Working Capital Model Investing - The Process

Most people enter the investment process tip first. They hear something, grab an idea from a popular blog, accept a Cramerism or some motley foolishness, and think that they are making investment decisions. Rarely, will the right-now, instant-gratification, Internet-generation speculator think in terms that go beyond tomorrow's breaking news.

It just doesn't work that way in the long run. Investing takes place in an uncertain environment with at least three important cycles working their way through time at different rates of speed. Each should have an impact on investor decision-making. More often than not, short-term thinking and impulse decision-making are ineffective long-term investment strategies---

Today, in the midst of a cyclical "perfect storm", how many Wall Streeters have the cold-blooded temperament required to focus on anything other than dwindling market values, depressing economic news, and income securities that just don't want to react normally to minuscule interest rates?

The short-term mentality thrust upon investors by the tax code, the media, and the underground investment advice community obscures the big picture and makes investing more and more difficult as time goes on. The Working Capital Model (WCM) is a long-term-thinking-only-welcome-here approach that is based in a much less frantic, but parallel, investment universe.

The investment community evaluates short-term time intervals, and compares all performance to popular indices that rarely have any direct relationship to real live investment portfolios. If an investor thinks long term when constructing his investment plan, how does he justify short term thinking when it comes to performance evaluation?

In rising markets, investors second-guess their profit-taking disciplines because they exited a security too early, and strong markets often tempt the shortsighted into more aggressive asset allocations. In falling markets, just the opposite occurs. Most investment decision-making is a series of much-too-late, knee-jerk reactions to cyclical conditions that are misunderstood.

Market Value growth does little more than increase a person's hat size; Working Capital growth increases a person's asset base. The point is that paper profits can't be reinvested or reallocated. True portfolio growth requires additions to the income and growth producing asset base--- the working capital.

The most important fundamental tenets and basic differences between the WCM methodology and modern Wall Street craziness are these:

One. The length, depth, breadth, and height of the various cycles are presumed to be totally unpredictable. Additionally, even though they are inter-related and inter-connected in many ways, none of them are related in any way, shape, or form to the calendar year.

Unlike Wall Street, and most of Main Street for that matter, the calendar has no role as a measuring device within the WCM, making the horse race mentality, and competitive atmosphere disappear entirely.

Two. To be successful, an investor must make cycle-savvy, buy-sell-hold decisions, and formulate different performance expectations for securities based upon their purpose. The WCM recognizes only two classes of securities, Equity and Income, leaving more speculative "others" out of the equation entirely. Each class is purchased with a different primary objective in mind.

Investors must learn what to expect from each, and at different stages of the various cycles. The cyclical focus of the WCM makes it easier to determine now the actions and decisions most likely to produce the best results later--- in terms of investor specific investment goals and objectives.

Three. The WCM does not focus blindly on short-term changes in the market value of securities, nor does it concern itself with calendar time intervals. Similarly, it does not look at cyclical peaks and troughs as either good or bad. Rather, it attempts to deal with conditions at hand in a manner most likely to achieve long-term goals.

Four. The generation of annually increasing levels of "base income" is given paramount importance in the WCM. It is defined as the total of interest and dividends produced by the portfolio, without the inclusion of realized capital gains. Income pays the bills, not market values.

Five. The WCM is as much a planning tool as it is a decision making model. Working capital is defined as the cost basis of the securities and cash contained in the portfolio. This approach simplifies the implementation of the asset allocation decisions that all investors should be making before they purchase security number one.

Six. The WCM uses the market value of securities quite differently than most other investment methodologies. It recognizes that the price of a security is as much a function of speculation about the movement of market price as it is about the inherent fundamental quality of the security itself.

Lower prices of IGVSI stocks, for example, are considered opportunities for purchase, while higher prices are considered opportunities for profit taking.
Similarly, lower prices of income Closed End Funds translate into opportunities to increase income and reduce average cost per share, while higher prices are also viewed as profit taking opportunities.

The Working Capital Model operates in an environment of cycles rather than calendar years, and emphasizes a security's fundamental value as opposed to its market price. Market Value is used only to signal buying and profit taking decisions. The methodology has three operating objectives:

One. Growing Working Capital at a rate consistent with portfolio asset allocation. Higher equity allocations should produce a higher long-term rate than income portfolios.

Two. Growing portfolio base income at a rate consistent with portfolio asset allocation. Higher income allocations should produce a higher growth rate than equity portfolios.

Three. Trading securities for reasonable profits, as often as possible. Equity portfolios should produce more capital gains than income portfolios, and mostly short term if the operating disciplines of the WCM are being observed.

When the cycles converge higher, new market value highs will appear as well.