Monday, April 23, 2018

If I Could Only Teach One Financial Lesson…

By Christopher R. English, President of Lumen Capital Management, LLC

My official job is developing and managing investment portfolios using our ETF process.  However, I also spend a lot of time educating my clients and potential investors about our process so that they understand how we are managing their money. 

Investments are complicated, so there is a lot that I try to explain to clients over time. However, if I had to narrow it down to just one lesson, it would be the importance of tracking money flows into and out of any investment that you follow.  Money flows, along with fundamental and valuation analysis, form the triad of our investment analysis.  In modern markets, money flows may be the most important concept for us to follow and try to explain.

The Importance Of Price

Price is one of the most important characteristics of an investment. It measures what someone is willing to pay for something at that current moment. And the more people that want something, the higher the price will go. That is what causes markets to advance; when there are more buyers than sellers, so buyers compete by paying more. The reverse is true in bear markets. Sellers have to lower their prices because there aren’t enough interested buyers. 

How Price Influences Investment Selection

Price and money flows are an important factor in how we choose our investments here at Lumen Capital Management. We have tools that help us track these money flows, which are a major focus in our investment analysis of securities. Two of the most important things we strive to identify are over-bought and over-sold environments, as well as support and resistance levels.  A basic way to define support and resistance is to think about price areas where there is a higher probability that buyers will come in and support a security in a decline, and where stocks will face resistance (ie. sellers will possibly emerge as a security advances).  By analyzing the underlying trading patterns in money flows, we are trying to develop a reasonable set of probabilities as to how a particular security may trend. These probabilities then become the foundation of our investment analysis. We uncover these patterns by embedding proprietary indicators that we have developed onto stock charts. 

What Are Money Flows?

A good way to describe money flows is by comparing them to actual flows of water. The chart patterns that we develop are a lot like river and coastal maps. Unlike maps of mountains or highway systems, rivers are constantly changing. However, they mostly follow distinct and fairly predictable patterns.

If a river map suggests that around a certain bend currents often deposit a sandbar, it would be wise to expect one there or close by. Of course, there is no guarantee that the sandbar will be around the bend every time you pass by, but if eight out of ten times you pass by and sand has deposited in that particular area, there is a higher probability of it being there the next time you journey by that point. If you round the bend with caution, expecting a sandbar, then you will intentionally direct your ship toward deeper water and pass through unscathed. If you ignore the map, you could end up running your ship aground.  Unlike road maps, river maps don’t claim to show exactly what is present at all times. Rather, they show probabilities of underwater obstructions and the like. Any experienced ship captain knows that rivers are always changing and their maps can serve as a reasonable guide, but not a promise.

By tracking money flows into and out of investments, we can create financial chart patterns. Like river maps, they give certain types of clues and probabilities, not promises. Having a system in place to identify money flows makes it possible to take advantage of inefficiencies in prices if and when they occur in the marketplace. While no investment methodology is perfect or will have complete accuracy, our system based on data and probabilities in money flows hopefully increase the odds for investment success. 

If you would like to learn more about our proprietary tools for tracking money flows or how we build investment strategies around them, call my office at 708.488.0115 or email us at lumencapital@hotmail.com. You may never know where the next sandbar will be in a river, but it really helps to know where they have been over the past century.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters.   We also manage a private partnership currently closed to outside investors.   Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing him at lumencapital@hotmail.com.

Just a reminder we will only be posting once a week until further notice as we concentrate on our upcoming office move, however, I may put something up in short bursts depending on what I see out in the markets.