Over twenty-years ago, I looked at the rules that everybody else seemed to be working by. It seemed that they over-relied upon one simple untruth, which was that in the long run you are always better to be invested in equities. We hope that at long last that lie has finally been buried, but regrettably not before the ruination of many people's lives.
I set out to invent our own unique rules. First and foremost I wanted them to be simple to understand, rely on basic principles and reflect the lessons of history. After deep thought, I decided as follows, my first rule was not to lose clients' money; my second to outperform cash on deposit; all under the principle aims, to remain profitably invested whatever investment and economic conditions prevailed and avoid the herd. We would contend that any thoughtful investor would pick similar principles to work by.
Successful investing: don't lose money
There are three types of markets to avoid losing money you must be able to recognise them.
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Primary bull markets are supported by the 30-week moving average. You can't lose money investing in a primary bull market. When a primary bull market eventually ends, it is signalled by two simple changes. On a long-term chart, using weekly prices, the previous ascending low will be violated and, at the same time, the chart will fall below the 30-week moving average. At that point, the bull market is almost certainly over; if not, it's on its last legs. This technical change is invariably associated with sky high valuations and euphoric investor sentiment.
Primary bear markets are the opposite of a primary bull markets, if you inverse the comments above, you will get the idea. A bear market can be a productive investment as long as you are invested on the short side, not on the long side typical of this was our very profitable investment in the SocGen Bear Note and the current investment in the RBS Bear Note. At the end of a primary bear market investor sentiment is dire.
A trading range is where the price goes sideways, they are an investment avoid. However, an avoid with very attractive characteristics because they often lead to the best opportunities, which is to buy or sell when the end of a trading range is triggered all trading ranges eventually end. To summarise, you won't lose money if you only buy primary bull markets, always sell primary bear markets and avoid trading ranges if you diligently do the work, the investment result will be fantastic and with low volatility.
If you successfully remain invested all of the time and don't lose money, you will outperform cash on deposit in the medium term. The key is to remain correctly aligned to investment markets which is what we strive to achieve.
Remain properly invested whatever the prevailing investment and economic conditions
The benefits of being effectively invested, irrespective of the conditions, is that it gives you such confidence. If you know that all conditions, whatever they may be and no matter how bad they seem, provide an opportunity to profitably invest, you have nothing to fear. You just have to work out what's going on and how to invest to benefit from that.
Successful investing: avoid the herd
At major turning points, the herd is always wrong. For managers such as us, this is the stressful part of our work because everybody, unless they are counter-intuitive, believes that if the top guys at the likes of Barclays Capital, UBS, Merrill Lynch and Goldman Sachs all say something is so, it must be correct because individually and collectively they are so clever. Except it's those very same, very clever people who have ruined our world; so believe us, when they all say the same thing, invariably they are wrong.
The final and crucial requirement is to own your own time machine, travel into the future and see how it turns out and then come back to the present and invest accordingly. Of course, we haven't really got a time machine but we study the lessons of history, use our imaginations and have confidence in our work how else have we been able to make so many good calls and achieve our objectives? The industry says these things can't be done but, dare we say, hardly anybody else has ever tried'. We believe, without question, that it can be done because in the way it's explained here it isn't any big deal. As long ago as the 1960s America put men on the moon. Surgeons, some of whom are clients of ours, are so clever that they can cut open people's heads, delve into their brain, fix it and sew it up again. Others can remove hearts from the recently deceased to save the imperilled life of somebody else. These examples and many more besides, are of truly difficult things to do; in comparison, not losing money, outperforming cash on deposit by being appropriately invested and avoiding the herd is easy peasy!
This article was written by John Robson & Andrew Selsby at Full Circle Asset Management, as published in the threesixty Newsletter.
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