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
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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
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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
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Year
2008
2009
2010
2011
Returns
-34%
+20%
+14%
+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
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Kenneth M. Lavin, D.P.M., M.S.F.
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www.themodestinvestor.com
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(508) 660-2222