Monday Meeting Update

Today's meeting covered the following topics:

• How far will the market go up and when will it end?

We do not know how long the market will go up or down. However, not knowing the future doesn't mean we can't take an educated guess as to how far it will go using Dow's Theory. Dow Theory says that the market will likely go up at least 1/3 of the amount of the previous decline. In the most recent instance we're looking at a decline in the stock market from 14,164 down to 6547.05. By dividing the difference by 3 we get 2539.16 (1/3). Adding 2539.16 to 6547.05 gets us to the level of 9086.21.

We now have a tentative upside target of 9086.21. However, Dow Theory also says that both the Industrials and the Transports need to exceed each prior peak in order for the trend to be valid (in this case the trend is up). As of the close of the market today, the Industrials smashed through the prior peak of 7350.94 on February 24th. The Transports barely closed above the prior peak of 2709.90 on February 24th. So far the signs are good that both indices will get close to the next peak which is 3203 for the Transports and 8280 for the Industrials.

Because both indices have gone above prior peaks we should continue to believe the market will generally go higher with some declines to occur along the way.

• What is the good and bad of Dow's Theory?

The good of Dow's Theory is the fact that it attempts to tell investors what the general trend of the market will be. How does the theory do this, by using the movement of the Dow Industrials, Transports and Industrial Production index along with volume indications from the New York Stock Exchange. Also, Dow Theory relies upon historical valuations of the stock market like P/E, dividend yield, book value, earnings and other assorted ways to measure the overall value of the markets.

The bad of Dow's Theory, if it is correct to begin with, is the fact that it can give false and early indications especially at perceived market tops. An example is the top in 1961 was 5 years before the actual top in 1966. Likewise the top in 1999 was 8 years before the actual top in 2007. Also, Dow Theory doesn't tell us about the direction of the market within a long term trend. For this reason, it becomes difficult to "trade" the market using this approach.

• The more people follow a concept or theory the less effective it will be.

The point was made that Dow Theory has been relatively ignore because of its lack of predictive value. While this is open for debate, my research says that it is a reasonable approach as long as it keeps working for me. If it no longer works then I will still use it but I won't rely so heavily upon it. However, if the critics keep ignoring the relative value of Dow's Theory then it makes the use of it more valuable and effective.

Dow's Theory alone won't answer the question of which stocks I will actually buy and sell. It only tells a person the trend. This is the reason why I combine Dow's Theory with my dividend investing approach so that at least if I'm wrong because of my reliance on a theory then I'll be able to collect income until I'm right or sell out if I'm disastrously wrong.

• Bear markets last a very, very long time.

Many market commentators in the media might claim that since we have seen a rise of 20% or more in the stock market then we must be in a bull market. However, I like the conservative view that Dow Theory takes on this issue and that is, a bull market begins when both the Industrials and Transports have exceeded the high of prior peaks. That means a bull market only starts at the 14,164 and 5,492 levels for the Industrials and Transports. This essentially means that both indices could go up over 100% and still be in a bear market as has been demonstrated many time in history.

• Ride out the upside action unless proven otherwise.

Because we are in a Bear market rally, the market trend is up until or unless we go below the previous low of March 9th.

• Those with outsized gains are probably more lucky than smart.

As I have learned the hard way, it is far better to be lucky in the stock market competition than smart. However, don't worry about getting lucky. Instead, focus on being informed as much about the history of the market to prepare yourself for the next wave of opportunity without losing money. Our goal is to learn and be ready. The luck will come in due time.

• I project that this bear market will last a while.

History suggests that the bear market will last 1/3 as long as the previous increase from 1974 to 2007. This means that the market should trade in a wide range until 2018. Around the year 2010 to 2018 we should see rampant inflation.

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Today's Investment club meeting notes:

• Losses due to quick trades and short sells

Losses due to quick trades and short selling is acceptable when you're required to get the highest return possible in the shortest amount of time with money that does not belong to you. However, keep in mind that you're not investing but speculating.

• Percentage change of investment portfolio matters more than dollar change

When working in the professional investing arena the only real measure of performance is the amount of percentage change to the entire portfolio, including cash, and not the dollar amount of change.

• Dealing with a rally within a Bear Market

We're currently experiencing a bear market. As with previous bear market rallies ( 1906-1924, 1929-1933, 1966-1982) they are violent and fast. Bear market rallies tend to get a lot of participants who end up losing any money that they didn't already lose on the first, second or third wave down. Be ready to take advantage of the rally but also be ready to jump out as soon as possible.

• What's the deal with Citigroup (C) and Bank of America (BAC)

To deal with the reality of a bear market rally we need to adapt to the changes taking place. First, even though nothing has materially changed with Citigroup or Bank of America we should be going long (buying) both stocks and using as much leverage as possible. The next upside target for Citigroup is $4.21 while Bank of America is $7.39. Hold these positions unless or until the stocks fall below the $1.02 level for Citigroup or the $3.14 level for BAC. If you're not comfortable with losing money then stay away from these stocks. Other speculative stocks to consider are MS, GS, HIG, GE, HBC, PAY, WFC.

• My rational for speculating in Helmerich and Payne (HP)

The rational for my stock purchase of HP is that the company has fallen from the high of $77 and has consistently bounced above the $20 level since 2005. If the stock falls below $18 then I will consider selling the stock. However, I have already accounted for the possibility of the price declining to the $8 level. Successful investing requires that you prepare your mind to losing all that you invest. If you make money then you have a problem that most investors would like to have to figure out how to deal with.

• What happens when the Dow Theory indicators are divergent? What indicators do you use to gauge where the market or economy is going?

When the Dow Transports and Dow Industrials are not going in the same direction then there is the problem of determining what the trend is according to Dow Theory. In circumstances such as these the best thing to do is assume that if the prior trend is down then it is still going to go down until proven otherwise. If the trend was previously going up then it is safest to assume that the trend is still up until proven otherwise.

The next question is, "are there other ways to determine the health of the stock market and economy?" Please visit my blog and look at the indicators on the right hand column. What I have posted is probably 1 out of 100,000 ways to view the markets health and direction. The ones that I have are ones that I feel are reasonable indicators of the general direction of the market but their certainly not foolproof. Only time and more experience will tell if these indicators are of any practical value.

• Dealing with investor psychology

All stock market investing is dealing with investor psychology. For this reason it is helpful to read books that deal with behavioral finance, game theory, Dow theory, market history or stock market psychology. While these topics don't answer the question of which stocks to buy what they do give is insight as to what people are likely to do under conditions of a rising or falling market.

• Investing in stocks is a 50/50 proposition, dividends from a quality stock tips the scales in your favor to 51/49.

Because there is always the prospect that the stock market will either go up or down you have one of the rare opportunities to enter into a 50/50 transaction. Unlike buying a home for investment, you won't have to fix the plumbing, deal with bad tenants, insure against loss or worry about earthquakes. Unlike starting your own business you don't have worry about the location, the foot traffic, zoning laws, or marketing. The purpose of researching and buying stocks that have increased their dividend every year a minimum of 10 years in a row is so that you can have the income from the stock even if the price declines. Remember, don't worry about the yield of the stock being low like Helmerich and Payne's (HP) 0.90%. Instead, focus on the fact that their earnings could fall 90% and still be able to increase the dividend.

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