Personal Finance

10 Basic Investment Rules To Live By

Posted by Lance Roberts: The X Factor Report

on Monday, 12 August 2013 17:30

As the markets are propelled higher by the successive interventions of the Federal Reserve it is hard not to think that the current rise will continue indefinitely. The most common belief is currently that even if the Fed begins to “taper” their purchases the resurgence of economic growth will continue to propel stocks higher even in the face of higher interest rates. The financial world has finally achieved a “utopian” state where there is no longer investment risk in any asset class -because if it stumbles the central banks of the world will be there to catch them.

There are 10 basic investment rules that have historically kept investors out of trouble over the long term. These are not unique by any means but rather a list of investment rules that in some shape, or form, has been uttered by every great investor in history.
 

1) You are a speculator – not an investor

 
Unlike Warren Buffet who takes control of a company and can affect its financial direction – you can only speculate on the future price someone is willing to pay you for the pieces of paper you own today. Like any professional gambler – the secret to long term success was best sung by Kenny Rogers; “You gotta know when to hold’em…know when to fold ’em”
 

2) Asset allocation is the key to winning the “long game”

 
In today’s highly correlated world there is little diversification between equity classes. Therefore, including other asset classes, like fixed income which provides a return of capital function with an income stream, can reduce portfolio volatility. Lower volatility portfolios outperforms over the long term by reducing the emotional mistakes caused by large portfolio swings.
 

3) You can’t “buy low” if you don’t “sell high” 

 
Most investors do fairly well at “buying” but stink at “selling.” The reason is purely emotional driven primarily by “greed” and “fear.” Like pruning and weeding a garden; a solid discipline of regularly taking profits, selling laggards and rebalancing the allocation leads to a healthier portfolio over time.
 

4) No investment discipline works all the time – however, sticking to discipline works always

 

Screen Shot 2013-08-12 at 10.27.23 AM

 
Growth, value, international, small cap or bonds all have had times when they topped the charts in terms of return. However, like everything in life, investment styles cycle. There are times when growth outperforms value, or international is the place to be, but then it changes. The problem is that by the time investors realize what is working they are late rotating into it. This is why the truly great investors stick to their discipline in good times and bad. Over the long term – sticking to what you know, and understand, will perform better than continually jumping from the “frying pan into the fire.”
 

5) Losing capital is destructive. Missing an opportunity is not.

 
As any good poker player knows – once you run out of chips you are out of the game. This is why knowing both “when” and “how much” to bet is critical to winning the game. The problem for most investors is that they are consistently betting “all in all of the time.” as they are afraid of “missing out.” The reality is that opportunities to invest in the market come along as often as taxi cabs in New York city. However, trying to make up lost capital by not paying attention to the risk is a much more difficult thing to do.
 

6) You most valuable, and irreplaceable commodity, is “time.”

 
Since the turn of the century investors have recovered, theoretically, from two massive bear market corrections. After 13 years investors are now back to where they were in 2000 if we don’t adjust for inflation. The problem is that the one commodity that has been lost, and can never be recovered, is “time.”  For investors getting back to even is not an investment strategy. We are all “savers” that have a limited amount of time within which to save money for our retirement. If we were 15 years from retirement in 2000 – we are now staring it in the face with no more to show for it than what we had over a decade ago. Do not discount the value of “time” in your investment strategy.
 

7) Don’t mistake a “cyclical trend” as an “infinite direction”

 
There is an old Wall Street axiom that says the “trend is your friend.” Investors always tend to extrapolate the current trend into infinity. In 2007 the markets were expected to continue to grow as investors piled into the market top. In late 2008 individuals were convinced that the market was going to zero. Extremes are never the case. It is important to remember that the “trend is your friend” as long as you are paying attention to, and respecting, its direction. Get on the wrong side of the trend and it can become your worst enemy.
 

8) If you think you have it figured out – sell everything.

 
Individuals go to college to become doctors, lawyers and even circus clowns. Yet, every day, individuals pile into one of the most complicated games on the planet with their hard earned savings with little, or no, education at all. For most individuals, when the markets are rising, their success breeds confidence. The longer the market rises; the more individuals attribute their success to their own skill. The reality is that a rising market covers up the multitude of investment mistakes that individuals make by taking on excessive risk, poor asset selection or weak management skills. These errors are revealed by the forthcoming correction.
 

9) Being a contrarian is tough, lonely and generally right.

 
Howard Marks once wrote that:
 
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’) Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.” 
 
The best investments are generally made when going against the herd. Selling to the”greedy” and buying from the “fearful” are extremely difficult things to do without a very strong investment discipline, management protocol and intestinal fortitude. For most investors the reality is that they are inundated by “media chatter” which keeps them from making logical and intelligent investment decisions regarding their money which, unfortunately, leads to bad outcomes.
 

10) Benchmarking performance only benefits Wall Street

 
The best thing you can do for your portfolio is to quite benchmarking it against a random market index that has absolutely nothing to do with your goals, risk tolerance or time horizon. Tom Dorsey summed this up well by stating that:
 
“Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus. If you tell a client that they made 12% on their account, they are very pleased. If you subsequently inform them that ‘everyone else’ made 14%, you have made them upset. The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy. Money in motion creates fees and commissions. The creation of more and more benchmarks and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage.”
 
The only benchmark that matters to you is the annual return that is specifically required to obtain your retirement goal in the future. If that rate is 4% then trying to obtain 6% more than doubles the risk you have to take to achieve that return. The end result is that by taking on more risk than is necessary will put your further away from your goal than you intended when something inevitably goes wrong.
 
 

About Lance Roberts

Lance Roberts, the host of “StreetTalkLive”, has a unique ability to bring the complex world of economics, investing and personal financial wealth building to you in simple, easy and informative ways but also makes it entertaining to listen to at the same time. Lance brings fundamental, technical and economic perspectives, combined with a unique focus, to the day’s news helping listeners understand how it impacts their money.

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

Making money is not hard. Learning how to keep it has been the trick. Lance’s teachings are fairly basic. Conservation of principal, a disciplined approach and living on less than you make and carrying little or no debt is the only way to build wealth. His advice is more of the “chicken soup” variety as there is no magic “black box” to build wealth – just time, hard work and sacrifice.   

Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

After all it is “All About You And Your Money”

 
 

Gold as an Anti-Inflation Hedge?

Posted by Matt Machaj, PhD for Sunshine Profits

on Monday, 12 August 2013 17:21

The mantra that gold is the only inflationary hedge to use should have a closer look. Here is one – Ed.

My first article is based our just-released Market Overview (monthly reports). It focuses on gold as an anti-inflation hedge, and why it is precisely a hedge against something else. In the article below I will focus on John Paulson’s recent comments on gold by discussing the link between base money and gold. In short, significant increases in base money can be good reasons to be bullish, but not necessarily as bullish as Paulson argues.

John Paulson is betting in favor of gold based on his inflationary explanation of the current situation. He is consistent is his belief in the inflationary scenario when he states that the housing market is not far away from the bottom. He even goes so far to say that buying a home is one of the best investments one can make. (Let us not forget that Paulson correctly predicted the peak in the housing market and became a billionaire by short selling subprime mortgages in 2007). So where is the consistency? What does being bullish about gold have to do with being bullish about the real estate market? The answer is: if you believe in strong inflationary forces, you have to believe they should prevail macroeconomically, and you cannot separate various markets. If money printing should lead to inflation, you should see inflation everywhere, because it is a universal phenomenon; an upward march of prices. Of course, some markets are more affected than others. One price can increase by 10%, another by 25%, other by merely 4%. Nevertheless, once inflation takes a hold there are no doubts about it, since rising prices are noticeable virtually everywhere. Therefore, it would seem contradictory to argue on the one hand that high inflation is coming, and at the same time state that the housing market should still plummet. In other words, if you believe in hyperinflation, you should believe in a runaway boom, a flight into real assets, any assets useful to the public despite any possible debt shackles (since the real value of debt shrinks in the high inflation storm).

This of course does not imply that gold always has to move in the same direction as real estate. But, if the argument for buying gold is based on hyperinflationary conclusions, then one must accept the consequences and argue that other real markets also have to boom. That is the nature of high universal inflation: everything gets more expensive (except for money and past contracts, which lose their value). Therefore, if one posits that gold will rise because very high inflation is around the corner, one could just as well say that real assets are going to rise due to the upcoming inflation.

Actually the same goes with interest returns, including government bonds. If high inflation is on its way, one should see investors demanding inflationary compensation. In other words, interest returns on current investments should take into consideration the inflationary wave that is supposed to swipe the currency market. If you believe in hyperinflation, observe current interest returns and all commodity markets. If you do not see an upswing in both cases, nobody’s really expecting high inflation to happen. Therefore, you should not make the case for gold based on hyperinflation argument.

In the environment of very high levels of inflation (tens of percent) gold will rise as other real values. What is the case with single-digit inflationary scenario? Is gold really the inflation-hedge as it is touted? People believe so, and they are right when it comes to high inflation scenarios, but if we focus on smaller doses of inflation there is little correlation between the inflation rate and the gold price. Actually, as stated above gold is an anti-inflation instrument only when biginflation is on its way. Very big. The last 40 years tell us that gold has its own cycle, in fact unrelated to levels of inflation. Take a look at this graph:

machaj august122013 1

For the last 40 years the dollar was constantly losing its value (right scale) sometimes faster, sometimes slower. Yet gold appears to have its own way of reacting to this steady decline in the dollar’s purchasing power. Take as an example the case of the period between 1982 to 2002 when the dollar lost half of its value. During the same period gold did not gain 100% to compensate for inflation. It did not increase and did not even stay at the same level. In fact it lost its value. It was one of the worst inflation-hedges one could pick. It did not save your capital from inflationary policies. Worse, because it was inferior to the dollar putting your green paper currency in socks was a better choice than buying gold.

Two decades is not a short run. We do not take the highest gold price from the 1980s to prove the point. During those 20 years gold was losing its value faster than the dollar. Then things changed. For the next ten years the dollar lost its value, but there was a significant shift in the gold market. During that period of time, as we well know, gold gained tremendously. Even though the time period is not very long it can clearly confirm one thing: gold has its own separate market. Its value may be related to the inflation rate, but it is not a primary reason for major shifts in the value of gold. Simply put, there is more–much more. Historically gold is not a good inflation hedge (or precisely it can be in only certain circumstances).

The key to proper understanding of the gold market and more importantly – making a correct investment choice in the gold market – is getting rid of this popular notion about the yellow metals and admitting that gold will not necessarily save you from the inflation monster. Yet it can save you from something else: the endangered dollar system.

As mentioned earlier, the above is a part of the first Market Overview report that we have just published. The full version includes detailed discussion of the anti-inflationary investing vs. anti-system investing (when is gold exactly an inflation hedge?), physical gold production, mining costs, and more. We are generally fans of the try-before-you-buy policy, so we have already provided two parts of this month’s Market Overview this and last week. We are also posting this month’s Overview later than usually so that if you sign up for the monthly subscription, you’ll be able to read 2 monthly Market Overview reports in this period. The price for one month is $14.95, but we decided to lower it for the first month to $9.95. So, instead of one for $14.95 you get two for $9.95 – that’s a 67% discount for a premium publication. We’re not saying that you have to sign up but we highly recommend that you do and given the discount, it would be a waste not to take advantage of it. You can sign up here.

Thank you.

Matt Machaj, PhD

Sunshine Profits‘ Contributing Author

Sunshine Profits’ Gold & Silver Market Overview

 

About Matt Machaj, PhD
 
Matt Machaj, PhD, is an economist whose research is focused on the monetary policy, the gold standard, and alternative monetary regimes. Matt is a university professor, blogger, publicist, founder of the Polish Mises Institute branch, member of Property and Freedom Society, and laureate of Lawrence Fertig Award.

He is a free market advocate, believes in personal liberty, responsibility, and believes that social power is a better alternative than government power. Personally he believes that intelligence is the most powerful thing in the universe and beyond. He is no fan of conspiracy theories, but likes to study conspiracy practices.

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Disclaimer

All essays, research and information found above represent analyses and opinions of Matt Machaj, PhD and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matt Machaj, PhD and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Matt Machaj, PhD is not a Registered Securities Advisor. By reading Matt Machaj’s, PhD reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Matt Machaj, PhD, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


Miners Become Currency Traders

There’s been one bright point for miners lately: depreciating global currencies.

Reports this month suggest that Australian coal miners are benefiting from a recently-weaker Aussie dollar.

Management at Indonesian coal miner PT Adaro Energy said their company is facing stiffer competition from these re-invigorated Australian producers. With the A$ lower against the USD, such miners make a larger domestic profit selling their product abroad in American dollars.

But it’s not just Australia. Indonesia’s biggest coal miner PT Bukit Asam said it may also benefit from a weaker rupiah when it next reports earnings.

It seems the story is the same in many mining-focused economies. South African coal miner and synfuel-maker Sasol reported last week that its headline earnings for the year ended June 30 may jump as much as 30%. Management cited a 14% depreciation on the rand against the dollar as part of the reason for the surprising rise in profits.

Watch for the same story to unfold in Brazil. The real has dropped a staggering 13% against the dollar in just three months. This is bad news for Brazilian firms buying USD-priced imports. But it’s great news for miners and oil producers who sell their product in dollars, and mainly pay expenses in local currency.

We could see some earnings surprises here over the next quarter or two.

Here’s to foreign exchange,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

Chinese Demand, SPDR Inflow, Buy Stops Boost GoldChinese Demand, SPDR Inflow, Buy Stops, Short Covering Boost Gold & Silver

Posted by Kitco/Marketwatch

on Monday, 12 August 2013 17:08

“There was very good physical demand overnight out of Asia,” said Bill O’Neill, one of the principals with LOGIC Advisers. “That got things going, and it kind of built upon itself….We hit (buy) stops as the session wore on.”

September silver SIU3 +4.65%   rose 92 cents, or 4.5%, to $21.32 an ounce. Silver hasn’t traded above $21 since mid-June, according to FactSet. The Global X Silver Miners ETF SIL +6.28%  was up more than 5% in recent trade.

But other factors were at play as well, including a fresh news report about the robust demand from China so far this year. The China Gold Association said that the country’s gold consumption in the first half of 2013 rose 54% year-on-year to 706.36 metric tons.

“You still have China on a gold- and silver-buying binge,” Flynn said. “At a time when prices were falling, China continues to buy. That report today is a reminder that there is still a lot of physical demand for the metal.

Kevin Grady, president of Phoenix Futures and Options on the Comex floor, said gold futures are in slight backwardation, in which prices for the nearby contract are more expensive than for deferred contracts and seen as a sign of a tightening market. Normally, deferred contracts are more expensive due to costs such as storage. As of Friday’s close, August gold had a 70-cent premium to December.

“There is definitely buying in the physical market,” Grady said. “It’s coming out of Southeast Asia and it’s coming out of the Middle East, and it’s strong. There’s been buying the entire way down.”

….read more HERE

 

The US Is Weeks Away From A Confluence Of Risky Economic Events That’s Unlike Anything We Can Recall

Starting sometime in September, we can expect to see the following:

  • A fight over the government’s budget, leading to a possible government shutdown.
  • A fight over the debt ceiling.
  • The beginning of Fed tapering (the reduction of large-scale asset purchases, known as Quantitative Easing)
  • A nomination for a Fed Chair to replace Ben Bernanke.

Each one of these could be economically significant to varying degrees. Together they’re likely to be very exciting.

….some analysis HERE

Also: Why Wall Street Should Worry About the Next Fiscal Fight