Investing for Retirement

Much of this initial introduction to my investment approach is a summary of the more detailed analysis and explanations I provide in my upcoming book Yachtsman Retirement Investing. My objective in this series of articles is to introduce specific concepts and methods I have used to build retirement wealth and long-term retirement income.

In upcoming articles we will explore various investment techniques including money management and developing a financial plan, asset allocation and total portfolio diversification, techniques for capital preservation, the stock market cycles, using fundamental indicators and basic technical analysis, adjusting time frames to deal with risks, stock splits and trading around long-term core positions.

My investment approach is centered upon defining and controlling the risks that are inherent in investing. Investing involves risks and there are individuals who cannot tolerate the slightest amount of risk or the thought of a decline in their existing principal. For those individuals there are the safest of investments in Treasury Bonds and the highest rated Certificates of Deposit.

But for investors seeking a higher return, the concept of investing involves the acceptance of risks of loss to principal in exchange for a return in excess of the safest of all investments. It is the value of this "risk premium" that is at the core of all investment vehicles.

Be it stocks, bonds, preferred's, real estate, hard assets, jewelry, commodities or art they are all valued in the simplest terms relative to their replacement or intrinsic value and in economic terms relative to the risk involved in owning them in lieu of Treasuries and their potential future market value and appreciation.

Focusing now on common stocks, in my view the risk premium of a stock market holding can initially be determined relative to it's price multiple. I rely upon the price to earnings ratio. The current P/E represents the absolute price of the stock relative to it's current absolute earnings. I also calculate a stock's price to earnings growth ratio (PEG) to determine the potential value of the holding and my potential total return relative to the risks and time value of other safer investments involved in holding the position.

As I value stocks relative to their future stream of earnings, discounted to present money value, I am constantly asking how much am I paying for $1 worth of earnings and at what premium am I being compensated for accepting the risks of owning this stock in lieu of the return I could earn on cash or a Treasury.

In Yachtsman Retirement Investing we examine these types of computations and many others in more detail so you can independently make these determinations for yourself. You can then determine the return on your investments relative to the risk you are willingly or currently unknowingly accepting.

Once I determine I am being adequately compensated for what I am paying for the future stream of earnings and the risk premium that is inherent in the ownership of the stock it becomes a matter of market risks. Market risks are the unquantifiable.

I am often asked about "black box" computerized program investing and Quantitative Analysis that is often touted as, among other things, a means of quantifying market risk. The "Quants" as they are called, attempt to use mathematical models and statistical research to quantify market risks and predict stock market behavior. I have yet to see a quantitative model than can accurately predict stock market risks or stock prices consistently over any meaningful period. And even the shortest term models that are used for trading rely heavily on "qualitative" or fundamental analysis in evaluating the ultimate value of any investment. Once someone convinces me a quantitative approach can quantify market risks or predict stock price action, I'll be the first in line to utilize it. Until then, I'll adhere to my approach of managing market risk.

And managing market risk is the prime directive of my stock market investing. My approach is defined by a series of Investment Disciplines that are designed to minimize downside exposure while attempt to control stock market investment risks. My Disciplines are more of a process than a list of investing directives. While I attempt to control risks in many different ways, including cutting losses using stop-loss protection, entry price sensitivity and staged buy and sell disciplines, the foundation of my investment approach is achieved by building long-term core positions in the fundamentally strongest stocks within each sector of the market.

I have found that the best risk-defense for my long-term retirement portfolio is the ability to trade around fundamentally superior long-term core positions after having created an extremely low cost basis over time and through varying market cycles.

I believe my investment time frame is the strength of my investment approach. And because of my time frame, every market correction creates an opportunity to create a lower costs basis in a core holding or a new long-term position in a market sector leader. My approach is to use short-term market weakness to create long-term portfolio strength.

A position I have owned and that I have averaged down by adding to during market corrections and stock splits allows me during favorable market or sector conditions to make a series of new staged buys and profit-protecting staged sells above the original cost basis of the core position. As the new shares of the stock increase in price, I have the confidence and cost protection of my underlying core position to move aggressively in a shorter-term investment process that we will later examine in more detail.

In addition to providing the opportunity to enhance my portfolio's performance by using a shorter investment time frame with additional shares, this approach also allows the dividends of my core positions to compound while the new staged buys are supported by the costs basis of the underlying core position. This is the best of both investing worlds as the dividend compounds and we participate in the stocks appreciation with an increased number of shares.

Defensively, my definition of "going to cash" is cutting back to my original core positions with no trading positions around those cores. The last time that occurred was the spring of 2001, when I moved all available cash into Municipal Bonds as the "tech bubble" imploded and the economy went into recession. Because of the very low costs basis of my long-term core positions, I can hold through any market correction and actually benefit if a core position provides the opportunity to add to the position. This approach truly takes the stress out of investing as corrections are opportunities to lower the cost basis, start a new core position or add shares at a greatly reduced and advantageous price.

That is why I prefer to focus on diversification and best-of-sector dividend paying business cycle leaders in big capitalization stocks. I hit singles. I learned as a baseball player that 4 singles equals one home run and singles happen more frequently than home runs. I may once in a great while buy a very short-term trade based upon some news release, a volatility squeeze in a very favored sector or on a very strong earnings report. But that is definitely not my investment style.

My investment techniques are based upon a fundamental approach to the equity markets focused upon the concepts I have developed to deal with the risks that are inherent in investing for longer-term and superior investment performance. Keep in mind that investing is not about your first year's performance or instant gratification. Investing success comes from the powerful concept of compounding returns over time to create real wealth.