Rational Investing: Irma Indicator calls bottom on stock market's decline

The Irma Indicator appears to have a perfect record 100 percent accuracy in calling bottoms in market declines.

As with all statistics, the size of the sample matters. In this case it consists of only two occurrences, but the first one was right on the money and the second looks promising.

What, you may ask, is the Irma Indicator? It's a call or, most recently, an e-mail from my client Irma alarmed about the markets. (In the interest of full disclosure I must tell you that she is a real client, but her name is not really Irma. I chose that name to protect her privacy and because I like the alliteration.)

The first time Irma sounded the alarm was in early July of 1994. The Dow Jones Industrial Average had ended the previous month at 3,625, down almost 10 percent from its January close of 3,978. She was beside herself because of what she had heard on the evening news about how bad the markets were doing.

"Don't you think we should sell everything and just put the money in certificates of deposit?"

After reassuring her that her portfolio was not speculative, was balanced and did not consist solely of common stocks, and suggesting that she not let the media "bad news of the day" upset her, she agreed to stay the course.

Score one for Irma calling the bottom of that decline.

By the end of the year the media were reporting (with little fanfare, I might add) that the market closed at 3,834. At the end of the following year it closed at 5,117, more than 60 percent above the point at which she had almost pushed the panic button. Her patience was rewarded.

Her second reverse market call occurred April 4 of this year. Perhaps because she remembered what had happened previously, she had her daughter e-mail me a note that they had heard on CNBC about how the markets were expected to decline further because of the economic uncertainty.

The question again was one of should we sell and put the money in certificates of deposit. For the record, the Dow Jones Industrial Average had closed the day before at 9,485 BINGO! Mark down call No. 2.

Of course, only time will tell if she called the bottom of the last correction. My guess is that at year-end, a look back to that level will prove her ability.

Those of us who have been in the investment business through multiple bull and bear markets usually have one or more clients who are bellwethers, clients who want to be overly aggressive when markets are screaming to new heights and who, when markets are at or close to bottoms, reach for the panic button.

It is every investment pro-fessional's job to help serious investors stay the course with a disciplined, rational approach.

A substantial part of our business is brought to us by investment brokers and financial consultants who concentrate in providing solutions to specific client needs.

Two common characteristics almost always mark the difference between them and the transaction-oriented broker: The professional has helped the client identify his risk tolerance and has employed a logical approach to investing that emphasizes reasonable performance expectations.

In other words, by managing expectations, he helps the client avoid the states of euphoria or despair that market cycles can cause in the less disciplined.

Oh, yes, I almost forgot. I know a 30-year-old who may be in an Irma apprenticeship. He jumped on the dot-coms in March of last year.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)