Economists #2
August 28, 2010
Economists know more about how the fragments of society work than anyone. In school they are taught to break down the economy into its tiniest parts and to quantify each minutiae so it can become part of a formula. Once done those econometric formulas should become a viable equation to predict how the total economy will react when a change occurs to any part of the formula.
Since economists know all this I must ask if these formulas are so good at predicting the economy why aren’t all economists rich?
They aren’t. And I will give you some clues why.
The more complicated a formula the less likely it is to work. When the economy is not reacting the way an economist thinks it should based on his formula he will tell you that one part of his equation is not acting “normally”, whatever that is. Another thing you will find is there is no Holy Grail formula. Each one of these PhDs has tweaked the basic one and either added or subtracted parts or maybe changed the weighting of certain parts. If you ask 1,000 economists for an answer to what will happen and why you will receive 1,000 different reasons. That doesn’t mean they are all wrong. It does mean there is no one right way to arrive at a correct prediction. The law of averages will have many with a valid answer even if their reasoning is wrong. Sometimes pure luck is enough.
Evaluation I
August 19, 2010
An insane person cannot evaluate an insane evaluation system.
As you know I have been trying to restore sanity to the insane premises Wall Street has been teaching its brokers and you for all these years. Their insanity has become so pervasive that it has become conventional wisdom. The brokerage houses have taught everyone to act insanely and to think that what they are doing is sane.
Wall Street has taught you the insanity of doing research, dollar cost averaging and buying and holding. Anyone who can rub two braincells together can figure out that all these are lies. A book written 40 years ago by Nicholas Darvas called “How I Made $2,000,000 in the Stock Market” came to the same conclusions I have, namely, brokers don’t know anything and research is worthless. He gives a good explanation as to why he came to those conclusions. You might still be able to get the book at the library as it is out of print.
Enron Cure
August 11, 2010
Let’s hope you did not have any of the Enron stock. Maybe you know someone who did and lost everything, but you certainly might know several people who owned stock that lost almost everything. They probably aren’t talking about it.
According to Investor’s Business Daily newspaper there are 1,387 companies that lost more than 90% of their value from the highest point during the last 5 years. That is almost as bad as Enron except the folks that own this junk have hopes that someday their stock will go back up. And pigs can fly.
Do you realize that if a stock loses 50% from its high it must gain 100% to get back to the old high? And there are literally thousands of stocks that fall into that category. The people that own these dogs are waiting for them to rally so they can get out “even”. What this means is that the stock has an effective cap or ceiling on it’s price. Each time it sticks its head up it will meet with thousands of folks who will sell. The chance of it ever getting back to the old high is almost nil, never, nada, zip. From my experience as a professional floor trader on the exchange I can tell you it will take a minimum of 5 years of repeated rallies before the investors who are waiting to get out are finally exhausted.
Emotional Involvement
August 3, 2010
I’ll bet with almost anyone that has stocks or mutual funds in his portfolio that he has losers, but he won’t sell them because he “likes them” or some similar excuse. This is the philosophy of a loser.
You cannot become emotionally involved with anything you have bought whether it is stocks, mutual funds, collectibles, real estate, etc. etc. When you see the value of these things heading down it is time to try to salvage some of your money even if you have to take a loss.
I have seen people hang on to a piece of land (or a stock) for years just so they could get out “even”. Believe me “even” is not even. Suppose you paid $20,000 for the land and it took you 8 years to find someone willing to buy it for $20,000. If you could have sold it for $15,000 and put the money in a money market account at 6% for 8 years you would now have more than the original $20,000 ($20,495). When you invest money in anything you cannot afford to have emotional ties to it. You must be willing to sell when the time comes. Most people don’t want to sell for two reasons. They won’t take a loss; however, the main reason is psychological - they don’t want to admit they were wrong. When I was a broker I would watch people trade. Almost none of them were trading to make money although that was what they said. They were trading to find out how much pain they could stand from losing. They were trading for emotional reasons.
Economists
July 25, 2010
In today’s volatile and confusing stock markets everyone is searching for a guru who knows which way the market is going and when. Ask any economist and he will have an answer. Ask 2 economists and you will have 2 answers. Ask 3 economists - ad infinitum.
At the Federal Reserve Board we have Mr. Greenspan and all his economist Governors talking at each other about how to best micromanage the U.S. economy. Notice I said talking at and not talking with. Each one of them thinks he has the Holy Grail and knows exactly what to do. It has not occurred to any of them that doing nothing might be the best for everyone.
On April 27 there was an important economic statistic released. The Employment Cost Index gain was 1.4% which was more than expected by the investment community. This was considered to be negative for the stock market because the Fed is considered to be “anti-prosperity”. This number shows more people are being paid more money. Mr. G. thinks this is inflationary. It is a theory he has dreamed up. Going back in history there is no actual correlation showing wage increases cause inflation. This is one of his own pet theories.
How Much Information Do You Need?
July 18, 2010
You have decided to buy some stock or mutual funds, but wonder which one to buy. You need more information so you call your broker for advice. A so-called "full service" broker will bury you with all kinds of reports, analysis sheets and other pretty pieces of paper, but will probably try to sell you something that makes him the most commission.
Let’s see. What does Wall Street think you should know? Of course, you will want a company that is currently favorable or "hot" ? like WorldCom used to be. Then you need to look at their financial statement that has been audited by a big accounting firm. ? like Arthur Andersen. You really should check to see if they have any big outstanding financial obligations that have little asterisks next to them in the Annual Report ? like under funded pension plans.
Of course you will want to get their financial statement to check their P/E ratio. That’s Price/ Earnings or how many years of earnings it will take to make back the price of the stock today. The lower that number the better. For many years the average has been about 14. If it is above 20 or 30, well ??? We won’t factor in the rate of inflation that will dilute the buying power year after year. And there are lots of other numbers like this Wall Street says you should be studying.
Hold Em and Fold Em
July 9, 2010
When most analysts, financial planners, fund specialists and investors try to decide whether to buy a particular stock they immediately go to the financial statements to determine the growth potential of the company. Numbers and more numbers. Then management analysis and industry speculation. Unless you are an experienced financial analyst (and there are not very many good ones) the numbers in the reported statements can be very misleading - just as the company Controller wants them to be.
Let’s not consider fraud as there has been plenty of that both here and abroad. They are all honest (I hope). Most corporate executives want to remain within the law so they report statements that are true to the FASB - Financial Accounting Standards Board.
As the old saying goes, “Numbers don’t lie, but liars can figure”. If you are good with accounting techniques you can make a bankrupt company look good - on paper. On CNBC-TV many folks watch the CEOs telling a great story about their company. You sure don’t expect them to tell you the whole truth and nothing but the truth, do you? That is why I always hit the mute button. And many times when you look to see what the insiders are doing in this wonderful (?) company this executive and his buddies are selling out.
Gurgle Gurgle
July 1, 2010
Caught in a whirlpool and being sucked under. No life vest or other device to save you. Gurgle, gurgle. Down you go.
This last couple of weeks in the stock market kinda feels like that whirlpool when you look at your financial statements. Of course, your broker will tell you this is a “normal correction and it gives you a chance to buy more so you can dollar cost average. He could be right about this being a correction, but dollar cost averaging down is 100% wrong. The proper way to average into a financial holding is buy more as it goes up in value, never down.
There is a basic law of physics that applies equally well to many things including the stock market. An object in motion will remain in motion in the same direction until interrupted by another force.
Keeping that in mind before you buy any stock or mutual fund is very important. Just because something looks cheap does not mean it will increase in value because you bought it. Usually there is a compelling story to go with it, but that doesn’t mean anything.
The Golden Goose is Sick
June 23, 2010
It is finally catching up with them. The brokerage companies I mean. For years they have been feeding bad food to their flock and now the flock is rebelling. The customer has been low man on the totem pole for too long. That food has been the disinformation that has caused customers to lose large sums of money.
Last year there were 33,000 brokerage company recommendations for thousands of stocks. Things like Strong Buy, Buy, Long Term Buy, Outperform, Underperform, Neutral, and Hold. The one word that was missing was Sell. Of those thousands of messages sent to their clients only 125 were Sell. Something is very seriously wrong here. While the market was going up in 1999 the so-called analysts whose job it is to figure out if the company is a BUY candidate were telling you to buy everything in sight. Anyone could have used a dart and thrown it at the long listing of stocks in the newspaper and hit a winner almost every time.
Hill of Hope
June 14, 2010
Just about now everyone is confused as to which way the stock market is going to go - up or down. For the past 3 years it has been headed south, but the Wall Street experts have told us that the market never goes down 4 years in a row so this has to be an up year. But no guarantees.
The old saying is that the stock market climbs a wall of worry. We watch sharp moves up followed by days, sometimes weeks of weakness and then another shot to higher prices. From 1982 to 2000 this went on until we absolutely, positively knew it was going to continue forever. The current mindset is you can’t lose if you just “hang in there”. Mr. Average-stockholder has lost about 50% of his money so far and has chewed his fingernails to the nub. Now what?
I hope you don’t need a house to fall on you to realize we are in a long-term bear market, one that could last for years. In a bear market the action is exactly opposite what you see in a bull market - sharp declines followed by slow agonizing rallies that don’t quite make it back to the previous high prices. This is called climbing the Hill of Hope. This is a slippery hill to which you will not make it to the top. Hope is the most expensive word in an investor’s lexicon.
