Why is this? Why are people fascinated with markets? Why are they wasting a lifetime looking for that secret tip that will lead to easy money?
The critical first step to achieving profitability is to identify your own style and get comfortable with it. Jim Furyk has what many consider the ugliest golf swing imaginable. He literally looks like he is making a figure 8 when he swings the club. We can't be too critical of Jim though as his trophy collection far exceeds any that we may ever amass. He has a style and he plays his game. This is how you need to view investing in the stock market in order to make money.
Brokers Are Useless:
Most average people see brokers as successful professionals that possess great knowledge and should be trusted. The paradox is that nothing could be further from the truth. Many people fail to ever audit their broker's results. If he is selling it that means his firm doesn't want it! All major firms trade for their own benefit creating a clear moral hazard. While there is the occasional decent broker that is too chicken to break out on his own, as a class these people are worthless and should be avoided at all costs.
If They Are Selling You Should Be Too:
Many investors have learned that hard way that being offered a space in a fancy partnership or "Special Investment Vehicle" was a bad idea. If the firm doesn't want it, you probably don't either.
When it comes to their buy and sell recommendations, proceed with great caution. Typically the rating is determined in a conversation like this:
Investment Banker "Hey there Bill had a great time on the golf trip last week let's get down to business talking about that $100mil bond issue that you really don't need but we are going to sell you"
CEO "I don't know.....doesn't seem like the best thing for our shareholders and we really could use our credit line instead"
Investment Banker "Well that is too bad because we thought your shareholders would like the fact that we see your stock as a strong buy right now"
CEO "Really......WOW....a rise in the share price would trigger all of my incentive options!"
Investment Banker "Well....tell you what.....why don't we make the bond issue $150mil and add you to our Conviction Buy List?"
CEO "OK I am sure you have my best interest at heart"
So you have a meeting with your broker and ask him what you should buy. He dutifully looks at his screen of instruction from New York and says, "We have a conviction buy on ABC Inc right now." Why would you ever want to be involved in this type of game? You can't possibly win.
Reading Financial Statements Is Largely A Waste Of Time:
There are several thousand MBA types in New York that are dying to get another title on their business card. If they didn't see something in the report, you certainly are not going to find it. As we will briefly discuss below, certain information is critical and can only be found in these documents, but as an investment primer, don't waste your time.
Now that we have successfully irritated the entire mainstream investment community, we will offer a sincere attempt at redemption by again giving away our secret formula. This is only our style and like Jim Furyk, it is all we have so we must use it confidently.
Economics Is Our Base Primer
Economics, herd mentality and physics are the keys to everything in the financial world. Yes everything, there are no exceptions. Every decision is made by a human that is manipulated from every direction by need, desire, greed, fear, lust, envy, hunger or the acquisition of power. Americans disagree firmly with this broad generalization but our international readers, especially our Russian and Ukrainian readers, just smiled and agreed. Americans are endowed with the privilege of existing in a fantasy land as long as their dollar is accepted as the world's reserve currency. The day that the world rejects the dollar, Americans will again be subject to the economic laws that govern the rest of the planet.
Physics comes in to play here because as humans drive wedges between nature's balance, one that eventually gets so distant from equilibrium, that they capitulate and return. Often times so much force has been used in the latter part of this move that a massive amount of pressure is released during the capitulation event. The reason that so much force is used lies in the fact that humans have a herd instinct. While most fancy themselves independent their true behavior shows a great deal of discomfort when outside of the herd. The herd offers warmth. Our problem is that we see the herd headed relentlessly towards the slaughterhouse!
A clear, complete and unemotional understanding of economic law, human behavior and basic physics is absolutely critical in order to survive in markets. After all, if you lose all of your capital you are no longer a capitalist.
How To Read The News
Most Americans get their news from one of five sources, Fox, CNN, CBS, NBC, ABC or a corporately controlled derivative of these. How can you possibly be thinking for yourself if you are reading blindly from these sources? Also, they get their marching orders from AP/Reuters or the US regime.
Proper news reading takes the approach of scanning the press. Open up papers and read them quickly looking for data points, not opinions. This takes practice but what you want to do is take in as many data points as you can possibly handle and overlay those with your understanding of geopolitics, human nature and economic law. This sounds difficult but it is not. The first time you get in front of a market you will understand that this behavior is worth the time it takes to develop. We should remind readers that we posted a piece on 2-20-11 called Oil Prices To Rise Dramatically on our previous host site and this preceded crude's 30% price accent. How did we know? We did not know we only saw several catalysts building that made a dramatic price rise likely. It could have taken a year so we did not purchase large amounts of oil futures. Sticking to our style we purchased shares of an oil explorer located in Albania. Our thesis was that western regimes would soon throw large amounts of capital at accessible oil reserves in friendly nations.
Looking For Opportunity
Once the two points above have been mastered patience and curiosity must dominate your conscious thoughts. Great ideas don't come often and there is no way to rush them. Proof of this lies in analysis of the herd. They always want to look at the past 2 years of a track record and then go all in just before the blades of the slaughterhouse are within earshot. This is in direct polarity to our recommended approach.
Your editor has made a point of maintaining the stoutest Rolodex possible over many years of investing. In early 2009 a contact in Eastern Europe reported on a late night drunken conversation with two US Air Force officers. The officers described two planes that were recently unveiled, Raptor and Joint Strike Fighter. The former was superior but not available in the desired quantity due to "lack of some metals needed to make critical parts." We never forgot this and one year later read research on Rare Earth Elements and their use in military equipment.
A detailed study driven by curiosity found that China controlled 97% of the world's current output related to these critical elements. As described above, we had been fully aware of the real situation and tension between the US and China. Avoid listening to the news or grandstanding from elected officials desperate for power, we knew of the war behind the scenes raging between the two powers. We anticipated that these critical elements would be a major tool of this war.
We took a small stake in 8 companies that appeared to have good deposits of the most demanded elements. The following filters were used to screen companies:
- Reasonable Share Structure
- Experienced Management
- Valuable Economic Deposit (High Grade)
- In Development Process
This stake amounted to approximately 4% of equity related investments as only a gambler with a masochistic desire to lose money would risk more. During the summer there was a missile fired from a submarine near Los Angeles and we assumed Chinese responsibility. They were likely saying, "We can have subs in your harbor too." Also there was a misreported event involving a Japanese fishing vessel we suspected must be smuggling rare earth elements from China. Over the next 4 weeks we quadrupled our stake in the sector. This continues to be our most bullish position as the mainstream press has not the foggiest idea what is going on in this market. The herd is not aware of the pasture where we graze. Some day they will discover it and rush towards our field. We will attempt to sell positions within 25% of their eventual top. Greed has no place in profitable investing.
All good organizations must be guided by a written statement of values that maintain order. We have had many ups and almost an equal number of downs. Blame has been thrown at everyone imaginable until we realized that it only belonged to us as never once has a gun been placed to our head and trading instructions dictated. Here is our constitution:
- Never use margin
- Never trade options
- Never go short
- Never day trade
- Never have a 2nd mortgage
- Never risk money we can not afford to lose
We have many associates and peers that profit from these behaviors but remember, this is only our constitution, they probably have one of their own that begins with rule #1, never speculate. We would be fired immediately!
When To Buy/Sell
How do you know when to buy or sell? Some people say, "Buy low, sell high" and applaud themselves for their brilliance. Further investigation reveals that they often do the opposite. We attempt to buy high and sell higher. This is possible when noticing an economic condition and placing a trade while waiting for the herd to wake up. Most people are scared of profit and enjoy the agony of loss. A trading journal can help discover what drives this behavior. Masochistic tendencies or not enough hugs from mom as a kid are likely to blame but these must be overcome or serfdom awaits.
Charting should be utilized to help remove emotions when taking positions. We will write a post on charting shortly and hope that readers will take it seriously and avoid future losses.
Finally, once a decision is made to exit a trade regardless of the outcome, be happy with what you got becuase we can promise you, that is all you are getting!
Good luck developing your own style.