Redrick Terry:
4 Your Money time now, we are joined once again by David Nelson, CEO of NelsonCorp Wealth Management. David, welcome back.
David Nelson:
Good morning, Redrick. Thank you very much.
Redrick Terry:
Absolutely. So a key pillar of what we do here for 4 Your Money is the concept of risk management. You guys look at all sorts of data to understand that risk. But often the focus gets heavily weighted towards price movements. So why is price such an important metric?
David Nelson:
Well, it’s the most important variable when we look at investing. We have a saying that we share around the office here and that is, “Being right or making money, they’re not always the same.” So when we talk about price, we look at supply and demand and we’re looking at what sellers and buyers are willing to pay as far as for a particular security. There’s a lot of analysis that goes into this. Most of which is probably fundamental, which is a fancy way of saying, “We’re trying to determine as far as the growth trajectory of this company and the dividend potential flow, et cetera.” So it’s the nuts and the bolts type behind the scenes analysis. Sometimes you talk about technical analysis, which is just looking at market reactions as far as the things. But it really is important as far as the price and trying to avoid the big mistakes and trying to capture the big moves. If you focus on price, you’re typically not going to get every penny of the upside, nor will you take the big hit as far as on the downside. It’s a pretty good place to start.
Redrick Terry:
Do you have an example that we could look at to see how this works?
David Nelson:
Yeah. I love this chart that I brought along today and folks, please pay attention to this one because this is really, really good. What we have here on the top in blue is we’re looking at essentially the Dow, which is what most people look at when they talk about what the market do for the day. So this is the Dow Industrials on the top and on the bottom is looking at the Dow Transports. Now this particular theory called the Dow Theory was developed by a gentleman by the name of Charles Dow. So he was one of the founders of the market. So what he did is he was looking for a means of trying to look at when to be invested and when not to be. And he wanted a very broad representation of the markets. So what he looked at was the Dow Industrials the top and the bottom being the Dow Transports.
David Nelson:
And essentially said that if you look at the average which is the yellow lines that were illustrated under both. When the blue line is above the yellow there, typically that’s a very good sign as far as the Industrials are performing. And on the bottom one it’s above the yellow, it means the Transports are. So when both are above, basically that if you follow this to the letter of the laws as far as this theory, that’s the time you want to be invested. And again, it’s not a guarantee that you’re going to make money, but historically this has been a wonderful, wonderful tool to help you get the big part of the move on the upside and avoid a big part of the move on the downside.
Redrick Terry:
We’re running low on time here, but how can people use this type of data in their own investment processes?
David Nelson:
So it’s pretty simple actually, and it’s easy to find this type of data. But I don’t think most people out there want to be a technical geek. So again, we go back to having a discipline approach, no matter how you invest your money. And we think this Dow theory is a pretty solid example of technical analysis and how it can be used to, again, get gains and try to minimize losses. But we recommend for most people, if they’re going to go down this path is to use it kind of as, what we call a risk on, risk off. So when you’re above the yellow lines, that would be risk on. So you probably want to own stocks. When it’s below you probably want to not own stocks, but own something safer, cash, maybe a bond, a government bond, something of that example. So again, just trying to give you a big picture of what some of the tools are and how they can be utilized to help have a better experience financially, as far as investing in the markets.
Redrick Terry:
We appreciate your advice as always David Nelson. Thanks for being with us.
David Nelson:
Thank you, Redrick. Appreciate it.
Redrick Terry:
Absolutely. And if you missed any part of this discussion, we’ll make it available to you at ourquadcities.com.