Saturday, September 4, 2010

Investment Cycle



Boom to Bust and Back



My experience in 50 years of stock market

watching is that there is usually an index leader

that usually precedes the fall of the whole market

If you listen and watch carefully for signs that a

particular part of the economy is doing

extraordinarily well and then start following an

index or a basket of stocks in that area of the

economy you will probably notice a decline that

will preceed the whole market by several months


-
Early in 1999 the Technology Stocks reached their
High and started to fall.Within a year the S & P
Index and the rest of the Market started to crash.
It reached the bottom in 2002 [It was not caused by
9/11] 
The Technology Bubble Greed had caused a
 Recessionon the Bush watch. He wanted it over
 fast. He cut Taxes of the Rich and lowered interest
rates on mortgages to pump up construction.

It work so well that they kept them low and
invented new types of 100% mortgages including
the ARMs and other sub prime contracts.

Brokers sold them any way they could to earn
the big commissions. They sold the bad

mortgages to banks. Bankers get rid of

them to private investors as securities and raise

more money. The bubble grew ever bigger until the

 Builders finally built too many houses. Supply out

stripped demand and prices started to fall.


The bad mortgages began to default and prices

fell farther.The mortgage securities started to

fail and in the fall of 2008 the cards came

tumbling down. Greed had again hurt the

working man and made the Bankers richer.


The Taxpayer bailed out the big banks and

unregulated Capitalism had come full cycle

again.Greenspan said we just missed the signs.


Now we know what to look for. We don’t need to

overregulate the banking system. As they say in

 Battleship Galactica “This has all

happened before and it will all happen again”

As Cassius observed in Julius Caesar.

“The fault, dear Brutus, is not in our stars,

But in ourselves, that we are underlings.”



The lesson to be learned is that is possible to

foresee the turn in an economic cycle.
Follow as many indexes as you can that

measure important segments of the economy.

When you see one that is booming too much in

excess of the general economy you wait until

it makes a dramatic change in direction.

Then you move your investments in the Stock

Market into fixed income investments.


When the stock market falls substantially

(wait at least a year) you start to move your

investment back into different types of Mutual Funds until at least 80% of it is invested. Then you wait

for the next Boom and do it all over again.


This is not an attempt to make exact market 

timing.That is not possible. You simply want to ride the curve up and get out.  Then get in again when

 you spot another annomally after enough time for the Market to reached bottom [ about a year on 

average]. This is a lifetime method for investing. It is not a short term adventure.






Copyright © William Hodge 2010