As always, every rally succumbs to a new correction… and new opportunities
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
If you are not rubbing your hands together in anticipation of the bargains you are about to pounce on, you may just want to reassess your approach to investing. You must be able to experience nearly as much pleasure from income enhancing processes at lower prices as you do from profit taking disciplines as prices move higher. (Nothing matches the pleasure of taking profits on income purpose securities.)
Smiling As The Market Falls
I admit that I am one of the few professional investors that you will see smiling as broadly as the market has fallen this week, but let me explain why…
For nearly a year now income purpose and equity CEFs have been rocketing higher along with the stock market but with one significant difference… the average CEF in our selection universe pays between 7.5% and 8.5% in dividends while the S& P 500 pays less than 2% and the average bond or retirement fund less than 4%.
During this spectacular rally, reasonable profits were taken daily and reinvested regularly, and virtually no profit above 5% remained unrealized up until February 21st… leaving very little “on the table” for COVID-19 to infect.
Compound earnings, coupled with strategic “top-of-the-market” loss taking on the weakest positions, grew invested working capital1 at unprecedented rates, and capital doesn’t go away just because prices stop rising. In fact, as prices decrease across the board, yields increase proportionately, meaning that every monthly dividend can be put to work to increase total portfolio income, month, after, month, after month…
Same Securities… Lower Prices
Today, the same securities we’ve traded in and out of for years are still paying the very same dividends while being available at much lower prices. This is what turns the fear of corrections into an appreciation of the opportunities lower prices always provide… in well constructed, properly diversified, quality vetted CEF portfolios… as the S & P 500 hovers just 2.7% above its September 20, 2018 level.
Assuming that one invests only in high quality, income generating securities, and that serious diversification protocols are in place, there are only two decision processes needed to become a successful investor: always, absolutely always, take reasonable profits whenever they are available
Patiently add new positions, and add to existing positions that are below your cost basis, with all capital gains and dividend income. I’ve written dozens of articles on how investors could be dealing with market corrections in a productive manner right now. (Google: Stock Market Corrections-Selengut). They can pretty much be summed up as follows:
There has never, not ever, been a stock market rally (or correction) that has not succumbed to the next market correction (or rally). You need to develop a portfolio structure that benefits from either scenario.
I’ve sent the message within the above headline to some 500 individuals whose portfolios have been managed in this manner, in some cases, for decades. It is provided only for informational purposes; there are no ulterior motives. The approach has successfully navigated the three major market meltdowns of my lifetime… is this the fourth?
1The “Working Capital Model” of portfolio management is explained in “The Brainwashing of the American Investor: The Book That Wall Street Does Not Want YOU To Read”