Investment Strategy Utilizing Economic Indicators

Kenneth M. Lavin, DPM, MSF,Economic Consultant for the 360 Huntington Fund

Success as a Doctor

• Doctor Needs to be 80%-90% Successful in Diagnosis and Treatment • Medical Decisions involve Differential Diagnoses and Various Treatment Options Including Precise Surgical Skills

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Success as an Investor• Trading is a Binary Decision: Buy or Sell

• Average Investor is 50% Successful in His Trades

• If an Investor is 60% Successful in His Trading Decisions, He/She can Make a Very Good Living

• Leverage Up the 10% in Opportune Trades

Return on Investments (R.O.I.)

• Annual Savings versus R.O.I• Critical Mass of Portfolio : $500,000• Savings of $50,000 = 10% of $500,000 Portfolio

• Losses are More Painful than Gains i.e. a Loss of 20% in your Portfolio Needs to have a 25% Gain to Return to the Same Value

• Need to Limit Losses

Financial Planner

• Doctors Who Have A Financial Planner?• All Assets?• Portion of Assets?• Portfolio Based on Age and Risk Assessment• Example: 50% Domestic Equities, 20% Foreign Equities, 20% Bonds, 10% Misc. • Personal Oversight of the Investment

Decisions by the Financial Planner?

Madoff Factor

• Academic Background of Mr. Madoff?

• Academic Background of a Financial Planner?

• Performance of the Financial Planner

• 2008 Investment Performance?

Counter Party to the Trade• M.B.A., M.S.F. , C.F.A.• Academic Background – Economics,

Accounting, Investments, Equity Valuation, Fixed Income, Portfolio Management

• Analyst Following that Stock for 2 Years• Academic Background of Doctor –

Disadvantage in the Trade

Analyzing Individual Stocks

• Catalyst for Buy Position• Evaluate Management• Evaluate Balance Sheet, Income Statement,• Cash Flow Statement and Foot Notes• Numerous Variables with Individual Stock

Analysis • Need 30 Stocks to Get a Sufficient Diversified

Portfolio (Diversifiable Risk)

Valuation of Stocks• Ratio Analysis : P/E, P/B , P/C.F., P/E/G

Compared to Industry

• Discounted Cash Flow Analysis: CF1/(1+r)1 +CF2/(1+r)2….+ CFn/(1+r)n

• Weighted Average of Ratio Analysis and D.C.F.

• Alpha = Weighted Average minus Present Value

Economic Investment Strategy

• Analyzing Economic Data = Analyzing Patient’s Lab Data

• Few Economic Variables to analyze• Economic Data is Widely Available• Barrons, Yahoo Finance, Bloomberg• Economic Investment Newsletters with Timely

Alerts • Trade Indices i.e. Exchange Traded Funds

Macroeconomic Analysis of the Markets

• Objective: Get 60% of the Upside of the Market and Avoid 60% of the Downside of the Market

Macroeconomic Indicators

• Conference Board: Leading , Coincident and Lagging Indicators

• Yield Curve of Treasuries• T.E.D. Spread : Credit Risk= L.I.B.O.R. –T. Bill • Sovereign Debt Yields: Greece, Portugal, Italy• Oil Prices: Brent Crude • Volatility Index: VIX

Macroeconomic Analysis

• Federal Reserve Policy: Federal Funds Target Rate

• World Events• Historical Trends with Indicators and the

Markets• Follow the Most Timely Indicators

Investment Strategy

• Most of the Time there is no Clear Consensus of Where the Market is Going – Competing Economic Forces

• Major Upside or Downside Movement Occurs When All the Economic Forces are Aligned in One Direction

• Make Significant Asset Allocation Decisions When These Factors are All Aligned with ETFs

Previous Asset Allocation Decisions Based on Economic Indicators

• October, 2007: Oil Prices Up, Negative Yield Curve in 2006

• March, 2009: Housing Starts Improved from Previous Months i.e. Less Negative, Stimulus Package Introduced

• September, 2010: Back to School Sales Up, Decreased T.E.D. Spread, Decreased Social Security Taxes

S&P 500 Annual Returns

• Year Returns• 2008 -34%• 2009 +20%• 2010 +14%• 2011 +0.5%

• Need Another +16% to Return to • January 1, 2008 Value

Investment Summary

• Aware of the Macroeconomic Environment• Understand Your Investments in this

Environment• Need to Avoid the Painful 2008 losses of 30+%• Primary Care M.D. = Financial Planner (Fixed

Portfolio)• Need Specialist Doctor = Economic Consultant

(Get 60% of the Upside of the Market and Avoid 60% of the Downside of the Market)

Questions and Answers

• Kenneth M. Lavin, D.P.M., M.S.F.

• www.themodestinvestor.com

• (508) 660-2222