Assumed wisdom in the markets is that you cannot avoid blow ups such as occurred with MF Global (bankruptcy), Netflix (down 75% in 3 months) or Sino-Forest (fraud investigation leading to suspension of trading at $0.00). Diversification and limited position sizing are the risk management methods that work best with a buy-and-hold portfolio. Fund King would not recommend any other strategy if the investment mandate is to be fully invested at all times.
However, if one uses the Fund King method to manage a portfolio that includes these securities – MF, NFLX and SNOFF – along with a range of other diversified ETFs such as TLT, SPY, MDY, EEM, EFA, etc., then you would have a diversified portfolio of choices in which to invest. Using the Fund King ranking system, you would get clear “SELL” signals for these blow up names. Three months ago NFLX was the #2 ranked security in this portfolio, and subsequently lost 67%, and yet this model portfolio keeps sailing.

What does this imply? It implies that trouble in a company is broadcast by its stock price. One does not need to mud wrestle with the financial statements, interview senior management, listen to fund managers and Wall Street analysts. All of that hot air means nothing if investors do not act on it. And in the stock market the only action that matters is clicking on either the “BUY” or “SELL” button. So what the Fund King system can measure is the action at the margins, which has the most material influence on prices. If more investors act on these changes, they tend to become self-fulfilling, creating a recursive feedback loop, and the company share price declines.

Don’t take my word for it. Try it yourself!

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