Ask Mike:
What about 5-Year Investment Strategies

Question:

Hi Mike,

I've been looking at various ways to invest lately, and your 10 rules portfolio strikes me as interesting. I have an autotrade account at TOS that I have played with a little bit.

I don't think there is one true path to success in investing or trading, but certainly the rules you mention are sensible. Originally I was interested solely in fundamentals (Ben Graham, Peter Lynch), but more recently I've seen the value of technicals. I've also looked at other ways of trading like using options.

Anyway, I would be interested to see more specific performance info about your 10 rules portfolio. I understand it can be autotraded; correct me if I'm wrong.

I'm actually curious how it has done in July and August with the market weirdness even though that's too short a timeframe to judge -- I just think it's an interesting time to look in. And I'd be curious to know what your time horizon is. A lot of investors might say five years, or traders a few months. I'm guessing you're somewhere in between.

Thanks for your help,

Dan S

Mike's Response:

Hi Dan,

I am happy to respond to your questions:

1. My 10 Must Follow Rules portfolio is designed to follow my upcoming book with the sub-title of "10 Must Follow Rules for Consistent Profits in the Stock Market". My publisher tells me the book should be on bookshelves sometime next spring. The goal of the portfolio is to follow the most stringent application of the rules. Specifically, that means I will only add "Strong Buy" rated stocks (according to my TurnerTrends stock ratings), long-only positions, and strong or at least strongly supportive broad market indicators (according to my TurnerTrends Bull/Bear rating).
2. I firmly believe that to make consistent profits in the stock market, investors must use a combination of technical analysis and fundamental analysis. Fundamentals are very lagging indicators and technicals are highly tied to current market momentum and overall investor sentiment. The key, I believe, is to use both of these indicators, along with a common-sense approach to diversification.
3. The 10 Must Follow Rules portfolio was started on May 1 of this year (2007), so it is a very young portfolio. One of its rules is to only add new positions once a month, generally at the beginning of the month. Both July and August did not provide sufficient justification (according to my 10 Rules) to be buying any equities. According to my rules, I moved the stop loss settings into my 'Aggressive Stop Loss Strategy' in early July and stopped out of all positions with huge gains. So, to answer your question, I was in cash for most of July and all of August.
   
   Assuming the market has bottomed (that vote is still out, however), I may be adding one or two new positions to the portfolio at the start of September. Again... that decision will be made at the time in strict accordance with my 10 Must Follow Rules.
4. I do not believe a multi-year investment horizon is appropriate for most investors. It is difficult enough to see where the market is headed for the next 90 days; much less several years out. It is only a wild guess where the market will be in the next 3 to 5 years. The only reason to invest for a 5-year horizon is to just assume (ie, hope and pray) that the market will move higher over the next 5 years. In the 90's that was a good guess. The first 5 years of this century has not done nearly so well. Not everyone has the luxury of the requisite research staff, money and time left to have 5-year horizons. My goal is to generate 20% or more each year by looking out 90 days, and by being in the market when my stocks are moving up; in cash when they are not; and in inverse ETFs when the market is in a bear mode.

Thank you for your interest, Dan.

Mike