FSO Editorials: Back to Investing Fundamentals by Robert B. Gordon 09/01/2004

Back to Investing Fundamentals
by Robert B. Gordon, Sc. D.
September 1, 2004

As we write, the stock market has finished a small bear market rally and is getting ready for a major move down that will get a lot of attention by investors who are ready and those who are not ready for further downside action. In this article we will summarize how cautious investors can create a portfolio aimed at preventing major losses in this great bear market.

Over recent months we have seen our list of stable assets decline to a very small group. We have also decided to eliminate volatile assets and include short funds in every one of our portfolio suggestions. Our objective is to minimize losses and maximize profits in the current market conditions. We have reached a point in this bear market where all serious investors must eliminate every possible losing stock and fund from their portfolios.

It is really sad that our largest mutual fund companies like Fidelity and Vanguard, with 100 or more funds, have practically no funds designed to perform in a severe bear market. True, they both have gold funds and energy funds that are acting fairly well, but there is no assurance they will be going up a year from now. They have consciously avoided short funds, probably because they did not fit in with their generally bullish philosophy. A few years from now, with the bear market still in full sway, they may regret their position.

The first fundamental I want to stress is "get rid of losing securities." Here we are in the fifth year of the nation's worst bear market and I’ll bet that millions of younger investors are still adding monthly to securities in a downward price spiral. They are doing this because they have been told for years that stocks and funds "always go up in the long term." But for the first time in our nation’s history, the long term may be past your retirement date. The lesson that must be learned is to buy and hold only funds that are going up in price right now. And the number of such stable funds is very small as we will discuss.

As this bear market progresses, fewer and fewer stocks and funds will prove to be in a real up trend. Right now we only favor a very short list of funds and there is no guarantee they will continue to advance in a difficult bear market. The Hussman Growth and Income funds have both had losing periods in the past 6 or more months. I have faith in their ability to go up in the long term, but they have both had significant losing periods this past year.

We still like the Permanent Portfolio fund with its six asset classes, but it may suffer some losses from its 25% position in gold and silver bullion if they continue down in price. However, I still like this great fund for the long term. We still favor the Prudent Bear short fund and the Prudent Global Income fund, although they need to be watched during major changes in the stock market.

I do not believe that I have ever suggested holding a significant amount of cash, but I am at this time because of the present market situation. Now, I realize that for many investors holding cash is a no-no, but under present circumstances I like to hold it and reinvest it at much lower future prices that I feel are coming.

A SIMPLE BEAR MARKET PORTFOLIO
Allocation	Asset	Performance 8/26/03 - 8/26/04	Weighted Percent
10%	Hussman Growth	6.2%	0.6%
10%	Hussman Income	8.5%	0.8%
10%	Prudent Global Income	7.3%	0.7%
10%	Permanent Portfolio	22.1%	2.2%
30%	Prudent Bear Short Fund	-7.7%	-2.3%
30%	Cash	0.9%	0.3%
100%	Total		2.3%

The figures above are surely indicative of a bear market and they will perhaps get a little worse until the short fund starts gaining. The results over the last 3 months show that is happening. We like the idea of putting aside some cash to invest at much lower prices, although some investors might like to increase the amount of the short fund right now instead.

Please note that Hussman Income, Permanent Portfolio and both Prudent funds hold sizable amount of precious metals, which may result in some price declines if the gold and silver prices decline as forecast by the current Elliott Wave status. However, eventually these holdings will be very profitable for patient investors.

A CAPITAL PRESERVATION PORTFOLIO
Allocation	Asset	Performance 8/26/03 - 8/26/04	Weighted Percent
30%	Short U.S. Treasury	2.2%	0.7%
10%	Hussman Income	8.5%	0.8%
20%	Prudent Global Income	7.3%	1.5%
30%	Permanent Portfolio	22.1%	6.6%
10%	Prudent Bear Short Fund	-7.7%	-0.7%
100%	Total		8.9%

This portfolio would be suitable for investors of any age who want a safe middle-of-the-road experience. The small percentage of the short fund is included to protect against the 30% of stocks in the Permanent Portfolio fund.

A MODERATE GROWTH PORTFOLIO
Allocation	Asset	Performance 8/26/03 - 8/26/04	Weighted Percent
35%	Hussman Growth	6.2%	2.2%
35%	Permanent Portfolio	22.1%	7.7%
30%	Prudent Bear Short Fund	-7.7%	-2.3%
100%	Total		7.6%

This quite simple portfolio should do very well in the future as the short fund commences to build profits in this bear market. At the bottom of this bear leg, this portfolio should be rebalanced. Or better yet, the short fund should be sold and purchased again at the next market top.

With the market heading lower, irrespective of whom wins the presidency, confidence in the economy should weaken and start to bring talk of a renewed recession. Eventually, and I cannot predict when, the talk will shift to a depression. The real estate bubble will start to burst in the U.S. and other English speaking nations and unemployment will start to worsen.

I have been expecting this outcome of our stock market crash just as it followed the 1929 crash. Every reader of this essay should be forewarned of what lies ahead and take whatever steps are available to lessen the effects of a severe depression. Eventually, the economic depression in the U. S. and Europe will merge with that in Japan and we will have a world-wide depression to deal with.

The current events are taking almost precisely the same path as that after the 1929 crash except at a much greater level predicted by the Elliott Wave structure years ago. Again our Economics profession has shown no understanding of what has been occurring in our stock market and economy. As a result, both our President and his Democratic rival have not been given the critical advice needed for them to lead our nation.

So, our people are once again left in a position requiring every family to fend for itself. We urge every reader to alert their extended family to the disaster that lies ahead. Preserve your home and your capital to the very best of your ability.

Please remember that it will take perhaps many months for awareness of the word depression to spread thru our whole country. So it will probably make sense to limit your warnings to those who know and respect your opinions.