School of Hard Knocks 02 (Jan 10 - Jan 13)

[kennynah]

Or why smart people fall for stupid cons.

becos .... "I want to Believe"

[winston]

Why You Should Learn How to Invest Outside of Stocks... Immediately
By Chris Weber, editor, The Weber Global Opportunities Report

A year ago I was getting calls from old friends saying that they were scared to be in stocks any longer.

These were people who just had bought and held for decades. In fact, a year ago was the right time to start buying stocks, not selling them.

Nowadays, I see the opposite comments. People are proud to own stocks. Of course they are... since they've risen 60% in the past year.

As one reader put it (in the February 24 review of my letter in www.stockgumshoe.com/reviews, a site where readers rate the newsletters they read): "I am a traditional market investor, dividing my investments primarily between stocks and mutual funds."

Now I'm no Sherlock Holmes, but a sentence like this tells me that this reader is middle-aged at the youngest. And it all makes perfect sense, really. Take a person who started investing in 1982. From then until 2007, he'd had a full quarter-century of gains. If the market fell, as it did in 1987 or from 2000-2002, it always snapped back.

The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life.

But what if a 25-year bull market was an anomaly? A once in a lifetime event? For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You've come to accept them as normal. Any change is thus temporary. That is, until it isn't, and you are left holding on to past dreams.

I've seen this happen several times over my life. As a kid in the late 1960s, I listened to investors who had ridden the great stock bull market from 1949 to 1966. The Dow soared from about 150 to 1,000 during those 17 years, a great rise of over 550%. They thought it would last forever, and when the Dow briefly touched new highs of over 1,000 in early 1973, they all thought they were back to the races. In fact, they were in for hard times. By mid-1982, the Dow was well below where it had been in 1966.

Then came the people who had gotten rich in the precious metals markets during the 1970s.

Silver soared from $1.29 to nearly $50: a rise of over 6,000%. Gold rose by 2,300% from 1971 to 1980. For many of them, all through the 1980s they waited while what they thought was a temporary correction turned into a 20-year bear market. Many held all during this period with only hopes and memories to sustain them.

I believe we are seeing the same thing now with those who hold stock as a huge portion of their total investments. Getting back to the reader quoted above, his use of the term "mutual funds" already dates him from the time when these were every investor's dream. Younger investors well understand that with mutual funds, you are paying managers a fee that is too high for what they give back. Exchange traded funds, or ETFs, accomplish the same thing at a much lower cost.

And to say that you are diversified between stocks and mutual funds is to say that you are not truly diversified at all. A recent letter to me from another reader shows he understands this. A new reader, he comes on with 2% in cash and 98% in stocks, and he knows he has too much in stocks.

Probably most new readers are in this position. For them I would advise setting a trailing stop and selling if that stop is reached. This stop can be 25% from the recent post-March '09 highs.

In my way of thinking, the stock market has given a rare reprieve to those who hold most of their money in it. This is a time to be moving out. You don't even have to abandon the stock market entirely (though I myself very nearly have). You can just lower the percent you hold in stocks to 33% or so.

Cash and physical metals could make up the other two-thirds. You can have some precious metals stocks, but try to arrange things so that you own them with as little risk as possible, and have patience. A new leg down in the general market could take down all stocks, even the mining stocks.

I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.

Source: Daily Wealth

[winston]

The Only Stock Market Predictor That Actually Works by Alexander Green

There are lots of theories about how to predict future stock market performance.

Most of them are the sheerest nonsense.

There is, in fact, only one indicator that virtually guarantees you will be on the right side of the market.

But first, let's look at the most popular source of misconceived market predictions: Data Mining.

Pick Your Parameters... But Don't Expect Reliable Answers

Every year, investors pour billions of dollars into data-mined investing strategies. They come with impressive-sounding features like "proprietary trading tools" or "McMillan Oscillators." But the money might just as well be invested on a coin toss because the reasoning behind it is completely baseless.

What dating-mining strategists typically do is "back-test," or simulate what would have happened if you'd used a particular technique in the past (typically without incurring any fees, trading costs or taxes).

It's not hard to look back and see what the market did under certain circumstances. For example, what has the S&P 500 historically done when the Federal Reserve starts raising interest rates...

* Early in an expansion?

* During the late summer?

* When the U.S. President is a Democrat?

* In an election year?

* After a team from the old National Football League wins the Super Bowl?

In truth, it doesn't matter, regardless of what parameters you use. You can look at GDP growth, inflation levels, stock market valuations, long-term interest rates, the price of gold, or the value of the Swiss franc to the dollar.

As irresistible as data-mined numbers sound for making predictions, the whole shebang is based on a faulty premise...

Don't Fall Into the Data-Mining Trap

The first thing you learn in Statistics 101 is that a positive (or negative) correlation does not infer causality.

In other words, even if stocks have rallied every second Thursday in May for the past 50 years, it doesn't mean they will rally this year on the second Thursday in May. Data-miners regularly turn up meaningless correlations and claim they have discovered how to divine the stock market.

If history could determine what the stock market is going to do next, the world's richest investors would be historians, data-processors and librarians. And that's not the case.

The hypothetical results of data-mining always crumple when they collide with real-world investing.

There is only one sure-fire market timing strategy. It's only available occasionally. Plus, it takes guts and a genuine contrarian spirit...

The Best Time to Invest

It's when you see extreme valuations coincide with extreme sentiment.

For example, if unbridled optimism reigns supreme - as it did during the tech-stock bubble ten years ago and at the top of the real estate craze four years ago - and prices are sky-high, you can bet your last dollar that prices will soon come tumbling down.

By the same token, if abject pessimism is the order of the day - as it was during the financial crisis one year ago - in concert with rock-bottom valuations, you can bet that a rally isn't too far distant.

Indeed, the Dow is 62% higher today than it was a year ago.

That's why you might want to invest a few dollars today in one of the world's cheapest and most unloved markets: Japan.

What's the difference between data-mining and seeking out extremes in sentiment and valuation?

Two things, really. The latter strategy doesn't require a rabbit's foot - and it works.


Source: Investment U

[winston]

Little-known "Godfather strategy" can immediately change your life for the better
By David Galland in Casey’s Daily Dispatch:

We humans are a tough lot, but it is relatively easy for us to fall into a demoralizing mental rut.

I have a technique I have used [tough] circumstances – when everything just seemed to be wrong – that may be helpful.

I call it my “Godfather strategy,” named after the book/movie. As you may recall, in The Godfather the Corleone family is on the ropes, beset from all sides by other Mafiosi. Until, at the end of the movie, the Corleones wipe out everyone and everything that is bedeviling them in a single day, then pack up and head for Las Vegas to start over.

On several occasions in my life, when it dawned on me that I was “stuck” and life had become bound up in a poor job, a poor relationship, bad geography – whatever – I made a hit list of what wasn’t working, then set out to get it sorted ASAP. It may not take a day, but it’s amazing how much change you can effect, if you set your mind to it, in a couple of weeks or a month.

During one of my “Godfather” moves, I quit my job and sold or gave away pretty much everything I had. In a remarkably short period of time, I was setting my bags down in a foreign country – truly reborn and reinvigorated at the possibilities.

Could taking drastic action, while you still have the resources remaining to take it, make sense for you? I have no way of knowing – and executing your own Godfather strategy may end badly. But sometimes only by taking a big risk can a big change occur… hopefully, a big change for the better. And I wouldn’t rule out moving to a foreign country where the quality of life can be markedly better, and at a fraction of the cost of what it is in a more developed country.

[winston]

The TA "expert" has a nice story today ..


We're Headed Toward Another Bolshevik Revolution By Jeff Clark

In the world of technical analysis, price action is king.

I'm bearish. Everything in my heart, my soul, and my mind tells me I have to be short the stock market. But I've avoided making large downside bets because the price action – the king – has been so persistently positive.

The peasants, however, are not very enamored of his royal highness. Volume is weak. Negative divergences exist on nearly every momentum indicator. Sentiment indicators show remarkable investor complacency. And the world news is highly negative.

Yet, the king continues to reign.

But here's the thing...

When kingdoms are overthrown, it happens overnight. It's an instantaneous transition of power. One day, the king is in charge, the next day it's a religious zealot, a military general, or a drug kingpin.

It always comes off as a surprise. But in hindsight, there are always plenty of warning signs.

Think back to the Bolshevik Revolution. The Russian royal family was slaughtered overnight, but the peasants were unruly for months beforehand.

The CIA was aware of turbulence in the Middle East long before the Shah of Iran was exiled in 1979.

The Berlin Wall collapsed overnight. But the blueprints for its destruction were drawn out months ahead of time.

In hindsight, all of these events were predictable and foreseeable.

The same is true of the stock market crash in 1987... Economic conditions were faltering. Interest rates were rising. The public's appetite for risk was growing. And stocks were rallying on the back of deteriorating technical conditions.

Anyone, with even the simplest understanding of market conditions, could have called the crash in 1987. In fact, many of the brightest analysts did. But they were early and their reputations suffered as stocks continued to climb despite the overwhelming technical divergences.

I remember 1987 well. I was a young trader, and I was on the wrong side of the market for five months before my bearish bets finally paid off. In August 1987, I was so perplexed by the market's action I considered leaving my trading post and pursuing another career. Heck, standing behind the plexiglas booth at the local gas station and putting $10 on pump number 5 was a more attractive career path than what I was doing at the time.

When it finally happened that October, the crash of 1987 took almost everyone by surprise, and it seemed to happen overnight. By now, though, we all know the warning signs were everywhere. So, too, were the warning signs when the Internet craze crashed and burned in 2000.

Today isn't any different.

I know, I've been bearish for months and I've been wrong – even though I haven't bet heavily in that direction. I'll wear the egg on my face for as long as necessary.

Every day, I wake up and I look for reasons to be bullish on the market. There aren't any – except the king remains in power. Meanwhile, the peasants grow more and more restless, and the tension continues to build.

Months from now, we'll all look back at this time – much as we all look back at October 1987 and March 2000 – and we'll remark on how obvious it all was.

Yet we'll be surprised that it happened out of nowhere.

Source: growthstockwire.com

[millionairemind]

haha... Winston... you are digging at the guy.

[kennynah]

this man hasnt been accurate...his timing off.... but one day he will be vindicated....all a question whether he still has the money to be in the game by then....

[winston]

Warning: Investors Still Face No. 1 Danger, Says Madoff Whistleblower by Dr. Mark Skousen

No one would accuse Harry Markopolos of beating around the bush when it comes to talking about the government protecting the public against fraud and bad investment advice.

He's the private investigator who uncovered Bernie Madoff's massive $65 billion Ponzi scheme, which destroyed the financial lives of thousands of individuals and foundations around the world.

Markopolos outlined five recommendations to preserve your hard-earned capital when approached by investment salesmen...

Markopolos Offers Five Tips to Keep Out of Trouble

1. Select your own investments. Don't be talked into an investment product by a broker who calls you.

2. Make sure managed money is custodied at an independent third party custodial bank.

3. Avoid most offshore entities.

4. Avoid most structured products, such as private equity deals or insurance products - they're too expensive, too illiquid and full of hidden costs.

5. Forget about background checks from the SEC or Better Business Bureau. Be your own investigator. Shop around and seek advice from qualified independent advisors.


I'll add two more tips of my own to Markopolos' list...

1. Always diversify. Never put all your funds with one money manager, no matter how good a track record he's got.

2. Always be suspicious of any managed account that never loses money.


Source: Investment U

[winston]

Beware the Giant Tick-Infested Rodent By Jeff Clark
April 1, 2010

I knew there was something wrong.

"Come in," my friend John yelled at me from inside his house. "We're in the kitchen."

I opened the door and discovered my friends' meticulously perfect home had been replaced by a Beirut bomb target. Sofa cushions were on the floor. One leg of the antique rosewood dining table had collapsed. The table lay tilted, with one corner piercing into the hardwood floor below and the other pointed into the air – like the Titanic just before its final plunge.

The shattered remnants of a Baccarat vase sparkled from a pool of water that was slowly soaking into the 100-year-old Persian rug. In the hallway, droplets of deep red blood stained the carpet along one side, and a mixture of yellow and brown feces stained the other.

John was in the kitchen with his wife, Mary. Their faces were pale.

"What happened?" I asked.

"I opened the door to let the dogs out into the backyard," John began, "and then I came back upstairs to help Mary with the packing for our spring vacation. The next thing I know, all hell broke loose."

The dogs, two prize-winning golden retrievers, had chased a squirrel into the house.

"One minute, we're packing and looking forward to a pleasant vacation. The next minute, we're staring at $40,000 to $50,000 in damage."

There's no telling the chaos a nervous squirrel can cause.

Investors would do well to keep that thought in mind as we enter the second quarter of 2010.

The first quarter was like a relaxing springtime vacation. Outside of a couple rough weeks in late January, stocks have gone steadily higher. Each week finished with stocks slightly higher than the week before.

Investors are complacent and have no problem leaving the back door open so the dogs can play in the yard.

But there's a giant, tick-infested rodent lurking in the garden outside.

Beginning today, the Fed is supposed to end its quantitative easing program. The program allowed the Fed to use your tax dollars to buy about $1.3 trillion of mortgage-backed securities (MBS) from troubled banks.

That action provided an artificial stimulus to the market. It helped strengthen banks' balance sheets and it funneled liquidity into the economy.

Now we'll get to see how the markets work without the artificial stimulus.

Who knows? Maybe everything will be just fine. The markets will pick up the slack the Fed leaves behind, and investors can go on packing and looking forward to a pleasant vacation.

Or maybe the squirrel will destroy the house.

It wouldn't hurt to be insured against the latter, just in case.


Source: growthstockwire.com

[millionairemind]

I am just trying to get my hands around these issues.

QE has ended last week. (supposedly)

Oil is higher at $85, putting less money in the consumer's pocket.

10yr yields is spiking up with prices down. 30-yr mortgage rates will be going up again since they work off the 10yr.

The $8k credit for first time buyers is ending by the end of this month.

And yet the market is supposed to rally much further???

At these levels, how much more can it go before it is being brought down by the high oil prices, the mortgage delinquencies, the lack of QE etc...etc....

If you were a BIG FUND, would you take money off the table at this levels and put it somewhere safe?

Or well, better follow the market then follow your reasoning..