Achieving perspective amid the terror of stock market volatility

No matter what your analytical style of investing a special mention goes to the wise commentators who reinforce the perspective, wisdom and necessity of ‘not losing money’ as the primary focus during times of market volatility. It’s not always about making money, which is often the secondary objective.

Peter Morgan renowned investment manager in a recent article in the weekend Australian dated 20/12 October 2018 summarised his investment philosophies with safety being the key.It doesn’t matter what type of market analyst you are capital preservation is the golden rule that ensures your survival. Markets correct and that’s the ‘normal course of business’ and they simply need to be dealt with appropriately. The recent stock market drop is a shot across the bow of risk, which is a message of warning the market often delivers. We should heed this message when stops are hit. In my world the stop is God and inevitably the stops know best and many have been triggered over recent weeks.

The recent drop in Stockradars Stock Pick count (number of stocks having qualified up trends from within my covered universe of 160 stocks) was significant and is one of the biggest drops we’ve seen since 2006. The cautious approach is to recognise this as a market correction that happens, heed your stops, increase you cash position and let the market action play out. As to how far and how long that is the unanswerable question so the sensible approach is to be as protected as possible but also remaining open minded as to the future possibilities. Apart from the spike higher in 2016 by the stock pick count, the current advance by the ASX/200 back towards the old highs at 6750 hasn’t had the breadth of the 2003/06 major rally. There had been many Stock Picks to choose from especially the growth stocks that took over more recently from the yield story but now they are taking stock and investors are clearly trimming their holdings.

The overseas markets dipping after this monstrous free money driven rally and this is now the second unnerving dip this year. The percentage fall is already greater basis the Russell 2000 and that’s a clear message of caution. So I am responding appropriately as the Stock Pick count plunges and my cash balance jumps. Safety.

This is a good time to reflect on how the Stockradar process works, the money management techniques it employs, how they flow through the market and what your subsequent actions should be.

The Stockradar portfolio models are based on the ‘slower’ weekly time frame allowing for a wider and less ‘noisy’ window of perspective. Daily ups and downs can be frightening making it is easy to get caught up in ‘a moment’ but the clever thing look through a window of perspective that gives you a good reality check. The charts below will add some scale and depth to what I do, how the process unfolds and how the portfolios manage to track a steady growth path. The markets aren’t easy and have to be negotiated with sense and caution. A new trend phase will emerge which always offers better odds of making profits while also delivering a greater degree safety. That’s what trends do.

Firstly to the Stockradar Stock Pick count chart below, which is not benchmarked against the index as I have an absolute growth focus regardless of market action. That’s imperative. It is plotted against the ASX/200 index so you can see how they interact. The first thing to note is wider swings by the Stock Pick count, which reflects the nature of how I jump on a trend, but am also quick to protect capital against falls. The main reason is we just don’t know when the ‘big one’ is around the corner and they are the portfolio killers. This is how I deal with that issue of drawdowns, I simply don’t let get bigger than a predetermined limit.

This may seem difficult for some to comprehend but it can be work an effective strategy as on the positive side we maximise the up trends and let them grow and grow. It is the long-term trend of results that is the proof of process and that can be seen on the graph on the next page. It is worth noting the recent significant divergence between the Stock Pick count and the index over the last 2-years. Remember those are not absolute values but indexed for the purposes of comparison only.

Stockradar Index (All 160 stocks)

The next chart shows the results of the 20 stock Energiser portfoliowhich takes its signals from a universe of 100 stocks. It also shows the cash and equity balances at any point in time to more cleary  understand the interaction of the process with the results. This chart is updated to the 8/10/18 so doesn’t take into account the recent weeks of price action. I provide this chart as an ongoing inclusion in the Radar newsletter. Depsite quick cash to equity swings the growth remains steady and this is mainly due to the big trends we let grow and capture using the trailing ‘lock in your profit’ stop process.

Points to note:

  1. The cash value is often be at zero because that’s when the portfolio is fully invested and that’s the objective. This enables us to get the apprpriate leverage offered by the stock picks using aa 100 stock universe and a portfolo size of only 20.
  2. Rarely does the cash balance rise above the equity value unless the market is in a down trend.
  3. Only twice has the equity value gone to, or very near, zero. Once in 2008 and once in 2011.
  4. The portfolio has for the most part risen steadily with small periods of contraction. This is hard to avoid and members must be prepared to trade off these short periods of contraction for the longer-term growth.
  5. As the market travels sideways there will be quicker changes between cash and equity balances but as the market trends this will be far more stable as we hold onto the major stock trends.
  6. Cash is always a postive no mattter what the market is doing. When the market is volatile and uncertain the importance of cash is that you are not losing money and depending on the interest rate you will also be earning something positive. The safety of a trend gives us confidence and we are more heavily weighted to equities.

Energiser Portfolio 20 stocks

This article is followed up in the Radar Newsletter on the Stockradar website with a comprehensive review of the portfolio service regarding the ‘why’ I have developed it, the background, where we have got to now and where new developments anf fine tuning will take us. This is an exciting process. I needed to build a structure around the Stock Picks to find a way to leverage stocks picks while efficiently implementing them into a manageable portfolio process with stocks that grows but also must be done in a safe environment using money management as my primary tool.

This is a culmination of work that began 18 years ago as Stockradar began moving down the path of managing stocks using price as the bases for decision making devoid of fundamentals and outside influences such as news. I believe insider trading remains rife and always will do so I consider that as part of the challenge but I find ‘price’ is the tool that best reflects the ‘flow of money’ no matter what drives it. When all these thoughts, ideas, opinions and actions are built into an overall ‘money flow’ picture, as reflected be the price, it provides a clearer picture of odds and trend behaviour. It is not so much the actual fundamentals we are interested in but rather the reactions and responses to those fundmamentals and this is what the price tells us. The price never lies because it is the price that we benchmark our profit and loss on so the only stock market advice you can really trust is the price action.

Having traded futures at Australian Bullion Company and equities and options at stockbroker A.C. Goode for many years and then a long stint at information provider Dow Jones, both here and in London, it has provided me with a perspective and understanding of what really ‘happens’ on both sides of the market, how it works, and the pitfalls that can engulf us. It has given me a good awareness of how it can be beaten taking all things into account! Structure, rules, biases, common sense, processes, money management, discipline and expectations are all things taken into account when building and designing my portfolios.

In the end the proof is in the pudding and I am very much a nuts and bolts man of profits and losses rather that analysing Sharpe, Information ratios, Tracking Errors and the many tools the fund managers use to ‘evaluate’ their portfolios. Most of them are simply index followers anyway. To me it’s all about profit and loss and I want profits to be bigger than losses and that’s what my portfolios aim to deliver in a simple, transparent manner.

During the recent maket turmoil there has been some solid words of wisdom from some of our more knowledgeable and respected more participants that have proven track records and amongst them is one of my favorite US money managers Joe Fahmy – The Next Big Move. His regular short, to the point market videos covering the major US Indices can be found at and of course  Peter Morgan who I metioned above. Notably both are cautious, sensible, make money and right now have ample cash to deploy. i.e. they are  not fully invested and like Mr. Buffett, Peter Morgan reinforces the adage of not losing money as his first objective and making money as his second objective. Buffett’s first two rules are firstly, don’t lose money and secondly, don’t lose money! The message is clear, survival and being able to stay in the game with your capital is imperitive and that’s what the successful investors do.

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