I recently came across Steven R. Selengut and his book, The Brainwashing of The American Investor. After reading all the reviews on Amazon, I decided to buy a used copy. The following is a review of the book and a brief overview of the Working Capital Model as outlined by Steven Selengut.
Selengut starts the book with his negative opinion about Wall Street and the current paradigm. Here are some of key points made:
- Most financial institutions and advisors do not have their clients’ best interests at heart.
- Theses institutions will do everything in their power to part you from your money, as is evident by many financial products that are designed to line their pockets with your money.
- These institutions have the power to manipulate the market and the media to generate financial transactions to their advantage — after all, they make more money if you actively buy and sell financial products.
- The indices such as the Dow Jones Industrial Average (DJIA) and the S&P 500 have no basis in economic reality (they used to). Nowadays, they are designed to generate more interest and transactions.
- Most Wall Street Financial Advisors are just over-hyped sales person. Their primary goal is to make money and do what is most profitable for their companies — not to help you.
- Stock analysts make recommendations for many reasons but to give you good timely investment advice is not one of them.
- There is no meaningful correlation between a calendar year and any economic investment cycle.
- Tax-loss harvesting and not selling your winners to lower your taxes is the wrong way to think.
The premise he makes are very interesting and some will challenge the way you currently look at the whole system. However, it’s unwise to believe everything that you are told and I would move with caution while you’re digesting the points he’s making.
The Working Capital Model Of Investing
Steven Selengut’s investing system is called the Working Capital Model where investors follow a prescribed approach to investing with a well-defined asset allocation, selection process, exit strategy, and performance measurement.
Selengut argues that there are only two asset classes that matter: fixed income and equity. He recommends that a starting portfolio starts with 30% fixed income and 70% equity. For fixed income, he recommends municipal bonds, corporate bonds, Treasuries, and REITs. For equity, he prefers individual stocks (or closed-end mutual funds if you have less than $20,000 to invest).
For the equity portion, the investor starts with a Selection Universe which Selengut recommends stocks that are listed in the New York Stock Exchange (NYSE), have investment grade credit rating (i.e., AAA to BBB as rated by Standard and Poor), and pays dividend.
Each day the investor reviews his Selection Universe and look for stocks that are more than 20% below their 52 weeks high as the “buy” candidates. There are a few more minor rules with regard to buying, the most important being:
- Never use market order to buy your stocks.
- Never buy more than 5% of your capital in one stock, preferably start with no more than 3% position in any individual stock.
Overall, the Selection Process follows the principles of Quality, Diversification, and Income (QDI):
- Quality – Invest in NYSE investment grade rated stocks (or you can design your own quality criteria).
- Diversification – Split your portfolio between fixed income and equity, and do not exceed 5% position with any one stock.
- Income – Generate a steady stream on income with both fixed income and dividend paying stocks.
Selengut believes in two primary exit conditions. First, sell any stock that increased 10% or more since you bought it. Second, any stock that do not reach the target within 12 months should be sold as well.
This technique is similar to the high inventory turnover concept employed by discount stores where selling a lot of low profit margin products is better than selling very few high profit margin products. He argues that it’s easier to find stocks that quickly attain 10% gain than it is to find ones that will double in value.
Lastly, he believes that measuring investment by its market value is unproductive, because the value moves up and down too quickly for it to be meaningful. Secondly, paper gain is meaningless until it becomes realized gain and therefore should not be the basis of performance.
Instead he proposes measuring the portfolio performance by its working capital value (how much you have invested) and its ability to generate income. He believes increasing these two values year over year is the true indicator that your portfolio is healthy.
I thought the conspiracy theory and behind the scene Wall Street insider stories were entertaining. I also felt that Selengut’s technique is intriguing enough to warrant additional investigation; however, everyone should be cautious about any “proven strategy”. The qualities I like most about his Working Capital Model are the well-defined buy and sell mechanics. I am a bit wary about the performance of his model since he doesn’t provide any concrete data to back up his theory.
If you are a seasoned investor, this book may be worthwhile to check out. But for average investors, it might be better to stay with the simpler investment strategy of globally diversified portfolio made up of low cost, passively managed funds.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.