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What March Madness Can Teach Us About Stock Trading

Posted March 23, 2011 at 2:24 am

by The Wild Investor:

MarcGators are in the Final Fourh Madness is a great time of year for anybody, whether they follow college basketball or not – mainly because it is a bunch of unpredictable “madness” where everybody has a shot. Even if you never watched a day of basketball in your life.

Upsets happen and college kids do what college kids do best – make mistakes, and at the end of the day the actual poor quality of basketball is overlooked because people just want to see “madness.”

When you compare the NCAA Tourney with the stock market, the scary part is that the two are actually very similar…

Here are a few lessons March Madness can teach us about stock trading…

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Friend or foe, take the dough

Posted March 5, 2011 at 1:55 pm

Editor’s Preface: This very powerful piece explains in existuite logic the Wall-Street adage: “You can make money by taking profits!” And, just when you think you shouldn’t take ‘em, because you feel there’s more air to be squeezed out of the balloon ride, FIRST read what Louis has to say below:

by Louis James, International Speculator

Some investors in this bull market bemoan “lost profits” resulting from taking profits on stocks that continue to rise – sometimes to much higher prices. This idea of “lost profits” is a very dangerous one, borne of pure wishful thinking, that can lead to realizing huge losses instead of profits.

The idea is based on applying what you know after the fact to a time before the fact. It is the precise intellectual equivalent of wishing you could go back in time to buy gold at its 2001 bottom, or sell all stocks at their pre-2008 crash top. This is simply not possible – and the same applies to knowing in advance when a stock will peak, for profit-taking purposes.

At the moment you make a speculative investment decision, you do not know what will happen. You have an educated guess about a trend that you think will stack the odds in your favor, and you have your due diligence on the best bets to make to take advantage of that trend. That’s all. THAT IS ALL.

It is critical for speculators to understand this, not to imagine that they have some special foresight just because they’ve made money in a raging bull market. Nor should they imagine, in spite of our track record, that we mighty titans at Casey Research have any special ability to predict what will happen in the future either. What we do have is a very keen sense of the trends and a lot of experience picking the best bets to place on those trends. But we never forget that the market can buck the trends we see, and even when the trend holds true as the future becomes the present, individual speculations can fail for any of a host of reasons, ranging form a bear attack on a key individual to a surprise coup d’état.

At any given point in time, you can have the best possible research on a bet on the most solid trend imaginable, but you never have knowledge of the future. Anything can happen – and it often does.

Over the last year, more than a half-dozen companies we recommended surged within a few months of our recommending them, or were taken over as we speculated they might be. Sometimes that happened within days, sometimes it took a few months. Those were good bets, but I did not know what would happen, only what could happen. They have all corrected after surging, in some cases to well below the price at which we took profits, and yes, in some cases to prices well above where we took profits.

But again, at the given point in time when you are considering whether or not to take profits (which we recommend doing when you get your first double on the stock), you do not know which way the market, and the stock, will go next.

You do not know that you will be missing out on profits. But you do know that you will eliminate all risk in the play by recovering your initial investment. This asymmetry between not knowing a stock’s future price and knowing that you can benefit from whatever that might be free of risk makes the decision very clear: friend or foe, take the dough.

The only exception I can think of to this rule is when you honestly cannot think of a single thing you’d rather do with that money. If, at that point in time, I feel a near-certainty that the very best thing I can do with any cash I may happen to have available to speculate with is to put it into the same stock I am considering taking profits on, I may just let it ride.

But if I do that, I don’t get to whine about losing the whole bundle if my “double or nothing” bet comes up “nothing.” I’m a big boy, and I take my lumps with grace, knowing that no one but me decided to take the extra risk.

What else could I do with the recovered investment (which is what you get when you take profits on a 100% gain)?

I can stuff it back under the mattress and continue speculating with money I will now not be anywhere near as upset if I lose. Or I could use it to buy a different speculation. That would expose me to some new risk – but a different risk than the first one, vulnerable to a broad market correction, but impervious to company-specific bad news that might afflict the stock I took profits on. Or I could invest in something more solid, like real estate in a place where I want to live. Or park it in gold to reduce my financial risk even further. Or I could hold it, keeping some powder dry until the next super-speculation with out-of-the-ballpark potential comes along. Or… well, you get the idea.

Getting your money back out of a risky game is never a bad idea, no matter what happens next. Don’t get greedy, play the odds smart, and build your fortune carefully, emphasizing risk reduction as much as maximizing gains. Recklessness will just get you slaughtered along with all the sheep in the next market crash.

Remember the cold, hard truth: There is no way to distinguish in advance lost profits from missed losses.

[“Due diligence” is Louis James middle name. For years, has been picking the best small-cap metals juniors as the Metals Strategist at Casey Research… beating the S&P 500 by more than 8 times and physical gold by 3 times for his subscribers. For a very limited time, you can save $300 on the annual subscription fee for Casey’s International Speculator– plus receive Casey’s Energy Report FREE for a year! To learn more, click here now.]

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The Gambler

Posted January 20, 2011 at 6:00 pm

by Cullen Roche:

“If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.”  -Chinese Proverb

As a society we have been conditioned to believe that there is a difference between gambling and investing.  Of course, this partially true, however, the degree to which we “invest” and “gamble” is smaller than most are likely comfortable admitting.  The majority of us have been conditioned to believe that buying a share of Bank of America is vastly different from placing a bet at a roulette table. 

A closer inspection of “investing” and “gambling” shows that the two are closer than the Wall Street sales machine would like you to believe.

60 Minutes aired an excellent piece this past Sunday about Billy Walters (video attached below).  Walters is a Las Vegas gambler widely acknowledged as one of the greatest gamblers Vegas has ever seen.  He’s so good that he has to bet anonymously through partners due to the fact that most casinos won’t take the other side of a bet from Walters. 

The few casinos that do bet with Walters do so mainly because they want to know what he’s thinking.  But Walters isn’t truly a gambler. Walters is so good that he feels safer gambling than investing. 

And ironically, it isn’t the casinos in Vegas that have taken Walters for a ride over the years, but Wall Street.  Walters claims that it is not Vegas where the thieves live, but rather the men in suits on Wall Street.

Before we can understand the difference between gambling and investing it’s best to define each…

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Harry Schultz’s last testament

Posted January 15, 2011 at 2:59 pm

by Peter Brimelow:

NEW YORK (MarketWatch) — After 45 years, Harry Schultz has just published the last issue of his International Harry Schultz Letter.

He’s superbearish but opportunistic.

Schultz, now 87, is one of the legendary characters of the investment letter industry: a hard-driving promoter who specialized in bold, radical high-concept stands. ( See Sept. 16, 2010 column.) I named him Letter of the Year in 2008, because he indisputably predicted the Crash (a “financial tsunami”) although paradoxically failed to benefit very much. ( See Dec. 28, 2008 column.)

But Schultz is also a trader, with a great respect for short-term trends. In this respect, if no other, he’s like the Aden sisters, to whose Aden Forecast he will be contributing occasional columns. ( See Dec. 30, 2010 column.)

The International Harry Schultz Letter has been something of a tsunami itself, with dozens of recommendations and opinions on an amazing range of subjects. Its relationship with the Hulbert Financial Digest’s monitoring system has been complex and sometimes strained.

Full article…

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Are You A COIF?

Posted January 13, 2011 at 10:18 pm

by Dynamic Hedge:

Being a contrarian means having a healthy dose of skepticism.  It’s necessary in the trading world.  Contrarians don’t take things as they come.  They don’t chew and swallow every morsel spoon fed to them by the media.  They don’t blindly act on every analyst research note.  In a world where every thesis can be slanted with near-ideal scenarios, few roadblocks to success, and a long-term trend in their favor, a critical mindset is required to temper all the BS.

Great contrarians are invaluable team members and collaborators.  They force you to consider counter arguments by highlighting perspectives you may not have considered.  They tend to dig deeper in their analysis than average, especially when the consensus is heavily against them.  This contrarian persistence has uncovered information that may have never seen the light of day (see Enron, WorldCom, etc.).  They can be inspiring in their fearlessness, conviction, and bravery, armed only with their due diligence and intellect.

Not all are contrarians are created equal.  In my experience I’ve come across three types of contrarian:

  1. The Natural Contrarian.
  2. The Trained Contrarian
  3. The COIF

The Natural Contrarian has skepticism and intellectual curiosity from birth.  They have a competition in them that drives them to “take the other side” when they know they’re right.  One of the defining characteristics of a Natural Contrarian is that they know where to pick their battles.  The work hard to confirm or disprove their thesis and aren’t afraid to walk away when proven wrong.  Contrarian opportunities are intuitively obvious to them, and being right in the face of the consensus comes naturally.

The Trained Contrarian is different in that skepticism is not second nature to them.  They force themselves to be more skeptical and to against their naive and trusting tendencies.  They can become even better at spotting contrarian opportunities than the natural.  They work much harder and dig deeper into their analysis than the naturals — not only to prove their thesis, but to convince themselves.

A terrible condition exists for those that take contrarianism too far.  They make it a part of their identity and wear their cynicism as a badge of honor.  The identity of being a skeptic determines how they view all events in life and business.  Give them any consensus and they will fade it.  Present them with any situation or opinion and they will argue against it.  They see the world as perpetually incorrect.

New term: COIF, (Contrary Opinion Indifferent to Fact) (Pronounced kwäf)

The main difference between contrarian and COIF is that the COIF doesn’t hold the same standards for logical and intellectual analysis to see if they’re correct.  They carpet bomb cynicism because their internal contrarian gauge is uncalibrated.  The kiss of death is when COIFs have been correct enough times by simply betting against others that they believe that “betting opposite” is all that is required for success.

Contrary does not equal correct, although it can appear so in the rear view mirror.  COIFs appear right more than wrong because they are unafraid to take bold stands against popular modes of thinking.  Being right about something as serious as a financial crisis can appear critical and timely after the fact if the observer doesn’t realize that they are dealing with a COIF.  Being correct about big events is addictive and being a COIF offers a high probability of doing that.  If you bet against everything you will be right about many things.  More importantly you will be right about things that many others were wrong about.  They will wonder what the COIF saw that they missed, and to them the COIF looks like a hero/genius.

Contrarianism needs to be tempered with fact.  Cynicism can only masquerade as intelligence for so long.  There is a time to be a contrarian and, believe it or not, a time when the consensus is actually right.  You do NOT need a COIF on your team, because they’ll never be able to tell the difference.

[ orginal source ]

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Interview with Richard Bookstaber, veteran Wall Street risk manager

Posted January 7, 2011 at 8:46 am

Introduction Via Nancy Miller @ Fortune

Richard Bookstaber, veteran Wall Street risk manager and hedge fund manager, made a splash on the eve of the financial meltdown with the publication of Demon of Our Own Design, a book that warned the markets had grown too complex and were headed for a crash.

Last year, Bookstaber left Wall Street to join the Securities and Exchange Commission as Senior Policy Adviser in the newly formed Division of Risk, Strategy, and Financial Innovation – a job he calls the most fulfilling of his career.

In what spare time he has, Bookstaber trains in Brazilian jiu-jitsu, pens a broadly read blog, and during his New York-Washington commute is working on a novel that explores the limits of human knowledge.

Click Here To Read: Interview with Richard Bookstaber…

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How To Plan For 2011

Posted January 6, 2011 at 12:14 pm

by Jeff Miller:

Should investors pay attention to the turn of the calendar?

Putting aside the seasonal effects — the Santa Claus rally, the January effect, and the Presidential mid-term rally — it is an important psychological time.  People reflect and plan.

Here are a few simple but important suggestions for 2011…

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8 Valuable Lessons We Learned About Investing in 2010

Posted December 31, 2010 at 6:13 am

by Sara Glakas
via InvestingAnswers.com

It’s time to prepare for 2011.

But before we do, first let’s look back to the lessons learned in 2010.

As the S&P 500 climbs to levels not seen since September 2008, it’s easy to forget the massive uncertainty that confronted investors at the beginning of this year. With so many conflicting trends and disparate prognostications, it was easy to become paralyzed — afraid to make the wrong move. Needless to say, in 2010, I learned the value of having a plan and relying on it to counteract the forces of investing inertia.

Jeremy Grantham, chief investment strategist of global investment manager GMO, is one of my all time favorite investors and financial commentators. He wrote the following in a newsletter titled “Reinvesting When Terrified,” way back in March 2009 when the S&P 500 plunged below 700:

“…a simple clear battle plan — even if it comes directly from your stomach — will be far better in a meltdown than none at all. Perversely, seeking for optimality is a snare and delusion; it will merely serve to increase your paralysis. Investors must respond to rapidly falling prices for events can change fast.”

I printed out that piece of advice, taped it into the notebook I carry around with me, and look at it whenever my stomach is in knots.

Which brings me to another lesson I learned in 2010: seek out the best and brightest financial minds before wading into the deep waters of investing. It’s a world largely populated with sharks.

Luckily for us here at InvestingAnswers, our family of publications, including StreetAuthority.com, TopStockAnalysts.com and SmallStocks.com, draws on the expertise of some of the country’s most thoughtful and experienced financial talents.

I can just walk down the hall (or send an email) to ask our writers what they learned in 2010, and more importantly, how they hope to apply it in 2011.

Here’s what they told me…

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A must-read interview with resource legend Rick Rule

Posted December 10, 2010 at 11:34 am

From an interview with The Gold Report:

Jeff Howard (CEO, Global Resource Investments):
Rick, let’s start with the precious metals markets because it’s been a glorious time the last three months or so, and it may be a good opportunity to get your thoughts on where we’re going from here.

So starting with gold, you know we’ve always joked over the years that when you start reading about gold in the Wall Street Journal or the Los Angeles Times and you start hearing about it on CNBC, that’s a sign of a market top, and that’s kind of what’s happening right now. It’s a popular topic out there. However, the actions of central banks and the growing distrust of paper currencies suggest that the strength in gold may continue for much longer than what we’ve seen in the past. So, what’s your take on the future direction of gold prices?

Rick Rule: Well, sadly…

Full article…

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Mad, Average, or Stupid Money?

Posted December 1, 2010 at 5:07 am

by Barry Goss:

There he was, like a clock, ticking away with the noise.

I simply took a break from the office, sat down with a bag of gluten-free pretzels, turned on the TV to keep me company, and almost choked at what I heard:

“Ya see, today is a perfect example of why bears aren’t to be heard. Most, on the institutional side, even have a hidden agenda to talk a stock, or even the broader market, down. Because they’re undercapitalized, and sitting on too much cash.”

I yi yi… the master spinner of “See, I told ya so,” when the market rallies, was at it again.

Today, for instance, stocks got off to a gangbuster December start. The Dow Jones industrial average rose 249 points, its sixth biggest gain of the year.

And arm-flailing Cramer was speed-talking his way through the next great coming rally.

Yup, even in the face of a worldwide credit crisis (which equates to a currency crisis throughout), declining income / employment, and no real, durable, stable growth in the U.S., he’s still the ringmaster for… er… well, for the U.S. stock market as a whole.

Those are stocks that have, naturally, already hit a big run due to recent events. Yup, Mr. Mad Money is almost blind to crucial longer-term trends.

If you’re AFTER an analyst who has his TIMING down, rest assured, it’s not Cramer who you want to follow.

For instance, in this piece (and video clip) from July 30, 2008, Cramer boldly proclaimed that the stock market lows hit in mid-July marked the end of the stock market’s downturn!

The worst part of the 2008 stock market decline didn’t take place until the late summer and early fall, and in fact the market dropped another 30+% from the low which Cramer predicted was the bottom!

And, you might think that Cramer’s advice on investment banks, where he has lots of contacts and used to work, might have led him to have some insight before that sector imploded in 2008.

But, on 8/17/2007, Cramer recommended buying Bear Stearns at $118.20 per share. He lost 95 percent on this one — selling at just under $6 per share on 3/20/08.

And, his picks on Lehman Brothers, Morgan Stanley, and Merrill Lynch are just as atrocious!

So, while I could cite a bunch of head-shaking references (links and videos) about his merely overall average record, while exuding unabashed confidence, I won’t.

What I will say, however, is this:

If you’re into the “feel good” thrill of being jazzed-up by a TV authority figure who has the ability to push your emotional hot buttons, continue watching Mad Money on CNBC.

If, however, you understand that there are no-nonsense, results-driven TRADERS out there (not nicely-dressed, fast-talking stock pickers who love their bright lights and big noises) who are only compensated when they ALSO produce results for you, click here…

The link above will take you to a very short educational video about the underground (non mainstream) world of professional MTAs — select investment vehicles that won’t keep you awake at night because you made a hasty decision, due to a wild shoot-from-the-hip recommendation by a TV personality.

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