The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client). He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.
I have to tell you, I really like this guy. I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity). Also, he is a good athlete — and umm, well, I like sports. Over time, I’ve learned there are many common threads where our lives cross paths.
Wait a second…what does this have to do with point and figure analysis?
Everything.
I really believe I would have never met him if it weren’t for point and figure analysis. See, like many folks, he was referred to me — by another client. If I didn’t use the point and figure approach in managing the risk for my clients, I am not sure he would be my client today!
Time out.
Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there. The game plan, as directed by the home office, was “gather assets, place the assets with a money manager — or in mutual funds run by “professionals,” then go find more assets.”
When I was a financial adviser, there were many of those “episodes” where Toto pulled back the curtain and exposed the “Wizard” of the marketing department. You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down. I got tired of watching people’s investment accounts getting blown up — through no fault of their own.
It’s a wonder anyone made money.
There wasn’t “one defining moment” in my 16 years as a broker that pushed me to change. It was more like a “body of evidence.” And in 1997, I started looking at alternatives to “fundamental analysis.”
Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.
Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.
Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?
Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.
You say you didn’t own that stock back then? Ummm…OK.
Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?
Hmmm. Oh well, onward…
Know this: fundamental analysis does have a purpose. But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.
What I was able to show my friend — in screenshots — is how the market has moved from a “negatively trending market” to a “positively trending market.”
For the first time in about a year and a half!
That darn chart makes it crystal clear there are times you should be “in the market,” and times when you should be “out of the market.”
Fundamental analysis will never tell you when to get out. Never.
My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.
With all they have going on, I’m happy they sidestepped a lot of potential damage.
And what about you…what’s your story? Is getting a game plan for your investments important today?
This is precisely why I use point and figure analysis… point and figure simply measures price. And price IS the ultimate indicator — as it reflects changes in supply and demand.
In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.
Feel better my friend, you are on my mind.
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Tearing Apart the Headlines
by Thomas Mullooly on March 7, 2009
Did you know General Electric (GE) posted record revenues last quarter? That has not really helped their stock, has it? Remember always, price is the ultimate indicator, which is why I rely more and more on charts. Fundamental analysts and company management can pontificate all day long about market share, earnings and revenues. If the market doesn’t like it, the stock is going down.
I don’t think I’ll ever get tired of reminding people that the job of the media is to sell advertising. The fact that you get informed — or get information — is a side benefit.
I’m not saying the media dispenses incorrect information. What I’m saying is they tend to focus on some really dumb things, and then pound it over and over and over. Just keep reminding yourself: their job is not to hang around and “fill you in” on the news of the day. The media is there to sell ads. So their teasers and headlines will often be filled more with drama than facts.
And often, the drama persuades you into doing precisely the WRONG thing. My friend, Tom Dorsey has often said “Remember everything that is written or said in the media about Wall Street is made to make you do the wrong thing.”
Example of “News” headlines:
One of the headlines on CBS MarketWatch is Freedom Bank (Georgia) is the 17th bank failure in 2009. OK, look, in the previous recession, there were over 700 bank failures. Some will be spectacular. If we have less than 700 bank failures during this recession, now THAT will be news.
Here’s another:
General Motors shares trade near Great Depression territory. Face it, the stock trades for about a dollar, it’s not coming back. Sure, it might get to two dollars. But will this ever be a $30 stock again? I don’t think so, under its present structure. Now if they were to file bankruptcy, wipe out the common stock and reorganize (where the debt/bondholders become the new stockholders), anything is possible… see Kmart.
I am far more interested in learning what will happen to General Motors and the bondholders in a bankruptcy proceeding. The government has poured $13 billion into General Motors in the last few months, and company management is back at the trough asking for another $17 billion. Amazingly, the market capitalization of General Motors is less than $1 billion ($900 million currently — one third the size of Burger King). Where did all that money go?
And another:
This past week, the financial media focused on how the banks were killing the Dow Jones Industrial Average. This is total nonsense. Citibank trades for $1 per share, Bank of America trades for $3 per share. If these two companies filed for bankruptcy tomorrow (or were nationalized — essentially, the same thing), this would move the Dow Jones Industrial Average a total of 50 points. I wonder how long it will take Dow Jones to remove Citibank, Bank of America, General Motors and General Electric from the Dow Jones Industrial Average.
Another favorite topic:
Unemployment rate reaches 8.1%. Okay, lots of room for debate on this topic. Historically, the average unemployment rate hovers around 5%. Did you know, for the past 15 years, the economy has averaged an unemployment rate between 3% and 4%? This is actually a pretty spectacular news item, but no one was writing headlines about that. During economic recessions, the unemployment rate often reaches 10%. So be prepared for that, and don’t be surprised when that news arrives. In fact, there have been several times where the unemployment rate surges in the latter stages of a recession — and the first phase of recovery. You read that right — many times the unemployment rate will rise, as the economy is improving.
And lastly:
GDP numbers. The stock market fell out of bed last week when it was announced that fourth-quarter GDP came in at -6.2%. First of all, this should not be a shock to anyone. Secondly, the media never really puts it in its proper perspective. So let’s look at this number. It measures growth (or shrinkage) of the economy in the fourth quarter 2008. The quarter ended December 31, 2008.
The original estimate was released January 31, the preliminary number was released February 27, the final revised GDP for fourth-quarter 2008 will be released at the end of March. The final revision may be a completely different number — for better or worse. But by the time we get it, that information is petrified like a redwood. Irrelevant.
By the way, at the end of April we will receive the original estimate for first-quarter 2009 GDP. What do you think THAT number will be? I expect it will be absolutely dreadful. And the media will go crazy. Be prepared.
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