2014: Leverage The Power Of Now In Investing

Staying In The Now Is Key To Investing
Eckhart Tolle’s New York Times Best Seller 2007 to 2009

Investing In The Now – How Do I Make It Happen?
A structured system or model is one excellent way to stay in the Now. You should build a model or find a model that passes the “that makes sense to me” test. Any model should be thoroughly backtested. Strict rules are also necessary since a model is useless if you do not follow it 100% of the time (no exceptions). The beauty of the financial markets is there are countless ways to skin the risk-management cat. The articles below cover the concepts of paying attention and adjusting as the evidence changes:

1. IF, THEN Systems
2. The Market Does Not Care What You Think

The concept of paying attention is based on probabilistic outcomes, or if you prefer probabilistic forecasting. The difference is we base our allocations on known information, markets and hard data, rather than where we believe the data or markets will be in the future. When the “knowns” change, we adjust our allocations as needed.

1982: Would You Have Predicted An 18-Year Rise In Stocks?
Human bias about the markets is a form of forecasting. If your self-talk is something along these lines, “Stocks cannot go up given all the problems in the world today”, then ask yourself how many people felt the same way in 1982?

The events below took place in 1982, or in the first year of an 18-year bull market in stocks:

1. A brief but severe recession began in the United States.
2. The Hama massacre began in Syria.
3. Syrian president Hafez al-Assad ordered the army to purge the city of Harran of the Muslim Brotherhood.
4. London-based Laker Airways collapsed, leaving 6,000 stranded passengers and debts of $270 million.
5. The DeLorean Motor Company Car Factory in Belfast was put into receivership.
6. The United States placed an embargo on Libyan oil imports, alleging Libyan support for terrorist groups.
7. The Falklands War began: Argentina invaded and occupied the Falkland Islands.
8. Argentina invaded South Georgia.
9. A blizzard unprecedented in size for April dumped 1–2 feet of snow on the northeastern United States, closing schools and businesses.
10. The nuclear submarine HMS Conqueror sank the Argentine cruiser General Belgrano, killing 323 sailors.
11. Spanish priest Juan María Fernández Krohn tried to stab Pope John Paul II with a bayonet during the latter’s pilgrimage to the shrine at Fatima.
12. Braniff International Airways declared bankruptcy and ceased all flights.
13. Hussain Muhammad Ershad seized power in Bangladesh.
14. The 1982 Lebanon War began.
15. A rally against nuclear weapons drew 750,000 to New York City’s Central Park.
16. The body of “God’s Banker”, Roberto Calvi, chairman of Banco Ambrosiano, was found hanging beneath Blackfriars Bridge in London.
17. ASLEF train drivers in the United Kingdom went on strike over hours of work.
18. Pan Am Flight 759 (Boeing 727) crashed in Kenner, Louisiana, killing all 146 on board and 8 on the ground.
19. Checker Motors Corporation ceased production of automobiles.
20. The Reverend Sun Myung Moon was sentenced to 18 months in prison and fined $25,000 for tax fraud and conspiracy to obstruct justice.
21. The Provisional IRA detonated 2 bombs in central London, killing 8 soldiers, wounding 47 people, and leading to the deaths of 7 horses.
22. Torrential rain and mudslides in Nagasaki, Japan destroyed bridges and killed 299.
23. In Beaune, France, 53 persons, 46 of them children, died in a highway accident (France’s worst).

1. Attempted coup against government of Daniel Arap Moi in Kenya.
2. Italian Prime Minister Giovanni Spadolini resigned.
3. Mexico announced it is unable to pay its large foreign debt, triggering a debt crisis that quickly spread throughout Latin America.
4. Italian general Carlo Alberto Dalla Chiesa was killed in a Mafia ambush.
5. Iowa paperboy Johnny Gosch was kidnapped.
6. Lebanese President-elect Bachir Gemayel was assassinated in Beirut.
7. The Lebanese Christian Militia (the Phalange) killed thousands of Palestinians in the Sabra and Shatila refugee camps
8. In Israel, 400,000 marchers demanded the resignation of Prime Minister Menachem Begin.
9. The 1982 Chicago Tylenol murders occurred when 7 people in the Chicago area died after ingesting capsules laced with potassium cyanide.
10. Helmut Kohl replaced Helmut Schmidt as Chancellor of Germany through a constructive vote of no confidence.
11. During the UEFA Cup match between FC Spartak Moscow and HFC Haarlem, 66 people were crushed to death.
12. A gasoline or petrol tanker exploded in the Salang Tunnel in Afghanistan, killing at least 176 people.
13. Camerun president Ahmadou Ahidjo resigned, replaced by Paul Biya.
14. Minneapolis Thanksgiving Day fire destroyed an entire city block of downtown Minneapolis, including the headquarters of Northwestern National Bank.
15. The first U.S. execution by lethal injection was carried out in Texas.
16. The December murders occurred in Suriname.
17. An earthquake (Richter Scale 6.0 magnitude) in Dhamar, northern Yemen, killed at least 1,507.
18. The United Freedom Front bombed an office of South African Airways in Elmont, NY and an IBM office in Harrison, NY.
19. The United States Environmental Protection Agency recommended the evacuation of Times Beach, Missouri due to dangerous levels of dioxin contamination. Source: Wikipedia

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Investment Implications - 2014/Now
Last week, our market model detected relatively minor, but noticeable deterioration in the market’s risk-reward profile. Consequently, we reduced our exposure to stocks in many client accounts. If the S&P 500 fails to hold at the support levels between 1,820 and 1,830, the model will call for further incremental reductions in equity exposure. For now, we continue to maintain positions in U.S. stocks (VTI), financials (XLF), energy (XLE), small caps (IJR), Europe (FEZ), and global stocks (VT). We will let the market be our guide, given the somewhat vulnerable state of stocks and the economy in the short-run.