Point and Figure Helps Manage the Risk

by | May 30, 2009 | Asset Management, Point and Figure

The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client).  He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.

I have to tell you, I really like this guy.  I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity).  Also, he is a good athlete — and umm, well, I like sports.  Over time, I’ve learned there are many common threads where our lives cross paths.

Wait a second…what does this have to do with point and figure analysis?


I really believe I would have never met him if it weren’t for point and figure analysis.  See, like many folks, he was referred to me — by another client.  If I didn’t use the point and figure approach in managing the risk for my clients, I am not sure  he would be my client today!

Time out.

Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there.  The game plan, as directed by the home office, was “gather assets, place the assets with a money manager — or in mutual funds run by “professionals,” then go find more assets.”

When I was a financial adviser, there were many of those “episodes” where Toto pulled back the curtain and exposed the “Wizard” of the marketing department.  You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down.  I got tired of watching people’s investment accounts getting blown up — through no fault of their own.

It’s a wonder anyone made money.

There wasn’t “one defining moment” in my 16 years as a broker that pushed me to change.  It was more like a “body of evidence.”  And in 1997, I started looking at alternatives to “fundamental analysis.”

Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.

Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.

Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?

Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.

You say you didn’t own that stock back then?  Ummm…OK.

Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?

Hmmm.  Oh well, onward…

Know this: fundamental analysis does have a purpose.  But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.

What I was able to show my friend — in screenshots — is how the market has moved from a “negatively trending market” to a “positively trending market.”

For the first time in about a year and a half!

That darn chart makes it crystal clear there are times you should be “in the market,” and times when you should be “out of the market.”

Fundamental analysis will never tell you when to get out.  Never.

My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.

With all they have going on, I’m happy they sidestepped a lot of potential damage.

And what about you…what’s your story?  Is getting a game plan for your investments important today?

This is precisely why I use point and figure analysis… point and figure simply measures price.  And price IS the ultimate indicator — as it reflects changes in supply and demand.

In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.

Feel better my friend, you are on my mind.

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