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Cutting Losses With Fisher’s 3 Golden Sell Rules

Returning readers to Investing Caffeine understand this is a location to cover a wide assortment of investing topics, ranging from electric cars and professional poker to taxes and globalization. Investing Caffeine is also a location that profiles great investors and their associated investment lessons. Today we are going to revisit investing giant Phil Fisher , but rather than rehashing his accomplishments and overall philosophy, we will dig deeper into his selling discipline. For most investors, selling securities is much more difficult than buying them. The average investor often lacks emotional self-control and is unable to be honest with himself. Since most investors hate being wrong, their egos prevent taking losses on positions, even if it is the proper, rational decision. Often the end result is an inability to sell deteriorating stocks until capitulating near price bottoms. Selling may be more difficult for most, but Fisher actually has a simpler and crisper number of sell rules as compared to his buy rules (3 vs. 15). Here are Fisher’s three sell rules: 1) Wrong Facts : There are times after a security is purchased that the investor realizes the facts do not support the supposed rosy reasons of the original purchase. If the purchase thesis was initially built on a shaky foundation, then the shares should be sold. 2) Changing Facts : The facts of the original purchase may have been deemed correct, but facts can change negatively over the passage of time. Management deterioration and/or the exhaustion of growth opportunities are a few reasons why a security should be sold according to Fisher. 3) Scarcity of Cash : If there is a shortage of cash available, and if a unique opportunity presents itself, then Fisher advises the sale of other securities to fund the purchase. Reasons Not to Sell Prognostications or gut feelings about a potential market decline are not reasons to sell in Fisher’s eyes. Selling out of fear generally is a poor and costly idea. Fisher explains: “When a bear market has come, I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price.” In Fisher’s mind, another reason not to sell stocks is solely based on valuation. Longer-term earnings power and comparable company ratios should be considered before spontaneous sales. What appears expensive today may look cheap tomorrow. There are many reasons to buy and sell a stock, but like most good long -term investors, Fisher has managed to explain his three-point sale plan in simplistic terms the masses can understand. If you are committed to cutting investment losses, I advise you to follow investment legend Phil Fisher – cutting losses will actually help prevent your portfolio from splitting apart. DISCLOSURE : Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Factor-Based ETFs Provide Increased Stability, Returns

During a volatile market climate where ETFs are especially getting hit hard, an increased utilization of factor-based investing has the opportunity to provide more stable and higher returns. Factor-based investing allows investors to increase exposure to certain factors, including size, value, quality and momentum. Last year, MSCI introduced a variety of multi-factor indexes that offer investors a better strategy that could be just right for this market environment. These indices cover US, World, Emerging Markets, and more. Click to enlarge The 1 year return of the MSCI US Momentum Index (NYSEARCA: MTUM ) distinctly outperformed iShares Russell 1000 Value ETF: Click to enlarge (Source: Bloomberg) A Focus on Momentum Momentum-based investing has proven to be a successful strategy in a volatile market climate, as seen with AQR’s posted returns in their liquid alternative funds. Such a strategy can provide returns in a downed market as well because the strategy works both ways. A hedge fund can short a portfolio of negative momentum securities and vice versa. For MSCI with their new diversified multi-factor indices, it’s all about choosing the right exposure to multiple factors, not just momentum. They’re targeting four main factors (listed above), including momentum. The MSCI USA Momentum Index didn’t perform well in the past year (-8.04%), but the MSCI diversified multi-factor indices have seen much better returns. MSCI is able to increase or decrease their exposure to certain factors that they see as favorable or unfavorable. Such optimization is extremely strategic as risk level of the underlying index is maintained. These multi-factor indices aren’t brand new strategies, either. The MSCI World Diversified Index returned an annualized 9.8% over a 16-year period during backtests, which is double the return of the regular MSCI World Index. The main methodology is to increase factor exposures to achieve higher historical returns. Which Factor is the Best? With the recent sell-off and market environment that is arguably a mess, what is the right factor to increase exposure to? With the MSCI World DMF index, which has one tilt towards value, there was a positive exposure to earnings yield even in this market. There is no one best factor, which is the point of these indices. A combination of multiple positive exposures with tilts towards different factors (momentum, size, value, quality, leverage, etc.) is what has made these MSCI products produce better returns than the run-of-the-mill ETFs. For example, the MSCI World DMF Index had positive exposure to stocks of lightly levered companies, lower residual volatility and smaller size: (SOURCE: MSCI ) The above described strategies for ETFs is something investors should make note of as clearly alternative strategies are needed in this market situation. Consistent optimization of diversified multi-factor products, like those of MSCI’s, are not completely immune to risk, but have now proven to have broken away from the poor performance of regular ETFs in the past year. Factor-based investing is very optimal for this market is a very forward-thinking investing strategy. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

FVC: First Trust To Roll Out Dynamic Focus Five ETF

By Jonathan Jones and Tom Lydon First Trust, the seventh-largest U.S. ETF issuer, is planning to introduce a dynamic version of its popular First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) . The First Trust Dorsey Wright Dynamic Focus 5 ETF (NASDAQ: FVC ) is expected to debut today, reports ETF Trends . The new ETF will track the Dorsey Wright Dynamic Focus Five Index. “The index is designed to provide targeted exposure to five First Trust sector and industry based ETFs as identified by DWA’s proprietary relative strength methodology. This methodology is a ranking system used to measure a security’s price momentum relative to its peers and helps DWA identify meaningful patterns in daily share price movements,” according to a statement issued by First Trust . FV, one of the most successful ETFs to come to market in 2014, follows DWA’s relative strength ranking system where sector ETFs are compared to each other to measure price momentum relative to other ETFs in the universe and the top five ranking ETFs are included in the underlying index. The momentum strategy basically bets that hot movers will continue to rise, so investors would essentially be buying high and selling even higher. FVC’s underlying index “allocates to the cash index when the relative strength of more than one-third of the universe of First Trust ETFs begins to diminish relative to the cash index.” “The index seeks to identify major themes in the market, have exposure to those sectors whose price action is superior to others in the universe, and eliminate exposure to those sectors whose price action is sub-par to others in the universe. In instances where relative strength diminishes across equity sectors, the index gains varying amounts of exposure to the cash index,” according to the statement. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.