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

[winston]

Profiting from the Sjuggerud "Natural Rate of Return" Theory By Steve Sjuggerud
Tuesday, December 21, 2010

Oh man, the Hotshot loved to hear himself talk.

"I own a couple restaurants, and I own a couple beach houses I rent out…"

He kept talking. People around me were hanging on his every word.

But I tuned out. I know chances are GREAT this guy won't keep the fortune he's made.

Why? It all comes down to my theory about the "Natural Rate of Return."

Today, I'll explain how this little "mental model" works… and show you how to use it to increase the return on your money.

This'll take a few paragraphs. So bear with me. Here we go…

This theory starts with the idea that there's a "natural" interest rate for money. And there's a "natural" rate of return on your money.

The natural interest rate is where lenders and borrowers meet in a free market. (Let's call it 6% for now, but it doesn't have to be 6%.) I believe that, over the long run, the natural rate of return on money EQUALS the natural interest rate.

Some investors will earn much higher than 6%, and some will earn much lower. But balancing it all out, the natural return on money equals the natural interest rate. (It's just a theory here… But stick with me a little longer and I'll show you how it works with your money.)

Only a few things tilt this equation. One of the most important is the "Enjoyment Factor"…

For example, most people don't own a beach home for the rental income alone. There's a certain Enjoyment Factor (bragging rights… a great vacation spot… whatever) that doesn't have a monetary value.

Once all is said and done – after property taxes, insurance, damage, maintenance, and so on – a beach house rental might actually be a money-losing business. But a lot of people are willing to sacrifice investment return for the Enjoyment Factor of owning a beach rental.

The same might be true of a restaurant…

To some people, there's no greater thrill. They're hosting their friends, and they're the toast of the town. The Enjoyment Factor of owning a restaurant can be so great, people are willing to sacrifice investment return. But like the beach house, once all the bills are paid, a restaurant might just be a money-losing business.

The actual rate of return on a beach house or a restaurant is the natural interest rate (our hypothetical 6%) MINUS the Enjoyment Factor. So the return can be very low… or even negative. It's the price of the enjoyment.

So if you don't own a beach house or a restaurant, what does this have to do with you? How do you use my Natural Rate of Return theory to maximize your gains?

Well, the theory works on the flip side, too. Guys dealing in things perceived to be unsavory (like toxic waste disposal, for example) will earn the natural rate of return PLUS a reward for managing something nobody else wants to.

Let me show you with an example…

I've written about gold coins for about eight years – but I've been too embarrassed to talk about 'em. At cocktail parties, they didn't turn heads like the latest beach house "knockdown."

But who is better off today? The guy who bought my recommended gold coins? Or the property flipper?

Now, gold coins were hardly toxic waste. But they sure weren't popular when I first started writing about them. And they absolutely made a higher return than real estate.

In short, if you want to be like the Hotshot above… if you want investments you can brag about at a cocktail party… go ahead. But realize you're swimming upstream – you're on the losing side of the "Natural Rate of Return."

If you actually want to make money, invest in things you're embarrassed to talk about… The more you have to "hold your nose" to make an investment – the more the "Enjoyment Factor" is negative – the more money you'll likely make.

In my career, "holding my nose" to buy has worked out fantastically better than buying what was hip. I didn't have to subtract the Enjoyment Factor out of my returns.

This is just a little "mental model" I use to help increase the rate of return on my money. Keep it in the back of your mind the next time you're stuck talking to the Hotshot.

Source: Daily Wealth

[winston]

Lessons Learned By Looking Back At 2010 By Mike Larson

The year is winding down, and boy has it been an exciting and volatile one. Bonds. Currencies. Financial stocks. Some of the gyrations we’ve witnessed in those instruments over the past 12 months were enough to take your breath away …

• The “Flash Crash” that wiped 1,000 points off the Dow in the blink of an eye …

• The European debt meltdown that caused interest rates to double, and double again in countries like Greece and Portugal, and …

• The launch of the Fed’s QE2 program, which sparked one of the biggest surges in U.S. interest rates in ages — rather than the decline Ben Bernanke promised.

The list of significant market developments goes on and on. So what kind of lessons can we learn from events like these?

Here’s my take …

Violations of Trust Have Four Serious Consequences

First, you just can’t trust many government pronouncements!

Second, even the best laid plans can blow up in your face … especially if you’re a Fed policymaker!

Third, you can postpone the day of reckoning for a while. But eventually, your problems catch up to you.

It's easy to get buy recommendations. But when it comes time to sell, you're on your own.

But as I noted, rates are already starting to rise — a sign that investor patience is wearing thin.

Fourth, you can’t count on Wall Street or Washington to look out for your interests.

http://www.dailymarkets.com/economy/201 ... k-at-2010/

[kennynah]

Lessons Learned By Looking Back At 2010 By Mike Larson

Fourth, you can’t count on Wall Street or Washington to look out for your interests.

other than the Divine and our closest kin.... it would be rather foolish to expect anyone else to look out for our interests..

[winston]

In 2010 I Learned That … By Prieur du Plessis

Josh Brown, writer of The Reformed Broker, asked a few dozen financial bloggers and commentators to send him their quotations starting with “In 2010 I learned that …”. Some of the pieces are below.

Prieur du Plessis (Investment Postcards): an open mind, common sense and a solid dose of one’s own research, as opposed to conventional wisdom, are the key ingredients for nailing the markets.

Justin Paterno (StockTwits): my Friday night routine of slapping on yoga pants and watching movies on my computer was stimulating the economy all along.

Jared Woodard (Condor Options): you may not care about the macroeconomy, but the macroeconomy cares about you.

Paul Kedrosky (Bloomberg): some people will pay a stupidly high price – both in portfolio and in reputation – so that they can one day say, “I told you so”.

Michelle Leder (footnoted): selling your company and having a baby (in close proximity to one another) is something that only a truly crazy person would attempt to do.

Stacy-Marie Ishmael (FT Tilt): Truthiness applies to finance just as much as it does to politics.

Barry Ritholtz (The Big Picture): despite all of the talk about Democratization of investing, Wall Street primarily serves only the very wealthiest Americans. And that is a shame.

The Fly (Outer Space): it pays to go bankrupt.

Mike Konczal (Rorty Bomb): my friend JW Mason is correct: in order to understand value judgments (great news, disaster, opportunity, worry) made by economists and financial journalists, you need to add “for bondholders” for it to make sense.

The Weakonomist (Weakonomics): markets are only as efficient as the engineers that programmed them

Cardiff Garcia (FT Alphaville): your blunders are easier to forgive if you’re not an ass****, your triumphs easier to ignore if you are.

Noah Rosenblatt (UrbanDigs): nothing is really secret anymore.

Leigh Drogen (SurfView Capital): “social leverage” is definitely not just a Howard Lindzon catch phrase.

Eli Radke (Trader Habits): I should never bet against the resilience of those in finance, sequels are never better than the original and Tony Robbins is an idiot.

Joe Donahue (Upside Trader): Larry Summers was really a mannequin.

Kid Dynamite (Kid Dynamite’s World): It’s a momentum world and we’re all just living in it.

http://www.dailymarkets.com/stock/2011/ ... %e2%80%a6/

[winston]

8 Investment Lessons From Top Wall Street Experts By Evelyn Lim

"Psst!" You’ll hear someone say in a Wall Street bar. "Do I have a great stock tip for you!" It sure sounds like a dream come true for you; getting a stock tip from someone who is in the know. However, it is better to learn how to trade or invest yourself, rather than rely on getting stock picks from someone else. You also do not have to be lounging around a bar along the financial district to get investment lessons either.

Here are nine quickie lessons from some of the nation’s top Wall Street experts which you can easily apply:


Wall Street Lesson 1: Recessions happen

Peter Lynch: "You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets."

This is a very important lesson for us, folks. The stock market does go up, up and up! But it also can also comes down, down, down. The smart investor knows what calls to make; either to stick out the ride during the temporary sell down or to cut losses and re-enter the market just before a turnaround.


Wall Street Lesson 2: Investors forget too easily

Roman Abromovich: "Investors have very short memories."

Doesn't it seem like a horrible shock every time we hear the whisper of a recession coming through our country? We’ve been through this before, and we are going to go through it again (and again). Investors do have short memories and they seem to forget the past and even the very recent past.


Wall Street Lesson 3: Go BIG on Bets That You Are Sure On

Warren Buffett: "Wide diversification is only required when investors do not understand what they are doing."

Buffett raises an interesting point. If you have an investment that you feel confident about, why not place almost all your bets on it instead of diversifying your portfolio? Not to forget, the highest rewards go to those who dare to take the most risks. However, it is absolutely critical to know what you are doing with your investments before making that decision!


Wall Street Lesson 4: Pick stocks you like and want to follow

Warren Buffett: "Why not invest your assets in the companies you really like? "
Mae West: "Too much of a good thing can be wonderful."

This is a great point, to invest in businesses that you like and feel confident about. If you have an interest in the specific companies, following their every move is a natural thing for you. Often investors do well with investments they at they have knowledge about and that they like the most. There is nothing wrong with having few stock picks and doing very well with them.


Wall Street Lesson 5: Go Against The Herd

Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Buffett speaks of knowing how to invest in a Bear or a Bull market. When we are in a recession, this is actually a great time to buy stocks if you have the extra funds on hand. When the market is doing well, this is less of a time to buy stocks because everyone is buying stocks and the prices are high.


Wall Street Lesson 6: It is the perceived value rather than the actual worth that counts

Mark Cuban: "I rarely think the market is right. I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it."

Cuban has an excellent point. Much of what happens in the stock market is not about actual worth of something or a company: but about what someone thinks it is worth. Knowing that what is going on has to do with people’s inflated (or deflated) belief of what something is worth can help you keep things in perspective.


Wall Street Lesson 7: Follow The Trend Of The Market

Jesse Livermore: "When I’m bearish and sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale down, I buy on a scale up."

Livermore teaches us that no one really knows where the bottom is. Hence, it will be foolish to buy as prices come down because it is hard to determine if the market is about to turn or not. He teaches us that it is important to follow the general trend of the market. So only purchase stocks in a rising market.


Wall Street Lesson 8: Overall Trends Can Help Predict The Direction Of A Specific Stock Price

Jesse Livermore: "I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up."

The smart investor knows not to tell other investors which stocks to invest in. No one really knows any better specifically; but what is obvious is that stocks move almost together. It is therefore easy to assume that in a bear market, the prices of all stocks come down and in a bull market, the prices of stocks in general rise. If you want to appear intelligent, follow this same advice!

http://www.selfgrowth.com/articles/8_In ... perts.html

[winston]

Biggest Investor Mistake: Absolute Certainty By ETFCHANNEL.COM

The title of yesterday morning’s missive was about two words. And cutting to the chase (at long last), the BIG mistake that can destroy an investor can also be summed up with two words: Absolute Certainty.

My biggest blunders in the stock market have come when I was absolutely certain that I had it right. And to make matters worse, my view at the time was agreed upon by the masses. Therefore, I had lots of company telling me how right I was on a daily basis.

And believe you me, being right in this business is a curse. Just about the time you get yourself convinced about how right you are and how good you are becoming at the game, Ms. Market swings that Louisville Slugger she’s got with your name on it, and hits you upside the head.

Marty Zweig was famous for always being worried about something and I think most investors likely have a little of that in them. In this business it is healthy to be skeptical and to always question what is happening in the market.

However, the big mistake I’m talking about runs counter to this idea. The bottom line is that when you find yourself absolutely certain of your view of the market, you might want to start thinking about going the other way.

At issue here is the fact that by the time it is easy to see what the market is doing and that everyone agrees with your theme, most investors have already taken action based on the theme at hand. Thus, by the very nature of people being absolutely certain about what is playing out, the move is almost over.

How does this concept fit into the current market, you ask? Well, in spending a little time with the sound actually turned up on the T.V. and in doing a little light reading on some stock market websites, I found that analyst after analyst appears to be absolutely, positively, 100% certain that oil prices have only one way to go right now – up. It’s like it is written in stone somewhere: Oil must rise.

Yes, I know that trends take on a life of their own and that the market can stay irrational longer than one can stay solvent. However, I found it very interesting that everyone is absolutely certain about what comes next for oil prices. Hmmm…

Turning to this morning… There are conflicting reports relating to the situation in Libya. The latest seems to be that Gadhafi had offered to negotiate stepping down in return for a guarantee of safe passage out of the country. However, the opposition has rejected talks. This has led Gadhafi forces to again use airstrikes against the rebels.

Also on the oil front, there are reports that some OPEC members are working to increase oil production.


Thought for the day: Choose to have a mind that is open to anything and everything…


http://blogs.forbes.com/etfchannel/2011 ... =dailycrux

[winston]

TOL:-

As interest rates are very low, people are now starting to look for higher returns, often outside their circle of competence eg. Commodities, Currencies, TEPs, Junk Bonds, Variable Annuites, Foreign Properties etc.

And in their quest to try to make, say 6% pa, they are exposing themselves to high losses, say 20%.

I have relatives and friends asking me about this Commodity, that Currency, this Country and that Industry ...

My reply to them has been: "It's better to sit in Cash then to invest in something that you dont know"

And most of them are not so happy with my reply. They think that by reading a few articles here and there, they can make money in Currencies, Commodities, Frontier Markets, Junk Bonds, Biotechs etc ..

And that's my indicator that all Risky Assets may be hit eg. Commodities, Risky Currencies, Properties, Equities, Frontier Markets etc..

Am reminding myself to invest accordingly..

[winston]

People who grossly mismanage their portfolios almost always make the same mistake.

They forget to ask that one basic question: What if I’m wrong?


Source: Investment U

[winston]

10 Celebrities Who Lost Big Financially By Jason Notte

MIAMI (TheStreet) -- Celebrities have more money than the average American, but there's no evidence that they spent or invested it more wisely during the recent economic downturn.

The following are just 10 examples of celebrities who've taken a huge financial hit during the past few years:

http://www.thestreet.com/story/11031940 ... ially.html

[winston]

AAR

1) Were you buying because the parrots were telling you that QE2 was coming and that there would be plenty of Liquidity slushing in the market ? And did the markets go up or down from there ?

2) Were you selling because the parrots were telling you that there would be Outflows from the markets for a few quarters from EM to DM. And did the markets go up or down from there ?


If you want to buy, do it early.

If you want to panic, do it early as well.