Philosophy & Methodology
The 80/20 Rule applied to Investing
In Bear Markets, timing and asset allocation are the keys to success. Like Nobel laureates, Sharp & Markowitz, we attribute 80-90% of investment returns to asset allocation. Sharp and Markowitz won the Nobel prize in part for applying the Pareto Principle to Investing. The Pareto Principle, named after the 19th Century Italian Economist, Wilfredo Pareto, states that 80% of outcomes result from 20% of efforts in every endeavor. Likewise, in investing, 80% of positive returns typically derive from just 20% of the portfolio. We attempt to stack the odds in your favor by doubling or tripling that crucial 20% which yield the highest returns
Timing and allocation decisions are largely technically-derived from original Elliott Wave analysis, consistent with the Austrian Trade Theory and often supported by timing cycles.
In a Bear Market, the rules of investing are virtually turned up-side-down. Buy & Hold, stock picking, are global diversification are now strategies which guarantee catastrophic losses and downward economic mobility.Isn't it about time you adopted a winning strategy?
The Elliott Wave Principle
The Wave Principle is R.N. Elliott’s discovery that crowd behavior trends and reverses in recognizable patterns. Mass psychology swings from extreme optimism to extreme pessimism, and back again in a natural sequence, creating specific price patterns. Elliott’s descriptions constitute an empirically-derived set of rules and guidelines for interpreting the Market. Although he began by incorporating his discoveries into Dow Theory, Elliott went well beyond Dow Theory in comprehensiveness and exactitude.
The Wave Principle's most striking characteristics are its generality and accuracy.In generality it gives market perspective most of the time, meaning that a student of Elliott needs only to glance at a long-term chart to know where we are in relation to the entire move. Its accuracy in identifying, even anticipating changes in direction is at times almost unbelievable.” Major directional changes to the downside are often indicated by Diagonal Triangles which not only anticipate a turn, but often provide its minimum downside targets. To the upside, a Diagonal Triangle type II indicates the beginning of a long move. Notechnical pattern comes close to the Diagonal Triangle in its accuracy for forecasting directional changes.
Elliott's Theory describes the market structure as a nested series of waves. The impulse wave moves in the direction of the primary trend; the corrective wave moves against it. Impulse waves are labeled with numbers, while corrective moves are labeled with letters.
The chart below describes the characteristics of each wave; the opposite characteristics apply to a Bear Market with the chart inverted. Thus wave 3 is characterized by rapidly deteriorating fundamentals in a Bear Market.
Elliott's Rules(except in Diagonal Triangles)
1)Wave 3 is never the shortest and usually the longest.
2)Wave 2 cannot exceed the origin of wave 1
3)Wave 4 cannot overlap the territory of wave 1
R.N. Elliott
Born in 1871, Ralph Nelson Elliott spent most of his business career as a railroad accountant in Central America. After 25 years in the railroad business he contracted a severe illness. During his recovery, Elliott decided to study the stock market, having subscribed to several market letters, one by Charles Collins and the other by Robert Rhea of Dow Theory fame. At the age of 63, he began his career as a stock market technical analyst, studying and plotting by hand the hourly Dow Jones Averages from the Wall Street Journal.
In 1934, Elliott wrote to Charles Collins relating some amazing discoveries and inquiring about the possibility of getting paid for market forecasts. At first Collins was not convinced, but continued to correspond. Elliott's forecasts proved amazingly accurate in calling several turns, including the bottom of the 1935 correction, which culminated in Collins finally hiring Elliott to provide market forecasts for an initial term of two years. In 1938, Collins wrote and published The Wave Principle, based on Elliott's notes. Within weeks Elliott moved to New York, and with Collins' backing,began a successful money management and consulting business on Wall Street, in which he remained active until 1945. Elliott passed away in 1948.