James A. Schorner, P.A., Vero Beach Florida
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Wednesday, May 22nd, 2024

Investing in the Stock Market without Losing your Shirt

I.                    [2] Is this program right for You?

A.                 Have you ever felt like you were at the mercy of the big brokerage firms?
.                 Did you ever curse yourself for buying a fund straight out of a magazine?C.                 Do you wish you had not been so heavy in Technology?
D.                 Are money woes—recent losses, or anxiety about your financial future causing disharmony at home?
E.                  If you have answered yes to any of the above, I can provide you with a different approach, a “Maverick Approach” to investing in the stock market.  But wait, one more question:
F.                  [3] If you hear about a “different” approach and if you are convinced that it is worthy of further evaluation, will you consider changing the way you invest your money?G.                 If not, why are you here?

II.                 Myths:
[4 – List myths]

A.                 [5] Buying and holding your stocks for the long-term is the key to successful investing.  Buy and hold!  Buy and hold!  Answer:  The key to successful investing is knowing when to buy and when to sell.

i.      There are no buy and hold securities:  AT&T, Xerox, Lucent, Qualcomm, Jacobs Internet Fund, S&P500 index.  Never mind, Enron, K Mart, MCI Worldcom.
ii.      Yet each of these had a time when buying it would have been a wise investment decision.
iii.      How do you know when to buy and when to sell?

B.                 [6] Spreading your assets across stocks, bonds and cash is the best way to invest.  Diversify!  Answer:  Getting 100% of your money in stock at the right time is the best way to invest.  Over any long period of time, the stock market outperforms all other investment media.  Yet over many short periods of time, the stock market under-performed all other media.  How does one know when to be in and when to be out of the market?

C.                 [7]Brokers and investment managers can manage your money better than you can.  Answer:  No, no one else cares as much about your money as you do.  You can manage your money better than they do.  Not only that but you can do something that they cannot do.

D.                 [8] Reducing you stock exposure as you near the age of retirement is a good strategy because it reduces the risk of losing capital.  Though this may be true, it also prepares you to outlive your capital and decrease your lifestyle.  Better is to invest in the stock market in a way that you will never lose a whole lot of money.

III.               [9] I could write a book on investing but I’m too late, Dick Fabian and his son, Doug Fabian, have already done so, Maverick Investing is the latest book by the family and is the basis of my philosophy.  I have subscribed to their newsletter and have embraced their systems since 1984.  In good times and bad, this system of investment has worked.  Not only that, its so simple, you can do it yourself.  This system has brought me a 15% compound annual return.  Even better, I can sleep well at night, knowing that I have a plan for the stock market and that I will not lose a lot. There is an old adage, “Cut your losses short and let your winners run.”  Our model employs this philosophy.

IV.              [10] What is the reasonable rate of return for an investment in securities?

A.                 We should shoot for 20% annual rate of return and we can get close over a long period of time.
B.                 The average return for the stock market as a whole for the past 90 years has been about 10%.
C.                 Bank trust companies expect you to return about 8% on your money over the long term.
D.                 Long-term bonds pay about 6% now.
E.                  Here’s how to make about 8% over the long-term:  Put 60% of your money in good stocks and never look at them again and put the other 40% in long-term bonds.  What this does is 10% x 60% + 6% x 40%
F.                  But there were plenty of mutual funds making 20% returns year after year in the 1990’s, putting your money in them would have been far superior and you would have had something to talk about with your friends.  My mother told me, “Son, you are doing well with my money, but I have nothing to talk about with my friends.  Can’t you pick some stocks for my account?”

V.                 [11] Here’s how we do 20% per year!  The theory:  It’s easier to make money in equities when the market is going up; it’s hard to do so when its going down.

A.                 Invest 100% in the stock market when the market is going up.
B.                 Invest 100% in money market funds when the market is going down.
C.                 Where are bonds?  In the garbage.
D.                 Where are annuities?  Same place.  (The man who makes the most on the annuity investment is the salesman.)
E.                  We let the market trend determine whether to be in or out of the stock market so that there is no guesswork or projection.  No one can accurately time the market.  That is, no one knows what’s going to happen next, not CNN not Louis Rukeiser, not even Alan Greenspan.
F.                  [12] We estimate whether the long-term trend is positive or negative by using the 39-week moving averages of two indexes.  This reduces the number of in and out turns as both indexes must be indicating positive or negative trends for a switch to be made.
G.                 The indexes we use are the Wilshire 5000 and the Domestic Fund Index which consists of five mutual funds:

i.      Janus Growth & Income
ii.      American Century Ultra
iii.      Fidelity Magellan
iv.      Schwab S & P 500
v.      Price Small Cap Stock Fund

H.                 [13] When the Domestic Fund composite exceeds its 39-week moving average and it is joined by the Wilshire 5000 also exceeding its 39-week moving average, we estimate that the long-term trend is positive and invest 100% of our funds in equity based mutual funds.
I.                    When either indicator crosses its trend line and the other confirms this trend, we believe that the trend has gone negative and we invest 100% in money-market funds.
J.                   This strategy works very well in upward markets as we had in the 1990s because all of our funds are invested in the highest return media, stocks, most of the time.
K.                This conservative strategy limits our downside risk and works well in downward markets because we do not watch our portfolios decline in value as the stock market’s long-term trend goes down.  Instead we earn 1 or 2% in the money-market fund.  A substantially better return than our friends in the market.
L.                  From time to time we incur losses but they are generally small.  In sideways markets the market may move upward indicating a positive trend that does not continue.  We incur a small loss, generally less than 6% in these whipsaws.  We have had three such whipsaws since April 2000, the advent of the bear market.
M.               [14] There is an old adage, “Cut your losses short and let your winners run.”  Our model employs this philosophy by what is effectively, a stop-loss condition, limiting our downside risk.  Accordingly, we can afford to invest 100% of the assets in equity positions when the market trend is positive.  In the buy and hold model, this results in too much volatility, hence a 60/40 stock/bond allocation is necessary.  Nevertheless, having 40% of your investments in bonds during upward markets reduces your potential and makes it impossible to achieve a 20% annual compound growth rate.
N.                [15] Watching 60% of your portfolio lose half of its value in bear markets is disconcerting and takes a very long time to recover.  When the portfolio loses half of its value, it must double to return to the same level.  For example, if you invested $10,000 and it later decreased in value to $5,000 that’s a 50% decline, right?  So now your investment is $5,000.  What proportional increase must it have before you return to $10,000?  This isn’t a trick question, the answer is 100%.
O.                This is a key principle:  Don’t lose a lot of money, it is hard to recover.
P.                  [16] Why haven’t you heard of this before?  The fact is, banks, trust companies and stockbrokers are prohibited from using this sound, conservative approach, because their bulk stock sales would disrupt the markets.  Do you remember I told you that you could do something that they banks could not do?  This is it, you can sell all of your equity holdings when the market trends downward.

VI.              [17] My results:  Since 1977 when this model was first published, it has returned 14 1/2 % compound annual growth through 2001.  Since 1984 I have personally used this model for my retirement plan and my compound annual return is about 15%.  The proof of the model is in falling markets because anyone can make money in rising markets.  Since April 2000, I have lost a little over 15% from the three whipsaws that I mentioned earlier.  The S&P 500 has declined 52% in the same period.  The good news is that we recovered our losses during 2003 and 2004 with a 20% increase in a little more than one year.

VII.            [18] Here we have our results in a graph.  Can you be happy with this result?  Why buy and hold?

[19] For more information on Successful Investing:  www.fabian.com


James A. Schorner, P.A.

Attorney: 772-231-5300
CPA:       772-231-2100

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