InvesTech Research’s Jim Stack, who was very bullish at the 2009 lows, determines his allocation based on risk analysis, and also uses sector rotation to manage risk as the bull market matures. In this exclusive interview with MoneyShow.com, Stack explains these strategies further.
This has been a wonderful bull run since the 2009 "market opportunity of a lifetime" that you told us about at the conference in February 2009, right before that low, and yet you do not advocate a buy and hold approach.
Has it been a buy and hold approach since that 2009 low? And not advocating a buy and hold approach…perhaps you could explain that.
Charles, unfortunately on Wall Street anything other than a 100% blind buy and hold is thought of as market timing.
I’m not a market timer. We don’t jump into the market or jump out of the market. We allocate our level of invested position in the market based on the level of risk.
When we have all the blocks in place for a new bull market, we maintain a high level of investment. We stepped up to over a 90% invested position within a couple months after that March 9 bottom in 2009. We’ve maintained over a 90% investment position through today. That’s the good news.
The bad news is that bull markets don’t last forever. On average, they last less than four years. So, at some point over the next two years, as we start seeing running flags flying, either on the monetary, technical, or fundamental side, we will start reducing our invested allocation, perhaps first down to 85% or 80%.
Again, it’s not market timing, it’s based on the level of risk in the market and reducing our allocation to the point at which hopefully in the next bear market, we can do what we’ve done in the last bear markets…reduce the downside risk by over half. That’s our goal, to take out as much of the downside risk in the bear markets as possible.
How do you dice that up with individual securities? Are you in bonds as well as stocks or 100% stocks, and what kind of stocks are you in?
We look at managing risk with a three-step approach.
First, we look at overall allocation in the market. Are we 93% invested, as we are today, or is it time to step down to 70% invested? We can do that just by reducing our investment allocation slightly, and taking a position in an inverse bear market fund. In other words, reduce our exposure to the market. That’s a very important means of managing risk.
But there are two others that you can’t look past. What is sector allocation? Knowing which sectors perform the best in bull markets and knowing which of the sectors survive the best in the next bear market, and transitioning between those strong performing sectors to those more defensive sectors as that bull market matures.
Of course, the last way of managing risk is in your stock selection. If you go out and you’re always playing in the IPO market and the new issue market in a mature bull market just before it’s going to end, you’re going to get burned.
So, we try to focus on true value companies. Those companies that have established revenues, established earnings. I leave the speculative plays to others who want to chase that hot market.
