A Low Stress Investing Approach

Yesterday I said I’d demonstrate how to ‘fuse’ two very different expense approaches to gain an trading advantage. I’ll get to which in a moment with an actual instance.

I’ve been using this new ‘fusion method’ since late last year. Despite the current correction, the results have been good and it’s outperforming the market comfortably.

I spoken with Kris Sayce about it today, as part of the number of Facebook chats we’ve been doing this week. You can check it out through clicking the screenshot below…and, of course, don’t forget to ‘like’ the page.

Before I show you how this fusion method functions, I want to touch on the topic de jour. That is, China’s currency devaluation.

Don’t you believe it’s funny how everyone is now an expert on it? The other day it was not even on the mainstream media’s horizon. Not that I saw anyway. But now it’s leaking off the business pages.

It wouldn’t have come as a surprise to you though, dear reader. In the 3 August edition associated with The Daily Reckoning I wrote the following:

‘The additional very big issue here is China’s currency peg to the dollar. As the All of us dollar strengthens and the US loses competitiveness, so does China. A break of the dollar-yuan peg is coming.

‘And that will send another deflationary impulse through the global economy.‘

Global miners BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] felt those chill deflationary winds the other day, dropping 4.3% and Five.4% respectively. And this morning, the actual Financial Review reports just how this deflationary behavioral instinct flows through the global economy:

‘Chinese steel producers have already cut export prices in response to a lower yuan, industry sources stated, providing some of the first proof of how Beijing’s devaluation can help companies in the world’s second-biggest economy boost sales.

‘China’s steel industry is the world’s biggest, but shrinking demand in your own home has forced many generators to ship record amounts abroad, with some said to be selling at a loss.

‘A weaker yuan will make Chinese steel products even less expensive overseas as Beijing’s surprise move to devalue its forex gives the country’s exporters leeway to chop prices.

‘Some small Chinese generators had already lowered export prices of steel products like rebar for construction use, through $US5-$US10 a tonne, sources familiar with the problem said.‘

But in all the pages discussed China’s ‘one-off’ currency devaluation (which to date stands at two adjustments totalling around 3.5%) no one has mentioned the architectural problems behind it.

I don’t know, maybe it’s implied in the entire currency war argument. Jim Rickards, editor of Strategic Intelligence, must be using a good old laugh at how the media are now flogging a term he or she reinvigorated and popularised years ago.

Yes, it is all about the ‘currency wars’. But what are the forex wars really about?

The way I view it, it’s a consequence of a horribly flawed global economic ‘structure’. I go on about ‘economic structure’ all the time. I think it’s a very important way to view the global economy.

In the context of China and the currency wars, here’s the problem. China has a huge trade surplus. It’s constructed its whole modern economic expansion around exports…which creates this trade surplus.

By all accounts, China remains really competitive on a global size. In July, it generated a trade surplus of US$43 billion. Yet it’s devaluing in order to retain export competitiveness?!

It’s doing so because it has an inflexible economy. It cannot handle change. The whole framework of its economy is geared towards satisfying the needs of western customers. Especially US consumers.

Even a little change in that dynamic periods trouble for China. Think about it. China wants to create a more balanced economy. One that sees it’s consumers driving growth.

Don’t you think a strong currency would make feeling in this case? It would make imports less expensive. It would increase the purchasing power of Chinese households. The problem is: the production structure of the global economy is not designed to provide for the Chinese consumer. It will take years of switch to get there.

But politicians are not thinking about structural change. They are only interested in maintaining the status quo…their own grip on power. Which is why the focus is always on monetary policy. Unfortunately, this only reinforces the structural impediments weighing the economy down.

We are truly stupid. The global economic climate is like the Titanic. It is headed for crisis, but everyone is blissfully unaware.

For me, the only question is how the coming crisis plays out. Do asset prices collapse as the buying power of cash increases? Or even does the opposite happen? Perform central banks double down on their historic post-2008 blunder?

I’m prepared for anything. It’s why I’ve embraced the ‘fusion method’ of investing. That is, focus on the company’s fundamentals and value, but also ‘listen’ to what the market informs about it. The market is far smarter than you. Ignore it at your peril.

Let me give you an example…

In February last year, JB Hi Fi’s share price fell sharply, putting the actual stock into a downtrend. (Remember earlier this week I said a downtrend occurred when the short term shifting average (yellow line) entered below the longer term MA (nowhere line.) You can see the cross over on the chart below.

The stock was good value, but ‘the market’ (reflected in the downtrend) told you to stay away.

Source: BigCharts

And the market was correct. In August 2014, JB’s stock price plunged on its results release. Though it was still good fundamental value, it was a bad buy at this time because it was in a downtrend.

Buying right into a downtrend is a higher risk strategy. It might work out, but you just have no idea how far the trend will take you. In addition, it’s higher stress.

For instance, you may have bought at around $17.Fifty after the initial decline. However it then fell some more, rebounded a little, and then plunged to $14.50. Perhaps you thought you got it wrong, and decided to get out…at exactly the wrong period.

The ‘fusion method’ of investing prevents you against getting into these situations. This tells you to wait for the downtrend to play out and for a new upward trend to emerge before buying.

That’s what we did here. As JB Hi Fi made a new multi-month high in February this year, and the shifting averages crossed over to confirm an emerging uptrend was going ahead, I sent out a buy recommendation to subscribers. All of us didn’t pick the bottom, but that’s ok. No one will ever get it done consistently so it’s no something should even try to perform.

The fusion method is a lower stress strategy. It’s about finding essentially mis-priced companies and waiting for a good uptrend to unfold before buying into them.

It’s simple and efficient. And built to withstand the actual uncertainties of the modern trading world. It’s working pretty much too. Recently I’ve been planning a video report to show you the best way to begin taking advantage of it. It’s almost ready for release. Stay tuned.

Regards,

Greg