Stack's Sleep-Well Strategy

11/07/2003 12:00 am EST


James Stack

President, Stack Financial Management

Stressing value, diversification, and risk management  Jim Stack - money manager and editor of InvesTech Market Analyst - has become one of the most popular, respected, and successful figures in the advisory world. He employs technical and fundamental indicators - with a strong focus on historical precedent - to assess the market's outlook.

"The evidence is very, very compelling that we are in a new bull market. In fact, some of the technical readings that we are seeing in our indicators are at their best levels in a decade. Leadership is very, very strong. Our leadership index convincingly shows that it is synonymous with past bull market. We recently saw the strongest reading since January 1991, when the last bull market started; that bull market, of course, never looked back.

"Another tool that forced us into the market earlier this year is the Coppock Guide, which measures the momentum of investor psychology, or when the market has moved too far. This indicator has indeed confirmed the best bull markets over the past 80 years. Market breadth is very good. This is a very broad market; everything is moving up. Another piece of evidence that suggests we are in a bull market is the global markets. Global markets are confirming what is happening on Wall Street.

"If this bull market were to end today, it would be the shortest bull market in 50 years. The odds are against that. In reality, the major indexes are up about 33%. That’s not a lot compared to a lot of past bull markets. Most bull markets gain between 70% and 100%. Again, if this bull market were to end today, it would be the second least profitable in 75 years. This bull market is still most likely in its first half. If we were pressured to forecast when this bull market might end we would have to guess later next summer, or perhaps shortly after next year’s Presidential Election in November."

"The key is to have an investment strategy that allows you to manage risk. Prudent investors should have a more heavily invested allocation when bullish evidence is strongest. And conversely, one should not be afraid to pull profits off the table and hold some cash when odds start to tilt against their favor. Managing risk is just as important – if not more so – than going after profits. We tend to have a safety first philosophy and if we make a mistake I’d rather make it on the side of caution.

"Why manage risk? If you run into a big bear market early in a long-term investing program, it won’t hurt you that much. But they become far more important once you get years into your investment program. If you have one of those big bear markets after building a portfolio over 15 or 30 years, it can be disastrous. The key to investing in the markets is not just to beat the market averages, year in and year out. The key is to avoid big losses. The big losses are terribly difficult to recover from. Bottom line: if you place equal emphasis on risk management and going after the best profits, you will still have solid gains. But you will reduce the volatility – and most important of all, you will find it easier to sleep at night."

The InvesTech mutual fund model portfolio is 85.5% invested as follows: 46% in value securities, 30% in growth investments, 3.5% in international funds and 6% in resource stocks. The remainder of the portfolio (14.5%) is held in cash or short-term Treasuries. It’s largest positions are Heartland Value (HRTVX), Pennsylvania Mutual (PENNX) and T. Rowe Price Mid-Cap Growth (RPMGX). Stack also holds small stakes in the Japan Fund (SJPNX), Conagra Food (CAG NYSE), Engelhard Corp. (EC NYSE), Newmont Mining (NEM NYSE), and Encana (ECA NYSE).

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