(An Explanation of This Part of My Methodology)
This article was initially written on 06/1973 and Updated on 08/2011.
This is my 4th Article in a series: "Why Most Investors and Nearly All Traders Lose Money." It is expanded in one of the chapters I have in my yetto be published book. The title of my book is: "Decoding Wall Street."
An Inflection Point is: "An event that changes the way we think and act." Author: Andy Grove, Founder of Intel Corporation.
It is one of the Three Pillars of my Methodology of "Investing Wisely." (forand over-view of my Methodology, please see my Private Blog) http://twitter.com/#!/InvestRotation
The term Inflection Point was introduced to me in University, in a math class called Differential Calculus - Equations. It was at that time, and for over a year; I was manually charting about 100 companies per day for some wealthy Investors. The lights came on, and I have enjoyed remarkable success by simple taking this mathematic concept and applying it to managing assets. A couple of years later while in Graduate School, I was reintroduced to Inflection Points as part of course on Behavioral Economics and Behavioral Finance. I have since honed this knowledge into a tightly woven investment tool that has become one of the several conventions that I use to make wise and timely investmentdecisions.
It is clear to most everyone that, sooner or later, something if not most of things in life are going to change. Often it seems that it happens, too fast and all at once. On the other hand, my security's work / analytics can be quite boring, because these 'things' also move very slowly. My answer to this problem as a financial analyst is: Patience and Discipline, some Investors have it and others never will. As an old professor of economics and finance I have firmly believe that few will ever see the t ruth and the l ight of Investing Wisely.
My use of the words "Inflection Points" in this article could be converted to the word "Change." These two words have been good to me financially and in my overall life. Please don't misinterpret my rather strong focus on these words. After all, this Article is all about sharing with you my favorite couple words for making money!
You hopefully will recognize from this chart that just when you think the trend or path is to continue to ascend, there is a divergence. The trend or the path can continue to move upward, as expected or the trend or path does the unexpected and begins to descend. That's the snafu that the stock market presents to all, Investors, Financial Analysts and Asset Managers alike. The stock market has a mind of its own and if you are relying on your logic and sound reasoning you are destine to be a loser in the realm of Investing Wiselyand enjoying being profitable.
It was over 50 years ago that I began to understand what this graphic is trying to share. It is pure mathematics and requires considerable knowledge of math to work through the various formulas. When the light came on, I was determined to be able to differentiate when the probabilities were to continue moving upward and/or when the probabilities were to reverse and move downward. Probability Analytics is simple a comparative process I use to identify the securities that will do well in the coming weeks. My Inflection Point work is not perfect, but it is as accurate as anything you, or I will come across. Inflection Points have produced many profits and very few losses over the past years.
As I said, the above is a mathematical and fancy illustration and one of my favorites. It is identical to what I learned in Differential Calculus - Equations, and it is the graphic that best describes my work in developing my Inflection Point tool for managing assets in the stock market.
In Differential Calculus - Equations an Inflection Point is a point on a curve at which the curvature (second derivative) changes signs. The curve changes from being concaved upwards that is a positive curvature to be concaved downwards that is a negative curvature, or vice versa.
Putting this in simpler terms, imagine driving your car along a winding road, inflection is the point at which the steering-wheel is momentarily "straight" just before being turned from left to right or vice versa.
These Inflection Point changes signal the beginning or the end of both economic and stock market bullish cycles or bearish cycles. They are always the forerunners of either a new period of growth, resulting in profits, or a new period of retrenchment that can and does, either enhance or wipe out a business or investment capital gains that have taken years to build. I remain conservative, yet proactive in my approach to Investing Wisely.
The lesson here is, sooner or later, change (business, technological achievements, financial and much more) is going to affect every business and every investor. If you manage a business or invest your money, you must plan for change, although no amount of education, research or analysis can accurately anticipate what those changes will be. What they will be is one thing but when they occur is yet another. Statistics and probability analytics can and does help us to know 'When' a bullish or bearish Inflection Point is coming. No one can predict the future, but some of us still try. Some are simple more successful than those who do not use these wonderful tools. The best we can do is, size up our chances, calculate the risks involved, estimate our ability to deal with things, and then make our plans with confidence. Timidity does not produce growth or profits, so I carry on my work quite enthusiastically.
Before continuing, I would also like to make clear that my use of the term Inflection Point is neither, fundamental nor technical in nature. It is an analytic process or methodology taking into account a wide assortment of financial conditions and factors that I have experienced (good and bad) over many years.
For several decades, I have accurately warned investors that sooner or later there will be a lifestyle-threatening change, a "Negative Inflection Point." You will note in many of my articles that I use the word "Warnings" as a way to communicate and present the facts that my research gives me every single day. I emphasize that hyper-vigilance is a necessity for successful investing, both in choosing the WHAT ( a Company / ETF ) and in turn deciding WHEN ( the date of the highest probability for maximum profit) to make your investment decisions. I strive, in my blogs to also give you the WHY.
The best and perhaps the only way to avoid disaster is to be hyper-vigilant. Work hard, do your homework, and be mindful of the facts. If you're not always on guard, something will come up and bite you in a place that makes it difficult to sit down. You won't know why the old rules are no longer working, and you won't know what the new rules are. Believe me there are 'new rules' and special situations (up the kazoo-die) in today's stock market for you and I to deal with.
Another way to avoid disaster is to stop reading so much of the stuff / crap that is published in the many political, business and financial blogs today. I used to enjoy reading 10 or even 20 every day. I now read maybe one or two per day. I suggest, the quantity of misinformation coming from unqualified authors makes for very poor assimilation of facts and in turn poor investment decisions. I suggest you follow just half a dozen ( or less ) authors that are: first positive and second are focused on making you a consistently successful Investor. Most financial books, newsletters and blogs are worthless to the quest of making money and most of their information and data will never help you make money. You may want to consider or ponder this point, reading and collecting a great amount of information and data does not make for profitable investing. I learned that after much education, and it took nearly 10 years for me to figure out that the education and textbooks on investing were of little value in my pursuit of making money.
Personally, I tend to be more hyper-vigilant about getting wrong information and data than trying to find something or someone that makes sense. I can read, interpolate and understand correct information and data, but when it's wrong or skewed by Wall Street, mutual funds, stockbrokers, financial analysts, asset manager, bloggers or the financial media, I tend to worry. And, or course, I also worry about how/what my Clients will read, interpret and understand from these often poor sources. I spend much time on the Internet with Clients and Followers trying to teach and share a correct financial mind-set. I fear "few" are good listeners.
We have all heard the expression, and I see my job as simply to "Buy Low and Sell High" (vice versa in a Bear Market) while being sure that my risk/reward ratio is in focus. I also believe that most individual Investors, as well as professional money (asset) managers, try way too hard to hit home runs. I have always been content with hitting a lot of singles and doubles. If you have just a few - 10%ers and/or 15%ers per annum you can certainly smile. Unfortunately few have had that experience in the past decade. (Key: a single is a 10%er net profit; a double is s 20%er net profit; a triple is a 30%er net profit and a home run 40%er+ net profit.)
I have researched and analyzed decades of information and data on many securities including their sectors and industry groups.
This work has proven to me without a doubt you can be consistently profitable using my Inflection Point tool. I would add that it is relatively easy to recognize pretty much exactly where the General Market, Sectors, Industry Groups and Companies or ETF is at any given time. Once you see an Inflection Point coming, you can begin to respond to it. Every Inflection Point is triggered by a common change. I call it "Repeatability." Inflection Points, both Bullish and Bearish, repeat themselves over and over and over again. The "trick" is to understand, the point I made above, that they all are constantly 'rotating' in and out of favor. (That is the subject of another article you might want to read). All you have to do is be Patient and Disciplined enough to wait for the next Inflection Point and be hyper-active in my analytics of identifying those securities that have the current highest probability of profit for the coming new bullish or bearish cycle.
Recognizing change, according to me, requires "separating the majors from the minors, the wheat from the chaff." To distinguish one important change from another and then eliminating the surrounding noise or chatter, I have developed a "Conformation" process within my methodology that does this job quite well. I start with the old 'silver bullet' question: If you had just one bullet, how would you use it? When the answer is obvious, then decisions are easy. It's when the answer is not obvious than we have a very different set of conditions and at times like (it's not clear) I recommend taking no chances, baring no risk and staying in Cash. It is simple, be patient and disciplined, and wait for a clear set of conditions before committing your capital. Sometimes no decision for a month, or even several months, is the best decision over the term of a year. It is at these times that Cash is your safe harbor. I can tell you from experience that it won't be long before new investment opportunities will present themselves to you. Remember they come in cycles just like many other things in life.
Remember, untested decisions that cannot be "Confirmed" by repeatability often lead to disappointing results. Definitely do not listen to some Broker, Trader or other blogger beating his or her drum about the merits of their current recommendation. Instead of complacency, be on guard to avoid a wrong decision stimulated by misguided people. This is what causes me to do my homework well, and I recommend that you do the same! I use the word "Confirmations" quite often in my Blog; I hope you understand what that word means.
It has been clear to me that top business leaders such as Andy Grove and top portfolio managers such as Warren Buffett accept the reality of the changes causing an Inflection Point. Then and only then they take prudent and decisive action. They make buy/sell decisions without much anxiety because they know, over the long-term, it is the correct thing to do. Lesser 'leaders' always seem to stumble and often never seem to recover. May I remind you that you don't have years to waste trying to fix - past non-productive and profitable decisions.
I believe that confronting the inevitable Inflection Point is one of the biggest challenges, in today's marketplace for an Investor, Financial Analyst or Portfolio (Asset) Manager.
This is important "Stuff" and has been shared exclusively for you folks that are Serious Investors and are truly interested in making money in the Stock Market. . .
The good news is that I have figured out how to make money with my conservative methodology.
Keep Smiling, have Fun - "Investing Wisely,"