You're not as smart as you think you are... Investing Wisdoms.

The following is from an email a colleague sent to me. It has great rhyme and reason, and I feel it is a great reminder for anyone who invests in the stock market.

Our emotions are our biggest enemy, at least when it comes to investing. We should all know this. If you don’t, stop making your own investment decisions right now.

Our emotions lead us to do the opposite of what we should be doing. They lead us to buy high and sell low. They make us excited when we should be scared, and scared when we should be excited. They make us slaves to the stock market; they let the market become our master.

The market is there to serve us, and not the other way around. It is okay to have emotions; we’re human, after all. But what we really need is an investment process. This is system of rules that we follow that keeps emotion in check.

Now, I hate republishing old articles. But a few, the ones that focus on the process, I’ll recycle (and improve upon) for a long, long time. I wrote the following article, in 2007. I included it in my book. I’ve shared it with readers in the past. And I even wrote the flip side of it in October 2008, addressing the impact of a cyclical bear market on out psyche by cyclical bear market.

I’m not offering it now to provide a hidden message that I think the current (cyclical) bull market is over. I don’t know that. I just want to remind you (and me) that a rising market has an impact on our psyche, our analysis and our decisions, and we need to be aware of it.

You are not as smart as you think you are; psychotherapy for (cyclical) bull markets
Lately I’ve been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret way to follow Will Rogers’ advice: Buy stocks that go up, and if they don’t go up, don’t buy them.

No, I didn’t get much smarter, and my stock-picking skills haven’t improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are the same way a bear market makes you feel dumber than you are.

Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make us careless. We forget about risk since we haven’t seen it in a while and focus only on the rewards. You have to actively make yourself aware of the four-letter word R-I-S-K!
How do you do that? My favorite way is to remind myself how dumb I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my errors.

We all have these stocks, the ones we lost a lot of money in because we were overconfident. We tend to forget about them during a bull market. But I suggest you remember them now, so you’ll have fewer of those names to remember in the future. Risk is still there; it is just hiding under the joyful sentiment of the bull market.
Believe me, it will show its ugly face. It is just a matter of time.

Discipline counts

In a bull market, it is easy to forget about selling discipline and then turn into a “buy and forget to sell” investor. Every time you sell a stock, you look dumb because it usually goes up afterward.

I recently sold several stocks. Shamelessly, paying absolutely no attention to the fact that I sold them, they went higher. I don’t feel smart about those sell decisions. However, when I bought those stocks, I set valuation targets. When they approached the targets, I quickly reviewed their fundamentals. They had not changed much. The decision was obvious — sell.

Cyclical bull markets teach us not to sell, while cyclical bear markets teach us not to buy. If you let the market tell you what to do, you have no process.
But the bell doesn’t ring when bull or bear markets are over.

You cannot worry about marking the “top” in every sell. My objective is not to buy at the “bottom” and sell at the “top.” My objective is to buy a great company when it is cheap and to sell it when it is fairly valued! I suggest you do the same.

-Courtessy of Vitaliy Katsenelson.

To Benefit From The Knowledge Of Historical Trends.

There is a firm belief that the following is happening (or will happen) in connection with the current economic stimuli being applied to the global economy. I feel it is necessary to look into what the real effects of this stimulus are, without speculation or political suggestion driving ones conclusions:

1. Central banks worldwide are flooding the global economy with liquidity to stave off deflation and stimulate economic activity. This is particularly true of the United States, which is central to the global economy.

2. This monetary policy will result in a significant increase of M2 (typically viewed as the total currency in circulation, deposits and money market instruments or other cash equivalents), which will debase currencies, but in particular the U.S. dollar.

3. The price of gold will increase, anticipating the effect of the M2 increase and inflation.

4. The price of energy will increase, being an essential input of an inflating economy.

5. A more broad-based economic recovery will then begin resulting in a rise in share prices world-wide.

6. Insurance companies, which are more levered to the stock market (compared with banks)as a result of, among other things providing guaranteed returns on variable annuity products, will benefit next as their capital position backing those policies grows in connection with rising share prices.

7. Credit conditions will improve, lifting the prospects of banks globally.

*Current actions taken by governments around the world are designed to create an inflationary effect in the global economy, stimulating economic output and consumer spending.

*Historically, industrial output contraction has been followed by significant output increases which have driven economic growth and market returns.

Asset Allocation Designed To Benefit From An Economic Recovery:
Certain sectors and companies will benefit earlier and more substantially than others in the event of a market recovery. And it's within these names that you will find the greatest value and successes in rebuilding your portfolio holdings over the next 5 years and beyond. Once again, tactical, active management is needed now more than ever before.

(Due to licensing constraints, I will not be listing the individual names of companies I am following, but send me an email if you would like to hear more.)

Regards.

Bubbles To Recovery...

I sat with a senior advisor and partner at my firm last week. The topic of the conversation was "bubbles", and the usual action/reaction process that takes place when they "pop". He was an advisor back in the 1970's, and he's quite astute when it comes to this particular subject. (This is also proven through his uncanny ability to miss each bubble-bursting that his taken place since... I.E. Dot Com, 9-11, LTCM, etc...)

Firstly there is a predictable behavior when bubbles reach their peak... That is, no matter who you are, whether you are a novice or an investment professional, the story ALWAYS sounds good and convincing. For example: In the dot-com bubble, anything "tech" related was a great story. "This company specializes in this", and so on... Eventually, everyone starts to see it as a very compelling idea. It is a trick on our emotional nature that, even though our rational minds are telling us: "OK, this company is run by two college kids, went public last week, no proven revenue, but is located in California and specializes in something computer related... This is crazy to even consider, BUT, Greg my neighbor has made 200% so far... And the technology they are developing is cutting-edge as they say... I'll do it! Sell the tractor, back up the truck!!!"

Bubbles:
They start as a reasonable, but unproven idea at a reasonable price.
They end as a sound proven idea, but at an unreasonable price.

Sound familiar? Look at the "potash" story. Great story. Feeding off of the "world food glut" problem. It also fits in nicely to the China and India story, whereby, China has the largest population in the World, and has a quickly developing middle-class who will demand higher grades of protein (beef, chicken, etc...) Imagine the economics that goes in to matching this increase in demand. It blows your mind. So, the developed world gets wind of this and follows the supply chain right back down to agriculture and of course the fertilizer companies. POW. You have a small fert company in rural Saskatchewan that suddenly becomes a heavy-hitter on the world stage, and a very large weighting on the Canadian Stock Exchange. (Eerily familiar to what Nortel did during the dot-com era... Look at Nortel now. Once worth a few hundred dollars per share, now in the pennies.)

Of course times are different now, and China hasn't even begun to wake from it's long slumber, so the story remains strong. (But, that doesn't mean we wont see future bubbles forming in this sector. We just have to be much more active in how we manage our investments. Passivity will surly lead to personal destruction in this new and interesting economic environment.)

After the recent "correction" we've experienced in the markets around the globe, the number one focus should be on recovery. The 5 year plan... Probably the most important 5 years your assets will experience for a life time. Let's look at 2 possible recoveries and the conditions that need to be met to succeed:


V-shaped Recovery:

“When a downturn in growth is followed by steep upturn”

Historical Precedence:
Zarnowitz Rule: Deep recessions are almost always followed by steep recoveries.
This was exhibited over the last four recessions. The shallower than average recessions of the early 2000’s and 1990’s were followed by shallower than average recoveries. The deep recessions of the early 1980’s and 1970’s were followed by steep recoveries.

Conditions needed for a V-Shaped Recovery:
Sustained recovery in U.S. consumer spending, including housing, autos and other durable goods with no significant increase in household savings. Significant Government spending and investment stretched out over several years. Significant increases in private investment. Strong export growth resumes, trade deficit shrinks further.


L-shaped (sideways) Recovery:

“When a steep downturn in growth is followed by several years of sluggish recovery”

Historical Precedence:
Financial & Global Recessions: An IMF study found that recessions caused by financial crises tend to be followed by slow recoveries. Similarly, recoveries from globally synchronized recessions are generally weak. After Japan’s real estate and stock market bubble burst in the 1990, its financial system was crippled. Economic growth averaged 0.5% over the next 10 years. This was dubbed the “lost decade".

Conditions needed for an L-Shaped Recovery:
Very sluggish recovery in U.S. consumer spending with a significant increase in household savings. Significant Government spending and investment stretched out over several years. Modest increases in private investment. Export growth resumes and trade deficit stabilizes.


Be Proactive Regardless of What You Expect from the Market:
What performed best going into the bottom will not likely perform the best coming out of it. Make sure you are comfortable with your asset allocation and security/fund selection. AND, if the story of something becomes too convincing, take a step back, maybe some profits as well, and watch for the inevitable bubble to grow and burst. With "preservation" being a key element to ones retirement future, having a bullish yet contrarian mind to these things may prove vital to your recovery. 'Luck.

Lets Talk Economy............. (Shall we?)

The Sky Is Falling....

It must be true. It’s in the newspapers, on TV and the radio. The economy is in trouble. Stocks, mortgages, banks, insurance companies. All falling and/or failing.

But, falling from where? The biggest economic boom of all time? The biggest housing boom of all time? The easiest loan requirements of all time?

Business is not down, it’s just different. The media, with their mysterious ways of relaying half-truths and impartial information, have impressed upon us to graciously "miss the point", thanks in part to the number 1 controller of our actions: Fear.

For example, when you hear the negative statistic on the news that home sales are down 33%, it actually means that FIVE MILLION homes will be sold this year. The only unanswered question is: Who will get that business? The media portrays gloom when actually there’s still PLENTY of opportunity – just not as much as before.

The low hanging fruit of two years ago is now much higher in the trees.

There’s plenty of business in the marketplace – just not as much as there was during what was the biggest housing and economic boom of all time. As a result, businesses are adjusting to current market conditions. (And this is especially reflected in the stock market, which has been and will always be the leading indicator of commerce... Investors should take heed.)

Since no one can predict the future, and the economic growth or slowdown answers are not yet apparent, senior management must react to present-day situations. Finding those who are doing so should be a primary focus of investment strategy going forward... Survival of the Fittest! and all that jazz...

An Interesting Reflection...

CAPITALISM STILL LIGHTS THE WORLD:

Sometimes images we see pass across our desk make cases for arguments far more perfectly and far more swiftly than any sum of words may or shall. One such is the “map” of the world compiled by amateur astronomers from pictures take from high
above the earth of the earth “at night”. We’ve included that “map” here this morning for the case is made that only the capitalist nations of the world are alight! One can see the US, Europe, Canada, Japan, the large cities of the coastlines of Australia, the lights of New Zealand, the major cities of S. America et al. One is even shocked by the “light” from India, and perhaps most fascinating, Israel stands out rather archly from the rest of the Middle East.

And then one sees the darkness that is most of Africa other than S.Africa and parts of Nigeria in the west. One sees the darkness of the Middle East. One sees the darkness of the “stans” in Central Asia…and one sees the utter and complete darkness that is the People’s Paradise of N. Korea. It is there, made evident by its complete and utter darkness.

(Co Of: Dennis Gartman - 04/28/09)

A Most Insightful Idea... (Courtesy of Brian Tracy)

I felt the following is a great topic regarding the current state of the markets and economy in the US... Great because it is generally looking at a "solution", and not just the "problem". A refreshing read to say the least. (Posted by Brian Tracy on Mar 25, 2009)

There is good news and bad news in our economy today. First, the bad news: We are immersed in the worst economic situation of our lifetimes. As a nation, we have been on a spending binge for decades, spending money that we have not earned on things that we could not afford, and on terms that we could not pay for, to impress people that we don’t care about that much in any case.

Now, it’s all over. As Stein’s Law says, “What can not go on indefinitely, won’t go on indefinitely.”

After several decades of affluence, Americans fell in love with the idea that they were entitled to have the highest standard of living in the world while working at half-speed, wheeling and dealing, flipping properties and generally trying to “get-rich-quick.” Now, it’s all over, and it’s not coming back. We are living in a new reality.

The good news is that the US economy is still the most entrepreneurial in the world. Americans start more businesses per capita, register more patents and copyrights, create more breakthroughs in every field, graduate more students, and are simultaneously more positive and optimistic about the future than people in any other country.

The key to reversing our negative economic situation is for the federal government to allow the business community to “take off the gloves” and begin investing, producing and creating new wealth and new jobs.

The current federal bail-outs and massive spending plans are imposing a huge financial burden on our children and grandchildren. The latest estimate is that each person in America has been saddled with an additional $48,000 in debt that they will have to pay off out of their paychecks and through their taxes in the years ahead. The tragedy is that virtually none of this big spending will do anything to stimulate job and wealth creation.

Almost every dollar has been allocated to pet programs, give-aways, earmarks, pork belly projects, and social welfare. None of the money invested in these areas will create any real jobs. And most of the spending doesn’t start until 2010 and beyond.

Government has no money. The only money government has is the money that it takes away from the private sector, and from individual taxpayers. Government creates no wealth. It merely redistributes wealth away from the people who earn it toward the government sector.

For every job that government creates, it must destroy approximately 1.4 jobs in the private sector.

Government jobs are those jobs that, by definition, nobody is willing to pay for because nobody values the results or outcome of those jobs.

Jobs in the private sector only arise when people produce products and services that people want and are willing to pay for.

The current administration seems to be obsessed with taxing the successful and productive people in America. These people are also the only real “job creators” in America. If you want to create more jobs, reward the people who create more jobs.

There is a simple solution to the current economic situation: abolish corporate income taxes. Abolish capital gains taxes. Abolish taxes on dividends.

Instead of taxing productive people so heavily that they have no money or incentives to invest and create jobs, remove these tax burdens completely.

The result would be a complete turnaround of the US stock market. Companies and their stocks would increase in value overnight. The monies lost in 401(K) plans would be largely recovered and recouped, thereby saving the retirements and dreams of millions of Americans.

Companies do not pay taxes anyway. Companies only collect taxes from their customers, or reduce the wages that they pay to their employees, and pass them on to the government.

Today, very few companies are earning any profits so eliminating taxes on those profits would cost the government almost nothing. On the other hand, it would signal to America, Americans, and the rest of the world that the US is now the most attractive country in the world to start businesses, and to invest and create wealth. The natural energy, ambition and determination of the American people can and will bring us rapidly out of this recession if entrepreneurs, businesses people, investors and wealth-creators are simply encouraged to “take off the gloves.”

Brian Tracy

(I recommend his website to any who are looking for inspirational ideas and insightful opinions: www.briantracy.com)

April... Bear or Bull Rally? Promising Thoughts.

(Please click on the above picture to get a clearer view... It details what, as investors, we should all be focused on... The main reason why staying invested in a portfolio of good quality companies is paramount to capturing this once in a life time opportunity.)

A quick blurb on Professional Active Management:

We're entering a great time for those of us who believe in active management. We will have the opportunity to acquire great businesses at historically low valuations. Mr. Buffett made his career from 1973 to 1975 because at that time picking grossly undervalued businesses was like shooting fish in a barrel. (OF course, this time the barrel is much larger, and finding the highest quality fish that much trickier.)
Successful investing through this near-term market volatility calls for tactical asset management. As the pace of creative destruction accelerates, it's important to own industry leaders with very strong balance sheets: The strong will get stronger, the weak will get weaker.

Pertinent Closing Thoughts (Bill Gross)

In a sense, we are all children of the bull market, although some of us are more mature than others – a bull market of free-enterprise productivity and innovation, yes, but one fostered by a bull market in leverage, deregulation and globalization that proved unsustainable in its excesses. We now must view ourselves as chastened adults, forced into acknowledging a new reality that is dependent upon bear-market delevering and debt liquidation to deliver us to our new and ultimate restructured destination – wherever it lies. Thus, while historians might describe these years as an evolution, for those of us living it day-by-day it most assuredly has the feel of a revolution. Much like Irving Fisher’s “permanently higher plateau” of prosperity that was quickly turned on its head in 1929, those who would forecast a “permanently lower valley” of despair might similarly be off the mark. Yet there should be no doubt that the bull markets as we’ve known them are over and that the revolution is on. Investing is no longer child’s play.