02-07-2005, 06:51 AM
Winning 'two-brain' strategy for 2005
Commentary: Play with 'mad money,' not 'untouchable' portfolio PAUL B. FARRELL
By Paul B. Farrell] (http://www.marketwatch.com/news/mailto.asp?siteid=mktw&x=80+97+117+108+66+70+97+11 4+114+101+108+108&y=Paul%20B.%20Farrell&guid=%7B02 182150%2DA2EB%2D4C8E%2DAEC2%2D778C1E6E22EC%7D), CBS.MarketWatch.com Last Update: 12:01 AM ET Dec. 29, 2004
ARROYO GRANDE, Calif. (CBS.MW) --So I'm at the Pismo Beach Athletic Club working out, deep in thought about what is the best investment strategy for 2005? Right now, happy talk of the Wall Street bonus season is overwhelming us with predictions for a bullish 2005, muting bears who predict a major correction dropping the Dow to 6,500.
Then bingo, suddenly I get an "aha" Zen-like moment while talking with two buddies working out at the gym. These two represent the "holy divide" that behavioral finance gurus now say separates America's 95 million investors into two distinct personality types -- the rational and the non-rational -- or more accurately, the savvy and the clueless.
Jack's bullish and loves playing the market. So I challenge him: "What'll you do if the market goes down?" Ah, he's got a strategy! "I'll short it with ETFs," he says as he breaks into a big smile. Bill shakes his head, "Short? What's that?" And Jack adds, "I've tried to explain shorting to him, but ..."
And in that brief dialogue, my fellow American investors, is the essence of your strategy for 2005. If you're like Bill and you don't have a clue about "shorting" the dollar or the markets in 2005, your strategy had better be radically different than Jack's.
Two secrets to successful clueless investing
Behavioral finance studies suggest that the vast majority of investors have a brain like Bill's. At least 75 million of America's 95 million investors, 20 percent, are virtually clueless about timing economic cycles and successfully playing the market. On the other hand, Jack's savvy brain loves the game.
So the solution for America's 75 million clueless Bills is very simple: First: Admit you're clueless! Never try to time or play the stock market. Never! Instead, create a simple well-diversified portfolio of low-cost mutual funds - indexed, actively managed or exchange-traded -- and rely on your asset allocation to make you a long-term winner.
Early in 2005 we'll do our annual update of the "lazy" indexed portfolios. But here's an early hint. Year-to-date Dr. William Bernstein's "No-Brainer Portfolio" is returning 13.7 percent from its four Vanguard index funds: the S&P 500-tracking 500 Index (VFINX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VFINX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VFINX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VFINX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VFINX&dist=mktwstoryp rofile)) ; Small-Cap (NAESX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=NAESX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=NAESX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=NAESX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=NAESX&dist=mktwstoryp rofile)) European Stock (VEURX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VEURX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VEURX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VEURX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VEURX&dist=mktwstoryp rofile)) and the Total Bond Market (VBMFX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VBMFX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VBMFX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VBMFX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VBMFX&dist=mktwstoryp rofile)) . No rebalancing, just allocate 25 percent to each. Lazy wins.
Second: (And listen closely because this is the real big secret): Start saving 10 percent of your income, every month. The big problem with clueless investors is not their lack of a rational investment strategy but their failure to save enough -- only 1 percent today, compared to 8 percent two decades ago.
Remember this simple equation: Nothing saved, nothing invested, nothing for retirement. Thomas Stanley, author of "The Millionaire Mind," says we should live below our means. Even 10 percent savings is too little; in the decade leading up to retirement increase your savings to 15 percent then to 20 percent. Tough, but essential. Otherwise, you risk an uncomfortable retirement!
The "two-brain" portfolio strategy
Now comes the fun part in your strategy for 2005; that is, assuming you're a savvy investor like Jack who smiles because he's got a short-term focused brain.
The Jacks of the world aren't worried because they're savvy about timing and playing the market. No, that's not why they're smiling. They smile because they made one key decision: They only "play" with 10 percent of their money, their "Mad Money Portfolio." The other 90 percent is in a rock solid "Untouchable Portfolio," often like a conservative "No-Brainer Portfolio."
Now, for you savvy investors, there's a new book to help you even more, David Saito-Chung's "Investor's Business Daily and the Making of Millionaires." He outlines the IBD method that may further increase the returns of America's savvy-Jack investors.
It's been a few years since I've written about IBD founder Bill O'Neil's work. But I've always admired him. Not because he's built a financial newspaper from scratch to a circulation of 350,000 in just two decades. Nor because almost half of their subscribers are millionaires.
The reason O'Neil earns our respect is because he's always been on a mission as a teacher. He's committed to raising the I.Q. of the average American investor, making them savvy and savvier. In fact, his newspaper has the exciting feel of a university graduate school campus, with editors like David Saito-Chung as the dedicated professors.
'Can-Slim' strategy can fatten your returns
The IDB strategy is condensed into a simple acronym, CAN SLIM, focusing investors on seven traits all high performing stocks have before they make their biggest gains: "You can significantly reduce your risk and increase returns by using the CAN SLIM Investment Research Tool as a fact-based performance checklist to evaluate a stock before you buy:"
C = Current earnings per share and quarterly sales should be up 25 percent or more and hopefully accelerating in recent quarters.
A = Annual earnings should be up 25 percent or more in each of the last 3 years. Annual return on equity should be 17 percent or more.
N = New products or services should be fueling earnings growth. Technical indicators should indicate the stock's about to break out to a new high.
S = Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases. (http://www.investors.com/learn/c01a.asp)
L = Leader or laggard? Buy the leading stock in a leading industry. A stock's Relative Price Strength Rating should be 80 or higher.
I = Institutional sponsorship by mutual funds should be increasing in recent quarters, as shown on IBD's Accumulation/Distribution Rating gauges.
M = The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since 3 of 4 stocks follow the market's overall trend.
In addition, the overall strategy is loaded with tactical tools that build wealth on the upside and protect the downside. For example, in the 2000-2002 bear market, IBD's system provided early warning signals that helped many investors preserve net worth.
Good things take time, lots of time
Is CAN SLIM for you? Whether you're a Jack or a Bill, savvy or clueless, rational or non-rational, the next time you're relaxing in your local bookstore, check out Saito-Chung's book. It's an easy, fun read, and a good education. And one key thing you will learn: Active investing takes lots of time, every day, if you want to play the game rationally and win. So turn to the appendix first and find out why and hour or more a day is essential.
Saito-Chung is frank: "It takes three to six months or even longer to get all the rules down, follow them religiously, and use them the right way. Going through a few market cycles also helps. If this sounds like too much work, then you might want to find a truly good mutual fund that has consistently beaten the S&P 500."
Better yet: If you're really clueless, try a 100 percent "Untouchable Portfolio" -- not just 90 percent like your savvy siblings. Remember, the "No-Brainer Portfolio" is returning 13.7 percent, beating the S&P 500 by almost 4 percentage points. And there's no monitoring, no rebalancing, no time wasted. Set, forget it, you've got a winner.
Commentary: Play with 'mad money,' not 'untouchable' portfolio PAUL B. FARRELL
By Paul B. Farrell] (http://www.marketwatch.com/news/mailto.asp?siteid=mktw&x=80+97+117+108+66+70+97+11 4+114+101+108+108&y=Paul%20B.%20Farrell&guid=%7B02 182150%2DA2EB%2D4C8E%2DAEC2%2D778C1E6E22EC%7D), CBS.MarketWatch.com Last Update: 12:01 AM ET Dec. 29, 2004
ARROYO GRANDE, Calif. (CBS.MW) --So I'm at the Pismo Beach Athletic Club working out, deep in thought about what is the best investment strategy for 2005? Right now, happy talk of the Wall Street bonus season is overwhelming us with predictions for a bullish 2005, muting bears who predict a major correction dropping the Dow to 6,500.
Then bingo, suddenly I get an "aha" Zen-like moment while talking with two buddies working out at the gym. These two represent the "holy divide" that behavioral finance gurus now say separates America's 95 million investors into two distinct personality types -- the rational and the non-rational -- or more accurately, the savvy and the clueless.
Jack's bullish and loves playing the market. So I challenge him: "What'll you do if the market goes down?" Ah, he's got a strategy! "I'll short it with ETFs," he says as he breaks into a big smile. Bill shakes his head, "Short? What's that?" And Jack adds, "I've tried to explain shorting to him, but ..."
And in that brief dialogue, my fellow American investors, is the essence of your strategy for 2005. If you're like Bill and you don't have a clue about "shorting" the dollar or the markets in 2005, your strategy had better be radically different than Jack's.
Two secrets to successful clueless investing
Behavioral finance studies suggest that the vast majority of investors have a brain like Bill's. At least 75 million of America's 95 million investors, 20 percent, are virtually clueless about timing economic cycles and successfully playing the market. On the other hand, Jack's savvy brain loves the game.
So the solution for America's 75 million clueless Bills is very simple: First: Admit you're clueless! Never try to time or play the stock market. Never! Instead, create a simple well-diversified portfolio of low-cost mutual funds - indexed, actively managed or exchange-traded -- and rely on your asset allocation to make you a long-term winner.
Early in 2005 we'll do our annual update of the "lazy" indexed portfolios. But here's an early hint. Year-to-date Dr. William Bernstein's "No-Brainer Portfolio" is returning 13.7 percent from its four Vanguard index funds: the S&P 500-tracking 500 Index (VFINX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VFINX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VFINX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VFINX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VFINX&dist=mktwstoryp rofile)) ; Small-Cap (NAESX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=NAESX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=NAESX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=NAESX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=NAESX&dist=mktwstoryp rofile)) European Stock (VEURX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VEURX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VEURX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VEURX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VEURX&dist=mktwstoryp rofile)) and the Total Bond Market (VBMFX (http://www.marketwatch.com/tools/quotes/detail.asp?view=detail&symb=VBMFX&siteid=mktw&dist =mktwstoryquote): news (http://www.marketwatch.com/tools/quotes/news.asp?siteid=mktw&symb=VBMFX&dist=mktwstorynews ), chart (http://www.marketwatch.com/tools/quotes/intchart.asp?siteid=mktw&symb=VBMFX&dist=mktwstory chart), profile (http://www.marketwatch.com/tools/quotes/profile.asp?siteid=mktw&symb=VBMFX&dist=mktwstoryp rofile)) . No rebalancing, just allocate 25 percent to each. Lazy wins.
Second: (And listen closely because this is the real big secret): Start saving 10 percent of your income, every month. The big problem with clueless investors is not their lack of a rational investment strategy but their failure to save enough -- only 1 percent today, compared to 8 percent two decades ago.
Remember this simple equation: Nothing saved, nothing invested, nothing for retirement. Thomas Stanley, author of "The Millionaire Mind," says we should live below our means. Even 10 percent savings is too little; in the decade leading up to retirement increase your savings to 15 percent then to 20 percent. Tough, but essential. Otherwise, you risk an uncomfortable retirement!
The "two-brain" portfolio strategy
Now comes the fun part in your strategy for 2005; that is, assuming you're a savvy investor like Jack who smiles because he's got a short-term focused brain.
The Jacks of the world aren't worried because they're savvy about timing and playing the market. No, that's not why they're smiling. They smile because they made one key decision: They only "play" with 10 percent of their money, their "Mad Money Portfolio." The other 90 percent is in a rock solid "Untouchable Portfolio," often like a conservative "No-Brainer Portfolio."
Now, for you savvy investors, there's a new book to help you even more, David Saito-Chung's "Investor's Business Daily and the Making of Millionaires." He outlines the IBD method that may further increase the returns of America's savvy-Jack investors.
It's been a few years since I've written about IBD founder Bill O'Neil's work. But I've always admired him. Not because he's built a financial newspaper from scratch to a circulation of 350,000 in just two decades. Nor because almost half of their subscribers are millionaires.
The reason O'Neil earns our respect is because he's always been on a mission as a teacher. He's committed to raising the I.Q. of the average American investor, making them savvy and savvier. In fact, his newspaper has the exciting feel of a university graduate school campus, with editors like David Saito-Chung as the dedicated professors.
'Can-Slim' strategy can fatten your returns
The IDB strategy is condensed into a simple acronym, CAN SLIM, focusing investors on seven traits all high performing stocks have before they make their biggest gains: "You can significantly reduce your risk and increase returns by using the CAN SLIM Investment Research Tool as a fact-based performance checklist to evaluate a stock before you buy:"
C = Current earnings per share and quarterly sales should be up 25 percent or more and hopefully accelerating in recent quarters.
A = Annual earnings should be up 25 percent or more in each of the last 3 years. Annual return on equity should be 17 percent or more.
N = New products or services should be fueling earnings growth. Technical indicators should indicate the stock's about to break out to a new high.
S = Supply and demand. Shares outstanding can be large or small, but trading volume should be big as the stock price increases. (http://www.investors.com/learn/c01a.asp)
L = Leader or laggard? Buy the leading stock in a leading industry. A stock's Relative Price Strength Rating should be 80 or higher.
I = Institutional sponsorship by mutual funds should be increasing in recent quarters, as shown on IBD's Accumulation/Distribution Rating gauges.
M = The market indexes, the Dow, S&P 500 and Nasdaq, should be in a confirmed up trend since 3 of 4 stocks follow the market's overall trend.
In addition, the overall strategy is loaded with tactical tools that build wealth on the upside and protect the downside. For example, in the 2000-2002 bear market, IBD's system provided early warning signals that helped many investors preserve net worth.
Good things take time, lots of time
Is CAN SLIM for you? Whether you're a Jack or a Bill, savvy or clueless, rational or non-rational, the next time you're relaxing in your local bookstore, check out Saito-Chung's book. It's an easy, fun read, and a good education. And one key thing you will learn: Active investing takes lots of time, every day, if you want to play the game rationally and win. So turn to the appendix first and find out why and hour or more a day is essential.
Saito-Chung is frank: "It takes three to six months or even longer to get all the rules down, follow them religiously, and use them the right way. Going through a few market cycles also helps. If this sounds like too much work, then you might want to find a truly good mutual fund that has consistently beaten the S&P 500."
Better yet: If you're really clueless, try a 100 percent "Untouchable Portfolio" -- not just 90 percent like your savvy siblings. Remember, the "No-Brainer Portfolio" is returning 13.7 percent, beating the S&P 500 by almost 4 percentage points. And there's no monitoring, no rebalancing, no time wasted. Set, forget it, you've got a winner.