Making A Volatile Stock Market Your Very Best Friend
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Making A Volatile Stock Market Your Very Best Friend

Published by: Steve Selengut (1)
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Most people never forget their first love. I’ll never
forget my first trading profit --- but the 600 (1970) dollars I pocketed on
Royal Dutch Petroleum was not nearly as significant as the conceptual
realization it signaled.
I was amazed that someone would pay me that much more for
my stock than the newspaper said it was worth just weeks ago. What had changed?
What had happened to make the stock go up, and why had it been down in the
first place? Without ever needing to know the answers, I’ve been trading RDSA
for over 40 years!
Looking at scores of similarly profitable, high quality
companies in this manner, you would find that: 1) most move up and down
regularly (if not predictably) with an upward long-term bias, and 2) that there
is little if any similarity in the timing of the movements between the stocks
This is the “volatility“ that most people fear
and that Wall Street loves them to fear. It can be narrowly confined to certain
sectors, or much broader, encompassing practically everything. The broader it
becomes, the more likely it is to be categorized as either a rally or a
Most years will feature one or two of each. This is the
natural condition of things in the stock market, Mother Nature, Inc. if you
will. Don’t take her for granted when she gets high, and never ignore her when
she feels low. Embrace her volatile moods, work with them in whatever direction
they travel, and she will become your love as well.
Ironically, it is this natural volatility (caused by
hundreds of variables human, economic, political, natural, etc.) that is the
only real “certainty“ existent in the financial markets. And, as
absurd as this may sound until you experience the reality of it all, it is this
one and only certainty that makes Mutual Funds in general (and Index Funds in
particular) totally unsuitable as investment vehicles for anyone within seven
to ten years of retirement!
Similarly, there is absolutely no growing income
component in any portfolio managed using Modern Portfolio Theory (MPT). How
many non-MCIM investors do you think have retired recently with more liquid,
income-producing assets than they had 12 years ago, way back in 1999?
There will always be rallies and corrections. In fact, it
is worthwhile to “go back to the future“ to establish a realistic
long term investment strategy.
In the last forty years, there have been no less than ten
20% or greater corrections followed by rallies that brought the market to
significantly higher levels. The DJIA peaked at 2700 before its record 40%
crash in 1987. But at 1700, it was still 70% above the 1000 barrier that it
danced around with for decades before --- always a higher high, rarely a lower
The ’87 debacle was followed by several slightly less
exciting corrections, but the case was being made for the more flexible, and
realistic, Market Cycle Investment Management Methodology. Modern Portfolio
Theory was spawned by great minds selling future predicting snake oil; Mother
Nature, Inc. is a much too complicated enterprise, even for them.
Call it foresight, or hindsight if you want to be
argumentative, but a long-term view of the investment process eliminates the
guesswork and points pretty clearly toward a trading mentality that keys on the
natural volatility of hundreds of Investment Grade Value Stocks (Google IGVSI).
During corrections, consider these simple truths: 1)
although there are more sellers than buyers, the buyers intend to make money on
their purchases; 2) so long as everything is down, don’t worry so much about
the price of individual holdings; 3) fast and steep corrections are better than
the slow attrition variety;
4) always accept even half your normal profit target
while buying opportunities are plentiful; 5) don’t be in a rush to fill your
portfolio, and if cash dries up before it’s over, you are managing the process
Most of the problems with Mutual Funds and much of the
increased opportunity in individual stock trading are functions of growing
non-professional equity ownership. Everyone is in the stock market these days
whether they like it or not, and when the media fans the emotions of the
masses, the masses create volatility that rarely under-reacts to market
Rarely will unit owners take profits, particularly if
they have to pay withdrawal penalties or taxes. Even more unusual are expert
advisors who encourage investors to move into the markets when prices are
falling. A volatile market creates opportunities with every gyration, but you
have to be willing to transact to reap the benefits.
A necessary first step is to recognize that both
“up“ and “down“ markets are forces of nature with abundant
potential. The proper attitude toward the latter, will make you much more
appreciative of the former.
Most investment strategies require answers to
unanswerable questions, in an effort to be in the right place at the right
time. Indecisiveness doesn’t cut it with Mamma --- in or out too soon is not an
issue with her. But wasting the opportunities she provides really ticks her
Successful investment strategies require an understanding
of the forces of stock market nature, and disciplined rules of portfolio
management. If you can transition back to individual securities, you will do
better at moving toward your goals, most of the time, because the opportunities
are out there --- all of the time.
So let’s adopt some new rules for this investment game
and learn to live with them for a few cycles: Let’s buy IGVSI stocks new and
old at lower prices during corrections. Let’s take reasonable profits on those
that go up in price, whenever they are kind enough to do so.
Let’s examine our performance based on the results of
these trading transactions alone and at market cycle examination points for a
smiley faced change of pace. And one other thing:
Let’s drink a toast to an uncertain and volatile Mother
Nature, and, of course, to our first loves.
Ask Your Financial Professional how to invest in a Market
Cycle Investment Management program.
Ask Your
Financial Professional how to invest in a Market Cycle Investment Management
Steve Selengut - About the Author:
 Steve Selengut
Author of
"The Brainwashing of the American Investor: The Book That Wall Street Does
Not Want You To Read"
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