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UPS AND DOWNS

Prestige - 1 Feb 2017

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PRESTIGE BUSINESS IT IS SAID THAT HISTORY REPEATS ITSELF BUT IN THE REALM OF BUSINESS HOW IMPORTANT IS HISTORICAL DATA IN DETERMINING STRATEGY FOR THE FUTURE? CHRIS BUCHANAN SPEAKS TO DR JOHN DEMARTINI ABOUT THE PITFALLS OF BEING HISTORICALLY DEPENDENT. he essence says Dr Demartini is whether you're looking at the long haul or relying on sentiment, and that the dayto He says there are cycles that form part of specific sectors and the general market as a whole, which are normally driven by interest rate decisions, particularly in the development and construction sectors. "The eight year cycles and 75 year cycles are pretty easy to pick as long as the industry is a viable industry." He cites the Chinese economic crisis of two years ago as a disruptor to the cyclical effect and then the recent US election as a further disruptor, postponing the raising of interest rates and creating a longer oscillation. UPS AND 'DOWNS day fluctuations because of events or sentiment are likely to hurt you in the long run. True value exists when you know what the mean is, or know what the intrinsic value of the investment is over time through cycles or fluctuations in the market. What we need to understand he says is that it's banking driven and collates with the debt cycles outlined by Bridgewater's Ray Dalio. What Dalio tries to do is simplify the economy looking at the factors that create growth. Productivity is one of the factors but borrowing, or debt, is the largest of the influences and this works in natural cycles. When interest rates are low, borrowing is cheaper so more debt is created which increases spending, which drives the economy. Under high interest rates borrowing decreases, as does spending, resulting in lower growth. But debt relies on two factors, the borrower's ability to pay it back through their income and the collateral they are able to put down to guarantee that debt. The crash of 2008 was a direct result of insufficient collateral or income to cover the overindebtedness of the borrowers. Dr Demartini believes that looking at the past gives you an indication of the cyclical nature of the economy but you also need to look at the present to understand the current status and whether there is an imminent correction, as was the case in an overtraded credit market of 2008. But he's not that fond of speculating what might happen in a cycle, instead he likes to examine the intrinsic value of a.company and see whether it has investment value, determined if the value is below the mean. He thinks it's time to accumulate cash because interest rates are on an upward cycle which will in turn reduce borrowing and may even create distress with current borrowers, presenting investments that will trade below He thinks it's time to accumulate cash because interest rates are on an upward cycle which will in turn reduce borrowing and may even create distress with current borrowers, presenting investments that will trade below their intrinsic value. their intrinsic value. Similar to what many cash flush investors did after the crash, pick up distressed assets that borrowers were forced to get rid of because they could no longer afford the debt. "I've got about 70 different parameters I look at before I buy a.company (stock) says Dr Demartini, that let me know what the.company's doing basically. I'd much rather follow that than just the cycle trends." Some investments he believes can live outside of their own performance and value criteria like.commodities. He says if he were buying.commodities, he would want to know who the buyer of the.commodity is and then look at their cycles. A case in point is the Chinese and Indian slowdowns that have put pressure and steel and copper prices through decreasing demand. Technical analysis by using charts to predict future value is, as far as he's concerned, a pseudo science. He said he watched forex traders following technical analysis which amounted to gambling on a daytoday basis, not looking at intrinsic value or cycles within currencies. Financial television programmes and websites spend a lot of time talking to technical analysts who take to the charts to predict short term gains or losses within the stock market which Dr Demarini says also amount to speculation and gambling, a bit like snake oil pedlars out of the old west with nothing of value to sell but smoke and mirrors. For Dr Demartini it's all about intrinsic value and where you are in the cycle. Get those two right and that will put you in a good position to make a financial or investment decision, whether you're buying stocks or the CEO of a corporation looking to sustain the.company on a growth path over the long term. ukdd Founder of the Demartini Institute, International bestselling author, educator and consultant www.dr.demartini.corn

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