Trouble With the Curve and Safe Investing

Trouble with the Curve is a great baseball movie with Clint Eastwood playing a scout with vision problems. His success in dealing with ‘the curve’ can be aptly transformed to making safe investing decisions.

While Gus (Eastwood) couldn’t adequately see the year’s potential #1 draft pick swing the bat he could hear how the bat sounded when the player hit the ball, plus Gus had the aid of his baseball-smart daughter who could see the player’s swing.

Evaluating a buy signal of a ticker symbol can be compared to evaluating the hitting ability of a ball player and the ticker’s “curve” or data signals.

If all you do is look at the Return of a ticker, the raw batting average so-to-speak, you may be seeing only part of the picture. Profitable investing requires the use of more than just the Return data.

To avoid trouble with the curve one should actually look at a number of key elements to discern if buying this player, this stock or ETF, is truly the best move. For example:

  • What is the equity curve of the ticker; is it really moving up?
  • What is the equity curve of the ticker compared to a key benchmark like the S&P 500?
  • How does the projected future of this ticker compare to others in your watch group? In other words what is the relative strength momentum as compared to the rest of the watch group, and taking it a step further, also to the S&P 500 or another benchmark?

In the same fashion you can analyze when to sell a mutual fund or any other investment. Just like deciding what to buy can be based on different types of analysis, different charts, different signals, the decision to sell can and should be based on a variety of key factors.

Obviously a sell signal based on a drop in value can be of utmost importance and one to act upon particularly if the price drop is significant. This is a signal, like deciding what to do with a ball player who consistently strikes out, that requires attention before your portfolio suffers or the ball team suffers because this player is not contributing.

But there are other sell signals that a good  investment program can highlight:

  • Drop in ranking where the ticker is now being out-performed by others in the watch group – just like a team that trades for or promotes a better hitting third baseman.
  • The Equity Curve signals the market is going down or is too volatile for safe investing.
  • The moving average chart indicates the ticker is dropping below its averages just like a player in a slump that needs to be benched or get in extra work with the hitting coach.

In other words your investment portfolio curve can stay in positive territory, moving upwards if you keep your eyes and ears open to multiple signals for when and what to buy and when to sell. In this way you will avoid trouble with your curve and your batting average will rise and you will score more runs.

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