Yesterday I said I’d show you how to ‘fuse’ two very different investment approaches to gain an investing advantage. I’ll get to that in a moment with an actual example.
I’ve been using this new ‘fusion method’ since late last year. Despite the recent correction, the results have been good and it’s outperforming the market comfortably.
I spoke with Kris Sayce about it today, as part of the series of Facebook chats we’ve been doing this week. You can check it out by clicking the screenshot below…and, of course, don’t forget to ‘like’ our page.
Before I show you how this fusion method works, I want to touch on the topic de jour. That is, China’s currency devaluation.
Don’t you think it’s funny how everyone is now an expert on it? A week ago it was not even on the mainstream media’s horizon. Not that I saw anyway. But now it’s dripping off the business pages.
It wouldn’t have come as a surprise to you though, dear reader. In the 3 August edition of The Markets and Money I wrote the following:
‘The other very big issue here is China’s currency peg to the dollar. As the 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 yesterday, dropping 4.3% and 5.4% respectively. And this morning, the Financial Review reports just how this deflationary impulse flows through the global economy:
‘Chinese steel producers have already cut export prices in response to a lower yuan, industry sources said, providing some of the first evidence of how Beijing’s devaluation will help companies in the world’s second-biggest economy boost sales.
‘China’s steel industry is the world’s biggest, but shrinking demand at home has forced many mills to ship record amounts abroad, with some said to be selling at a loss.
‘A weaker yuan will make Chinese steel products even cheaper overseas as Beijing’s surprise move to devalue its currency gives the country’s exporters leeway to cut prices.
‘Some small Chinese mills had already lowered export prices of steel products like rebar for construction use, by $US5-$US10 a tonne, sources familiar with the issue said.’
But in all the pages written about China’s ‘one-off’ currency devaluation (which so far stands at two adjustments totalling around 3.5%) no one has mentioned the structural problems behind it.
I don’t know, maybe it’s implied in the whole currency war argument. Jim Rickards, editor of Strategic Intelligence , must be having a good old laugh at how the media are now flogging a term he reinvigorated and popularised years ago.
Yes, it’s all about the ‘currency wars’. But what are the currency wars really about?
The way I view it, it’s a result 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 massive trade surplus. It’s built its whole modern economic expansion around exports…which creates this trade surplus.
By all accounts, China remains very competitive on a global scale. 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 can’t handle change. The whole structure of its economy is geared towards satisfying the needs of western consumers. Especially US consumers.
Even a little change in that dynamic spells trouble for China. Think about it. China wants to create a more balanced economy. One that sees its consumers driving growth.
Don’t you think a strong currency would make sense in this case? It would make imports cheaper. 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 change to get there.
But politicians are not interested in structural change. They are only interested in maintaining the status quo…their 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 economy is like the Titanic. It’s 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 purchasing power of cash increases? Or does the opposite happen? Do central banks double down on their historic post-2008 blunder?
I’m ready for anything. It’s why I’ve embraced the ‘fusion method’ of investing. That is, focus on a company’s fundamentals and valuation, but also ‘listen’ to what the market tells 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 stock into a downtrend. (Remember earlier this week I said a downtrend occurred when the short term moving average (yellow line) crossed below the longer term MA (the blue 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.
And the market was correct. In August 2014, JB’s stock price plunged on its results release. Even though it was still good fundamental value, it was a bad buy at this point because it was in a downtrend.
Buying into a downtrend is a higher risk strategy. It may work out, but you just don’t know how far the trend will take you. Plus, it’s higher stress.
For example, you may have bought at around $17.50 after the initial decline. But it then fell some more, rebounded a bit, and then plunged to $14.50. Perhaps you thought you got it wrong, and decided to get out…at exactly the wrong time.
The ‘fusion method’ of investing prevents you from getting into these situations. It 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 moving averages crossed over to confirm an emerging uptrend was underway, I sent out a buy recommendation to subscribers. We didn’t pick the bottom, but that’s ok. No one will ever do it consistently so it’s no something you should even try to do.
The fusion method is a lower stress strategy. It’s about finding fundamentally mis-priced companies and waiting for an uptrend to unfold before buying into them.
It’s simple and effective. And built to withstand the uncertainties of the modern investing world. It’s working pretty well too. Recently I’ve been preparing a video report to show you how you can begin taking advantage of it. It’s almost ready for release. Stay tuned.
For Markets and Money, Australia