : S&P 500


Allow me to pose a rhetorical question to you...


Does it makes sense to hold onto high quality stocks in a bear market where your net asset value can drop 30%, 50% or more? Except for the die-hard Warren Buffett-types out there (hopefully, you're not one of them), it just simply doesn't make any common sense to lose money when you can readily see the market is in a bear trend. Just go to cash and buy back after the market has bottomed. Isn't that just common sense?? [And, don't bring up tax consequences... I have yet to see where it is better to lose 50% (or more) in a bear market to avoid paying capital gains taxes.]


But, unfortunately, many individual investors and most of the professional financial advisory world does not sell and at least go to cash when a bear market ensues. There are many reasons why they do not simply go to to cash in a bear market and today's blog is not the place for me to explain the folly of the so-called 'buy-and-hold' approach to investing, which by the way, ONLY works if: 1) You never need the money, and 2) You don't mind losing 50% or more from time-to-time; and 3) You will live forever and thus have time to make up for all the money you lost in the last downturn.


No... Today's blog is help those of you out there that are losing sleep at night, gnashing your teeth, petrified about the possibility that this market could crash into oblivion at any moment. You know exactly who you are... You can't help yourself from checking your investment account every few minutes. You may have even moved 100% to cash years ago and have missed out on some huge gains; and you still don't know when to get back in. You remember how you were decimated 2001, 2008 and 2020. You just can't stand the pain, but with no ability to earn any interest on your money, you are somewhat forced to get back into the market, where you don't want to be. You hate being in the state you are in and you do not know how to get out of the conundrum.


Most individual investors and 90%+ money managers will say things like... Well, we can simply dollar-cost-average our way into a bear market where we buy more shares for the same money, so that as your stocks drop in price, we can buy more shares at a lower cost per share; lowering your average basis. Two things are totally wrong with this block-headed strategy: 1) If you are already in a buy-and-hold strategy and fully invested, where do you get the cash to buy the cheaper shares??; and 2) The definition of insanity is to keep repeating the same thing over and over and assuming you will get a different result... buying into a falling market is the epitome of insanity.


The solution is really very straightforward and mechanical (at least in my world)...


First, I assume every trade I put on is wrong; meaning, with all the analysis and rules and discipline we have at our disposal, there is no guarantee that buying anything, regardless of what it is, will not fall off a cliff the moment after the equity is put into the portfolio. With that assumption in mind, we set mathematically derived stops that are unique to each stock or ETF that are based on the relative volatility of each holding. We know, mathematically, how much a stock is likely to move in it normal range of volatility so as to allow that holding to move down, but not more than it should, based on its historical volatility range. If a holding moves against us more than it 'should', we know that it has moved from "normal volatility" to a "change in trend". If the pricing trend of the holding has reversed trend on us, we want out and will immediately sell the position.


In reality, it is just that simple.


Step one is to determine whether the market, as a whole, is in a bullish, bearish or neutral (or transition) trend.


Step two starts when the market is bullish, we look for fundamentally strong, up-trending stocks and ETFs to buy. And, we immediately set the stops as described above. We update stops as holdings move up in price, generally on a weekly (but sometimes more often) basis. We do the same thing when the market is bearish but utilize inverse ETFs instead of stocks.


Bottom-Line: We do not worry about a market crash. We look forward to BOTH bull AND bear markets, equally. We always have an exit strategy (stop loss settings). We never have to guess what the market is going to do. If we are bullish and the market suddenly turns bearish, our stops will fire and we will go to cash and/or begin putting inverse ETFs in play. If we are bearish and the market suddenly turns bullish, our stops will fire and we will go to cash and/or begin putting fundamentally strong, up-trending stocks in play.


It is just common sense... no worrying... no gnashing of teeth... no losing 30%, 40%, 50% or more (like even Buffett does from time-to-time). We make money for our clients based on trends... bull trends are great... bear trends are even greater.


If you are a client of mine, you already know all of this. If you're not... well... why aren't you?

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