Finding equilibrium between shareholders and business realities

The relationship between a public company and its shareholders can be a tenuous one at times. While both interests want the company to achieve success, each have a unique view as to how success should be gained and within what timeframe.

This difference of opinion is often magnified in the mining sector, where more often than not it takes years to see a return on investment for any given mining project.  This can create tension between mining executives and shareholders, one further complicated when shareholders are pension funds and money management firms.

To put it fairly simply, shareholders are looking for consistent growth in terms of capital and production because it translates into favourable fiscal projections. However, when it takes five to ten years for a mine to start producing ore, there’s a timeframe difference that can sometimes produce tension.

I briefly touched on this issue when I addressed Laurentian University in early 2015 (see Ian Telfer: Top 10 Mining Mistakes). As I explained, in my experience I have found keeping shareholder interest in mind is important.  However, it is equally important to find a balance between their more short-term goals and a mining company’s sustainable future. Increased pressure to focus on shareholder needs can skew perspectives and lead to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire later.

More importantly, shareholders are compensated based on short-term price performance rather than long-term business feasibility, which can misalign the interests of both management and current shareholders with the true welfare of the company.

In the mining sector, there is often a tug-of-war between management and shareholders over the company’s capital. Investors often view extra cash on a company’s balance sheet as a possible return to shareholders in the form of cash dividends, which in turn is looked favorable by markets.

However, the company’s management teams can be hesitant to do this, and rightly so. This is because management teams are committed to sustained growth and may want to use additional capital to invest in new mining projects. Re-investing capitals in new mining initiatives is sometimes not at the top of shareholders priority list.

By no means am I saying that shareholders aren’t valued, but as my history in the mining sector has shown me, they are only one component of a much larger picture that includes the management team, the employees, the shareholders and the community. Finding the right balance between appeasing shareholder demands and promoting and protecting the future of a company is paramount in order to achieve long lasting sustainability no matter what sector or industry.

Index and Sector ETFs: Mutual Funds: Speculation X3

How many of you remember the immortal words of P. T. Barnum? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a greed-driven rush to financial disaster.

The dot.com meltdown spawned index mutual funds, and their dismal failure gave life to “enhanced” index funds, a wide variety of speculative hedge funds, and a rapidly growing assortment of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs.

How far will we allow Wall Street to move us away from the basic building blocks of investing? Whatever happened to stocks and bonds? The Investment Gods are appalled.

A market or sector index is a statistical measuring device that tracks prices in securities selected to represent a portion of the overall market. ETF creators:

  • select a sampling of the market that they expect to be representative of the whole,
  • purchase the securities, and then
  • issue the ishares, SPDRS, CUBEs, etc. that speculators then trade on the exchanges just like equities.

Unlike ordinary index funds, ETF shares are not handled directly by the fund. As a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the index they were selected to track. Confused? There’s more — these things are designed for manipulation.

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund.

These activities create artificial demand in an attempt to minimize the gap between NAV and market price. Clearly, arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low — and why there are now thousands of the things to choose from.

Two other ETF idiosyncrasies need to be appreciated:

a) performance return statistics for index funds may not include expenses, but it should be obvious that none will ever outperform their market, and

b) index funds may publish P/E numbers that only include the profitable companies in the portfolio.

So, in addition to the normal risks associated with investing, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies.

We then call this hodge-podge of speculation a diversified, passively managed, inexpensive approach to Modern Asset Management — based solely on the mathematical hocus pocus of Modern Portfolio Theory (MPT).

Once upon a time, but not so long ago, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their diversification. Does diversified junk become un-junk? Isn’t passive management as much of an oxymoron as variable annuity? Who are they kidding?

But let’s not dwell upon the three or more levels of speculation that are the very foundation of all index and sector funds. Let’s move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management.

Mutual Funds were a monumental breakthrough that changed the investment world. Hands-on investing became possible for everyone. Self-directed retirement programs and cheap to administer employee benefit programs became doable.

The investment markets, once the domain of the wealthy, became the savings accounts of choice for the employed masses — because the “separate accounts” were both trusteed and professionally managed. When security self-direction came along, professional management was gone forever. Mutual fund management was delegated to the financially uneducated masses.

ETFs are not the antidote for the mob-managed & dismal long term performance of open end Mutual Funds, where professionals are always forced to sell low and to buy high. ETFs are the vehicles of choice for Wall Street to ram MPT mumbo jumbo down the throats of busy, inexperienced investors… and the regulators who love them because they are cheap.

Mutual fund performance is bad (long term, again) because managers have to do what the mob tells them to do — so Wall Street sells “passive products” with controlled content that they can manipulate more cheaply.

Here’s a thumbnail sketch of how well passive ETFs may have performed from the turn of the century through 2013: the DJIA growth rate was about 0% per year, the S & P 500 was negative; the NASDAQ Composite has just recently regained its 2000 value.

How many positive sectors, technologies, commodities, or capitalization categories could there have been?

Now subtract the fees… hmmmm. Again, how would those ETFs have fared? Hey, when you buy cheap and easy, it’s usually worth it. Now if you want performance, I suggest you try real management, as opposed to Mutual Fund management… but you need to take the time to understand the process.

If you can’t understand or accept the strategy, don’t hire the manager. Mutual Funds and ETFs cannot “beat the market” (not a well thought out investment objective anyway) because both are effectively managed by investor/speculators… not by professionals.

Sure, you might find some temporary smiles in your ETFs, but only if you take your profits will the smiles last. There may be times when it makes sense to use these products to hedge against a specific risk. But stop kidding yourself every time Wall Street comes up with a new short cut to investment success.

There is no reason why all of you can’t either run your own investment portfolio, or instruct someone as to how you want it done. Every guess, every estimate, every hedge, every sector bet, and every shortcut increases portfolio risk.

Products and gimmicks are never the answer. ETFs, a combination of the two, don’t even address the question properly — AND their rising popularity has raised the risk level throughout the Stock Market. How’s that, you ask?

The demand for the individual stocks included in ETFs is raising their prices without having anything to do with company fundamentals.

What’s in your portfolio?

How will ETFs and Mutual Funds fare in the next correction?

Are YOU ready.

Brave Old World: Market Cycle Investment Management

The Market Cycle Investment Management (MCIM) methodology is the sum of all the strategies, procedures, controls, and guidelines explained and illustrated in the “The Brainwashing of the American Investor” — the Greatest Investment Story Never Told.

Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutions. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time.

MCIM combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and “base income” generation in an environment which recognizes and embraces the reality of cycles. It attempts to take advantage of both “fear and greed” decision-making by others, using a disciplined, patient, and common sense process.

This methodology thrives on the cyclical nature of markets, interest rates, and economies — and the political, social, and natural events that trigger changes in cyclical direction. Little weight is given to the short-term movement of market indices and averages, or to the idea that the calendar year is the playing field for the investment “game”.

Interestingly, the cycles themselves prove the irrelevance of calendar year analysis, and a little extra volatility throws Modern Portfolio Theory into a tailspin. No market index or average can reflect the content of YOUR unique portfolio of securities.

The MCIM methodology is not a market timing device, but its disciplines will force managers to add equities during corrections and to take profits enthusiastically during rallies. As a natural (and planned) affect, equity bucket “smart cash” levels will increase during upward cycles, and decrease as buying opportunities increase during downward cycles.

MCIM managers make no attempt to pick market bottoms or tops, and strict rules apply to both buying and selling disciplines.

NOTE: All of these rules are covered in detail in “The Brainwashing of the American Investor” .

Managing an MCIM portfolio requires disciplined attention to rules that minimize the risks of investing. Stocks are selected from a universe of Investment Grade Value Stocks… under 400 that are mostly large cap, multi-national, profitable, dividend paying, NYSE companies.

LIVE INTERVIEW – Investment Management expert Steve Selengut Discusses MCIM Strategies – LIVE INTERVIEW

Income securities (at least 30% of portfolios), include actively managed, closed-end funds (CEFs), investing in corporate, federal, and municipal fixed income securities, income paying real estate, energy royalties, tax exempt securities, etc. Multi level, and speculation heavy funds are avoided, and most have long term distribution histories.

No open end Mutual Funds, index derivatives, hedge funds, or futures betting mechanisms are allowed inside any MCIM portfolio.

All securities must generate regular income to qualify, and no security is ever permitted to become too large of a holding. Diversification is a major concern on an industry, or sector, level, but global diversification is a given with IGVSI companies.

Risk Minimization, The Essence of Market Cycle Investment Management

Risk is compounded by ignorance, multiplied by gimmickry, and exacerbated by emotion. It is halved with education, ameliorated with cost-based asset allocation, and managed with disciplined: selection quality, diversification, and income rules— The QDI. (Read that again… often.)

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires daily decision-making. Risk management requires security selection from a universe of securities that meet a known set of qualitative standards.

The Market Cycle Investment Management methodology helps to minimize financial risk:

  • It creates an intellectual “fire wall” that precludes you from investing in excessively speculative products and processes.
  • It focuses your decision making with clear rules for security selection, purchase price criteria, and profit-taking guidelines.
  • Cost based asset allocation keeps you goal focused while constantly increasing your base income.
  • It keeps poor diversification from creeping into your portfolio and eliminates unproductive assets in a rational manner.

Stock Market Corrections Are Beautiful… When

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if any brief little market hiccup becomes considerably more serious, new investment opportunities will become abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price— Investment Grade Value Stocks. I start shopping at 20% below the 52-week high water mark— the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

4. Take a look at the future. Nope, you can’t tell when the rally will resume or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time— as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed (look it up). You should be out of cash while the market is still correcting— it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago—

9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it is based upon your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed portfolio.

Unfortunately, only Self Directed 401k and IRA programs are able to use Market Cycle Investment Management.

10. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the courage to get rid of them during rallies— also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Short ones (those that last a few days, weeks, or months) are nearly impossible to deal with using Mutual Funds.

So if you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction—

Think cycle instead of year, and smile more often.

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Income Closed End Funds and Total Return Analysis

What are the two main reasons mere mortals invest in income purpose securities: one is their inherent safety compared to equities… a 50% income asset allocation is much safer and theoretically less volatile than a 100% equity exposure.

There is less risk of total loss in XYZ company bonds or preferred stock than there is in XYZ common stock… a major fact of investment life roundly ignored by most investors/speculators in overpriced stock markets.

Equally important (as retirement looms larger) is the income these securities produce, first for compounding and then for spending.

  • Compound interest/dividends/realized capital gains is the most powerful retirement income force known to mankind… neither total return nor market value can pay your bills, take you on vacation, or pay your grandkids tuition.

Unlike Tom Wolfe’s “Masters of the Universe”, most of us are not bond traders. If our income inventory shrinks in market value, we don’t have to sell our positions. Wall Street fixed income pros don’t care about income production… buying and selling inventory is their business model, and they set the market prices.

The “higher interest rates are coming panic” you are hearing about in the media is a real problem for MOTUs, but it may be an investment opportunity for the rest of us. If I buy an Exxon 4% debenture, a 3% 30 year municipal bond, or a 10 year treasury note, three things are inherently true:

If interest rates rise, their market values will go down and it will be difficult to add to my positions… BUT my income (and their safety vis-a-vis equities) will not change; MARKET VALUE CHANGE HAS NO IMPACT ON INCOME, in high quality securities.

It is this “Interest Rate Expectation (IRE) Sensitivity” that CEF Investors are uniquely well positioned to take advantage of. All income focus securities (and funds that contain them) are impacted by IRE:

“Market Value Varies Inversely With Interest Rate Expectations”

The Net Asset Value (NAV) of CEFs is the sum of the values of hundreds of securities, inside a virtual “protective dome”, where only the manager can trade them. BUT we can “trade” the dome itself, reducing our cost basis and increasing our yield as we choose… something totally unimaginable in any othe income investment medium.

So this is precisely what is going on “inside” income CEFs right now. Individual security prices are being forced down by the expectation of rising interest rates and a significant discount is available. Absolutely nothing has changed with respect to the quality of the securities or the income being produced “Under The Dome”. The price of the dome has been reduced, and its “IN YOUR POCKET” income is rising.

Yes, that observation is correct, we can now accelerate the growing power of our Compound Earnings Machine

No change in the securities, their quality, or contractual payments… only the price of the package has changed. So there they are, investors, opportunities just waiting for you to pad your retirement portfolio pocketbooks with income over 6.5% tax free and up to 8.0% taxable.

These sweet discounts are only available through the financial genius of CEFs. Only here can “mere mortals” turn Wall Street’s blood bath into an income portfolio worth bragging about. There has been no news that suggests there is anything wrong with the “securities under the dome”.

So don’t be concerned with the “OMG, bond prices are falling” headlines… that’s Wall Street’s problem. This is the biggest CEF sale since 2011, and… the “Call to the Mall” has sounded!

The Investment Gods Are Furious

Market Cycle Investment Management (MCIM) is an historically new methodology, but with roots deeply embedded in both the building blocks of capitalism, and financial psychology— if there is such a thing.

The earliest forms of capitalism sprung from ancient mercantilism, which involved the production of goods and their distribution to people or countries mostly around the Mediterranean.

The sole purpose of the exercise was profit and the most successful traders quickly produced more profits than they needed for their own consumption. The excess cash needed a home, and a wide variety of early entrepreneurial types were quick to propose ventures for the rudimentary rich to consider.

There were no income taxes, and governments actually supported commercial activities, recognizing how good it was for “Main Street” — as if there was such a thing.

The investment gods saw this developing enterprise and thought it good. They suggested to the early merchants, and governments that they could “spread the wealth around” by: selling ownership interests in their growing enterprises, and by borrowing money to finance expansion and new ventures.

A financial industry grew up around the early entrepreneurs, providing insurances, brokerage, and other banking services. Economic growth created the need for a trained workforce, and companies competed for the most skilled. Eventually, even the employees could afford (even demand) a piece of the action.

Was this the beginning of modern liberalism? Not! The investment gods had created the building blocks of capitalism: stocks and bonds, profits and income. Stock owners participated in the success of growing enterprises; bondholders received interest for the use of their money; more and better skilled workers were needed — the K.I.S.S. principle was born.

As capitalism took hold, entrepreneurs flourished, ingenuity and creativity were rewarded, jobs were created, civilizations blossomed, and living standards improved throughout the world. Global markets evolved that allowed investors anywhere to provide capital to industrial users everywhere, and to trade their ownership interests electronically.

But on the dark side, without even knowing it, Main Street self-directors participated in a thunderous explosion of new financial products and quasi-legal derivatives that so confused the investment gods that they had to holler “’nuff”! Where are our sacred stocks and bonds? Financial chaos ensued.

The Working Capital Model was developed in the 1970s, as the guts of an investment management approach that embraced the cyclical vagaries of markets. This at a time when there were no IRA or 401(k) plans, no index or sector funds, no CDOs or credit swaps, and very few risky products for investors to untangle.

Those who invested then: obtained investment ideas from people who knew stocks and bonds, had pensions protected by risk-averse trustees, and appreciated the power of compound interest. Insurance and annuities were fixed, financial institutions were separated to avoid conflicts of interest, and there were as many economics majors as lawyers in Washington.

MCIM was revolutionary then in its break from the ancient buy-and-hold, in its staunch insistence on Quality, Diversification, and Income selection principles, and in its cost based allocation and diversification disciplines. It is revolutionary still as it butts heads with a Wall Street that has gone MPT mad with product creation, value obfuscation, and short-term performance evaluation.

Investing is a long-term process that involves goal setting and portfolio building. It demands patience, and an understanding of the cycles that create and confuse its landscape. MCIM thrives upon the nature of markets while Wall Street ignores it. Working Capital numbers are used for short-term controls and directional guidance; peak-to-peak analysis keeps performance expectations in perspective.

In the early 70s, investment professionals compared their equity performance cyclically with the S & P 500 from one significant market peak to the next — from the 1,500 achieved in November 1999 to the 1,527 of November 2007, for example. Equity portfolio managers would be expected to do at least as well over the same time period, after all expenses.

Another popular hoop for investment managers of that era to jump through was Peak to Trough performance —managers would be expected to do less poorly than the averages during corrections.

Professional income portfolio managers were expected to produce secure and increasing streams of spendable income, regardless. Compounded earnings and/or secure cash flow were all that was required. Apples were not compared with oranges.

Today’s obsession with short-term blinks of the investment eye is Wall Street’s attempt to take the market cycle out of the performance picture. Similarly, total return hocus-pocus places artificial significance on bond market values while it obscures the importance of the income produced.

MCIM users and practitioners will have none of it; the investment gods are furious.

Market Cycle Investment Management embraces the fundamental building blocks of capitalism — individual stocks and bonds and managed income CEFs in which the actual holdings are clearly visible. Profits and income rule.

Think about it, in an MCIM world, there would be no CDOs or multi-level mortgage mystery meat; no hedge funds, naked short sellers, or managed options programs; no mark-to-market lunacy, Bernie Madoffs, or taxes on investment income.

In MCIM portfolios, lower stock prices are seen as a cyclical fact of life, an opportunity to add to positions at lower prices. There is no panic selling in high quality holdings, and no flight to 1% Treasuries from 6% tax free Munis. In an MCIM portfolio, dividends and income keep rolling, providing income for retirees, college kids, and golf trips — regardless of what the security market values are doing.

Capitalism is not broken; it’s just been overly tinkered with. The financial system is in serious trouble, however, and needs to get back to its roots and to those building blocks that the Wizards have cloaked in obscurity.

Let’s stick with stocks and bonds; lets focus on income where the purpose is income; let’s analyze performance relative to cycles as opposed to phases of the moon; let’s tax consumption instead of income; and let’s not disrespect the gods, the “Bing”, or the intelligence of the average investor…

So sayeth the gods. Amen!

S&P 500 Index: Morning After 401k Musings

March 2000 witnessed the S&P 500 Index breach the 1,500 barrier for the very first time… seven and a half years later, it was in just about the same position.

Inter-day October 15th, after an incredible bounce from its 56% drop through March 6th 2009, the S&P was just 20% above where it had been 14.5 years earlier… a gain of roughly 1.4% per year.

Just how low will it go this time? and are you prepared… this time?

The long term chart (Google “s & p 500 chart”, look mid page and click “max”) shows the volatility over the past fifteen years. Just for kicks, see if you can find the “crash” of 1987  (October 19th).

Could any stock market image be more beautiful? Could any be more in-your-face damning… tactically?

What if your 401k investment strategy had required selling before the profits started to erode?

What if your 401k strategy made you hold equity-destined cash until Investment Grade Value Stocks fell at least 20% before selective, patient, cautious buying began?

What if your 401k investment strategy called for at least 40% of your investment portfolio to always be invested in income purpose securities?… securities rising in price so far today, in the midst of a major sell off.

Such an approach has been available since the 1980’s for a lot of happy investors who have never had to change their retirement dates; and the same program has been available to 401k investors since March 0f this year…  but you have not been allowed to know about it!

You can’t use it because your 401k plan rules don’t allow you to invest in 40 year old “makes-a -lotta-sense” strategies, just because they have a new label and/or not enough millions under management… who’s protecting whom?

This is precisely how the big operators keep new and innovative solutions on the sidelines. Tough luck investors… you’ll just have to bite the bullet and watch your “by-design” speculative portfolios crumble  for the third time in fifteen years.

Pity, but one-size-fits-all rules are every bit as bad for your financial health as one-size-fits-all products. How are those TDFs doing… and with all that experience and mega millions under management.

 

Dealing With Stock Market Corrections: Ten Do’s and Don’ts

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, corrections adjust equity prices to their actual value or “support levels”.  In reality, it may be easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking.

The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund holders rarely take profits but often take losses. Additionally, the new breed of Index Fund speculators is ready for a reality check. If this brief hiccup becomes a full blown correction, new investment opportunities will be abundant.

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation is based upon long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect lower stock prices. That would be an attempt to time the market. Asset allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of Investment Grade Value Stocks as they move lower in price. I start shopping at 20% below the 52-week high water mark… the shelves are full of bargains.

3. Don’t hoard the “smart cash” you accumulated during the rally, and don’t get yourself agitated if you buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, and selling too soon is investing brilliance.

4. Take a look at the future; you can’t tell when the rally will resume or how long it will last. If you are buying IGVSI equities now, you will to love the next rally even more than the last… with yet another round of profits.

5. As the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to “Shop at The Gap” than meets the eye, and you should run out of cash well before the new rally begins.

6. Your use of “Smart Cash” proves the wisdom of Market Cycle Investment Management; it should be gone while the market is still falling… gets less scary  every time. So long your cash flow continues unabated, the change in market value is just scary, not income (or life) threatening.

7.  Note that your Working Capital is still growing in spite of falling market values, and examine holdings for opportunities to reduce cost basis per share or to increase yield on income Closed End Funds). Examine fundamentals and price; lean hard on your experience; don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of media hype and propaganda. Focus on Investment Grade Value Stocks; it’s easier, less risky, and better for your peace of mind.

9. Examine portfolio performance with your asset allocation and investment objectives in focus and in terms of market/interest rate cycles as opposed to calendar quarters and years. The Working Capital Model allows for your personal asset allocation.

Remember. too, that there is really no single index number to use for comparison purposes with a properly designed MCIM portfolio.

10.  So long as everything is “down”, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should NOT be discarded during general or group specific weakness.  BUT, you must have the courage to cull them during rallies… also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with.

If you overthink the environment or overcook the research, you’ll miss the party.

Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction:

There has never been a correction or a rally that has not succumbed to the next rally or correction..

Inside Modern Portfolio Theory – For Emperors Only

Maybe it’s just me, but when I hear “Monte Carlo”, I can’t help but think “casino”…

My previous article post dealing with the income growing opportunities of 401k account “drawdown” elicited some interesting commentary from the MPT community.

Apparently, if we apply the proper mathematical algorithms to all stock market probabilities, including all possible cash flow scenarios, we will be able to deal with 401k participant expectations better…

I can’t control the warmth and fuzziness that has taken over my financial feelings… future predictions that possibly, maybe even more often than not, can reduce my drawdown to a less painful level than otherwise, while doing nothing to boost the income generated by my portfolio is certainly bringing on a huge sigh of relief…

What!

I’m the type of investor who cringes when he hears market analysts explain how investors are “placing their bets” but how can you possibly sleep at night when you know that your 401k selections are “probably” being designed using the “Monte Carlo” algorithm subset of Modern Portfolio Theory?

Check it out if you wish, but if you aren’t rolling-on-the-floor, LOL, when you finish, have I got a new suit of clothes for you: http://en.wikipedia.org/wiki/Monte_Carlo_method

How many soontobe retirees (including myself, eventually) would even pretend to understand it. Really, a show of hands would be appreciated. How many of you think that these probability games are “investing”.

Retirement income is not (and should not be) about gambling. A fundamentally sound (i.e., quality) portfolio that generates 6% or so income (tax free, even) is easy to put together… yes, in today’s low interest rate environment.

4% to 5% in the 401k space, convertible upon rollover to the 6% variety is doable as well. You need to make a market value drawdown an opportunity to grow the income… faster.

Once the retirement income has been secured, then you can tour the world’s casinos until the excess capital is gone.

The MPT portfolio that bursts like a 4th of July “finale” in my weakened brain is reminiscent of the magical Junk Bond Portfolios of the ‘1980’s.  Don’t worry  about it, investors, we’ve put all these fundamentally speculative securities together in such a brilliant manner that the sum of the junk has been transformed into non-junk.

As of August 31st, 2014, the Vanguard Target 2015 portfolio was still 51.8% invested in the World’s Stock Markets and generating less that 2% in spending money…

Yes, it is true, the inmates really have taken over the asylum.

The Retirement Income Gap

A BlackRock and EBRI analysis (from Think Advisor, July 9th) suggests that older retirees are further from being retirement ready than their younger counterparts… go figure.

Ironically, since most benefit plan investors (really speculators) at all ages are market value focused instead of income focused, this observation will likely be the same ten years from now.

… and this is so easy to fix, if plan participants are forced to start thinking “income” from the get-go. Retirement readiness is a planning issue that “target date funds” and most other 401k product shopping menus are just not equipped to deal with.

Plan advisors, fiduciaries, and plan sponsors need to make sure they have “serious income production options” in the benefit plans they are advising.

What if you could liquidate your “all time high market value with nearly zero programmed income” benefit plan balances and trade them in for a 5% or so compound income machine that is convertible, security for security, at retirement? You can. And, at retirement, you’ll actually be able to increase the income production significantly with a few simple tweaks….

Here’s where the 401k industry and DOL focus on expense ratios make no sense at all. Income Closed End Funds pay in excess of 6%, and have for years. Nearly all of them (the hundreds that I’m familiar with) continued their payments without a hiccup throughout the financial crisis and continue to do so now…

The 6% is AFTER EXPENSES. The best from Vanguard Target Funds is maybe 1.5%; Stable Value Funds are in the 2% area, again, maybe….

Isn’t it our fiduciary responsibility to focus on the income purpose of benefit programs? Isn’t it our responsibility to educate plan sponsors and participants enough so that they understand that it is the income that pays the bills… not the market value, and not the three year total return.

Isn’t our responsibility to school the DOL…. that performance of a retirement income program should be measured in terms of income production… and that market value and expense ratios are not the predominate considerations? Well maybe not that one.

There is only one product I know of that has the proper income focus — and with a reasonable expense ratio. For more information, contact a qualified 3(38) fiduciary at either QBOX Fiduciary Solutions or Expand Financial.