What’s your guru spruiking now?

Greece’s economy is on life support, Spain, Italy and Portugal are barely holding their heads above water and the Euro zone is starting to look like a no-go zone. There’s nothing slick (sorry, bad I know) about BP’s sorry mess… well you catch my drift… I don’t blame you for thinking the (investment) world has gone to the dogs.

Richard who?

A few weeks ago I read Alan Kohler’s article with an urgent ‘sell’ warning which details American technical analyst, Richard Russell‘s, well, press-panic-button-here, early warning control system for the stock market.

Richard Russell is also publisher of the Dow Theory Letter’s.

This is the commentary response I provided with some explanation of how the Dow Theory works.

Richard Russell granddaddy of investment gurus – hardly!

Can we use their information to determine our investment decisions – That would be downright dangerous! Great in theory, lousy in practice.

As with many market-timing systems, the idea behind the Dow Theory is pretty simple. Stocks in different sectors of the economy often move independently from each other, so just because one Dow average makes a new high doesn’t necessarily mean that the whole market is doing well. When both industrials and transport stocks do well at the same time, however, that suggests a more unified advance in the broader market.

However, while the thinking behind the Dow Theory may make commonsense, it doesn’t always work so well in practice.

What’s more, Richard Russell will often change his mind very quickly when sentiment presents itself.

Bad press

The press have a strong tendency to run with this sort of stuff at the first sign of collapse and following this advice blindly will lead to wealth destroying behaviours. By the time the Dow Theory calls a buy you’ll have missed most of the bargains served up and again you’ll have sold well before due.

Richard called the ‘end to the bear market’ around mid-April 2008 well before Leman Brothers demise and our March 2009 low.

This article I have posted a link to rates his ‘guru’ success rate as a mere 42%. See here for a comparison of his predictions and comments and how they stacked up.

By the way, most of that 42% success rate is just by chance and pure luck. Dow Theory – thanks but no thanks!

The bear has hibernated for the winter

While a little bearish in the short-term this smacks a little bit of market timing, I am ultimately a long-term bull, as an investor you need to assess whether there is good value in the market at the moment, buying in now will still reap you good long-term returns but holding out some for the next ‘slight’ turn down will reap you even more.

You need to exercise some caution.

Just be careful that you’re following the right gurus.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.