Investing in the Second Lost Decade: A Survival Guide for Keeping Your Profits Up When the Market Is Down

by Martin J. Pring

Overview

Are You Prepared for Another Lost Decade?

“[Pring] sees another ‘lost decade,’ but also ways to make it a winner.”
–The New York Times

Don’t let the secular bear eat you. Prepare to earn steady profits in another decade of volatile and disappointing market returns.

For more than four decades, Martin Pring has been a leading innovator and practitioner of financial and business cycle analysis. In Investing in the Second Lost Decade, Pring—along with seasoned portfolio managers Joe Turner and Tom Kopas—offers conclusive proof that we’re only near the midway point of a continued secular cycle of flat returns and deeply cyclical economic conditions. To guide you through these uncertain times, Pring, Turner, and Kopas deliver a proven action plan for mastering the realities facing today’s investors.

Using proprietary analysis, the authors explore the characteristics of long-term bear markets along with the looming dual threats of inflation and rising interest rates—and outline positive steps you can take to create a dynamically managed investment portfolio. You’ll discover not only how to take advantage of emerging profit opportunities but how to protect yourself from inevitable cyclical declines.

Invest confidently and decisively, even in today’s secular bear market. Learn how to:

• Understand the secular trends for stocks, bonds, and commodities and the importance of paying attention to business cycle swings.
• Develop two distinct game plans: one for defense, to protect assets in difficult periods, and one for offense, to grow wealth during favorable conditions.
• Learn to tailor asset allocations to minimize risk and optimize returns throughout the business cycle.
• Achieve more consistent portfolio returns with less risk—and less stress.

The secular bull markets of the 1980s and 1990s are long gone—and with them the conventional buy-and-hold, indexing, and passive asset allocation methodologies that will continue to frustrate investors. Wait-and-see isn’t a plan; it’s a wish. Start following the proven investing strategies outlined in Investing in the Second Lost Decade today and you will be on your way to building wealth while safeguarding your hard-earned assets.

Product Details

ISBN-13:	9780071797450
Publisher:	McGraw Hill LLC
Publication date:	06/15/2012
Sold by:	Barnes & Noble
Format:	eBook
Pages:	224
Sales rank:	772,869
File size:	6 MB

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INVESTING IN THE SECOND LOST DECADE

A SURVIVAL GUIDE FOR KEEPING YOUR PROFITS UP WHEN THE MARKET IS DOWN

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By Martin J. Pring, JOE D. TURNER, TOM J. KOPAS

The McGraw-Hill Companies, Inc.

Copyright © 2012Martin J. Pring
All rights reserved.
ISBN: 978-0-07-179744-3

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Excerpt

CHAPTER 1

WHY A SECOND LOST DECADE LIES AHEAD

The year 1553 saw Lady Jane Grey deposed from the throne of England after only nine days in the palace. This event has absolutely nothing to do with the subject of surviving the second lost decade, except for one thing. The number 1,553 marks the secular bull market peak in the S&P 500 composite on March 24, 2000. Prior to that date U.S. equities experienced an 18-year secular or very long-term bull market. Since then stock prices have been in a bear market, often labeled as the "lost decade" for investors. Nothing unusual happened on that early spring day in 2000, no one rang a bell to herald the passing of the bull, and no one realized that a new, more challenging investment era had begun. No broker called Mr. Smith to tell him the bad news. As usual the market transitioned quietly to a secular bear market without any fanfare announcing the painful shift awaiting complacent investors.

Two Types of Economic Turning Points

The economic history of the United States is littered with turning points initiated by financial panics, crashes, and banking failures followed by depressions or recessions. Not all turning points are created equal though, because it is possible to break turning points down into two broad categories as their repercussions are substantially different. The first is a normal business cycle peak marking the top of a typical recovery. Let us call that a cyclical turning point. The downturn that follows can be triggered by many factors, such as excessive inventories requiring liquidation and "unexpected" rises in interest rates that catch investors unaware. The principal characteristic of this cyclical type of reversal is that the problem can be corrected relatively easily once a brief period of pain and adjustment is made—a garden variety recession.

The second type of turning point is akin to the one that began on March 24, 2000—a more serious affair because it is structural in nature. Much like the difference between catching a cold and having open heart surgery. A cold is unpleasant to experience, but it soon passes and leaves no physical traces. On the other hand, open heart surgery results in a traumatic shock to the body and takes much longer for a full recovery. Eventually surgery leaves no permanent damage except for the scar caused by the surgeon's scalpel. These less frequent very long-term turning points are known as secular reversals. Just like a patient, the economy eventually recovers from one of these long-term declines, but it takes many years, even decades, and several business cycles to do so. This chapter describes some of the economic and financial forces causing these tectonic shifts and explains why we believe another lost decade lies ahead.

A run-of-the-mill business cycle recession is normally triggered by inventory adjustments. Corporations extrapolate recent sales growth trends and build up inventories anticipating further growth during the latter frantic part of an expansion. Then as sales unexpectedly begin to drop, there is a period when companies cannot liquidate inventories fast enough, and cash flow turns negative. For a temporary period they are forced to go to the bank and finance the difference. Since the demand for credit increases, its price, namely interest rates, goes up. This in turn causes overall demand in the economy to tumble. Finally, excess inventories are liquidated, recently acquired loans are paid off, and the economy is ready for the next recovery. This is a fairly simplistic explanation because in the real world there are different reasons for individual recessions. The main point to bear in mind is that during a normal business cycle recession the pain is relatively short-lived as the excesses of the prior expansion are worked off.

Secular turning points like the one that took place in March 2000 develop when financial excesses are allowed to grow, creating huge economic distortions over the course of many business cycles and finally coming to a tipping point. A common theme in the vast majority of these situations is the massive buildup of excessive debt. When a structural problem develops, it is far more difficult to work through than a typical inventory recession. Two great examples of secular excesses are canal and railroad expansion in the early and mid part of the nineteenth century, respectively. Both innovations in transportation began as sensible projects, where a respectable rate of return on capital was expected over a reasonable time. The problem developed over the course of several business cycles as investors became greedy (because returns were great) and complacent (because downside risk appeared to be minimal or even nonexistent). Consequently, capacity and investments expanded exponentially. As a result too many canals and railroads were built. It is a relatively simple, though temporarily painful, process to liquidate excessive inventories. However, it is quite another task to liquidate a canal or railroad investment because it represents a basic piece of infrastructure. The capacity of such sizable capital investment projects can be worked off only over the course of many decades when demand eventually catches up with supply. More to the point, like all large infrastructure projects, they are impossible to construct without resorting to borrowed money. Consequently, part of the unwinding process involves paying down or writing off debt. Indeed, we can go so far as to say that pretty much all long-term downturns have their roots in careless bank lending practices, whether it is to industry, individuals, or real estate.

The canal and railroad booms started off with capital being allocated efficiently. As investors optimistically extrapolated continued boom conditions into the future, projects became more speculative and eventually a misallocation of capital occurred. In those three words—misallocation of capital—you have the crux of our modern-day secular financial excesses.

The Importance of the Misallocation of Capital in Economic Downturns

In any economy there is always a finite amount of capital available for productive projects, and the capitalistic market usually does a good, but certainly not perfect, job of allocating it. This is because capital, when adjusted for risk, is attracted to the places where it can obtain the best return. The problem is that when an investment theme initially does well, it encourages a wider universe of investors. As time moves on, the investment story becomes even more believable thus enticing others to join the fray, especially as the speculation becomes ever more compelling. Nothing attracts attention like success. Positive psychology becomes contagious, but unfortunately crowd behavior leads to careless decisions. Bankers fall all over themselves to lend money to investors who have not considered the consequences of a mania and the bubble bursting.

One of the key problems is that such booming industries attract a considerable amount of the capital, capital that could be used more productively elsewhere. If there was an infinite amount of capital, this would not be a problem because other industries also benefiting from new investment could carry the load when our boom industry collapses. However, the stark reality is the industry breeding the mania sucks in most of the available money, so other more deserving sectors are starved of investment. When the bubble pops, capital that would be available for other deserving projects evaporates, wealth is destroyed, and the entire economy is left poorer.

The Technology and Housing Booms as Root Causes of the Current Secular Bear Market

After March 24, 2000, the U.S. e
(Continues...)

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Excerpted from INVESTING IN THE SECOND LOST DECADE by Martin J. Pring, JOE D. TURNER, TOM J. KOPAS. Copyright © 2012 by Martin J. Pring. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Acknowledgments ix

Introduction: Are You Prepared for Another Lost Decade Ahead? xi

Chapter 1 Why a Second Lost Decade Lies Ahead 1

Chapter 2 What Are Secular Trends in Stocks and Why Do They Matter to You? 19

Chapter 3 What Forces Cause Secular Trends in Equity Prices? What Do the Turning Points Look Like? 31

Chapter 4 Inflation, Inflation, Inflation! The Secular Bull Market in Commodities Is Already Well Under Way 53

Chapter 5 Looking Out for a Potential Change to the Upside for Interest Rates 71

Chapter 6 Introduction to the Business Cycle 93

Chapter 7 How the Business Cycle Can Be Used as a Road Map for Investing in Bonds, Stocks, and Commodities 105

Chapter 8 How to Identify the Business Cycle Stages Using Easy-to-Follow Indicators 119

Chapter 9 Introducing the Dow Jones Pring Business Cycle Index-the All-Season Answer for the Smiths 131

Chapter 10 Portfolio Risk Management 145

Chapter 11 Do It Yourself or Hire a Money Manager? 167

Conclusion and Resources 177

Appendix A Additional Signs of Secular Turning Points for Equities 181

Appendix B Supplementary Observations Relevant to the Secular Commodity Bull Market 197

Appendix C Global Aspects to the Secular Bear Market in Stocks 205

Appendix D A Guided Tour of Asset Rotation Around the Business Cycle 219

Index 235