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Unlike most of my colleagues, I am a professional economist. I have postgraduate degrees in economics and economic history. That’s the base from which I approach stock trading.
Throughout most of my career before I joined Banyan Hill, I managed large-scale housing investment funds in South Africa.
Since joining Banyan Hill six years ago, I’ve been completely immersed in the world of asset trading. Because my focus has long been on helping to preserve as well as accumulate wealth, I have experience with all sorts of assets, not just stocks. I’ve written about precious metals, commodities, rare collectibles like stamps and even collectible musical instruments.
The business cycle is at the heart of my approach to investment. Fundamentally, I use my skills as an economist to identify where we are in the regular cycle of growth and recession. Then my team and I apply our technical analysis skills to identify specific companies that are poised to do best. Within the sectors that match where we are in the business cycle.
This influences The Bauman Letter’s investment approach in various ways.
For example, growth companies like up-and-coming biotech stocks are exciting because the expectation is that they will do well no matter what the economy is doing. You buy-and-hold.
But the bulk of the market is comprised of companies competing with their rivals for market share and trying to increase their efficiency and profits. To identify the specific companies we want to buy for short to medium-term gains, I take a two-step approach.
First, I want to know where we are in the business cycle. What kinds of stocks tend to do well when the cycle is just past its peak? When a recession has just bottomed out?
Second, I want to identify the undervalued companies from within the stocks that match where we are in the business cycle.
The difference from simple value investing is that you’re buying the company because it’s cheap and because of where it’s situated in the business cycle. When the business cycle changes, that company may become overvalued simply because it’s in a sector that declines when the business cycle enters a new phase.
I also use income distribution and demographics in my analysis.
Let’s say you’re excited about the prospects of selling products to millennials. What can they afford? Are there regional and geographical differences in what they might buy? What are their longer-term income prospects, and how might that affect the future of specific companies? Or consider recent college graduates. The economy is strengthening, but they’re heavily burdened with debt. How will their cash flow affect their purchasing behavior over the next 5 to 10 years? What will do to housing? Will companies that operate large-scale rentals benefit? What kind of cars will they buy? Will they even buy cars at all?
Income distribution and demographics also play a role in regionally-based companies. Right now, we’re seeing people fleeing the expensive coastal cities and looking for opportunities inland. Who is going to benefit from that? What sectors? What companies?
Demographics plays a similar role. We know how population trends are unfolding — the population is aging — and we can use that to predict sectors that are likely to benefit over the next 5 to 10 years. So I look for strongly-positioned companies in those sectors, like healthcare, or something as specific as home nursing. From there we identify those that have the strongest dividend potential, for example. Or who are poised to make acquisitions. Or we look at how income inequality is creating opportunities for some firms and hurting others. Macy’s and Sears are dying but Dollar Tree is growing, for example.
I also incorporate analysis of global supply chains. Every company is both a producer and consumer of goods and services. In the modern globalized economy, companies draw on supply chains that stretch all around the world. All kinds of things can affect those supply chains, both good and bad. Weather. Politics. Regional and national financial crises.
Normally, a stock analyst will start with an interesting company and work outward from there to identify opportunities and constraints on the supply and demand side. I flip that on its head. I look at trends in markets on both the supply and demand side to see how they might affect specific companies.
For example, right now Apple is tied into multi-year supply contracts with Chinese suppliers and assemblers. If the trade war continues Apple will have to find other suppliers or help their existing suppliers move their factories to other parts of Asia. That will hurt their bottom line.
Or let’s say a company is investing directly in suppliers in a key market (like China) and wrapping up capacity for itself ahead of its competitors. That company may take short-term earnings hit thanks to the expenditure, but it’s setting itself up for longer-term improvement.
Finally, inevitably, I incorporate politics in my analysis. Not politics in the red versus blue sense, but politics in the more general sense of government policy, which has a big impact on markets and specific companies.
Taxation policy, for example, can have a strong influence on a company’s performance. At the beginning of 2018 we saw companies poised to benefit from the huge corporate tax cut, like retailers, experience a boost in their stock price. Trade and tariffs are also critical.
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Clint Lee is The Bauman Letter’s research analyst. Over the past 15 years, Clint has provided investment research for some of the largest institutions in the world and has managed more than $2 billion in assets for his clients. He also led a fund recognized by U.S. News & World Report in 2018 as the No. 1 fund in its category.
He received his MBA from Case Western University, a top-ranked program, and has also earned the Chartered Financial Analyst (CFA) and Chartered Market Technician (CMT) designations. These designations demonstrate Clint’s commitment to analyzing investments from all angles by combining fundamental and technical analysis.
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As I explained above, our model is to use economic analysis to identify sectors that are likely to gain given current trends in the U.S. and world economies. We then use technical analysis to identify the companies will invest in.
We divide these investments into three different portfolios:
- The Endless Income Portfolio holds dividend-producing assets, including REITS, MLPs and BDCs. These are typically large U.S. companies with a long track record, strong market share, sound, finances and excellent management. We may also include dividend oriented exchange traded funds (ETFs).
- The Base Hits Portfolio contains stocks and ETFs that we expect to gain in value steadily and with lower risk. These companies may be large or mid-cap. Instead of investing to capture dividend yield, however, we will choose these companies based on the likelihood of short to medium-term stock price gains based on our analysis of growth, momentum, value and sentiment factors. We may also include ETFs, including those targeting foreign markets.
- The Home Run Portfolio includes growth stocks, such as small or mid-cap companies on the verge of product breakthroughs that could result in large short-term gains. These are riskier positions.
You don’t have to invest in all three Bauman Letter portfolios. You can pick and choose amongst them based on your investment style, your personality, and above all, on where you are in your investment lifetime
The best time to buy, in general, is during the stock market’s regular hours: between 9:30 a.m. and 4 p.m. However, the best period for small investors is often between 11 a.m. and 3 p.m.
That’s because big-money investors tend to put their orders in at the open at 9:30 a.m., and then around the close at 4 p.m. When they crowd into these times, they tend to drive stock prices higher. By waiting until 11 a.m., you’re not competing with them to buy your stock — and often you’ll get lower prices.
The worst time to buy is during afterhours trading. This is between 4 p.m. and 8 p.m., when there are few transactions. Since there are just one or two sellers during this period, they’re going to give you a horrible price, so stay clear of this time.
As I explained earlier, The Bauman Letter has three portfolios. The allocation strategy differs depending on the portfolio.
For the dividend-oriented Endless Income Portfolio, I recommend that you hold as many positions as you can. Since the purpose of this portfolio is to accumulate income, and not primarily to achieve stock price gains, it is not strictly necessary to hold every position in the portfolio.
For the Base Hits Portfolio and the Home Run Portfolio, I do recommend that you purchase all the positions.
That recommendation is based on a fundamental principle of investing: diversification. You should never “bet the house” on a single stock. Instead, you should diversify and own a series of different holdings in your portfolio to limit your exposure to any one company. This is especially important with higher risk assets like those in the Home Run Portfolio.
To achieve this, simply decide how much you want to invest in these portfolios. Then divide that amount equally amongst the positions in the portfolio.
Let’s say you have $10,000 to allocate to the Base Hits Portfolio. We will typically have about 10 stocks in the portfolio at any given time. You should therefore allocate $1000 to each position. The same would apply if you choose to invest in the Home Run Portfolio.
This way, if one stock ends up disappointing, you still have other stocks in the portfolio that continue to work in your favor. The idea is to spread your bets!
Absolutely. Most brokerages have what’s called a virtual account. It’s simply a fake account with a set amount of capital you can use to track trades in real time, all without ever risking real capital. It’s a great tool for someone new to this strategy, as it will help you learn how to follow my recommendations without making a costly mistake in your brokerage account. I recommend doing this for a few trades until you’re comfortable.
Then, when you go back to your live account, it should be a breeze to keep up with my recommendations.
If a position is still listed as a “Buy” in our ePortfolio (where I track all of our active positions), by all means, feel free to enter the position! If a position is listed as a buy, you can still profit by entering now.
If a position is listed as a “Hold,” however, please do not enter the position. If the stock experiences a pullback to a better entry price, I may move it from a hold to a buy in the future, but it’s better to wait while I look for the stock’s trend to point toward a likelihood of higher prices in the future.
You will need a brokerage account. These are described in detail in our Beginner’s Guide to Investing document.
There are two types of brokerage situations.
- A taxable brokerage account: This is an account that is separate from your retirement account, such as your IRA or 401(k). You contribute to this account using post-tax funds. Any capital gains that you enjoy are taxed, and any capital losses can be used to offset your income tax.
- A retirement brokerage account: Most retirement funds managers allow you to set up a brokerage account under your IRA or 401(k). This allows you to trade in the same way as a nonretirement, taxable brokerage account. The difference is that you do not pay capital gains taxes or enjoy deductions for capital losses. You withdraw them from your retirement account, at which time they are taxed at your normal income tax rate.
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Our returns are calculated based on our official entry price, which can be seen in the ePortfolio on our website. Your entry price might be different from our official entry price, which could have a significant impact on your total returns.
In addition, the calculation of the portfolio’s returns do not include any transaction fees that you might incur.
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