Guest Author - Guido Deboeck

When you get up in the morning your look through the window to see what weather it is. Some pickup the daily newspaper and glance at the weather charts. Others more technologically inclined may have a weather station somewhere in the house, which provides an instant overview of outside temperatures, barometric pressures, cloudiness. Why are we so interested in what the weather will be during the day? Clearly it affects how we dress, how we feel, what we can or cannot do. The weather can change our entire schedule: classes close, kids stay home, offices are on liberal leave policy, maybe even the airport is snowed in. The weather affects what we do, how we live.

The direction of the market also affects how we live and what we can or cannot do. If you know the market direction at all times (or at least most of the time), you have fewer problems knowing how to invest. If you have less problems investing, you make more money (maybe even to the point where your day job may become a minor distraction...); you may have more choices. If for some reason you never seem to know what the market is about or where it is heading, then you are likely to feel frustrated, not knowing where to put hard earned savings. Frequently, those people blame the markets for low portfolio returns.

Before we go on let’s think football, a sport many men are quite familiar with without realizing the valuable investment lessons it teaches! Here is your way to teach them about football.

Think about a football game in which you are on the 'home team" and the other team is, let’s say, “the markets”. A key thing to know at any time in the game is: "who’s got the ball"? If your team, meaning the 'home team' has the ball, then the game plan should be offensive; if the other team (the markets) have the ball the game plan should obviously be defensive.

How do you figure who has the ball? What does it mean to play offensive or defensive? To figure out who has the ball, just open a newspaper (like you do for the weather), look at some indices or preferably charts. Some financial newspapers make this real easy for you. Ask yourself: what has been the recent trend (five to ten days at the most) of the major indices such as the S&P500, the NASDAQ, and/or the Dow Jones. Eyeball some charts, compare the level of these indices between two dates not much more apart than a week or two, is all what is necessary. If all tree indices point upwards the conclusion is that “you” have the ball; if all three (or at least two of these indices) point downwards then the other team (the markets) has the ball. Can it really be that simple?

Yes, but the key is not to observe correctly what the direction of the market is --most people could pass this test even half asleep-- but to draw the logical implications, which is the best investment strategy.

The choice among investment strategies boils down to two: offensive or defensive. To adopt an offensive strategy in football is to run with the ball as far as one can in the direction of the opposite side. In investments an offensive strategy means to be fully invested and to capture the highest possible returns from all your invested assets. If the opposite is the case, meaning markets are pointing downwards, then a defensive play requires that you protect your assets, move some assets out of the markets, maybe even sit on cash for a while, or on the sideline as we like to call it. When the markets have the ball, they will pull you down; the return you made during the uptrend will evaporate in little time, four out of five stocks will be pulled down with the market trend, hence the key is to loose as little as possible whenever there is a down draft.

It is amazing how many people check daily the weather charts in the newspaper and how few people bother to check "who has the ball" in the investment game. It is even more surprising how few football fans know how valuable game watching is to learn about investments...The weather only affects your short term schedule, maybe some vacation plans, but chosing the right investment strategy based on factual knowledge about the trends in the markets can affect your long term well being. Not knowing who has the ball is a major mistake. Fortunately, it an easy one to fix: read daily in your newspaper what the direction of the market is; then adopt the right investment strategy.

Visit us again to read more about how gardening and cooking also teaches valuable lessons for investing.