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Investment Strategy Utilizing Economic Indicators

Investment Strategy Utilizing Economic Indicators. Kenneth M. Lavin, DPM, MSF, Economic Consultant for the 360 Huntington Fund. Success as a Doctor. Doctor Needs to be 80%-90% Successful in Diagnosis and Treatment Medical Decisions involve Differential Diagnoses and

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Investment Strategy Utilizing Economic Indicators

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  1. Investment Strategy Utilizing Economic Indicators Kenneth M. Lavin, DPM, MSF, Economic Consultant for the 360 Huntington Fund

  2. Success as a Doctor • Doctor Needs to be 80%-90% Successful in Diagnosis and Treatment • Medical Decisions involve Differential Diagnoses and Various Treatment Options Including Precise Surgical Skills • ``````````````````````````````````````````````````

  3. Success as an Investor • Trading is a Binary Decision: Buy or Sell • Average Investor is 50% Successful in His Trades • If an Investor is 60% Successful in His Trading Decisions, He/She can Make a Very Good Living • Leverage Up the 10% in Opportune Trades

  4. Return on Investments (R.O.I.) • Annual Savings versus R.O.I • Critical Mass of Portfolio : $500,000 • Savings of $50,000 = 10% of $500,000 Portfolio • Losses are More Painful than Gains i.e. a Loss of 20% in your Portfolio Needs to have a 25% Gain to Return to the Same Value • Need to Limit Losses

  5. Financial Planner • Doctors Who Have A Financial Planner? • All Assets? • Portion of Assets? • Portfolio Based on Age and Risk Assessment • Example: 50% Domestic Equities, 20% Foreign Equities, 20% Bonds, 10% Misc. • Personal Oversight of the Investment Decisions by the Financial Planner?

  6. Madoff Factor • Academic Background of Mr. Madoff? • Academic Background of a Financial Planner? • Performance of the Financial Planner • 2008 Investment Performance?

  7. Counter Party to the Trade • M.B.A., M.S.F. , C.F.A. • Academic Background – Economics, Accounting, Investments, Equity Valuation, Fixed Income, Portfolio Management • Analyst Following that Stock for 2 Years • Academic Background of Doctor – Disadvantage in the Trade

  8. Analyzing Individual Stocks • Catalyst for Buy Position • Evaluate Management • Evaluate Balance Sheet, Income Statement, • Cash Flow Statement and Foot Notes • Numerous Variables with Individual Stock Analysis • Need 30 Stocks to Get a Sufficient Diversified Portfolio (Diversifiable Risk)

  9. Valuation of Stocks • Ratio Analysis : P/E, P/B , P/C.F., P/E/G Compared to Industry • Discounted Cash Flow Analysis: CF1/(1+r)1 +CF2/(1+r)2….+ CFn/(1+r)n • Weighted Average of Ratio Analysis and D.C.F. • Alpha = Weighted Average minus Present Value

  10. Economic Investment Strategy • Analyzing Economic Data = Analyzing Patient’s Lab Data • Few Economic Variables to analyze • Economic Data is Widely Available • Barrons, Yahoo Finance, Bloomberg • Economic Investment Newsletters with Timely Alerts • Trade Indices i.e. Exchange Traded Funds

  11. Macroeconomic Analysis of the Markets • Objective: Get 60% of the Upside of the Market and Avoid 60% of the Downside of the Market

  12. Macroeconomic Indicators • Conference Board: Leading , Coincident and Lagging Indicators • Yield Curve of Treasuries • T.E.D. Spread : Credit Risk= L.I.B.O.R. –T. Bill • Sovereign Debt Yields: Greece, Portugal, Italy • Oil Prices: Brent Crude • Volatility Index: VIX

  13. Macroeconomic Analysis • Federal Reserve Policy: Federal Funds Target Rate • World Events • Historical Trends with Indicators and the Markets • Follow the Most Timely Indicators

  14. Investment Strategy • Most of the Time there is no Clear Consensus of Where the Market is Going – Competing Economic Forces • Major Upside or Downside Movement Occurs When All the Economic Forces are Aligned in One Direction • Make Significant Asset Allocation Decisions When These Factors are All Aligned with ETFs

  15. Previous Asset Allocation Decisions Based on Economic Indicators • October, 2007: Oil Prices Up, Negative Yield Curve in 2006 • March, 2009: Housing Starts Improved from Previous Months i.e. Less Negative, Stimulus Package Introduced • September, 2010: Back to School Sales Up, Decreased T.E.D. Spread, Decreased Social Security Taxes

  16. S&P 500 Annual Returns • Year Returns • 2008 -34% • 2009 +20% • 2010 +14% • 2011 +0.5% • Need Another +16% to Return to • January 1, 2008 Value

  17. Investment Summary • Aware of the Macroeconomic Environment • Understand Your Investments in this Environment • Need to Avoid the Painful 2008 losses of 30+% • Primary Care M.D. = Financial Planner (Fixed Portfolio) • Need Specialist Doctor = Economic Consultant (Get 60% of the Upside of the Market and Avoid 60% of the Downside of the Market)

  18. Questions and Answers • Kenneth M. Lavin, D.P.M., M.S.F. • www.themodestinvestor.com • (508) 660-2222

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