A10, Stock Trader Dude

A great book filled with real insight about people that run money for a living, and marketplace dynamics, with a focus on international equity expansion. Regarding the Internet bubble, people were willing to believe that the Internet was the most important modern invention, above air travel, the phone, and computer processing power… even air-conditioning has a direct impact on the living and working lives of hundreds of millions of people. Hong Kong, New York, and other cities wouldn’t have the same kind of growth without the merits of air-conditioning. Tech failed because it was never authentically strong to begin with; it offered all the promises of “newness” and change without long-term substance. In my own analysis, what people missed was that the Internet is simply a delivery mechanism. A pipeline is not necessarily valuable; it’s what is transferred within the pipe that contains value. 

But getting back to the insight from the book: It took 15 years for stocks to regain their 1929 highs, and 21 years to outperform bonds. The Dow Jones Average was at the same level in 1982 as it had been in 1965 and had lost more than half its purchasing power. Returns depend a lot on when you invest. As for volatility, to suggest that stocks are no more volatile than bonds in the long run is simply not true. 

What I like about this is that it is a reminder that you cannot rely on a broad market index to produce great wealth for you. It comes down to finding a superior investment in a crowd of average offerings. Even stocks for the long run aren’t a great investment.

Have some money to gamble? Here’s how you can post huge gains in a bear market. I found this in the May 2008 issue of Men’s Health magazine. There were no huge gains discussed, and a photo takes up half the page because there isn’t much information:Angel investingLong-short fundsSocial lendingBear fundsYou cannot trust the editors to provide you with valuable insight; and in this case there isn’t any meaningful information – huge gains come from concentrating your focus, and your capital on one bet. You win big when there is a lot at stake on one bet, not sprinkling capital around among multiple bets with low impact. Squeezing cash from a down market implies that an investor should be looking for companies that are unprepared to compete well in the marketplace, earnings will be reduced, prospects for improvement dim, and the stock price will significantly fall. That’s where the money to be made is – finding companies that will sink. The other thing an investor could do is hedge downward bets by using net credit spreads.

Whether the stock market is in a fundamental upward trend or downward trend doesn’t matter if the objective is clear… don’t get out of proportion… you take it one stock at a time in any market environment because it’s that one or two special stocks that are capable of significantly expanding your capital in a short amount of time. Everything else is everything else – a distraction.

Turn off the tap: 2 gallons of water wasted per minute while brushing teeth.5 to 10 percent of U.S. homes lose 10 gallons of water a day through leaks; less than 1 percent of water is available for drinking use.Go low flow: The toilet uses the most water in your home. Save $72 a year just in your bathroom, and conserve 9,200 gallons of water.Lawn care – reduce the amount of water used by leaving grass clippings on the lawn because the clippings retain moisture that will be absorbed into the lawn.Containers and packing make up 31 percent of municipal waste, 80 million tons in 2006.Bring your lunch to work.Plastic bags (Ireland has saved 18 million liters of oil since 2002 by reducing the production of plastic bags 90 percent.)Eat less meat.Grow your own food.Use recycled paper products.The average adult gets 41 pounds of junk mail a year.Turn off office lights and computers.Think before you print.Telecommute.

Panic… The stock market offers great chances to make money when the big institutional investors are running for the exits and driving stock prices lower. The same kind of windfall can occur when the institutions are bidding up the stock price as they go into a heavy buying mode. (This is nothing more than saying that when market forces are pushed to extremes it causes overbought or oversold conditions – very few people will profit in a panic – you need the ability to get in or out in fast moving markets with favorable fills on your orders.)Avoid diversification – you must bear the risks. Diversification offers mediocre returns. The banks are a safe place to put money. The stock market is not. (Good point, the best way to distance yourself from the pack is to pick the best performer, not the best one hundred… it diverts focus from the real aim – taking chances on the best candidates for outstanding performance.)The author’s view – let the winners get away. Go after prominent stocks that have fallen. (The author doesn’t have the focus to search the marketplace for the best candidates for outstanding performance and when these stocks become known in the marketplace the author chooses to ignore them. Some of the best gains have been stocks that seemed like they already went up incredibly far, incredibly fast. This type of investor is always going to miss the best stocks to creating wealth in short amounts of time, such as Dell, Amazon, Yahoo, Taser, Google, and any other companies that were hot at one time but faded… the point is not that the companies didn’t provide long-term stock price growth, it’s that there is a short window of time to act before high prices cause higher prices and the kind of gains that separate one from the pack.)Timing is not everything. (It’s almost everything – the right stock at the wrong time does little good because it ties up capital that can be used more effectively elsewhere.)Nobody wins like an insider does.The unknown – there are still undiscovered opportunities that have not been brought to light. When invisible stocks attract liquidity and buyers to them… (It doesn’t matter how promising the company is that you invest in – what validates and creates wealth is when other people in the marketplace believe it to be of worth; voting is done with dollars, that’s where liquidity and buyers come into play; they have to have a reason to be attracted.)Long-term investments. It is, after all, the best investment strategy. Buy low, sell high – it requires all the guts and courage to practice it – to know just when a stock is actually selling at a low price – and to have the discipline and conviction to buy it. (I would qualify that long-term investments may be the best strategy for those that are part of the crowd of mediocrity that cannot go for outstanding returns without damaging themselves… the best strategy is not long-term investments – no investment class throughout the long-term, such as a thousand years does particularly well. The best investment strategy has been having a keen understanding of the marketplace and taking the risk associated with it to benefit from short-term inefficiencies and imbalances. Anything that runs up in price and allows you to sell it for significantly more to someone else with low transaction costs and little or no tax consequences is the best investment. The thing about it is… it’s not obvious to any of us until much later.) 

The author claims cash reserves should be from 10 to 20 percent of your portfolio. The most important point is missed – you are going to need all the capital you can get to do wonders in the stock market even when prices are depressed and due for a rebound; the critical element is to dispose of all investments before price changes significantly reduce your capital. The author claims the distinction of having a stock picking record that beats the broad market averages since his picks were tracked in Business Week from 1985. The market has been in a huge upswing anyway throughout most of that time so I don’t see it as much of an accomplishment unless one has compounded his or her money at a much higher rate, and perhaps with less risk. Where is the money? Stock picking is one thing but backing your decisions with real cash is another… if the trading account and bank records are missing it’s misleading to think that any of this “expertise” has translated into actual profits. Here’s what the author recommends as great stocks to own: 

1.   Apple2.   Boeing3.   CVS4.   Genetech5.   JP Morgan Chase & Co.6.   Petroleo Brasileiro S.A.7.   Pfizer

The question is, are you dumb enough to buy the book? It’s filled with plenty of nonessential advice, wisdom, and experience regarding buying real estate. It begins with the same success advice found in many other books:Write down goals
Create a planNone of this matters; plans are ideal foolery. Life is a constant adjustment. Then the book promotes having a mindset of a millionaire (another idea borrowed from much better books, such as How to Get Rich, but in this case the author offers a poor concept for a millionaire mind and simplifies it to a Think and Grow Rich type of accumulation statement:I will make $____ in the next 120 days through my real estate investments. I will need to sell _____ houses at an estimated _____ profit to make this goal. I will need to talk to _____ callers a day to make my sales.That is what the entire book is based on: it lacks significant insight into worthwhile endeavors.Pitfall: Partners should bring meaningful skills or cash. Two or three broke, inexperienced people getting together to start a company simply illustrates the company is broke and none of the partners have mastered the ability to make money. Two or three weak links do not make for a strong chain.Ten commandments for a successful real estate career:1. Make offers
2. Secure funding
3. Be detail oriented
4. Market, market, market
5. Keep the human touch
6. Know the numbers
7. Know the exits
8. Don’t spend it all
9. Be sure to insure to assure and ensure (general business liability insurance for around $100 a month)
10. Incorporate it before you ink itI would add an eleventh commandment thou shall not invest time in inferior material like this.

It is not what you earn that makes you rich or poor; it is what you spend. I’ve seen this theme repeated in million dollar consulting – it’s not what you make, it’s what you keep. But Go Green, Live Rich makes bold claims about living rich… which is then defined as save ten dollars a day for thirty years at ten percent interest and you’ll have $678,146. The problem with this approach is that I’ve never seen an author or financial expert’s bank statement and audited financial documents that prove the person has ever saved their way to wealth. They just like to print numbers in books. Here is what you can expect as great green ideas that save you money (most of them are not particularly intriguing): 

Avoid buying bottled water (save $500 a year, based on $1.39 for a 20-fl-oz. container)Increase your fuel economyGo biodiesel (save five cents for every mile you drive; save 750 gallons)Maintenance matters (save up to $798 in gas every year and keep 5,800 pounds of CO2 out of the air every year)Get rid of the car or if that’s not an option skip a trip once a week (40 percent of car trips in the U.S. are less than two miles)Public transit (if one driver switched full-time… in New York the subway system isn’t a bargain in terms of time and price – service has been reduced, not improved – and when money is spent it seems to go on remodeling the look of the station rather than on air conditioning and running more trains at all hours – the author missed that but did bring up a good point about getting more people to bike to work)Get an energy audit. Roughly half our energy expenditures are from heating and cooling. Wrap/sealing ducts can result in a twenty percent efficiency increase. Adjust the thermostat by three degrees. Every degree you turn it down in the winter saves you five percent. Every degree you turn it up in the summer saves you three percent. A programmable thermostat could save you $150.Unplug it: phantom load costs Americans $4 billion. Phantom load could be twenty-five percent of your electric bill (Source: sciencedaily.com)Use energy star appliances, run the washer full, plasma vs. LCD – LCD screens use less electricity so they cost less to run.Switch to CFLs, the bulbs use seventy-five percent less electricity and last ten times longer than regular light bulbs. Save $45 over the lifetime of the bulb.Plant trees; they can reduce wall and roof temperature in the summer by twenty to forty degrees. This can save you $100 to $250 over a year.

Ready to dive in? How to tell if the stock market is ripe for your investment dollars – and so began an article in the May issue of Best Life magazine telling investors to ask a question that can be answered: Are stocks cheap yet? The article cited an investment fund manager with money on the side, which he was excited to deploy into stocks. That is the wrong focus – “Are stocks cheap yet?” is not the right question to ask. Why are stocks cheap and why should I believe that is the best place to place my bet/money? If fundamentally the US stock market is weak and not likely to offer promising rewards for many years, why play around? The goal is not to consider cheap stocks; it is, as with any investment to find the absolute best item/stock to bet on at the right time. If you put enough money on an investment and it moves in your favor you only have to do it once to have a life-changing amount of money. Investments are based on finding someone else to pay even more for the thing you bought. And if stocks are cheap, it says that the buyers are weak… and if there isn’t much confidence it doesn’t matter that stocks can be bought cheaply, the only thing putting money in your account are the fools that will pay significantly more than you did for your shares. The article articulates limited thinking – What about international stocks? Go to the marketplace that offers a sound fundamental platform with promising long-term rewards, and excited buyers in the near-term… excited buyers are the people that make you large sums of money, not the investment itself. So, here’s a bit of trading at a lower level, I mean stripping out all the useless stuff that doesn’t make you money, and hammering on a few points that could help:Practice good timing and effective risk control. (may include using options)It doesn’t take long to profit if your timing is right.Acting with your bow and arrow, you want to make shots as close to the center of the target as possible. Some people experience a thrill throwing a ball into a hoop. Whatever the case may be you’ll miss one hundred percent of the shots you don’t take.If anyone could identify market highs and lows in advance they’d own the world. It isn’t possible to do it consistently, so avoid all investment marketing that promises the stars and invokes your imagination to follow them so you can quit your job, buy a fancy car, big house near the beach, and travel the world. When you bet big on the most promising investments at the right time and it goes your way it can change your financial life… that’s all there is to it.