Three steps through the market cycle.
Preserve capital. Invest when market negativity is high. Concentrate the portfolio in my best ideas. These three steps describe how I approach changing markets.
Prepare before the opportunity arrives.
My research continues while I wait. Some investment ideas stay under review for years. I use that preparation to judge what may be worth owning when market conditions change.
Explore the three investment tactics
Three steps. One continuing process.
Each stage informs the next. The process continues as market conditions and individual investments change.
Preserve capital.
When several indicators show that markets are dangerous, I stand aside. I look for non-correlated ideas that can be used to seek a positive return while speculation continues in the overall market. I fundamentally attempt to avoid speculative markets - when these show, my process tends to choose defensive positioning.
Preserving capital is an objective, not a guarantee. Less-correlated investments can still lose value, and taking protective measures early can mean missing gains in a rising market.
Invest when market negativity is high.
Once the market begins to decline in a significant manner, I monitor indicators as they grow to a crescendo of negativity. This requires more fortitude than analytical capabilities.
When the sentiment of investors gets very negative, it is time for action. No indicator establishes that the bottom has arrived, and prices can continue to fall after I invest.
Concentrate the portfolio in my best ideas.
As it becomes clear that pessimism is extremely high, I begin to sift through ideas I have researched, in some instances for many years. I narrow them to a concentrated portfolio of the best ideas I can find.
At this point in my career, I am looking for exceptional managers who invest as I would, rather than individual securities for the most part. Concentration gives each selection more influence on the portfolio, including when a selection disappoints.
Questions about the process.
Do you primarily select managers or individual securities?
My current emphasis is on finding investment managers who invest as I would, rather than selecting individual securities for the most part. I research those ideas and narrow them to a focused portfolio.
Does this process depend on calling the market bottom?
No indicator can establish the market bottom in advance. I look for high levels of pessimism and weigh the opportunities I have researched. Markets can keep falling after an investment is made, or keep rising while I remain cautious.
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Tell me what you want from your investments, and we can discuss whether my approach may help.
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