First off, I want to start by saying that I am thrilled to be associated with DIF Broker, and in particular with their DIF Woman program. It is truly an honor for both myself and Tammy DeRosier to be contributors to this column. You may recall from Tammy’s story that we are both analysts with Dorsey, Wright & Associates. Relying on our many years of experience at DWA, it is our expressed desire to provide you with knowledge and guidance about the investment process. Ultimately, our goal is to steer you down the right path, allowing you to turn your money into wealth.
As I begin my relationship with you as a DIF Woman, let me first tell you a little bit about my journey on Wall Street. Unlike many of my associates, I was not on the straight road to financial analysis. In just getting to Wall Street, my path was nothing but circuitous. As a youngster, I was never the book worm type, but instead preferred to be outside “playing”, and participating in any sport that was in season! Given my interest in sports and my participation in athletics, on both a high school and college basis, I was drawn to the medical field, and specifically to Sports Medicine. Early on, I had made up my mind that I would be a doctor -- an Orthopedic Surgeon, specializing in Sports Medicine.
In school, I found the subject of Science fascinating, and it always came easy to me, while I eschewed business-related classes, and laughed at any suggestion that I could excel in Business and Finance. It wasn’t until I met Stuart Payne, a well-respected banker, that my eyes (and mind) were opened to the world of Finance. It was one of those “ah-ha” moments in life. One that makes you realize how amazing it is to experience what the world has to offer -- be it with your palate by tasting new foods, in traveling to exotic lands, having the guts to change your hairdo, or by re-careering, and in my case, into the Financial markets. It’s funny how life can present unexpected twists and turns. You don’t always end up where you start, but the journey down unchartered roads can provide rich, rewarding experiences. So today, I am not speaking to you as a Doctor, but instead have enjoyed a remarkable 23 year career in the financial markets, and specifically 20 years with Dorsey, Wright.
My relationship with DWA started back in 1987, only months after the company’s inception. I am proud to say that I was the first “associate” to join Tom Dorsey and Watson Wright. While learning and growing as a new analyst, I was a full-time student, juggling business and economics classes and Point & Figure chart books! Determined to complete my college degree, I attended Virginia Commonwealth University and graduated with honors (cum laude) in 1989. My college career lasted longer than most – with majors along the way in Pre-Med, Exercise Physiology, and then finally Finance & Economics. But the key is that the goal was ultimately achieved.
In getting to Dorsey, Wright I traveled down many paths, and confronted many forks in the road. Many decisions had to be made along the way, sometimes enduring outcomes that were less than desirable, yet typically these led to valuable lessons learned. For some women, a straight line defines their path in life. But for some of us, we take “the road less traveled”, and it can make all the difference. The point is there is no one right prescription or model that every woman must follow to achieve success. However you choose to blaze your path of life, be willing to adapt to changes and circumstances along the way, and be open-minded to new experiences and avenues.
This same outlook can be applied to your investment process – a willingness to adapt to changes in the market, while possessing an open mind with respect to how you make your investment decisions. A willingness to adapt to changes in the market is another way of saying “tactical allocation”. Many investors, and possibly you too, take a long range, “strategic” approach to investment decisions, not realizing the importance of being tactical with respect to asset allocation. Over time, with DIF Woman, we will provide you with insight and education on how best to accomplish this all-important task of being tactical. For example, there are methods and tools that will allow you to determine whether you should be emphasizing Bonds or Fixed Income more than Equities, or whether Emerging Markets are still in favor compared to U.S. stocks. Things change in the market, and you must adapt and be dynamic, rather than merely making portfolio changes once a year, or on specific anniversary dates. Just as styles of hairdos, or pants, or lengths of skirts change, so do aspects of the financial markets. Energy-related stocks may be “in favor” now, but one day another sector will present itself as a clear leader. Pleated skirts, leggings and ankle boots may be fashionable now, but who knows what 2008 or 2009 will bring? When a certain fashion goes out of style, you are willing to “tactically” change your wardrobe to reflect the current trends. Why not do that with your portfolio?
Now let’s look at the second part of our statement or recommendation -- possessing an open mind with respect to how you make your investment decisions. It is a long-accepted belief on Wall Street that the only form of analysis that really matters is Fundamental Analysis. For many years, business students have only learned how to evaluate a security, or really the company, based on its fundamental merits such as: earnings per share, cash flow, return on equity, revenue, management, products, etc. Our contention at Dorsey, Wright is that the fundamentals are only part of the answer, and that Technical Analysis should be an integral part of your evaluation process. So I am asking you to have an “open mind” to something new.
You, too, may be an investor that has only looked at one side of the equation – at the fundamentals, being unaware of what the technical picture has to offer. Today I ask you to consider incorporating technical analysis, and specifically the Point & Figure methodology, into your investment strategy. Instead of being concerned with earnings, or who the CEO of a given company is, we instead focus on something much simpler – the price action of the stock of a given company. Because ultimately, isn’t a stock’s price the true measurement as to whether you made money on your investment? Earnings can be steadily rising for a company, such as General Electric (GE), but that doesn’t necessarily mean the price of the stock is moving higher. (See Figure 1 below). Instead, in the case of GE, its earnings per share continued to rise, while the price of the stock fell 66%!
Clearly, as the GE example suggests, there are limitations to fundamental analysis. But in focusing on price, it is paramount to understand what makes stock prices move. A study done by the University of Chicago succinctly answers this question for us. As the graphic below displays, 80% of the risk in any given stock’s price movement is attributable to the overall market and to the industry group or sector the stock is a member. Only 20% of the price action is due to the stock, or company, itself. Yet ironically enough, the typical allocation of resources (money spent) on Wall Street is just the opposite. Roughly 80% of the money spent on research is dedicated to fundamental analysis on the companies themselves, with only 20% allocated to analyzing the market and sector risk. (See Figure 2)
Armed with the above information, doesn’t it make logical sense to bring technical analysis into your method of investment evaluation? In particular, you must not only appraise the stock itself, but more importantly must have tools that help to ascertain the risk in the market and sector. At Dorsey, Wright we have the tools to accomplish this all-important task. Specifically, we have created a “Four Step Game Plan” for investing, one that takes a top-down approach. Today I offer this Game Plan to you:
As we finish our discussion today, I hope that you have learned the importance of being open-minded and tactical with respect to your asset allocation and investment strategy. As Tammy and I spend time with you, it will be our goal to educate you in more detail on how to implement this Four Step Game Plan. In particular, you will learn about the different market and sector indicators that are cornerstones to our research at Dorsey, Wright. Come along on the DIF Woman journey with us. It may change your life!