Modern Portfolio Theory

AMP & Comalco Place

AMP & Comalco Place (Photo credit: mikkelz)

Here , from Moden Portfolio Strategy is the key to long term profits – how many of these five basics are you using ?

The Five Primary market movers:

1) the growth or decay of the Gross National Product and the business cycle

2) Expectations of the direction of  interest rates

3) Consumer Confidence  ( becasue the consumer is 70% of economic activity

4) Short -term inflation

5) Long term inflationary expectation

THE Bottom Line :  Improve your results:  Read the AMP books and plan your portfolio moves.

(If you would like an AMP Seminar in your city write to me at info@jackbassteam.com )

Learn more / earn more for your portfolio :

Product Details

AMP Gold and Precious Metals Portfolio: The Gold Investor’s Handbook by Jack A Bass (Sep 18, 2012)

Available Now at AMAZON.COM ( go to : books )

 

Your Investment Library Will Decide Your Investment Success

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Long Term Themes for The AMP

stock market

stock market (Photo credit: 401(K) 2012)

Nov 12

Long Term Investment  Themes

- governing selections for for both current publications The Apprentice Millionaire Portfolio and    The Gold Investor’s Handbook

AND for both blog sites ( http://www.amp2012.com and  www.ampgoldportfolio.com)

The single most important theme is the long term outlook for interest rates and the supporting policy of central banks around the world.

Markets are ignoring this idea. They do not want to accept a very-low-interest-rate policy for a protracted period of time. Markets are also ignoring the fact that the same policy is in play in nearly all major mature economies of the world

What Will This Low Interest Rate Climate Bring to your AMP Portfolio?

1) Rising stock markets – in general – specifics as per our books

2) Real estate recovery( already underway in SOME locations.

3) Precious metals and other hard assets are an alternative to low rates for the bond market and will attract more attention. Future inflation fears will attract more investment from individuals . Central banks will increase their gold reserves

What Must YOU Do ?

Take action- don’t sit wringing your hands about inflation, the fiscal cliff or the number of homes needing electricity. Study the market opportunities available and build your portfolio.

The Gold Investor’s Handbook – click here for  investment profits and much more detail on the ins and outs of investing in gold 

AND Give The Gift Of Money This Christmas

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Those who have been wringing their hands about the big inflation, rising interest rates, weakening dollar, fiscal cliff, tax policy and the election rhetoric have missed markets. They now have an entry opportunity if they did not take advantage of it in the past.

Related articles

New Year’s Resolution : Improve Portfolio Results

Stock Market Magic = Strategy , Selection , Knowledge

Step Up Your Game

500 pages of Investing Strategy and Selections –

All You Need To Succeed In Today’s Market

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

 
Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

 

Bob Farrell: Don't join the herd.

Thesis / Direction for The Apprentice Millionaire Portfolio

Reverse of U.S. two-dollar bill John Trumbull'...

Reverse of U.S. two-dollar bill John Trumbull’s Declaration of Independence (Photo credit: Wikipedia)

In answer to recent emails I am providing this outline :

October 18

The two AMP books now in print are focused on a disciplined approach :

1) Directional Trading

Meaning directional bets with respect to countries, currencies and interest rates

Opportunities arise from slow moving macro economic trends such as inflation and the decline of the U.S. dollar

This is a top down strategy.

2) Opportunistic

Based on finding opportunities in short term movements .Selling overvalued securities and buying undervalued.

3) Aggressive Growth

Long tem positions based on the assessment of a company having superior growth and management potential.

The extensive company and ETF  analysis in the books allows you to participate by either doing your own due diligence or following the book suggestions to build your  portfolio.

” The Gold Investors Handbook” is available at Amazon.com ( books) as is  ” The Apprentice Millionaire Portfolio ” which has a broad market sectors review  and portfolio suggestions.

Related articles

The Prophets Of Doom – Words of Wisdom from Jim Rogers and Marc Faber

” Doom ” is the headline in this Wealth Wire essay – but is really is a summary of plain, good old fashioned wisdom

Jim Rogers

“Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.”

jim rogers hand

Rogers is an American investor and author, currently based in Singapore. He may be most notable for co-founding the wildly successful Quantum Fund with George Soros. He also founded the Rogers International Commodities Index (RICI) and chairs Rogers Holdings and Beeland Interests, Inc.   

He famously broke a Guinness World Record by driving his motorcycle across the globe, checking out far-flung economies like China, Uruguay, and Mongolia.

These travels have made him very bullish on the long term economic prospects of China and Asia. As central banks around the world try to print their way out of the holes they’ve dug, the value of their currencies will be damaged by inflation. That should boost the prices of real assets — and Rogers is “generally short global equities and owns real assets and producing agricultural land.”

“I’m now selling long-term U.S. government bonds short. That’s the last bubble I can find in the U.S.,” he told CNN.

“I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn’t. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.”

Rules to Invest By:
1. Do your own work. Don’t be afraid of being a loner. 

I learned early in my career that if you read the annual reports, you’ve done more than 90% of the people on Wall Street. If you read the notes to the annual report, you’ve done more than 95% of the people on Wall Street, and if you actually sit down and do a spread sheet, you’ve done more than 98% of the people on Wall Street.” 

2. Good investors need a historical perspective

3. Think conceptually about the world.

4. Don’t buy stocks at high multiples. 

“I don’t buy them because, by the time they reach a high multiple, it’s probably about time for it to come to an end. Wall Street and politicians are the last to catch on to any­thing.”

5. Be selective in your investing and look for one good idea. 

“The most important trick for getting rich on Wall Street is not to lose money. There are many guys who do well for two years and then get creamed. Wait until you have a winner and are sure. In the meantime, keep your money in treasury bills. Professional money managers feel that they have to do something all the time and are the worst at following this advice.” 

“Even if you only have one play every ten years, you’re going to do a lot better than most people.” 

6. Every investment should be considered a commodity that will be affected by supply and demand changes. It’s just a question of when. 

“Everything has its own supply and demand cycle, which may be a twenty-, thirty-, or fifty-year cycle, and every­thing is basically a commodity in the end.”

7. Every investor should lose some money, because it teaches you about yourself.

Marc Faber

“What I object to the current government intervention in so-called ‘solving the crisis,’ they haven’t solved anything. They’ve just postponed it.”

The original “Dr. Doom,” Faber has been at the forefront of the Austrian economic school. Faber’s Doom, Gloom and Boom report has been the bible for millions of contrarian investors worldwide.

As the London Times wrote: “One does not go to see Marc Faber, Hong Kong’s iconoclastic share pundit, in the expectation of good news. But after listening to him, no investor could claim he had not been warned. For Faber says the things nobody wants to hear…”

Nobody but his clients, that is…

In 1987 he warned his clients to cash out before Black Monday in Wall Street; he made them handsome profits by calling the burst in the Japanese bubble in 1990.

He also predicted the collapse of U.S. gaming stoc

ks in 1993 and the Asia-Pacific financial crisis of 1997.

Faber

Rules to Invest By:
(from Gloom, Boom and Doom)

1. There is no investment rule that always works.

“If there was one single rule that always worked, everybody would in time follow it, and therefore, everybody would be rich.

But the only constant in history is the shape of the wealth pyramid, with few rich people at the top and many poor at the bottom. Thus, even the best rules do change from time to time.”

2. Stocks always go up in the long term?

“This is a myth. Far more companies have failed than succeeded. Far more countries’ stock markets went to zero than markets, which have survived…

Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.”

3. Real estate always goes up in the long term?

“While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1,000 years, but not for America’s Red Indians, Mexico’s Aztecs, Peru’s Incas, and people living in countries that became communists in the 20th century. All these people lost their real estate and usually their lives along with it.”

4. Buy low and sell high.

“The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower, and what is high will continue to rise.”

5. Buy a basket of high quality stocks and hold!

“Another highly-dangerous rule! Today’s leaders may not be tomorrow’s leaders. Don’t forget that Xer

x, Polaroid, Memorex, Digital Equipment, Burroughs, and Control Data were the leaders in 1973… Where are they today? Either out of business — or their stocks are far lower than they were in 1973!”

6. Buy when there is blood on the street.

“It is true that very often, bad news provide an interesting entry point — at least as a trading opportunity — into a market. However, a better long-term strategy may be to buy on bad news that has been preceded by a long string of bad news. When then the market no longer declines, there is a chance that the very worst has been fully discounted.”

7. Don’t trust anyone!

“Everybody is out to sell you something. Corporate executives either lie knowingly — or because they don’t know the true state of their business and the entire investment community makes money on you buying or selling something.”

8. The best investments are frequently the ones you did not make!

“To make a really good investment (which will in time appreciate by 100 times or more) is like finding a needle in a haystack. Most “hot tips” and “must-buy” or “great opportunities” turn out to be disasters.

Thus, only make investment decisions you have carefully analyzed and thought about in terms of risk and potential reward.”

“If you live in a small town you may know the local real estate market, but little about Cisco, Yahoo and Oracle. Stick with your investments in assets about which you may have a knowledge edge.”

10. Invest in Yourself!

“Today’s society is obsessed with money. But the best investments for you may be in your own education, in the quality of the time you spend with the ones you love, on your own job, and on books, which will open new ideas to you and let you see things from many different perspectives.”

Your Investment Library Will Decide Your Investment Success

 

 
Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Available at http://www.amazon.com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

S & P 12 Month Targets

What’s your crystal ball saying these days?
As you peer into the mist, do you see European Central Bank (ECB) President Mario Draghi standing idly by as the eurozone crumbles, dragging the global economy into a new recession? Do you see fourth-quarter earnings growth at S&P 500 companies faltering and missing current projections for a
robust 10.5% year-on-year gain?

DAVOS/SWITZERLAND, 29JAN10 - Jean-Claude Trich...

DAVOS/SWITZERLAND, 29JAN10 – Jean-Claude Trichet, President, European Central Bank, Frankfurt, speaks during the session ‘Rethinking Government Assistance’ in the Congress Centre of the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 29, 2010. Copyright by World Economic Forum. swiss-image.ch/Photo by Remy Steinegger. (Photo credit: Wikipedia)

Can you glimpse an image of the U.S. economy driving obliviously over the “fiscal cliff” as partisan bickering in Congress grows even worse?
What about persistently high U.S. unemployment and a still weak housing market sapping consumer confidence?
If this is the regularly scheduled programming now being shown on your stock market predicting mechanism of choice, it may be time for an upgrade to a high definition model.

TARGETS
12-Month S&P 500 1500
S&P 500 EPS 2012 $103.18
Mid-Year 2013 S&P Euro 350 1100
Year-End 2012 S&P Asia 50 3400
Year-End 2012 Emerging Markets 1050
Fed Funds Rate 2012 Average 0.1%
10-Year Note Yield 2012 Average 1.8%
Real GDP Growth 2012 2.0%
Real GDP Growth 2013 2.0%
WTI Average/bbl. 2012 $90.23
WTI Average/bbl. 2013 $89.23
Source: S&P Capital IQ.

Far from buckling under the pressure of the global economy’s myriad  roblems, however, the stock market has been rallying lately and is now within sight of the post recession high set back in April, when a series of strong employment report suggested (at least temporarily) that the U.S. economy was
rapidly gaining strength.
“While fundamentals can’t be ignored” says Sam Stovall, S&P Capital IQ’s chief investment strategist, pointing to the consensus projection for a less-than-inspiring 0.85% gain in second quarter S&P 500 earnings per share and a downright worrisome 1.5% decline for in the third quarter, “Wall Street
may be baking in an economic and earnings per share recovery a year or so from now.”

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon.com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Things The Millionaire Next Door Won’t Tell You

Who Wants to Be a Millionaire? (Philippine gam...

Who Wants to Be a Millionaire? (Philippine game show) (Photo credit: Wikipedia)

Although having a million bucks isn’t as impressive as it once was, it’s still nothing to sneeze at. 

In fact, Reuters reports that in 2009 there were 7.8 million millionaires in the United States.

See what your millionaire neighbor won’t tell you >

That’s a lot of people, people.  And the odds are one or two of them are living near you.

Heck, one of them might even be your neighbor.  In fact, the odds are very good that it is your neighbor.

But, Len, you don’t know my neighbor.  That guy doesn’t look anything like a millionaire.

Well, guess what?  Your suburban millionaire neighbor called (oh yeah, we go way back) and the two of us had a nice little chat.

Here’s a few things he shared with me – but apparently doesn’t want to tell you.  (No offense, I’m sure.)

 

He always spends less than he earns

In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

 

From LenPenzo.com

He knows that patience is a virtue

The odds are you won’t become a millionaire overnight.  If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.

 

From LenPenzo.com

He serves his guests inexpensive coffee

When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks.

 

And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan.  And if you think that makes him cheap, ask him if he cares.  (He doesn’t.)

From LenPenzo.com

He pays off his credit cards in full every month

He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

 

From LenPenzo.com

He realized early on that money does not buy happiness

He realized early on that money does not buy happiness

If you’re looking for nirvana, you need to focus on attaining financial freedom.

 

From LenPenzo.com

He knows the power of financial freedom

He never forgets that financial freedom is a state of mind that comes from being debt free. Best of all, it can be attained regardless of your income level.

 

From LenPenzo.com

He knows a thing or two about second jobs

He knows that getting a second job not only increases the size of your bank account quicker but it also keeps you busy – and being busy makes it difficult to spend what you already have.

 

From LenPenzo.com

He knows how to manage his money

He knows how to manage his money

He understands that money is like a toddler; it is incapable of managing itself.  After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

 

From LenPenzo.com

He’s a big believer in paying yourself first

Paying yourself first is an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

 

He knows that failing to plan is the same as planning to fail

He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck.

 

It’s not enough to simply declare that you want to be financially free.

From LenPenzo.com

He’s not afraid to think big

He's not afraid to think big

When it came time to set his savings goals, he wasn’t afraid to think big.

 

Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

From LenPenzo.com

He knows the importance of hard work

Over time, he found out that hard work can often help make up for a lot of financial mistakes – and you will make financial mistakes.

 

From LenPenzo.com

He insures himself against risk

He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk.

 

Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.

From LenPenzo.com

Stock Market Magic = Strategy , Selection , Knowledge

Don’t join the herd.

 

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon.com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Stock Market Magic = Strategy , Selection , Knowledge

Don’t join the herd.

500 pages of Investing Strategy and Selections – All You Need To Succeed

Posted: August 4, 2012 | Author:  | Filed under: AMP Books and Seminars | Tags:  | 1 Comment »

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

Bob Farrell: Don't join the herd.

Peter Schiff : Economy Has Sown The Seeds Of Its Own Destruction – Protect Yourself

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

August 6

The past week provided clear lessons not just in how central bankers have a limited ability to positively influence the economy but also how they are limited in their capacity to deliver the shortsighted policy actions that investors currently crave. The developments should provide new reasons for investors and economy watchers to abandon their faith in central bankers as super heroes capable of saving the economy.

The employment report released on Friday confirmed that the U.S. economy is stagnating at best and actively deteriorating at worst. While the numbers of jobs created in July was actually better than many economists expected, it was still far below the levels that would indicate a growing economy.  But more important than the official unemployment rate (which ticked up to 8.3%) or the number of jobs created, is the number of people who have left the workforce out of frustration or despair. This number continues to head higher. The labor force participation rate, which is the percentage of healthy working age Americans who actually have jobs, is at one of the lowest points since women first started working en masse in the 1970’s.  It’s also instructive to add back into the unemployment rate those who want full time jobs but who have had to settle for part time work. This figure, reported under the “U6” category, currently stands at 15.0%. This is just a 12% decline from the 17.1% high seen December 2009.  In contrast the “official” (U3) unemployment figure has declined 17% from its peak.

In explaining these bad results, most economists simply look at the stimulating effects of monetary and fiscal policy,not at the problems that those measures create. As a result, it is assumed that not enough stimulation, in the form of quantitative easing or federal deficit spending has been applied to the economy. The next logical assumption is that if the measures of the past few years had not been applied, we would have seen much weaker results over that time. In other words, no matter how bad things are now, defenders of the status quo will always describe how bad things “could have been” if the Fed hadn’t stepped in. This counterfactual argument gets increasingly threadbare as the years wear on.

Rather than admit that its policies have failed, the Fed statement last week gave all indications that it will continue with its current inflationary policy to the bitter end. These are the same errors that inflated the stock and real estate bubbles and ultimately resulted in the 2008 financial crisis and our continuing economic malaise. Without any fresh ideas,Fed press releases have become a Groundhog Day repetition of the same pronouncements and diagnoses. Oddly, many market watchers are frustrated that the Fed has not telegraphed that more stimulus is forthcoming. While it should be obvious that our current “recovery” is dependent on monetary support, it should be equally plain that the Fed can’t actually admit that fragility without spooking markets. To be clear, QE III is coming, but the markets should not expect Bernanke to supply a precise timetable.

Without question, if the Fed had not stimulated the economy with zero percent interest rates, two rounds of quantitative easing and operation twist, the initial economic contraction would have been sharper.  But such short-term pain would have been constructive.   By not taking away the cheap-money punch bowl, the Fed has delayed the pain and prolonged the party. But to what end?  So far all we have received is a tepid phony recovery that has sown the seeds of its own destruction.

In contrast, real economic restructuring would have resulted if the Fed had withdrawn its monetary props.  This would have paved the way for a robust, sustainable recovery.  Instead, the Fed helped numb the pain with unprecedented (and apparently permanent) liquidity injections. Its actions merely exacerbate the underlying imbalances that lie at the root of our structural problems, and thus act as a barrier to a real recovery.  So long as the Fed fails to learn from its prior mistakes, the phony recovery it has concocted will continue to fade until we find ourselves in an even deeper recession thanthe one we experienced in 2008.

Those who believe that artificially low interest rates are needed now,fail to see the price that will be paid down the road.  By keeping rates too low, the Fed continues to lead an overly indebted economy deeper into the financial abyss.  However, its ability to maintain rates at such low levels is not without limits.  Just as real estate prices could not stay high forever, interest rates cannot stay low forever.  When rates finally rise, the extent of the economic damage will finally be revealed.

The sad fact is that no matter how impotent and dishonest Fed officials become, their elected rivals on Capitol Hill (who control the fiscal side of the equation) have become even less significant.  The complete lack of any political conviction to take steps to confront our fiscal imbalances means that Ben Bernanke and his cohorts are seen as the only cavalry capable of riding to the rescue.  But no matter how often they blow their bugles,our economy will continue to deteriorate until we stop waiting for a savior and instead fight the battle for prosperity ourselves.


500 pages of Investing Strategy and Selections – All You Need To Succeed

Posted: August 4, 2012 | Author: | Filed under: AMP Books and Seminars | Tags: , , , , , , , | 1 Comment »

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

 

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

 

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

5.0 out of 5 stars  See all reviews (2 customer reviews) | Like 1678

John Mauldin Predicts Earnings Decline 30 % – 40 % ( Cycle )

Stock Market

Stock Market (Photo credit: Tax Credits)

 

August 5

Who Knew ?  – Will Not Be The Excuse Of AMP Readers  ( underline your AMP Book as you read)

The stock market and earnings analysts do not expect a decline in EPS over the next few years. The forecasts too often anchor on the recent past and extrapolate (in a burst of hope) current trends well into the future.

A broader view of history tells a different story. It is a story of a frequently erratic earnings cycle. The current cycle is now extended not only in duration but also in magnitude. It’s hard to deny that EPS is vulnerable to decline over the next few years.

When the decline in earnings occurs, it will not be minimal. The decline to the historical average would be 30% to 40%. These cycles, however, rarely stop at average. More often, they move well above and below the long-term trend line.

We’ve all seen that the stock market reacts to surprises quite negatively. There is no reason why investors should walk blindly into this storm. “Who knew?” will not a reasonable excuse.

What about the duration of earnings cycles? Past EPS cycles have lasted one to six years. Over the past six decades, there have been twelve up-cycles. Six lasted one or two years (last year, 2011, was year three of the current cycle). We’re now in the second half of the game. As each upcoming year passes with an increase in EPS, the likelihood rises for the next decline in EPS … and potentially the stock market.

Conclusion #1: Reported earnings, based on history, should be expected to decline over the next two years (or they are increasingly likely to disappoint current expectations). That will put pressure on the stock market. If history is a guide, and if the blue line in Figure 8 only slightly retreats below the historical baseline, the implication is a decline in reported EPS of almost 40%! While growth could continue (as it has done in the past), it is clear that this cycle is getting a little weathered. And note that almost every downturn came as a surprise to the markets. Any analyst suggesting a downturn is labeled doom and gloom (as we can attest).

Conclusion #2: The measures of P/E that are based upon reported EPS are currently distorted by the business cycle. Whereas current reports have the market’s forward P/E near 13, a more rational measure for P/E based upon normalized baseline EPS is close to 20. P/E is not below average and is not ready to propel the market upward; it is well above average.

Of the twelve up-cycles, half of them ended after one or two years of rising earnings. None of them exceeded six years, and only one went that long. Since 2011 was the third year of earnings gains for the current cycle, the likelihood of a decline is increasing. If a decline happens to not occur during the coming two years, then we’ll make history.

A weak economy, however, adds to the pressure on earnings. The typical vulnerability at this level in the cycle is accentuated by the external forces of the economy. That makes the risks particularly worrisome.

It’s Time to Think About Absolute Returns

As described in chapter 10 of Probable Outcomes and chapters 9 and 10 of Unexpected Returns, the goal is to use absolute return-oriented “rowing” investments rather than more passive relative return “sailing” strategies. Although the stock market will provide shorter-term periods of solid returns over the next decade, it will also have offsetting periods of declines. Unlike secular bull markets, where the upswings far outweigh the downdrafts, the current environment is set for a much more modest (and likely disappointing) result. Rather than acquiesce to the mediocre returns on the horizon, investors can take action and develop their portfolios to profit regardless of the overall market direction. Although market timing may be an option for some, it is generally not a good option for most investors.

Conclusions About the Earnings Cycle

The business cycle has endured for well more than a century. It generally delivers two to five years of above-average EPS growth before experiencing a year or two of pullback. We have had a dramatic run over the past two years, and the forecast for the next two years now positions profits well above their historical relationship to the economy.

Several factors now indicate that a period of EPS decline may be upon us. It does not necessarily portend a decline in the market, although that vulnerability clearly exists. Beware nonetheless! For investors, this means that portfolios should be positioned through diversification and active risk and return management.

As an analogy, winter is not a time for gardeners to hibernate; rather it’s a time for different crops and techniques than you employ in spring or summer. And let’s be certain about this: there will be a new spring, and I will turn bullish – probably too soon! – as we begin to see signs of a thaw in the markets. But for now, investors have many tools available that let them actively “row” and invest like institutions, thereby achieving relatively consistent returns with a lot less disappointment risk.

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