The US government appears to be taking an investment approach that is directly violating some of the rules of successful investing.  That is true, at least, to the extent that creating a larger budget deficit by sending taxpayers rebate checks amounts to going on margin to average down, which are topics worthy of further discussion. Investors have to watch out for their interest and use an intelligent tactical approach, meanwhile, only time will tell whether or not the economics gurus in charge of the country’s financial matters will get things right.

We are taught from the book “How to Make Money in Stocks” that averaging down in a stock is usually a bad idea.  It is especially dangerous to borrow money (i.e. going on margin) to buy more shares of a stock while it is down from your original cost.  Everyone should question the “expert” who might ever make the suggestion to average down in a stock.  And they should seriously grill any pundit who would advise averaging down by going on margin to buy additional lower-priced shares.  Provided that the risk is fully understood, it still would not be advised under this investment system’s guidelines.  The rules are repeatedly emphasized which say losses should be limited at 7-8%.  Despite that, some investors get the notion that sinking more money into a falling stock will one day pay off big.  The odds say that idea is likely to pay off – with a really big tax loss, not a big gain.  Come to think of it, in my 20+ year career as a licensed rep I have not seen any memorable examples of investors who generated huge profits by doing it that way.

Investors I hear from often are opposed to the idea of investing on margin because they realize it is an aggressive approach which can lead to magnified losses if the stock owned on margin goes the wrong direction.  That is true.  However, in the certification program, the experts taught us that the “right way” to invest indeed is to fully margin yourself when the market conditions (the M criteria) are favorable.  In fact, the few examples where I have seen clients generate truly fantastic profits (that were lifestyle changing in their magnitude) definitely did involve some very aggressive margin use at times when the market was very hot.  One cannot overemphasize enough the importance of having the skill to reduce margin exposure and raise cash as the market and your individual stocks begin to weaken.  Anyone who has difficulty dealing with discipline necessary on the sell side must make sure to get it under control before they decide to get reckless on margin.  Nobody should be reckless, regardless.  In a bull market, margining stocks is not exceedingly risky, but only as long as you always limit your losses with they are small.

To make big gains the market does not have to be red hot, but your chances are best when market conditions are at least a little cooperative.  To me, it seems fair to label “favorable” market conditions as a period when more stocks are rising than falling.  Most of you don’t need me to point out that the present time is not one of those favorable periods.  Through all that has already been reported about the poor 2008 start I am sure you have paid enough attention to the M to discover that fact.  Hopefully, as the facts sink in, your confidence that comes with this knowledge will allow you to be an aggressive buyer when the M is again offering favorable odds.  On this end, my team will be watching closely and anxiously awaiting those signs.

Further illustrating an already obvious point, let’s take another look at the Nasdaq’s Advance/Decline line to get an idea of how things have been going.  A graph of it was included in the December ’07 Investing For The New Millennium article (read here), and since that time there has a continuation of the ongoing trend where more stocks are falling than rising.  It is not a major breakthrough requiring years of experience to understand that it is a lot easier to make headway in a strong bull market in which most stocks are rising.

If you are running a profitable company and you want to return money to your investors through routine dividend payments, or perhaps a “special dividend” like Microsoft Corp (MSFT) did back in November 2004, that seems just fine.  Can you imagine the views people would have if Citigroup Corp (C) directors came up with the idea that, in an effort to improve their financial performance they were not going to cut, but increase their dividend?  While we could be critical of the job they have done at trying to turn around the financial giant, at least the company’s directors are smart enough to know handing out “free money” they don’t even have is very likely to be a recipe for an even bigger financial disaster later.  That illustrates some of my thoughts on the stimulus packages being talked about in Washington.  Meanwhile, the Fed has taken very swift and drastic action by aggressively cutting interest rates, and their recent maneuvers will inevitably help corporate earnings growth over time.