The Big Picture For the Week of April 29, 2012

I stumbled across a very important quote from Jeremy Grantham;

The cardinal rule is to not underperform in bear markets.

Confirmation bias being what it is I take this as a validation for some sort of objective trigger point for taking defensive action when chances for a large decline increase. Obviously at our firm we use the S&P 500 going below its 200 day moving average. There are several others that are similar like the 50 DMA crossing below the 200 DMA.

I don't think it matter too much which indicator is chosen as none of them can be the best for every market cycle. Our objective, as stated frequently, is simply to avoid the full brunt of a large decline. Top ticking the market might happen but that is less important than what Grantham states above.

While things are going well it is worth pointing out that markets are cyclical there will be another large decline at some and it will scare the hell out of people such that would have seemed to have forgotten the last one. Part of the concept of defensive action is the psychological benefit of reducing the odds of seeing the portfolio drop to a point that induces panic selling.

Every so often the market goes down a lot. And then it starts to work its way back. It might take years to get back to where it was or maybe not so long (Japan perhaps being the exception that proves the rule) and then it repeats. Sitting here today while things are looking pretty good, everyone would say oh, of course there will be a bear market again but then many of these same folks will become discombobulated when it happens. Don't let that happen to you or your portfolio.

This weekend is the Whiskey Row Off Road race which is a whole series of events that started last night with a criterium around downtown Prescott.