Working Capital Model Investing– Investing Rules Of Engagement-The QDI

Crash! The 2007 thru 2008 financial crisis halved 401(k), IRA, and Mutual Fund values in a matter of months. For many, retirement dates had to be pushed back; for others, new jobs had to be found. The tragic flaw? No income allocation in the investment program. Market value builds egos; income pays the bills.

Few employers cautioned Savings Plan participants that 401(k)s are just not defined benefit programs. Few mutual fund distributors suggested to benefit departments that their programs were missing something of critical importance.

Throughout the meltdown, all investment securities fell in market value. But the vast majority of income securities, including closed end income funds (CEFs), have continued to pay interest and dividends. Market value builds over-confidence; income pays the bills.

The Working Capital Model (WCM) is a comprehensive system for investment management that is based on uncompromising rules of engagement. The investor's focus must remain centered on the development of dependable cash flow and the creation of an expanding number of houses and hotels on his game board.

With a reasonable amount of effort, and a lot of self-discipline, anyone can use it to build a portfolio, slowly and sanely, benefiting from the cycles we all expect to continue indefinitely. All cycles have two components; the WCM helps you deal with each.

Every portfolio holding must generate regular income of some kind and each must have profit potential--- at least at the time of purchase. The planned balance between income producers and growth providers (equities) must be maintained throughout the process, even though there may be no immediate need for the income. Have you learned that unrealized gains are not growth?

Year to year, we want to see reasonable growth in both Working Capital (the total cost basis of the cash and securities in the portfolio) and base income (interest and dividend income produced by the securities in the portfolio). But more importantly, we want to produce this growth in a lower-than-usual risk environment, made up of properly diversified investment grade securities.

The first steps in the investment process are Management Functions: Planning, Organizing, Leading, and Controlling

Planning involves the identification/definition of Investment Goals and Objectives. They should be long-term but flexible over time. They should include parameters and rules that are well thought out--- at the personal level. They should be reasonable and realistic historically.

Goals and objectives are essential, but they need to be laid-up on a foundation that reduces the risk of loss at various stages in the life cycle of the investment program. Asset allocation is a planning/organizing tool used to design the portfolio in a way that will balance the need for growth in Working Capital with the age-dependent risk tolerance of the investor.

Asset allocation decisions should implement and support the Investment Plan. Under normal circumstances, the securities in the income "bucket" of the portfolio (bonds, government securities, mortgages, preferred stocks, REITs, etc.) are all much safer than any of those in the equity "bucket".

An asset allocation with 50% in each bucket is much more conservative than one with 80% directed toward equities--- regardless of the quality ratings we require for the equity securities. Asset allocation decisions must be made using the cost basis of the securities in each bucket.

Beyond asset allocation itself, organizing involves selecting actual securities that fit into the two investment buckets in a properly diversified manner. It may involve several separate portfolios, but must be easy to direct and control.Diversification rules (also based on security cost basis) will guide the portfolio into a variety of issues and sectors.

Proper diversification assures that the overall risk of loss is spread around companies, countries, businesses, and geographical areas. Market capitalization issues, and global representation are dealt with behind the scenes, in the quality determination phase of the security selection process.

Leading, most simply, is personal decision-making. You must direct the activities of others (brokers/managers/accountants/etc.) who may be offering you investment advice. The investment manager (you are the primary investment manager) must create the quality, diversification, and income generation rules (the QDI) that govern the day-to-day operations of all portfolios.

Why would anyone accept a portfolio that was not designed for his or her own unique situation and needs? Laziness, confusion, brainwashing, ignorance of the markets--- all of the above?

The Principles of Investing (the QDI) are superimposed in, on, and around the management functions. They control the security selection process to help reduce portfolio risk. They help set the targets for profit taking and provide mind-set controls that enforce the rules. They assure that every security within the portfolio contributes to base income.

It is imperative that you lead your portfolio into strict guidelines for security quality, cost-based diversification, income generation, and profit taking. Rules for disposing of downgraded or weakening positions must also be codified.

Profit taking is the most satisfying of all portfolio decision-making functions--- and possibly the least popular! Most of the reasons are ego centered, until the WCM shows clearly the opportunities that are available for the newly created working capital.

Reasonable targets must be set (between seven and ten percent dependent on the amount of smart cash available), and triggers pulled insensitively when targets are reached--- no hindsight at all can be tolerated. A monthly brokerage statement with unrealized gains is a sign of poor management.

Controlling involves realistic performance evaluation, and monitoring to assure that you are following your own rules and guidelines. Comparing your annual change in market value with the DJIA or S & P is not performance evaluation.


Working Capital Model Investing - The Process


Most people enter the investment process tip first. They hear something, grab an idea from a popular blog, accept a Cramerism or some motley foolishness, and think that they are making investment decisions. Rarely, will the right-now, instant-gratification, Internet-generation speculator think in terms that go beyond tomorrow's breaking news.

It just doesn't work that way in the long run. Investing takes place in an uncertain environment with at least three important cycles working their way through time at different rates of speed. Each should have an impact on investor decision-making. More often than not, short-term thinking and impulse decision-making are ineffective long-term investment strategies---

Today, in the midst of a cyclical "perfect storm", how many Wall Streeters have the cold-blooded temperament required to focus on anything other than dwindling market values, depressing economic news, and income securities that just don't want to react normally to minuscule interest rates?

The short-term mentality thrust upon investors by the tax code, the media, and the underground investment advice community obscures the big picture and makes investing more and more difficult as time goes on. The Working Capital Model (WCM) is a long-term-thinking-only-welcome-here approach that is based in a much less frantic, but parallel, investment universe.

The investment community evaluates short-term time intervals, and compares all performance to popular indices that rarely have any direct relationship to real live investment portfolios. If an investor thinks long term when constructing his investment plan, how does he justify short term thinking when it comes to performance evaluation?

In rising markets, investors second-guess their profit-taking disciplines because they exited a security too early, and strong markets often tempt the shortsighted into more aggressive asset allocations. In falling markets, just the opposite occurs. Most investment decision-making is a series of much-too-late, knee-jerk reactions to cyclical conditions that are misunderstood.

Market Value growth does little more than increase a person's hat size; Working Capital growth increases a person's asset base. The point is that paper profits can't be reinvested or reallocated. True portfolio growth requires additions to the income and growth producing asset base--- the working capital.

The most important fundamental tenets and basic differences between the WCM methodology and modern Wall Street craziness are these:

One. The length, depth, breadth, and height of the various cycles are presumed to be totally unpredictable. Additionally, even though they are inter-related and inter-connected in many ways, none of them are related in any way, shape, or form to the calendar year.

Unlike Wall Street, and most of Main Street for that matter, the calendar has no role as a measuring device within the WCM, making the horse race mentality, and competitive atmosphere disappear entirely.

Two. To be successful, an investor must make cycle-savvy, buy-sell-hold decisions, and formulate different performance expectations for securities based upon their purpose. The WCM recognizes only two classes of securities, Equity and Income, leaving more speculative "others" out of the equation entirely. Each class is purchased with a different primary objective in mind.

Investors must learn what to expect from each, and at different stages of the various cycles. The cyclical focus of the WCM makes it easier to determine now the actions and decisions most likely to produce the best results later--- in terms of investor specific investment goals and objectives.

Three. The WCM does not focus blindly on short-term changes in the market value of securities, nor does it concern itself with calendar time intervals. Similarly, it does not look at cyclical peaks and troughs as either good or bad. Rather, it attempts to deal with conditions at hand in a manner most likely to achieve long-term goals.

Four. The generation of annually increasing levels of "base income" is given paramount importance in the WCM. It is defined as the total of interest and dividends produced by the portfolio, without the inclusion of realized capital gains. Income pays the bills, not market values.

Five. The WCM is as much a planning tool as it is a decision making model. Working capital is defined as the cost basis of the securities and cash contained in the portfolio. This approach simplifies the implementation of the asset allocation decisions that all investors should be making before they purchase security number one.

Six. The WCM uses the market value of securities quite differently than most other investment methodologies. It recognizes that the price of a security is as much a function of speculation about the movement of market price as it is about the inherent fundamental quality of the security itself.

Lower prices of IGVSI stocks, for example, are considered opportunities for purchase, while higher prices are considered opportunities for profit taking. Similarly, lower prices of income Closed End Funds translate into opportunities to increase income and reduce average cost per share, while higher prices are also viewed as profit taking opportunities.

The Working Capital Model operates in an environment of cycles rather than calendar years, and emphasizes a security's fundamental value as opposed to its market price. Market Value is used only to signal buying and profit taking decisions. The methodology has three operating objectives:

One. Growing Working Capital at a rate consistent with portfolio asset allocation. Higher equity allocations should produce a higher long-term rate than income portfolios.

Two. Growing portfolio base income at a rate consistent with portfolio asset allocation. Higher income allocations should produce a higher growth rate than equity portfolios.

Three. Trading securities for reasonable profits, as often as possible. Equity portfolios should produce more capital gains than income portfolios, and mostly short term if the operating disciplines of the WCM are being observed.

When the cycles converge higher, new market value highs will appear as well.


by:

Steve Selengut
http://www.kiawahgolfinvestmentseminars.com
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Tips You Should Know to Prevent Identity Theft During Holiday Shopping Season

With holiday season fast approaching, consumers are entering into the most active spending period of the year. Reinforced by the soft economy, this is "high season" for identity theft with identity thieves seeking to take advantage of shoppers. Identity theft generally rises during the holidays because thieves assume that consumers aren't paying attention to their credit card purchases, debit card purchases, receipts etc. as closely.

One the leading provider of a new breed of services to help consumers safeguard their privacy and prevent identity theft is IdentityTruth. They are offering basic tips to help consumers to “prevent identity theft” and avoid putting your identity at risk during the 2008 holiday season. In addition to watching budgets this season, consumers also need to be vigilant in the face of possible identity theft.

1. Use credit cards instead of debit cards: Under the Fair Credit Billing Act, Credit Cards provide consumers protection again fraudulent charges and your liability is limited to $50. You also have the right to dispute charges and withhold payment during investigation. However, debit cards are entirely different. Although they market themselves to deliver the same protection, they are not required to by any law. Bottom line, your liability for fraudulent charges is the entire amount in your checking account as well as the credit line you have been authorized to receive.

2. Use a single credit card to consolidate your purchasing: The more credit cards open in your name, the greater the risk that a thief will obtain the account information for one (never mind that having numerous cards with big lines of credit can be a bad temptation and can actually drag down your credit score--even if you don't have balances). It's also easier to monitor a single statement for signs of fraud, and you won't incur the annual fees associated with having multiple cards. Make sure to cross-check all your receipts against your statements to see that they match.

3. Be sure to write "SEE ID" on the back of credit cards: This simple step can help to foil thieves if the card is lost or stolen, and might even help to catch the thief if your card is taken.

4. Shop on secure sites and be wary!: While the majority of identity fraud occurs offline, identity theft is also a problem online. You must exercise caution when shopping on the web. Stick to sites that you know are legitimate, and if you are trying a new site for the first time, here are a few things to look for: the URL should have "https" in the shopping cart; there should be a lock icon on the bottom right hand side of the window and look for icons that indicate site safety (the Better Business Bureau, VeriSign and Hacker Safe icons).

5. Watch out for "phishing" and "vishing" scams: These scams can be a real problem, as identity thieves try to play on people's generosity during the holiday season. Phishing emails often take the forms of requests purporting to be from a bank or credit card company; they ask you to "verify" account information such as login and password or they request a donation or assistance for the less fortunate during the holidays. Vishing scams--which involve fraudulent calls—seek to exploit consumer concerns over fraud by seeming to offer fraud prevention assistance. The bottom line: no legitimate vendor will ask for your login and password via email or on the phone.

6. Be careful when using ATMs: Only use ATMs with monitoring cameras, such as those in bank lobbies. Avoid kiosk ATMs, those freestanding units often do not have cameras and are statistically more likely to be infected by skimmers (electronic devices that allow thieves to record account and PIN numbers). "Shoulder Surfing" can also be a problem at a crowded mall. While you assume that the man behind you is uncomfortably close because of mall crowding, he may actually be looking over your shoulder trying to get your login.

7. Place fraud alerts to prevent new credit card accounts from being opened: Free fraud alerts placed on your credit report are good for 90 days (if you can demonstrate that you've been an identity theft victim, they can be set for 7 years) and, in combination with other proactive measures, can be used to help to prevent identity theft.