Market Hotline


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Investing lessons from the Jedi masters Print PDF


I have been a TV viewer since the first 8-inch, black-and-white set with a couple of channels made its way into our home in the early ‘50s. Despite the decades of hype dispensed by this medium, I’ve never seen anything like the new Star Wars hysteria displayed recently. Not only is there a focus on the event in the media and in Disney’s ads, but now every third-party advertiser seems to be running some kind of a tie-in commercial. The other day I counted five in a row!

Still, I have to admit, I was there when the first Star Wars film wowed audiences back in 1977 and was blown away. I was not alone. The film gained legions of lifelong fans and spawned five sequels and prequels. Now, 38 years after its first premiere, yet another version is opening this week.

Given its storied history, there must be wisdom to be mined from this epic series for the millions of investors that are among its fans. To find it, I’ve turned to the Jedi masters of that galaxy long ago and far, far away.

Of course, supreme among those elite was the nine-hundred-year-old teacher, Yoda. He would be the first to say, “Already know you, that which you need,” but some of his wisdom bears repeating.

“To answer power with power, the Jedi way this is not. In this war, a danger, there is, of losing who we are.”

Since the stock market hit bottom in 2009, the power has been in the S&P 500. It has more than doubled in value since then, outpacing most other stock market indexes as it moved on to new all-time highs. But an index that has lost more than 50% twice since 2000 is not really what we as investors should seek. We have to resist the allure of this much-publicized measure. "Adventure. Excitement. A Jedi craves not these things.”

“A Jedi uses the Force for knowledge and defense, never for attack.”

I’ve found that the best path to long-term growth in investing is to carefully maintain your defenses first, and then the profits will take care of themselves. As Darth Vader counseled, “You are unwise to lower your defenses.”

This one-step-out-the-door style of investing can mean returns that seem mediocre compared to a rallying S&P 500’s. However, maintaining an active defense can help one avoid the full fury of a market crash, such as those in 2000 and 2007.

Hedging your market bets with a number of defensive strategies improves your chances further. The goal is for your investments to survive until they are needed in retirement. And once you reach retirement, “Around the survivors, a perimeter create.”

 “You must unlearn what you have learned.”

Human beings have learned many investment biases that do not promote good investing. “Herding” or following the crowd is one of them. Believing that recent behavior is the best prediction of future behavior is another.

These bad habits limit investors’ profits and increase their losses. They play to investors worst fears: missing out on the supposed gains of others or incurring losses. But once you recognize this, the knowledge of the biases of others can create opportunities. “Named must your fear be, before banish it you can.”

“The fear of loss is a path to the Dark Side.”

Studies show that fear of loss has more than twice the impact on investors’ decision making as the pleasure attained from a gain. Such fears have the effect of freezing investors to the money-market sidelines when they should be returning to stocks after a bear market crash. Conversely, fear of taking a loss can lock investors into losing positions when a bear market first begins.

“Control, control, you must learn control!”

How can we avoid this fate? For me, it means taking my 40-plus years of stock market experience and reducing it to programming code that automatically and quantitatively implements our time-tested methodologies. By doing so, I can control my emotions and make rational decisions.

Other investors take a different path. They are attentive to the news. They devour the details of every event noted in the press. They sit glued to their screens watching “market gurus” spew their never-ending forecasts. And then they react.

The first Jedi that we are introduced to in the original Star War film is the wise Obi-Wan Kenobi. His advice was never more astute than when he asked, “Who’s more foolish, the fool or the fool who follows him?” He probably knew the miserable track record of stock market forecasters and investors who react to market news and prognostications.

“Difficult to see. Always in motion is the future.”

Unfortunately, it is my role here at Flexible Plan to ignore Yoda’s admonition. Instead, I must try to discern the future weekly in this, the FPI Market Hotline.

Counter to the Jedi cautioning, I continued on a roll last week. The stock market fulfilled my warnings from last Monday’s edition. All of the indexes fell at least 3%, with the worst of the market action coming on Friday. The weakness was not only apparent in U.S. stocks, but in their foreign brethren, which fell substantially as well.

Most attributed the decline to the continued tumbling of “other assets.” Those most noted were commodities, especially oil, and high-yield bonds. While most explained the latter as being caused by the former (a substantial portion of these bonds are offered by energy-related corporations), the following graph suggests the damage to the overall index of the asset class was also considerable.

Source: Bespoke Investment Group

Another reason advanced for the sell-off in most asset classes was the presumed raising of interest rates at Wednesday’s Federal Reserve meeting. Interestingly, bonds—rather than falling in general—were mixed.

Short-term interest rates did move higher (see chart), and prices fell in response, as was the case with the high-yield faction. But longer-term quality and Treasury issues actually rose in value following a counter-intuitive decline in long-term interest rates. Many attribute this to the belief by bond professionals that the Fed is wrong to raise rates and may have to backtrack on this week’s likely decision.

Source: Bespoke Investment Group

Source: Bespoke Investment Group

Joining short-term rates as a market negative were last week’s crop of economic reports. As has been the case of late, most reports failed to live up to economists’ expectations.

Counterbalancing these influences on the plus side, we have investor sentiment that continues to plummet (bulls are low in number, while bears are numerous). On a contrarian basis, this is positive news. Similarly, seasonality is now rated positive for the rest of the year. More than 70% of the time there is a Santa Claus rally in stocks, and the year’s last nine days are, on average, the most positive of the year.

With few earnings to report, and with the market just now reaching neutral range on our overbought/oversold measure, there seems little on which to rest a market prognostication.

“Patience you must have, my young padawan,” advised Yoda. He’s right. I believe more interesting times are yet to come. The reaction to the reality of a Fed hike in rates will certainly garner much attention. But while I wouldn’t be surprised with more downside volatility, my guess is that a flat-to-higher market will be the result of this week’s trading. For me, the positive seasonality and current price patterns break the tie.

While not a Jedi, the veteran of the rebel pilots in the first adventure was Davish Krail, affectionately known as “Pops”. “Stay on target,” he directed his younger followers as they took on the Empire. Here at Flexible Plan, we have our OnTarget Investing approach to guide our clients to their goals. It’s a benchmark customized to your suitability profile and the components of your strategically diversified portfolio. We track your account against it in our quarterly statements, which we deliver to you.

If an account falls out of the safe haven of the green background and into the red, we make it easy to respond with over a hundred suitability profiles and actively managed strategies to switch to that are accessible with just a phone call to your financial advisor.

Yoda must have known this when he said “If no mistake have you made, yet losing you are … a different game you should play.” Not bad advice from a green, two foot, two inches tall puppet!

Enjoy the premier and a happy, healthy holiday season.

All the best, and may the force be with you,


Jerry, Yoda, and Company

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To our In My Opinion readers:
Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

In My Opinion: Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you