A10, Stock Trader Dude

The increases in share prices for Chipolte, DinEquity and BJ’s restaurants have risen substantially compared to the S&P 500 which has increased 6% percent for the year:

Tuesday    2010
Chipolte Mexican    $212.86    141%
DineEquity              $45.84        89%
BJ’s Restaurants    $35.13         87%
Ruby Tuesday        $12.57         75%
Denny’s                    $3.15           44%

The ratings health of this sector has seen some improvements this year from S&P, which upgraded restaurants’ credit ratings twenty-one times and downgraded thirteen times so far this year. I’m definitely surprised by the strong Chipolte gains – I know that Ruby Tuesday implemented a multi-million dollar design upgrade to its locations within the last few years, and although the ambiance in Chipolte locations is pleasant I never factored in all the times I walked by the stores and would see people eating in their establishment. But I’ve missed out before – and I’m not tempted to get on this bandwagon.

The lesson here is that all these folks who claim to be experts didn’t know about any of the severe market drops over the last ten years and I haven’t heard any of them say you can make high-returns in the 2010 stock market environment as easy as buying the shares of these companies. But, even with these high-returns if you gambled as a long-term investor you still may not be at break-even in portfolio value due to losses over the past ten years (plus inflation) or simply due to the last two years of stock market decline. Are you sure you still want to gamble?

Virtual goods – perhaps up to 20 percent of social gamers will spend real dollars for, say, birthday champagne for a digital piglet (Smart Money, Feb 2010, pg 34). That’s just an example – but at least these folks don’t consider it an investment – but virtual goods also include stocks and bonds, don’t they? In terms of social games, the sale of virtual goods, digital stuff that doesn’t actually exist helps bring in revenue on free games. These games may have an audience of millions of people – perhaps great advertising appeal as well (I’m only interested in the branded content and ad potential).
But another form of virtual goods exists in most people’s lives – investments. Book entries stating that you bought or sold something which you’ve never touched. And the only reason you’ve bought them, presumably is because you thought someone else was going to pay more for them at some point and you would benefit from the difference in price.
Should you jump in now? That was the name of an article from the Fortune December 2008 issue, pg. 26. We know the answer turned out to be no – as the US equities market as a whole sank to further lows in March of 2009. If there was a time to buy and make a quick buck – that was it. The article didn’t offer critical thinking – it was more of a question of gambling. When Fortune updated their list of 2008 stock picks they were -45% vs. -43% for the S&P 500 on their ten picks. When you lose almost 50% on an investment it will take an increase of nearly 100% to break even. And that’s not going to happen for you.
Bonds performed well last year – overall, corporate bonds returned 10 percent in the first 10 months of 2009. Junk bonds were up 51 percent (Smart Money, Feb 2010, pg. 44). Commission fees on bonds can be 1 to 1.5 percent, so you pay a much higher price than stock commissions. Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds. It doesn’t matter if the positive momentum is over in bonds, or if positive momentum occurs in equities – you have to consider your real return which accounts for fees, commission, taxes, and inflation. So a nine percent or ten percent return can quickly get reduced to maybe two percent. Why risk your money for two percent? Inflation itself is the biggest risk without accounting for making any mistakes in the investment markets. When inflation is around six or seven percent or higher as happened in the 1970s you struggle to earn money that has less purchasing power – and conseqently, a few years of high inflation erases a few years of relatively good investment returns.
The average bond fund lost 12 percent in 2008 according to Morningstar.
On pg. 22 of that issue of Smart Money the article Slow Growth Hits Home quotes an economist who is a former UCLA professor saying that investors should expect stock returns equal to dividend returns plus one percent citing the following:
Rich economies aren’t likely to grow faster than 2 percent a year per person after inflation.
Population growth will add about one percentage point to growth.
Earnings-per-share growth should track the rate of economic growth, minus about two percentage points a year to account for dilution from new shares.

The article uses data from 1960 to 2006 stating that returns averaged 6.1 percent a year after inflation, including 3.3 percent a year in dividends. (In another post I’ve discussed that over the longer term in the stock market, such as 139 years, returns were roughly six percent, not including inflation – almost all gains in the stock market over the last 75 years or so have been attributed to inflation). The economist says don’t expect more of the same 6.1 percent returns because conditions that produced past stock market gains aren’t sustainable.

I’m just amazed that the DJIA is above 10,000 – times are certainly worse than most recession periods when the DJIA was closer to 1,000 so to me it seems artificially high.

According to the Urban Institute stock values decreased $13 trillion in 2008, shrinking retirement accounts an average of 40 percent. Smart Money, Feb 2010, pg. 52 states that when the tech bubble burst ten years ago it wiped out $5 trillion in wealth. I would note that I’m not keen on the wording “wiped out” – equity asset values decreased $5 trillion but a portion of that wealth wasn’t lost – it was merely transferred to speculators or investors who were able to exit their positions at higher values. Although it does not represent the average investor experience and certainly it affected even exceptional investors who lost value in their equity positions and gave back some profits from boom times there still are a few folks, lucky or skilled, who benefitted.

Pg. 22 “After the Dow ran up 20 percent from March 2008 – its best four-week performance since 1933…” We kind of had a strong repeat rebound in 2009 after stock market values decreased to new lows from March 2009.

Now think about all the billions of dollars in compensation that go to Wall Street firms – the real money is in selling investments, not gambling haphazardly in the markets. Virtual goods are a good business for sellers – they’re based on a powerful thing called belief, but at the core, fussing with stocks and bonds can seem a lot like buying virtual birthday champagne for a digital piglet.

I’ll tell you where I won’t be – Peak Performance Seminars 101 and 203 next month. Tharpy is at it again peddling his programs. I don’t know the difference between the Van Tharp Institute compared to his IITM operation, but I do know this: I can save you at least $4999.00

Seven money-making benefits await you in a one-of-a-kind workshop. You will make more consistent profits, keep your losses smaller, and be more relaxed about your trading.　

1. Learn the three ingredients of success. You must know this information, at least unconsciously, if you are to prosper. These three mental ingredients are a must in any task you do in order to perform like a “Market Wizard.” Most people don’t even know about them, which is why success is so difficult to duplicate. But after the Peak Performance 101 Workshop, you’ll thoroughly understand how these three key ingredients can control your life. Most of all, you’ll learn how you can control them.

Dude, the “market wizards” got rich without a lot of what Tharpy preaches. And when a journalist from Forbes visited Tharpy’s seminar and training operation way back in 1997 he couldn’t find exceptional value or much substance to make an article out of… Believe me, not much has changed – and that was when market conditions were most favorable to trading independently and making a small fortune. Now it’s rather silly to compete when Tharpy’s been ranting since 2004 that we’re in a secular bear market. And for all his ranting – you didn’t make any money, nor did he make any money from the bear market prediction because he couldn’t find an effective way to trade that “belief.”

At any rate he’s already discussed his “three ingredients for success bit” in books and magazine articles – and no one wrote to the editors to say they got rich… The books are just promotional literature for seminars.

2. Understand the components of a low-risk idea. The trick to compounding your personal wealth is to trade low-risk ideas. Low-risk ideas are found everywhere—not just in conservative investments. In fact, a great deal of wealth is made from following low-risk ideas in highly speculative arenas such as options and futures. But you must understand what makes up a low-risk idea. It’s not what you think.

If there are so many low-risk ideas out there maybe you’d find it surprising to hear that he can’t come up with any of them for his email newsletter over the past six years, and he doesn’t trade the markets – so he is not able to effectively compound any personal wealth by his own direct efforts within the investment markets. If you want to make $500,000 US, all you have to do is trade 500,000 shares and if the share price moves in your favor one point and you can capture that movement you have made $500,000. Tharpy doesn’t do that; he’d rather sell 1,000 people a two seminar package for $4,999 without any of the market risk. If you make money you’ll credit him and buy more stuff. If you lose you’ll blame yourself and buy from him to get more training. That’s the kind of racket he’s got: there’s no performance measurement tied to his revenues. After years of reading his stuff – he’s never been able to directly help himself profit in the investment markets, and I don’t believe he can help me.

3. Understand why position sizing strategies are critical to your bottom line results! Few people understand this key concept. Yet it means the difference between consistent top performance and average mediocre performance for most people. We’ll teach you position sizing based trading so you will have the same risk and exposure in the market day after day. Think how calm you could be, knowing that your risk is always the same.

Dude, what he’s saying here is that investing in the markets is gambling. True. So he advocates risking one percent or less of your capital per event/trade. There’s no quality filter. Do you think this guy ever would have bet on buying Google shares in 2004 and holding on to them for two to three years? No, all he could talk about at that time was his belief about the immediate and unavoidable bear market environment – which didn’t happen until 2008 and 1st quarter 2009 – and by that time he stopped using his bear market tracker/indicator. He had no clue to focus on buying Apple Computer shares in 2004, or even Chinese stocks or other international markets before they went up 100 percent or more. This approach has nothing to do with identifying strong market forces that could move a stock far enough to make you a small fortune or fortune in a reasonable amount of time – be it a year or within several years.

4. Learn 15 ways to develop rock-solid discipline in your trading. Discipline really means controlling your mental state. Unfortunately, most people allow their mental state to control them. In contrast, real winners maintain discipline that allows them to charge ahead of others in the field. If you play in a zero-sum trading game, like futures, you need to know every trick. These are the real secrets that separate successful traders and investors from the average person.

The reason Tharpy has discipline is because he doesn’t trade – his objective isn’t to make a fortune trading – it’s to make an income giving you an education. And that’s the safest bet for him because if he loses his own money in the markets he loses credibility. Dude, people cannot easily become disciplined in any area of life, dieting, exercise, improving in hobbies/projects that interest them, etc. and it would be foolish to think that when you throw in the element of money – gambling in the markets, that it allows for constant improvement in tackling your impediments to discipline. What he doesn’t explain is that the markets by their very nature are based on the majority of people not performing well or losing money to allow for the overachievers. The original “market wizards” are no longer the wizards they used to be or were purported to be because the market environment changed and they couldn’t maintain their performance, while the newer market wizards lost money during the 2000 to 2002 stock market decline and those that hung on as a going concern did so because they had sufficient money left to trade with and were able to adapt to the shift in the marketplace. And if self-made independent market wizards who had years of experience and good systems had trouble competing and trading profitably – what makes you think some silly seminar is going to turn you into a trading star?

Looking back on the February 2010 Smart Money magazine (the Wall Street Journal magazine) is good for a laugh… and a bit of a scam.

From the cover:

Fuel your own rally: 5 great energy stocks p.56

Health Care Reform: how to profit from it p.22

Make money with twitter p.46

Where to find winning stocks p.13

The new toolbox for investing is what they illustrated on the cover – but it’s just junk for the uninitiated. The concept of the toolbox isn’t explored, so no tools are presented.

How about those midsize energy companies they recommended? Bargain-hunting in the oil patch (p. 59):

Consol Energy (CNX) $45: briefly up for a week or two and then dropped ten points; currently $40.

FMC Technologies (FTI) $54: rose to $75, then dropped to $50; currently $72

Petrohawk Energy (HK) $22: dropped to $15 at the end of April and into May; currently $17.70

Plains All American Pipeline (PAA) $52: currently $64

Pride International (PDE) $32: down to $22 at the end of April and into May; currently $32

How about Health Care Reform and how to profit from it? The half-page article really didn’t deliver anything of substance. It mentions UnitedHealth Group, Amerigroup and WellPoint but not how to specifically profit from Health Care Reform so that when you get to the article on page 22 it has been renamed Learn to Love Your HMO. That qualifies as misleading. The share price of UNH dropped and recovered to around where it was when the article was released, AGP went up 15 points, and WLP is recovering from a drop from the $60 range to the $50 range.

How about that make money with twitter article? “The online phenomenon Twitter delivers 8,000 financial-advice messages every day – in tiny, often confusing chunks.” We don’t need an article for something so obvious – boring – and the article discusses Twitter, not making money with Twitter which makes the cover of the magazine look like a liar after seeing the article on page 46 renamed “bite sized advice.”

Where to find winning stocks? “Our Picks – When the market starts rewarding higher quality companies, these firms could shine, according to some pros.” So it’s a list of four companies… but it is stretched out to a page and a half so they can call it an article.

Pfizer (PFE, $18) Currently $17.77, but dipped to around $14 in June/July which is the same price it traded for in June/July of the prior year.

IBM (IBM, $129) Currently $141.20, but for most of May, June, July and August it traded for $125 (or less from time to time).

First Cash Financial Services (FCFS, $21) Currently $28.17, traded at $21 up until part of July.

JPMorgan Chase (JPM, $41) Currently $38.87, in April it briefly rose to between $47 and $48 before dropping to $36 where it traded for June, July, and September.  

The editors hope you’ve enjoyed reading the issue rather than feeling like you wasted time in their edition of Smart Crapper magazine. Of course, on the cover we’ll call it something else so keep a look out on the newsstand for the next issue of Smart Crapper magazine, although it will continue to be labeled as Smart Money for graphic design purposes.