Investing - The Basics

[winston]

Dont Count on Stocks and Bonds to Make You Wealthy By Mark Ford

In my ongoing effort to shock people with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today:

You cannot become wealthy by investing in the stock and bond market.

(Please keep this on the down low. If my colleagues in the investment-newsletter industry knew I said that, they would have me tarred and feathered!)

The investment-advisory industry – and by that, I mean brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications – is a huge multi billion-dollar business based on hard work, clever thinking, and sophisticated algorithms.

But also on one teensy-weensy lie…

The lie is that you can grow wealthy through investing in stocks and bonds.

It's not a big, black lie. There is plenty of evidence that strategic stock investing can provide returns that exceed investment costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation.

But to do that, you need time. More time than you probably have.

Let's say you have $50,000 to invest. And let's say you invested it according to a really good investment strategy. And let's assume that things go well. And by well I mean that you make, on average, 10%. If you started on January 1, 2012, by December 31, 2021, your $50,000 would have increased to $129,687.

That's not bad. But it hardly makes you wealthy. So let's say you were willing to extend your investment horizon to 20 years. Beginning at the same time with the same $50,000, you would have $336,375 on December 31, 2031.

That's better, but it's still a far cry from making you wealthy. So let's push the investment horizon to 30 years. By December 31, 2041, you would have $872,470.

If you made 10% on that $872,470 nest egg, you'd have a yearly income of $87,200. After taxes, you'd take home about $65,000 per year. That's OK, but it's hardly wealthy. And that's after investing for 30 years!

Most of the people reading this essay don't have 30 years to wait. Based on what I know about our readership's demographics, I'd say the average reader's wait period is 10-15 years.

So what's a middle-aged (or older) wealth seeker to do?

You can start by deconstructing the little lie.

Building wealth involves much more than just investing in stocks and bonds. Most rich people get that way by consistently doing the following five things:

1. They understand and manage their debt. They don't let debt manage them.

2. They are abstemious spenders and aggressive savers, far outpacing their peers.

3. They invest in stocks and bonds with discipline. But they don't expect stocks and bonds to make them wealthy.

4. Their primary focus is on increasing their active income. Usually, this comes from a business they know inside and out.

5. They invest in real estate and other "outside Wall Street" opportunities.

As you can see, investing in stocks and bonds is only one of the five strategies you must follow to become rich.

In fact – most of the rich guys I know spend little or no time investing in stocks and bonds.

Phil, a very wealthy friend in his 40s, invests in stocks and bonds. He favors municipal bonds, and he is a true expert at them. But he didn't become wealthy by investing in bonds. He got wealthy as a marketing and Internet entrepreneur and by leveraging some debts and eliminating others. Nowadays, he buys and sells bonds, but that takes him only a few hours per month. For Phil, investing is a part-time way to increase the value of his savings. It is not – and has never been – his primary road to wealth.

Bob, a mega-wealthy friend of mine who lives on my block, also invests in stocks and bonds. He too is a very smart guy and makes good returns on his stock and bond portfolios. But like Phil, he didn't make his fortune that way. He got rich as a commercial real estate developer. He also made millions investing in fine art.

It's the same with all my millionaire friends. They all have their own stock and bond investments, but like Phil and Bob, they got rich by putting their money and their time into other investment activities.

As for me, I paid only a minimum amount of time and effort into stock and bond investing until I started writing The Palm Beach Letter. Yet I managed to go from broke to having a net worth well in excess of $60 million – mostly by outside-Wall Street investment strategies.

Don't get me wrong. I'm not saying that investing in stocks and bonds has no value. It is essential. But it was not and will never be my core strategy for accumulating wealth.

It is certainly possible to become wealthy through stocks and bonds. But you have to devote 40-plus hours per week to it. And you have to be very disciplined. And you have to do it for a long, long time.

If you don't have that time, you have to take another course…

I will never be a full-time stock and bond investor. I am willing to spend an hour or so a week. The rest of the time is devoted to what I've always done. I want to talk a bit about that today…

If you want to get wealthy in fewer than 30 years, you should pay attention. Devote a couple of hours per week to managing your stock and bond investments and spend the rest of your working time on the other wealth-building strategies listed above.

You may be thinking, "I don't need to be told to limit my spending or manage my debt. I already know how to do that." My response to that: Do you?

Or you may be thinking, "I already lost money in real estate. I have no interest in doing that." My response: If you lost money, it is because you did exactly the wrong thing. Real estate investing, if you do it the right way, is the easiest way to build wealth. That is why most self-made billionaires have large real estate portfolios.

Or perhaps you don't like my idea that you must – must – increase your income. Most people reading this have been working hard for 30 or more years to raise families and put their children through school. They want to stop working for income. They want to quit their jobs and invest in stocks and bonds. They want to take it easy.

Giving up your active income (as I explained in this DailyWealth essay), is the single biggest financial mistake you can make. Your active income is essential to building your wealth. If you want to retire some day and don't have at least $250,000 put aside for that purpose, you need more income.

The good news is that there are all sorts of ways to do that. Just as there are all sorts of clever ways to manage your debt, get more value out of your spending, and ratchet up your savings.

This is very basic stuff… Wealth-building strategies that your grandmother would understand.

But simple – for some people – is not interesting. Some people think complicated works. I know it doesn't.

Source: Daily Wealth

[winston]

2 Rules of the Stock Market (and Art Market or Any Market)

"Nobody can consistently predict market tops or bottoms. If you come across anyone that claims otherwise, run a mile," says Chris Hunter of Bonner and Partners.

"Your aim as an investor is to buy at a discount and sell at par... or above. That means having a sense of where you are in the market cycle.

There are two rules to always keep in mind when it comes to thinking about cycles."

From value investor Howard Marks of Oaktree Capital Group:
Rule No. 1 – Markets are always cyclical.
Rule No. 2 – The greatest opportunities for gain or loss come when other people forget Rule No. 1.

Source: ETR

[behappyalways]

108-year-old investor: 'I doubled my money in 1929 crash – and I'm still winning'
http://www.telegraph.co.uk/finance/pers ... nning.html

[winston]

This simple advice will put you ahead of 99.9% of investors

By Chris Mayer

Source: Stansberry & Associates

http://thecrux.com/this-simple-advice-w ... investors/

[winston]

A Simple Way to Drastically Improve Your Performance

In this interview, Editor in Chief of Stansberry & Associates, Brian Hunt, discusses "a little-known secret that virtually guarantees you'll make money in the market."

It involves closely examining every holding in your portfolio, and then asking yourself, "If I wasn't in this position already, would I take it now?"

Read on to learn how this simple exercise can drastically improve your trading performance…

Stansberry & Associates: Brian… you're a believer in a rarely used trading strategy that can drastically improve a trader's performance. Something you call a "position audit."

Can you talk about this idea, and how our readers can start using this to make more money?

Brian Hunt: Sure… A position audit is something everyone with money in the market should do at least once a year. And if you're a trader who typically holds positions from two months to two years, you should do this exercise every month.

The exercise is taking a hard look at every position you have – long or short – and asking yourself, "If I wasn't in this position already, would I take it now?"

If the answer is "no" on any position, sell it immediately.

S&A: So the trader forces himself to be objective with his holdings on a regular basis.

Hunt: Exactly.

You see, lots of investors and traders struggle with admitting mistakes and taking losses early. Rather than cut losing positions early, they tend to hold onto them and say something like, "it will come back."

Or just as bad, they ignore the loser. They'll ignore a loser that is down 20% or 30% until it grows into a giant 60% or 80% loser. And of course, it's the giant losers that ruin your year… or your trading career.

It's simple human nature to try to forget your mistakes. Life is easier that way. And in many cases, forgetting painful memories and mistakes is a good thing.

For example, if an NFL quarterback has a horrible Sunday and throws five interceptions, he'd better get over it quickly… because he'll need his self-confidence to be effective in the next game.

But with trading, ignoring a mistake is like ignoring cancer. If you catch it early, it's not going to destroy you. But if you ignore it for months or years, it's going to be fatal.

Your goal with regular position audits is to force yourself to confront your mistakes… and root them out of your portfolio before they become big ones.

S&A: Do you recommend this for trades based on fundamentals or based on technical analysis?

Hunt: Both.

Let's say you buy company ABC because you think it's going to come out with a new tech gadget that will sell millions of units. If that gadget comes out and isn't a hit – let's say it only sells 20,000 units – the reason for owning that stock doesn't exist anymore. It's time to sell.

Or, let's say you buy a big dominant company, like phone maker Nokia used to be.

You think to yourself that it's going to be a good long-term holding. But, if Apple comes along with a game changing product like the iPhone that starts eating into Nokia's market share, the reason you bought that stock no longer exists. It's time to sell.

Those are two fundamental examples. Of course, a company has lots of moving parts you have to analyze. I made those examples very simple… but you get the idea.

S&A: OK, how about a technical example?

Hunt: Let's say you short a company or a commodity because you think it has reached a top. Maybe it has bumped against a particular price level and cannot break through it… it suffers high-volume selloffs. It cannot rally on great news. Those are technical reasons that cause some people to go short.

But let's say that after a few months, the trader goes short and the stock manages to break through to a new high on strong trading volume.

Your whole case for going short months ago is no longer valid. It's staring you right in the face. But most traders just won't admit it.

They won't confront the mistake and cover the position. Inertia and denial take over at this point… and you're now holding onto a position simply because you took it a few months ago, which is a terrible reason to be in a position.

If the reason you took the position in the first place isn't there, or has drastically changed, while you are doing your audit, get rid of the thing.

S&A: I have a feeling we'd have record-breaking trading volume next week if every investor or trader decided to sell old losing stocks they've been ignoring for a long time.

Hunt: Oh, wow… Yes, you'd see an unbelievable dumping of stocks.

I've talked with folks at investment conferences who tell me they own more than 100 different stocks. That's crazy. There's no way one individual can keep track of that many companies and do a good job of it. Those kinds of portfolios probably have 80 or 90 stocks where the original reasons for buying the shares are no longer there. They're simply being ignored.

Most people would rather ignore their mistakes than take steps to confront problems and become winners. But that's between them and their therapists.

Successful traders have to constantly confront – and admit – their mistakes. They have to be objective reviewers of their ideas.

S&A: There's an extra problem with holding onto losers that is worth mentioning… It ties up money that could be deployed into new, better ideas.

Hunt: Absolutely.

For example, take someone who bought a bundle of tech stocks back in 1999 or 2000. By 2003, after years of a bear market, the trader or investor who didn't cut his losses has what's left of his money tied up in some garbage "dot-com" companies.

That's money that can't be deployed in an emerging bull market, like commodities were back then. It's a double whammy. That trader is holding crap and missing out on a promising trend. It's the complete opposite of the golden rule of trading, which is "cut your losers short and let your winners ride."

S&A: OK… so how can a trader perform this kind of audit without dumping his winners as well? Wouldn't you cut your winners short in a lot of situations?

Hunt: That's a great question. One has to be careful here. It's key to ask yourself what your original reason was for entering the position, and what your goal with the position is.

For example, let's say you're a trader who bought Intel months ago because it was super cheap at, say, eight times cash flow, and you expected the stock to pop because you thought the market would soon be willing to pay 12 times cash flow for the stock. This is a shorter-term idea for you.

Now, let's say you were right… Let's say Intel has popped higher and is trading for 10 times cash flow, now. While performing your audit, you'd note that your original bullish argument is still intact. You wouldn't buy more of this position, but you wouldn't sell it. You'd hold it, and look to take profits once it hit your objective… the 12 times cash flow objective.

But let's say someone else bought Intel at the same time with a long-term holding goal of at least five years. That person would simply periodically check out Intel's position in the market and make sure the fundamental case is still solid. If it were, that person would hold the stock and look to compound for a long time.

For traders, it really does come down to holding winners when your plan is working out. Not necessarily buying more, but holding it because the trade is working out according to your plan.

The key here is placing most of your audit's focus on the losers. Those are the potential cancers in your account.

They need to be placed in an interrogation room and given the third degree. Is the fundamental story here still in place? If it's a stock that you're long, is it still a great value? Has management done anything stupid that is wrecking the company? Is the company's new gadget selling well? Is the technical picture still the same?

If the fundamental picture or technical picture has changed on one of your losers, chances are very good you'll be better off dumping it and moving that capital into cash, or another promising idea.

S&A: So how often do you conduct an audit?

Hunt: I do one at the end of each month. I typically trade with an intermediate time frame… like one to six months, so a monthly audit works for me. I usually hold four to six positions at any one time, and I'm very quick to cut losers. Oftentimes, the losers aren't around at the end of the month.

S&A: Sounds great. Thanks for talking with us, Brian.

Hunt: You're welcome.


Source: Daily Wealth

[winston]

How the “Smart Money” Invests

By Bill Bonner

Yale’s Robert Shiller recently explained how the stock market works. Unsuccessful investors, he says, read the paper… react to the news and opinions… and are greatly influenced by recent history.

They are “feedback investors,” he calls them. As stocks move higher and higher, more and more people come into the market hoping for quick and easy profits. These unsophisticated investors are particularly “feedback” sensitive.

They have not done the math. They don’t know the real value of the shares they buy. They bid them up. And seeing the stock market rise, they become convinced that it is going higher still.

The “smart money” of successful investors, like Warren Buffett, takes advantage of the irrational behavior of other investors.

When investors misprice a stock – which Shiller refers to as an “innovation” – a smart investor with a sharp pencil and a clear mind buys the stock. The stock then returns to a more reasonable price. And the smart investor makes more than the great mass of greedy and fearful investors.

Source: ETR

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Anyone can become a world-class investor. This is how.

By Porter Stansberry

1) Find companies that will last.

2) Only buy capital-efficient stocks that offer the potential of compounding returns.

3) Buy shares at “no-risk” prices.

Source: Stansberry Research

http://thecrux.com/porter-stansberry-ho ... 37gMXBU%3D

[winston]

"Investing should be more like watching paint dry or watching grass grow.

If you want excitement, take $800 and go to Las Vegas."

- Paul Samuelson

[winston]

The One Investing Tactic You Should NEVER Use

by Keith Fitz-Gerald

http://totalwealthresearch.com/2014/10/ ... /#deeplink

[behappyalways]

Quiz: Which famous investor are you?
http://www.telegraph.co.uk/finance/pers ... e-you.html