Book 14:  Investment advice

We need to distinguish useful information from garbage.

1             Newsletters and subscriptions

Why you do not see too many reviews on investment newsletters and subscriptions from the media? If it is a bad review, most likely

they will not advertise in the media. If it is a good review, they may have to face legal action if the vendor’s subscription or newsletter does not perform.

I've been using investment newsletters / subscriptions for years. Many are priced reasonably and some are even free. While a lot of them are garbage, some are very good.

When you have a lot of money to invest and you're not using a financial adviser and/or not subscribing to any investment service, it could be a big financial mistake. You do not want to be penny smart but pound foolish. Very few have the knowledge and time to make use of the free financial data, guidance and articles from the web.

You need a computer, access to Internet and a spreadsheet in order to use most subscription services effectively.

I'm not going to compare specific services / newsletters at the risk of being sued, but I will include general pointers on how to select them. Yesterday’s garbage could be a gold mine today if the subscription improves and/or the market conditions fit what they recommend.

First, you need to find out your requirements and how much time you can afford to use them. If you have $20,000 or less to invest, most likely your investment both in money and time will not pay off.  Just buy an ETF and practice market timing described in this book. My pointers are:

·         Newsletters giving you specific stocks to buy do not require much of your time. However, if they're successful, there will be too many followers buying the recommended stocks to drive up the prices at least temporarily. The owner of the subscription service and his insiders will buy the recommended stocks before you unless they’re not allowed to do so (who’s enforcing?). I had several of this kind of newsletter, and so far I have not renewed any one of them due to the poor performances.

·         If I found the Holy Grail in investing, do you believe I’ll share it with you for $100 or so? I only will after I invested my findings first. My subscribers would push up the prices for me and then I unload them before them.

·         If the volumes of the recommended stocks are small, they can be manipulated easily either by the newsletter owners and/or by your peer subscribers. The first ones to sell the recommended stocks win and the last ones to sell lose.

·         I prefer systems that can find a lot of stocks by providing many searches (same as screens). However, it will take a lot of time to learn and test their performances which can be obtained easily with a historical database. Most likely, you need to further research on each stock screened. The screens would select a limited number of stocks for further analysis, so it will save you time.

From my experience, the best performance comes from the stocks that have been screened by more than one search especially for short term (less than 6 months). My theory is that they've been identified to many folks and hence their prices will be jacked up. It is more profitable to buy them ahead of the herd and sell them before the herd. In any case, research the stock.

·         I have received promotional mails that indicate their incredible performances such as tripling the money. Just ignore them. If it is that good, most likely they will keep them for themselves. Same for seminars to boost some penny stocks. Most likely the recommended stocks would rise initially to lure you and other suckers to move it. Watch out! As of 2016, I do not see these junk mails that often than before; the public is smarter.

·         A ‘guru’ told me that he made a big fortune in silver a month ago. Guess what? He also recommended selling it two months earlier and lost a lot of money in doing so. He is always right but he will not advertise the times he was wrong. We call it a double talk technique.

·         There are free trial offers (or deeply discounted) for most subscription services. Take advantage of them. Some services require you to spend a lot of time, so ensure you have the time. Keep track of the performance yourself via paper trading. Do not trust their ‘official’ performances.

·         Subscribe the newsletter to fit your style of investing. If you're a day trader, newsletters on long-term investing are not good for you. Some subscriptions handle all kinds of investing styles and you need to find the strategies and recommendations to fit your style. A short-term swing has different metrics for long term investing.

·         Newsletters on penny stocks are risky for most of us. They may show you a list of big winners but they do not show you their losers.

I define penny stocks as less than $2 (officially $5) and a market cap less than 100 M. However, I do buy stocks with prices around $2 in stock price or a capital cap less than 100 M. Actually I bought ALU at $1 but ALU’s market cap then was about 2 billion at the time. The stocks with prices between $1 and $10 represent the most volatile stocks and few are real gems. They are routinely ignored by most analysts.

·         There are many sectors like drugs, mines, insurance and banks that retail investors cannot evaluate effectively. It is better to seek expert advices from specific newsletters. Check out their past performances and take advantage of the free trial offers.

·         Remember there is no free lunch in life. The higher potential return of a stock is, the riskier the stock is. To me, all trades are educated guesses. The more educated the guesses are, the higher chance they will perform in the long run. However, noting is 100% sure.

·         Some newsletters / subscriptions save us time by summarizing the financial data by providing a value rank and a growth rank. Some provide a timely rank from the momentum of the price.  When the market favors growth, you use the growth rank, and vice versa.

·         Be careful on the commercials particularly from radio in selling to peoples' fears and their greed by overstating without necessarily telling the whole story. It is not possible to make 50% in covered calls consistently or making another gold rush from $400 to $1,800. One advertises the market will lose 80% in 2016. It is possible but not likely. It is the tactics to get you subscribe their service.

·         TV financial shows usually exaggerate in order to sell their staffs. Analyze them before you act on the news.

·         As retail investors, most of us cannot afford to do extensive research. Many researches and market opinions are available in the internet free.  Start to search for such information from your broker’s site and financial sites such as SeekingAlpha.com, MarketWatch.com, CNNfn.com and Yahoo!Finance.com. Analyze the news and some could be obsolete or could be manipulated with hidden agenda.

·         Do not trust the performances of the newsletter providers. There are many ways to manipulate their performances.

·         Most compare their performances with S&P 500. It is legal for investment newsletters to inflate their performance with dividends while comparing to an index without including dividends.

To illustrate, S&P 500 has an average annual return of 1% on appreciation and 1.5% on dividends for a total return of 2.5%. Hence, the performance of a newsletter should compare itself to 2.5% not 1%.

·         The performance of last 10 years (I prefer last 5 years) is more important than that of 25 years. The last 10 years is a better prediction of the newsletter than the last 25 years as the weatherman finds out.

More than one time, I found a popular subscription did not beat the S&P in the last 5 years but it did in the last 20 years. It could be that too many folks are using the same strategy.

·         When the new major researcher takes over the subscription, s/he may not have the same expertise as the previous researcher.

·         Ensure the subscriptions change their strategies according to the current market conditions. For example, 10 years ago ADRs (U.S. listed stocks of foreign countries) performed far better than today. It may reverse the trend in the future. 

·         Few if any use real money for their portfolios, as they cannot cheat with real money. That’s why you never achieve the compatible performance by following what the portfolio trades. Some cheat by using the best prices of the day. Some omit their losers. Do not trust any performance claims even from reputable monitor services unless the portfolios can be verified with real money.

Some sample portfolios trade excessively and they may not fit your investment strategy not to mention the broker commissions and taxes.

·         When a subscription service has several strategies (say 10 for illustration), they will advertise the strategies with the best returns for a specific time period.

·         Today (12/8/2014) TNH was down by 12% by the end of the day. If they used open price, it would make a difference of 12%

Contrary to not recommending investment services, I recommend Fidelity or your broker for the stock research. AAII is a low-priced subscription. Blue Chip Growth, Finviz… are free today.

2          Making full use of a subscription

Most subscription services including the free (as of this writing) Blue Chip Growth have four grades for each stock: Value, Growth, Timely and a combination of the three (composite or total grade). Some have only two grades: Value and Growth.

When the market is favorable to value investing, select the Value Grade such as in Early Recovery, a phase in the market cycle defined by me. To emphasize one grade over another, divide it by the opposing grade such as Value/Timely if it can be done (a letter grade can be converted to a number) and use it for sorting and/or searching. In general, value stocks need more time for the market to recognize their values (i.e. holding them longer).

The following uses IBD and GuruFocus for illustration. Both require subscription.

IBD

I use the composite grade of this popular service especially for day traders and short-term swing traders. It is more a momentum grade to me, but they do have a value grade named SMR. I evaluate their IBD50 stocks, their top 50 recommended stocks. Check out the recent performance of IBD50 as provided. I would like to have a second opinion such as the equivalent grades from Blue Chip Growth.

Screen Basic (under Screen Center). It lists the stocks with top IBD’s metrics.

Leading sector (under Screen Center). Basically it is the second step of my Top-Down Investing strategy (the first step is market timing).

Next to the screened stock, click on Stock-Checkup for a complete evaluation of the stock according to IBD.

GuruFocus

I use the screener to find stocks in my book Best Stocks. I found there are a lot of useful features I had not used. It will be a perfect system if they provide a historical database for testing the screens.

The idea is following the institution investors who drive the market. However, at least in 2015, the gurus did not perform well.

Besides this great concept, it offers many tools for analyzing stocks.  It has a score system that has been proven. The following metrics are harder to find in other sites: F-Score, EV/EBIT, Shiller PE, and DCF. Many metrics are compared to its industry and its history. They are displayed in an easy-to-read graphics. Insider trade and institution ownership are great features.

Afterthoughts

·         My friend told me he saw an ad that would show him how to make $500 a day for working a few minutes before the market opens. He is nice enough to share his ‘discovery’ with me. If it is as advertised, I would be the first one to sign up. If it really works, it will not work very soon. When a strategy is over-used, it will not work. Unfortunately, a fool is born every minute as the same ad had been here for a while. As of 2015, the ad disappeared.

·         Currently (2016) I spend about $1,500 for all subscription services. I believe $200-$600 should cover the basic. To start, you can use your broker’s web site for research tools. Some have a lot of research for evaluating stocks and some even include searches. Try the biggest broker’s research as they spend more on this area. Even if you do not trade with them, use their research by opening an account with the minimum balance.

·         If the offer is too good to be true (like making $500 every day with little effort and little investing money), probably it is not. If they give you a free 50” TV for spending $299, most likely it is a trap with bait. Again, remember there is no free lunch.

However, some bait could be good like the free 30-day trial offer for an investment service or the free dinners I attended seminars on estate planning. It is part of the business cost. If I do not attend more than two dinners, eventually I would end up paying two free dinners for someone else. This book could be the best deal for your entire investment life if you invest time to read it, digest it and use the ideas that are applicable to you and the current market.

·         Do not trust any claim and the past performance may not have anything to do with the current or future performance.

To illustrate how to monitor their recent performance, if they give you 20 stocks every week, save the prices and check their performance in the same period you usually hold the stocks. It has busted many well-advertised and very popular subscription services. I prefer to compare the performance of the market.

·         On 5/2013, I received an ad boasting how great its portfolio performs from a well-known subscription on investing. The cumulative return from 2001 to today is an impressive 308% beating the S&P 500’s 43%. However, if you analyze it further, most of the big gains are made before 2009.

To prove it, I used their data and input their returns from 2009 to today. Their accumulative return is 37% while the S&P 500 is 66%. Current data has better predicative power than the older data.

The moral of the story:

1.       Read any claim with skepticism. Test it yourself.

2.       The recent performance has better predictive power than the older data.

3.       When a strategy is over-used, it will become less effective.

4.       The market conditions change from time to time. Some strategies work better than others in different conditions and different phases of the market cycle.

5.       Most likely their return includes dividends while the S&P 500 index does not.

3             How newsletters ‘improve’ performance

Investing subscriptions can ‘improve’ their performances:

1.       Cheating the results.

2.       Only show you their best portfolios.

Cheating the results

Do not trust the performance of the newsletter providers. They cannot cheat if they use real money for the portfolio. Here are some ways they can cheat:

·         They buy at the lowest prices of the day and sell at the highest prices of the day. To illustrate, a stock shot up by 25% in the afternoon, and the newsletter could use the open price of the day as the buy price.

·         Change the sold date 2 days earlier by using last Friday instead of Monday. The gain and the sell price do not change, but the annualized return changes favorably for gains and unfavorably for losses.

Trading with the closing prices has less chance to cheat. However, some stocks can be traded off hours and the morning futures can indicate the direction of the market for the day.

·         Survival bias.

In a nut shell, the stocks will not be included if they lose all the value or have been delisted from the exchanges. Many penny stocks go belly up. For example, Lehman Brothers was supposed to be included in your search, but it was not traded since the historical database took it out. Hence their portfolio looks better than it really is.

Penny stocks have higher chances of being out-of-business. The spin-offs and mergers could do the opposite to the effect of survival bias, but there are far more bankrupted stocks than the spin-offs and mergers combined.

To illustrate, you have two stocks 10 cents each. One stock gains 100% and the other one loses all the value. Your portfolio should have zero gain. However, if you use a historical database that does not take care of survival bias (most do not), the bankrupted stock is not in your database and your search shows you have 100% gain instead of 0% gain.

·         Most compare their performances with S&P 500. It is legal for investment newsletters to inflate their performance with dividends while comparing to an index that does not include dividends.

·         The performance of last 10 years (I prefer to use last 5 years) is more important than that of 25 years. The subscription uses the performance that is favorable to them.

Only advertise those strategies that perform well

When a subscription service has several funds or strategies, it may advertise the return of its best fund or strategy for a specific time period.

Afterthoughts

·         I advocate investment subscriptions use real cash for their portfolios to demonstrate their investing results. Alternatively, they should use some sites that can audit their trades. Authors like me do not have resources to enter all the trades, so my broker’s statement is an easy choice. My losses could be better lessons than my gains. Keeping track of my trades is getting a burden for me.

·         The performance sometimes does not tell the entire story. The cash position would deteriorate the performance in a rising market – it could be the correct decision for those who do not want to take risk.

·         Google the subscription service before you subscribe it. There may be some reviews on it.

1                   Hedge fund 101

LTCM, with two Nobel-prize winners, excellent supporting team and best technologies then, ran their hedge funds into the ground. Many hedge funds are closed due to frauds and/or poor performances.

The primary purpose is supposed to ‘hedge’ your investments from market plunges / dips. Since 2008, the government prints so much money, the market recovers and makes the hedges (shorts, derivatives, etc.) unnecessary. In reality, most hedge funds do not hedge.

Hedge funds get tons of press coverage as the Holy Grail of investing. The media need the advertising from this $2.5 trillion industry. It is similar to mutual funds but take more risk for better returns. Most require higher minimum investments and more restrictions such as requiring longer periods before withdrawal.

It could be the worst deal to most of their customers: 2% average up front and 20% average on your profit. It is more acceptable to me if the 20% is on profit over the S&P 500 or any relevant yardstick to the specific hedge fund. Why should I pay you 20% of my 10% profit when the market rises by 15%?

Well, if they consistently make a lot of money for you, it is not too much to object. However, most risk your money by betting big recklessly. When they win, they get 20% of your profit and they use you for advertising to lure other suckers. When they lose your money, they do not lose a penny. It encourages them to take big risks. I do not know any hedge fund (HF) manager who pays you back your losses.

An average mutual fund charges about 1.5% management fees. An average hedge fund charges 2% that would cover the expenses to run an office, market the products and research expenses. The real compensation of an average hedge fund depends on the average 20% of the profit.

You have better return by investing in a no-load index fund or a diversified ETF than an average hedge fund. To calculate the average hedge fund performance, you need to include the many hedge funds that are out of business.

After a hedge fund has failed, most fund managers just open another hedge fund (if they do not go to jail due to frauds) and give you all the excuse for losing your hard-earned money. Some lose their reputation but you need to check them out.

In 2011, the hedge fund industry did not beat the S&P 500 index fund after fees. I bet the hedge fund industry did not beat the market after 2011.

Some hedge fund managers learn modern portfolio theories from Ivy League universities and apply them in the hedge funds. Often their theories are wrong due to wrong testing procedures or they cannot be sustained in real life.

Many invest in new companies and small companies where they would have big profits swing. They need to learn the business of the company they plan to buy the stocks, interview the owners, read between the lines, and double check whether the owners are telling the truth by talking to their competitors, vendors and customers. It explains the high cost of their research. We just look at the transaction of the insiders and/or use a low-cost subscription to have similar research. There is no need to travel to visit the company unless you want to. 

Some use their specialty in certain sectors and that's fine. If they use derivatives, be careful and that's what resulted in our 2007 financial crisis. Derivatives could reduce the risk of the portfolio if they are properly used. If you still want to invest in them, ask for their methods and their historical performance. Very few hedge funds are good. When you find a good hedge fund, most likely it has been closed to new investors or its fees are outrageous.

The owner of a famous baseball franchise lost big money from a hedge fund that concentrated in the oil sector.  Almost every ETF in this sector made good money that year. He still stayed with the hedge fund and had similar miserable return the following year. I did not blame his first mistake, but on his sticking with the same hedge fund after a losing year. It could be the hedge fund gave him a hard time to take his money out.

One hedge fund has a performance of 25% every year for a long period. The SEC, take notes and investigate whether they were using insiders' information. There are very few hedge funds with consistent performance beating the market after their hefty fees. If you find some, stay with them forever. One hedge fund was rated as the top fund and the next year it was out of business due to poor performance. Hedge fund managers chase after short-term returns as the outflow will be serious if they do not perform well recently. When they are successful recently, they have a hard time to perform with excessive inflow of money. Both cost underperformance.

In 1980, this industry started with really capable fund managers and made good money for their clients. After that, every analyst wanted to open a hedge fund and most did not even beat the market after their fees. Alternatively, just buy the ETF SPY and relax, instead of waiting for the hedge fund to wipe out your savings.  This industry is not properly regulated.

Do not believe in any articles / ads praising how great the hedge funds are without knowing their credibility and their hidden agenda. The hedge fund indexes usually ignore the survivor bias of the bankrupted hedge funds and the early exits of many hedge funds.

Since the hedge funds very seldom keep the stocks more than a year, their capital gains would be short-term and hence would be taxed at higher rates than the long-term capital gains. In addition, most funds have 1-3 year lock-up periods and only allow withdrawals on the first day of each fiscal quarter.

Update as of 1/2016

Hedge funds have not been doing fine since 2009 as there is nothing to hedge in a rising market. Only a very few are doing great. Learn what and why they are doing great. The reasons are obvious by now. The successful ones unloaded energy stocks and Chinese stocks after the crisis but before the big losses. Some correctly shorted these problem sectors afterwards.

However, I still advise not to buy hedge funds for the average investor:

·         The better ones are not open to new investors or ask for a king's ransom.

·         On the average (including the closed hedge funds), they're not doing well after the high fees.

·         Even the good one last year could be a bust this year as they're betting high. Examples abound.

To make money, you need to depend on yourself. To start, play simple market timing. Buy value stocks when the market is not risky. Be patient. Evaluate your owned stocks every six months (prefer 3 months if time allows) and act accordingly.

Following these simple 'techniques' (or common sense), you should at least beat the market (or SPY) in the long run. It has been proven and being practiced by many successful retail investors among us.

Afterthoughts

·         From WSJ, from 1999-2008, the hedge fund industry beats the S&P 500 by 13% a year. From WSJ, from 2009 thru July 2012, it lagged the market by almost 8%.

In 2011, the average hedge fund lost money when the S&P 500 was flat. In 2012, the average hedge fund earned about 6% when the S&P 500 was up 13%. It is ‘genius’ to buy an ETF representing the entire market instead an average hedge fund.

·         Now hedge funds can advertise.

A pig wearing lipstick is still a pig. If you run 5 hedge funds, you will advertise your best fund. Advertising industry will benefit and eventually their investors in hedge funds will pay for this expense.

http://finance.fortune.cnn.com/2013/07/10/sec-votes-to-let-hedge-funds-advertise/?iid=HP_River

·         A hedge fund article from SA.

http://seekingalpha.com/article/584861-hedge-funds-are-they-just-smooth-operators?source=kizur

·         Another hedge fund fraud.

http://money.cnn.com/2013/07/25/investing/sac-capital-charges/index.html?iid=HP_LN

·         Gold even managed by great hedge fund manager is down as of 7/2013.

http://www.cnbc.com/id/100855708

·         A famous hedge fund manager (so is the one on Sears) has big losses in JCP and shorting another company. It teaches us to diversify and be conservative.

http://money.cnn.com/2013/08/26/investing/bill-ackman-sells-jcpenney/index.html?iid=HP_River

·         Hedge funds must have a hard time in 2013. Hedging against a rising market is a fool’s game. Another article.

·         In 50 years, the $10,000 investment will grow to $1,170,000 assuming a 10% return a year. However, about $700,000 will be the cost of the typical mutual fund. It will be better to buy an ETF (far lower fee) and avoid market plunges described in my book.  

Links

LTCM:https://en.wikipedia.org/wiki/LongTerm_Capital_Management

Hedge Fund: http://en.wikipedia.org/wiki/Hedge_fund

 

5          Modern portfolio theory MPT

Most fund managers learn modern portfolio theory from colleges. The theories are faulted. However, some gained Nobel prizes using the faulted theories - a bad reflection on today's silly Nobel Prize committee not to mention the silly award to President Obama for doing nothing but reckless spending. They do not invest with real money. Many others including myself have proved them wrong many times.

Walking randomly in the stock market postulates the price of a stock is already built-in, so there is no need to evaluate stocks. It is also known as the efficient-market hypothesis. Explain to me why as a group my stocks with high scores always beat my stocks with low scores for years. If you cannot find a functional scoring system, it does not mean all the scoring systems do not work. For the same reason, there is no need to take college courses to evaluate stocks if the prices are built-in.

When the professor writes equations on the board, he is dreaming and his fantasy world will never resemble reality. However, you need to waste time to ‘learn’ in order to get good grades. Without good grades from a prestigious college, you cannot get a good job in this profession.

The so-called modern portfolio theory is most likely based on wrong or insufficient testing parameters / assumptions. Unfortunately they're still supported by the Ivory Towers. All the students taking these courses should ask for refunds. Most likely these professors are still driving an old Toyota and have never made good money in the stock market besides in 'teaching', selling 'books' and/or running hedge funds to cheat you out of your money. Still not convinced? How do you explain many stocks increased 50% and many decreased 50% in a year?

I’m still waiting for the counter arguments to prove me wrong. Professors, please drop me a line to defend yourself. So far, there is none.

Links

MPT: http://en.wikipedia.org/wiki/Modern_portfolio_theory

Efficient-market hypothesis:

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

6          Advice from the ivory towers

Tim wrote several good articles at Seeking Alpha and is liked and adored by many. I'm not attacking him, but we have to ask: Should we follow investment advices from someone who can read, think and write professionally without making a BUCK in the market?

How many folks at the Ivory Tower made a bundle in investing even some with Nobel Prizes?  Not even the most beautiful minds like Newton and Einstein! I conclude that the market is not always rational and the investors need to be multi-disciplined especially in economy, psychology, statistics, finance, PC tools, etc. Luck also plays a good part of the performance but not in the long term at least to me.

Some very smart folks even lost big money for themselves and their clients such as the Nobel Prize-winning economists running LTCM to bankruptcy. Irving Fisher, considered the father of Modern Portfolio Theory, had several big wins, drew a lot of followers and then lost all his and his followers' money. Even the richest investor Buffett did poorly in his company in trading stocks in the recent five years (as of 1/2016).

There is another author at Seeking Alpha. He was graduated from one of the best colleges, writes very professionally, publishes many articles, sounds very knowledgeable to me, and has a lot of good arguments in his article. He was accused by several followers that most of his predictions were wrong and he had used double talk technique so he could not be wrong.

I have not tracked his performance and have no intention to. He could be a manipulator so he may advise folks to buy the stocks he is unloading, and vice versa.  The moral of the story is to follow good arguments when they appear to be logical but do not follow any stock recommendation blindly. In another words, do your own home work.

7          No investor heroes

As of 1/2012, Bill Miller is stepping down after big recent losses. Buffett's last three year performance is so lousy that he should be ashamed and should not show his handsome face in public (too harsh on him but we all enjoy making fun of winners). Gross, the king of bonds, made serious mistakes, so was Whitney on muni bonds (though she should be right on longer term; she should have learned the lesson of not fighting against the city hall).

It was same for a very famous shorter of Netflix with convincing arguments. Their arguments were correct but the timing was not. The fund manager of a famous financial service advocated bank stocks in 2007. He was burned badly and you would too if you followed him.

There are many examples of heroes turning into disgrace in the past. Recently my local newspaper Boston Globe had an article stating most top fund managers did not beat the S&P 500 index last year. Even Professor Irvin Fisher, the father of Wall Street, did not predict the 1929 crash and lost a bundle including most of his own life savings.

Recently Barron's had a round table discussion on 2012 market with the top experts. They also listed the recommended stocks from these experts a year ago and their performances. Guess what? Their average did not even beat the S&P 500 index. Was I stupid enough to follow their 2012 recommendations?

At least, most did not publish their past performances in the beginning of 2013 if they under performed. Most of their strategies did not work this year. That’s why I preach to monitor your current strategies and only use those strategies that work recently.

We learn:

·         Retire at your peak like Peter Lynch. You can call him a coward but he has a good sleep and laughs all the way to the bank. With his fame, it is easy to sell some books and live nicely and respectably.

·         Do not invest on your losing horse like Miller. Doubling on the way down without good reason is a fool's game and it could be the last straw that terminates his brilliant career. When he won all the time, he did not expect that he would be wrong this time. Success could blind his eyes and give him false security. A lot of time the market is not rational.

Bill Miller has beaten the market index 12 times in a row. Peter Lynch was the premier fund manager. Many similar outstanding fund managers have to retire earlier due to poor performance or deteriorating performance, or smart enough to realize that s/he cannot beat the market consistently in the long run. The lessons are:

·         Using the long-term performance of any fund manager to invest in a fund could be dangerous to your financial health.

·         Prefer to follow funds that have above average returns for the five years (ensure managed by the same fund manager).

·         For the last 15 years, you can beat the market by investing in ETFs with market timing described in this book.

·         Is your loser stock a good deal now when it loses half of its value? Usually not. Should someone be excited when the dividend yield is doubled due to the loss of half of its stock value? Definitely not.

·         Do not believe you're always right all the time and put all your eggs in a basket. Market is irrational sometimes as it is created by irrational folks. The black swan could occur unexpectedly. The one who made millions with all his/her money in one deal is just lucky or using insider’s information. Diversify and play it safe. I never bet my entire farm on one investment.

·         Even the genius could not be right all the time. It only takes one big loss to wipe out your entire savings if you bet it all. We should treat investment as going to battle with an exit plan to reduce your losses.

·         Gambling with other folks’ money is better than with your own. The most you lose is your job and the bonuses, but not your life-time saving.

·         Quit at the peak. We still remember the beautiful face of Princess Diana forever, don’t we? Jesse Livermore considered as the greatest trader experienced made millions and bankrupted several times. Finally he committed suicide. It is better to be a turtle, boring investor. It is easy for the mind to make millions, but tough to lose millions. His simple technique is trading more when the trend is to your favor. The book Reminiscences of a Stock Operator shares some of his techniques that most may not work in today’s market.

Afterthoughts

We do have some great stock pickers and I am following them but checking their performance from time to time. Einhorn is well known (though his portfolio is slipping).  Google ‘Einhorn’ to check his current picks.

Einhorn is a great investor, but he has made many mistakes too such as betting on gold in 6/2013.

Arne Alsin is not well known. Click here for his performance. I was told another smart stock picker is Michael Larson and he manages investment for Bill Gates.

Links

Buffett. http://tonyp4idea.blogspot.com/2011/06/mr-buffett.html

Irvin Fisher.        https://en.wikipedia.org/wiki/Irving_Fisher

Einhorn.http://en.wikipedia.org/wiki/David_Einhorn_%28hedge_fund_manager%29

http://www.cnbc.com/id/100855708

Arne Alsin.          http://seekingalpha.com/author/arne-alsin

Michael Larson

http://en.wikipedia.org/wiki/Michael_Larson_%28businessman%29

8             2011 & 2015, the year stock pickers died

2011 is a year when stock pickers (particularly the value pickers) did not perform. The performances of AAII screens and the mutual funds I tested recently confirmed it. Most investment advisers / newsletters did not beat the market index in 2011. Check the performances of your investment newsletters such as Value Line and IBD if you have any. However, do not give them up. They may not perform for a short while but they will return back to the normal performance and hopefully sooner.

Most likely the culprit is the result of the excessive printing of money.

The market was volatile with most of the gains in the first half of the year of 2011. Traders using technical analysis did better than the stock pickers based on fundamentals. Traders reacted to the trends.

From my limited data of about 250 stocks for a period of about half a year, I tested out which fundamentals do not work well in predictability in 2011. They were analysts' grade (Fidelity’s summary grade of analysts for a specific stock), cash flow and the short %.  Normally, the stocks with analysts' grade A (or above 8 from Fidelity’s Advisor Opinions), cash flow (grade A from Blue Chip Growth) and shorter % (less than 5) would perform better than the average. Not in 2011. You can obtain most of the mentioned metrics from many sources and most likely you reach the same conclusion for 2011. These parameters worked again in 2015.

I'm adjusting my search criteria accordingly for swing trades.  I'm not buying a lot and waiting for the big dip that I expect it will come. However, when I see bargains, I'll buy them and be patient.

My suggestion

Your fundamental metrics need to be checked whether they still perform in the current market. When they worked a year ago, it does not mean they will always work.

Update 2015

2015 is the year when the stock pickers died too.  Ackman the famous hedge fund manager and Buffett the legend both did not do well in 2015. Furthermore, I checked the performances of many gurus from GuruFocus.com. I found most gurus did not beat S&P 500 for the last 5 years but they did in the last 10 years. 

Most AAII screens were negative in 2015 and did not beat S&P 500.  Traders make money in a sideward market at the expense of the stock pickers. In other words, technical analysis beat value analysis which is based on fundamentals in 2015. Barron’s recommendations did not beat the market. IBD had about 25% loss from the peak in 2015 to the beginning of 2016.

I reviewed the performances of many gurus. I was surprised for the last five years it is far better to invest in an ETF fund that stimulates the market such as SPY. There are fewer great returns from a few mutual funds last year. However, there are more gurus beating SPY in the last 10 years.  

I bet it is due to the good performance of the ‘bubble’ stocks or FANG (Facebook, Amazon, Netflix and Google) that weigh a lot in the index especially the index that is market cap weighed.

I also speculate that when the gurus become famous to attract more followers, they cannot handle the extra funds to invest. The market may not be rational for the last 5 years or all of them chase the same group of stocks.

Ackman’s loss is our lessons.

·         They have been preached in this book such as diversification.

·         Even with the best evaluation, sometimes we still lose.

·         Use mental stop loss.

·         Do not follow any guru blindly.

·         “Buy Low and Sell High” is better than “Buy High and Sell Higher”.

·         It was $264 summer, 2015.

Do we want to buy VRX today at $65.45? As of 3/1/2016, P/E is less than 5 and P/FCF is less than 11. It seems to be a good buy but the Debt/Equity is about 5 times.

As of 3/30/2016, VRX was at $28 with a P/E less than 3. It could bankrupt if they could not pay the debt obligations. They have a market cap less than 10B but a good will asset about 4 times in last quarter. Sounds fishy?

·         P/E is not the sole metric. Debt/Equity is more important for VRX.

·         The business model was wrong. It bought the rights of maturing drugs and most times they overpaid.

·         One insider sold almost 1 billion worth of the stock in June, 2015 – not a good sign for sure.

·         Do more research such as from Seeking Alpha and many other sources. When they resolve the problem, it could be a buy.

·         Most of us do not have time to look at the financial statements as most financial ratios are readily available. The high value of s some intangible asset is very suspicious.

 

9        Letter to an investment guru

The following is real with the names withdrawn to protect the innocent.

Dear Guru, I followed your advice two times and both made me money. However, the last time you're totally wrong and I lost a lot. What should I do? John

First the guru did well with 66% correct. Investing is about educated guesses. 51% correct can make you a lot of money; try Black Jack. Even 50% can make you a lot of money if you bet more on winners and less on losers based on the reward/risk ratio.

Irvin Fisher made a fortune by several successful predictions. However, he bet most based on his last major prediction and lost it all. If John bet evenly, he would be far ahead of Mr. Fisher who bet it all in one hand. I have used Fisher example a few times in this book as I do not want to mention yesterday’s heroes that are still alive today.

The moral of this true story is: Do not bet it all as nothing is 100% certain in investing. Even with 99.99% sure, a black swan event could happen and could wipe out your entire savings. Unfortunately this has been repeated many times and many folks never learn.

When someone tells me he makes millions of dollar in a bet and this is his only bet for a long while, it does not impress me except his good luck. Actually he has violated the diversification rule in investment. His good bet could be due to using some information illegally or by our Congress members legally at least at one time.

 
Friends ask me what to buy and when to buy. I try to avoid these answers like a politician. If my guesses are right, they will not share their winnings with me. If they are wrong, I will be blamed mercilessly. Silence is proven golden here or the best advice is no advice. Folks do not know there is nothing 100% certain in investing.

10   Read a book with an open mind

I read a guru's book on selecting stocks. His idea of buying growth stocks made him a lot of money but it may not apply to the current market as of 2009. The current market favors value and not growth. With a historical database, it is quite easy to verify. Compare the performance of top 100 stocks sorted by a value grade to the performance of stocks sorted by growth grade in the last 90 days.

2009 seemed to be the Early Recovery phase of the market cycle (a phase defined by me). It favored the beaten down stocks that had high value. I made good money on these stocks in this phase of the market cycle and most likely the same strategy may not be that effective in other phases of the market cycle. The point is: Apply the strategy that favors the current market conditions.

For this period, I checked this guru’s performance and he did not even beat the market. Apparently his strategy did not work this time. When the market passed this Early Recovery phase of the market cycle, most likely his strategy based on growth stocks will work again.

Read any book including mine with an open mind and challenge the author. Even if the author is right, the strategy may not work on the current market conditions, and/or it may not fit your personal objectives. Many books were written long time ago, so while the concepts are fine, they may not be applicable today. Check out when the book was last updated.

It would not cost a lot for a big Wall Street firm to write an article to recommend a stock and publish it in the web site or newspapers. It is the common pump-and-dump strategy or using it to sell short to make millions for them. Do we have enough examples including WorldCom and Enron? Separate gems from the garbage and do your own home work. I was fooled more than one time.

A good pointer could make us thousands of dollars, and a bad one or a misinterpreted one could do the opposite.

Do not let this brief article fool you. It could save you a lot of time and money. Matching the right strategy with the predicted market conditions is not easy. However, when you have more rights than wrongs, you win big in the long run.

###

The following are what I’m reading. It is a gold mine for some, but not applicable to others. Write down your requirements. Some publications such as the Wall Street Journal and Barron’s are expensive but most of them are available in your local library.

Actually I am over-loaded with information. I select the best of those available to me. I try to read three or four books in detail in a year and glance thru a lot of books in Barns and Noble’s bookstore.

Seeking Alpha

Seeking Alpha (SA) is a fascinating web site for investors. The price is right (it is free). You need to understand that articles are written with authors’ agenda. Some may advocate the stocks they already own, and some may ask you to sell the stocks that they have sold short. In summary, authors may want you to trade the stocks to benefit their portfolios. If you want to know more about your stock, search for recent articles on that stock.

If the author’s agenda is selling his/her services, the article is most likely trustworthy. Shamelessly I use it to sell this book.

Recently, I made good money on ALU, DECK and ANC based on the opinions from articles at SA. I have evaluated these stocks long time ago and did not buy them until recently. I did lose some money from the stocks recommended even with good arguments. However, my gains outnumber my losses. Several times, good timing made a big difference.

If you want to have all the headlines and recent articles on your stocks, create a portfolio in the home page. It is quite handy.

SA has a Pro subscription service with good performance they claim. Most retail investors cannot afford to pay for this service.

Be cautious on some obscure alpha-rich stocks particularly with .XX (pink sheets for example). They are very risky and volatile.

SA and other sites provide us food for thought and I have been benefiting from them. The discussions in their comments to the articles clear my thoughts and biases.  However, as usual you have to do your own evaluations before trading any stock.

Barron’s and Wall Street Journal (WSJ)

I enjoy Barron’s and WSJ. WSJ does not describe individual companies in detail like Barron’s but the general market and the economy. Both are not cheap, but both should be available in your local library.

If you already have a subscription service on selecting stocks, WSJ is a very good companion journal. I cannot find a better paper than WSJ and that is why most business colleges require their students to subscribe WSJ.

From my experience, stocks recommended by Barron’s surge initially and then most cool down.

Update as of 1/2016

Barron’s kept track of their recommendations in 2015. Their predictions from bullish articles were not that well but their predictions from bearish articles were fine. However, there were 146 bullish picks and only 17 bearish picks. If you picked stocks and betted evenly according to Barron’s, you lose big time.

They compared the performance of a stock to a specific benchmark. For example, you should compare Apple’s performance to a technical index (or an ETF simulating that index). It is really comparing apples to apples (no bunch intended) instead of comparing Apple to the general market (i.e. S&P 500 to most).

I disagree another comparison using stock’s total performance (i.e. appreciation + dividend) to S&P 500 without dividend. It is legal but not correct.

For example, the stock appreciates 1% and the S&P 500 also appreciates 1%, and both pay 2% dividend. Hence it does not beat the market. However, it claims it beats S&P 500 by 200% as illustrated below:

  Beat S&P by = (3% - 1%) / 1% = 200%

        where 3% = 1% appreciation + 2% dividend  

This is one of the many tricks how many investment newsletters fool us. Personally I love Barron's. At least 2015 was not a good year for their stock pickers and many other stock pickers too. I do not want to speculate why the best minds in our industry cannot beat the market. It also reminds me of the benefit of top-down investing: Invest when the market is not risky, identify the best sectors and then the best stocks within the best sectors.

Yahoo!Finance

The comments from the user board at Yahoo!Finance are good and sometimes the information cannot be found in other sources. Everyone can post comments. Some information is too personal, too harsh, too promotional and simply not reliable. Many times there are contradictory comments such as shorting and longing on the same stock. Several times I learned there was a serious lawsuit pending or a major problem on a company.

I use it to update the stock prices (via the download function). I used the charts to identify the market cycle that turns out very beneficial. As of 2016, some of the functions have been deteriorating. If they cannot improve them, why not do nothing?

Others and your broker’s website

There is a lot of information than you expect and some brokers offer free seminars. Cnnfn.com and MarketWatch, The Street and

Fidelity’s ViewPoint are very useful.

https://www.fidelity.com/viewpoints/overview

11          This time is different

Today is really different.

Recently I read a classic book on investing. Similar to most other classic books, most ideas are not applicable to today’s market. The author died more than 50 years ago. By my rough estimate, the ideas are 30% correct and 30% incorrect. The remaining fall into the grey area that they are only correct in specific market conditions and/or specific interpretations. Most correct ideas are now conventional wisdom and many have been repeated in this book. Some of the incorrect ideas are described as follows.

·         Most of these books described strategies in investing and then selected examples to fit the strategies. Most of my examples are from my personal experiences. I included my bad experiences as they could be more beneficial to you by not repeating the same errors.

·         Tax laws have been changed since then. Roth IRA could be the best thing since slice bread if you’re eligible. Check my article on Tax Avoidance. This book has a link to the current tax law from Wikipedia to keep you updated with the current and future tax laws. Your tax lawyer or accountant is no substitution.

·         Today most brokers’ commission rates are so low that it makes some trading strategies more effective than before. My commission rate is $5 per trade (after some negotiation with the argument of my frequency in trading) and one account is even supposed to be commission-free for several months via a special promotion. Your Dad may have paid over $300 for commission per trade.

·         Your Dad did not have Technical Analysis. I use it effectively so far to detect market plunges. Many good technicians make great money. 2015 is better for chartists than stock pickers.

·         Tracking ‘mispriced stocks’ is less useful today than 50 years ago. Today these stocks are screened every day by investment subscriptions, fund managers and even retail investors. The extensively used P/E is only one metric among many to determine the value of a stock. P/B and ROE are not as effective as twenty years ago.

The only reason I can think of why the stocks are mispriced is via over-reaction by the media and manipulation. The media exaggerate in order to sell their viewership and most information is outdated. Most stocks are bargains during the market bottom. Lower prices than the historical prices do not mean better potential for appreciation in the short run. Buy when everyone is selling and vice versa.

Most ‘experts’ from the financial TVs manipulate the public in order for them to buy or sell specific stocks to their advantages. If you cannot turn off these TV or radio programs, analyze what they preach. Sometimes you act opposite to what they say and make a profit. To prove my point, check out what they say and see whether they will be correct in 6 months. Usually their predictions are correct only in the first few weeks and it could be due to my herd theory.

Goldman Sacks is one manipulator to me. A famous former fund manager from another company advised folks to buy a specific stock while he was unloading it; he did not go to jail.

Today, the real ‘mispriced’ stocks could be those who are losing the competitive edge of their major products, using high debts to boost up the earnings, having major lawsuits pending, etc.  These stocks most likely do not appreciate.

·         Retail investors have most of the financial information of a company and the economy at the same instance as the Wall Street experts. Actually we have more advantages. Our PCs are fast enough for our needs in evaluating investments and our spreadsheets can do most of the basic analyses. Indicated by any abnormal large volume of a stock due to trading by fund managers, day traders could take advantage of it. Hence, they pay more to get in and get out of a stock.

·         From 1970 to 2000, the market returned for an average of 10% including dividends. Market timing would likely deteriorate your return. However, from 2000 to 2016 (so far), we have two major market plunges with an average loss of about 45%. Today, market timing is more important to your financial health than before.

·         No one 20 years ago believed the bankruptcy of major companies such as Lehman Brothers and the old GM and losing most values of many companies such as Citi Group.

·         We have new regulations, which are supposed to protect investors (from insiders’ trading for example). However the government intervenes in the market by pumping up too much money to cause a non-correlation of the economy and the market. It seldom happened. When they stop this practice, the market will correlate with the economy. Our average market cycle is about 4 years and today it has been extended by a huge margin.

The chance of another 1987 crash is minimized with new regulations. We did learn a lot from the 1929 crash as our market and its regulations are quite different from then.

·         The economy may recover without employment recovery. Most jobs today can be outsourced. Big companies hire the best workers at the least costs in any country in the world. The world is getting smaller via better communication and more efficient transportation.

Free trade and globalization make the world connected better and the participants should benefit. Without employment recovery, it would affect many sectors such as housing and retail. When one country is down economically, many other countries will be affected. Watching the economy of the USA alone is not enough today.

·         Sir Newton and Irving Fisher lost a lot of their money in their investments, so their high IQs have nothing to do with investing. Even the Nobel-prize winners ran their hedge fund LTCM to bankruptcy. It also teaches us to diversify and the black swan could wipe out our entire savings if we bet all in one strategy or one stock.

We have to change our strategy to adapt to the current market. The market 50 years ago was not the same as the market today. Fewer lessons from 50 years ago are valuable than the lessons learned in the last 15 years.

·         We do have new challenges and new tools.

The big boys (mutual fund and pension managers) could manipulate the market. It could be a nice conspiracy theory that the blood-sucking big boys meet on the first full moon every month to determine the market direction and/or which sectors to rotate to. With today’s internet, the big boys could drive the market fast and violently and the retail investors would likely follow.

About 50% of today’s trades are executed by computers. When they act at the same time and in the same direction, the market would surge or plunge fiercely without warning. 

High speed trading could hurt us but also could benefit us. Sector rotation, ETFs, contra ETFs, options and day trading should be examined and understood (even if you don’t participate) by today’s retail investors.

Dow Theory with emphasis on the Transport sector (including UPS today) loses some of its luster as a lot of products do not have to be shipped by rails such as the digitized music, ebooks and movies.

These are the tools and strategies that your Dad’s generation did not use, not to mention those books written 50 years ago that did not have to deal with our challenges.

·         With today’s advances in publishing, books can be published / updated with minimum effort and distributed throughout the world. There is no need to print and store large numbers of books. Books can include multi-media features and links on other articles. Readers enjoy the lower cost and larger choices.  You do not need index and glossary in ebooks. Updating today’s digital business books to keep up with the current market is easy, low-cost (or even free) and efficiently done. This book is a living-proof. Without today’s publishing system, this book could remain as a note book for the author.

Conclusion

Technology and new regulations change our tools in investing. Your Daddy did not have today’s powerful PCs, spreadsheets, internet, etc. The tax laws and regulations are changing every year. Read any book with an open mind and apply what works in today’s market. Without updates, this book will be obsolete in 25 years.

Today’s market is influenced by the interest rate, aging population, population growths in different countries, globalization, China, wars, conflicts among countries, energy, technology, tax laws and regulations.

Afterthoughts

It is beneficial to buy a digital version of this book from the publisher such as Amazon.com. It is good for the authors too without dealing with the readers in marketing and maintaining book updates. The disadvantage is the charts may not be displayed adequately due to the limited size of the e-reader. I correct this problem by giving you a link to most screens.

It reminds me of some products that need updates all the time at full prices. Turbo Tax and similar products are the example. Unless the government does not and most likely will not have any tax law changes such as flat tax, we pay for a new copy at the full price every year. It is similar to programs in detecting viruses. It is a great business model for these companies.

Links

Newton and his market loss:     

http://www.cnn.com/2009/POLITICS/07/29/levenson.finance.regulation/

Irving Fisher:     

http://en.wikipedia.org/wiki/Irving_Fisher

LTCM:                  

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

Black swan:        

http://en.wikipedia.org/wiki/Black_swan_theory

12   The advantages of a retail investor

Why we, the retail investors, can beat the professional fund managers? It is not likely if you consider all those research resources they have. However, in reality, the average retail investor does not beat the market due to switching between stocks and cash at the wrong time. Via the greed, we invest in the peak of the market and via fears we divest in the bottom. We do not expect the market would return in the bottom but it always does. I am trying not to be the average retail investor.

Most fund managers are smarter than I, better educated in investing than I, have ten times more research tools than I and have ten times more computer power than I. However, most of them do not beat me, the average casual retail investor. In addition, I spend less time in stock research than an average fund manager (most working at least 60 hours a week) - I have a life too and they don’t. J

It could be:

o   They cannot beat the market all the time. When they do, money flows in. It is very hard for them to perform with extraordinary cash. When the market is depressing, everyone cashes out their funds. They need to sell stocks even though they have better potential to appreciate. 

The saying “When there is blood in the streets, most likely it is the best time to buy” is correct. 2009 is a recent example. Fund managers cannot take advantage of this opportunity as most clients have cashed out.

o   Most cannot play market timing freely and they have to satisfy all the rules set up for the fund. Every time they want to buy a stock, they need to ensure no rules have been broken such as a restricted percent of any stock to the fund. Most funds prohibit their managers to short, buy contra ETFs and/or maintain high cash position. Basically, most are not allowed to react to the market when it is going up or down.

o   When they trade, their high volumes are tracked by day traders who can ride on their wagons. Hence they have to pay more to buy and get less to sell.

o   By my rough estimate, they have about 1,000 stocks (about 600 for larger funds) to deal with. I as a retail investor have about 3,000 stocks even skipping most stocks with prices below $2 and/or not listed in the three major exchanges.

Their stocks have been fully evaluated by analysts and newsletters / subscriptions such as Value Line and /or some firms specializing in stock research for them. Hence, they do not gain any advantage by following their peers.

The small and mid-cap stocks are risky but are more rewarding statistically. Many fund managers cannot buy them due to the sizes of their funds.

o   Their performance as a group is actually worse when the closing funds are included.

o   Not nimble enough.

By the time when they have done all the research and received the approval to buy a specific stock, I may have bought the stock already. Usually it takes at least a week for a large fund to complete trading a stock.

o   The high expenses.

The fee is about 1.5% for the average fund.  The expenses are 2% plus 20% on the profit for an average hedge fund. When the fund and the broker belong to the same company, watch out how it can make its brokerage arm more profitable by jacking up the commission. The hedge fund’s usual 20% on the profit and no penalty of losing your money encourage its fund managers to take bigger risks.

o   Not spend enough time to do own research.

Most do not spend enough time on basic research and select the right strategies in current market conditions. They spend a lot of time in following the fund’s and the company’s objectives, rules and regulations.

o   Wrong objective.

The objective of most funds is beating the common index after expenses. Most fund managers do not want to take too much risk and their personal objective is job security. One will not lose the job if his performance is similar to a target index.

o   The reason for some of their good performances is due to taking too much unnecessary risk and the high leverage. Their performances improve when the market is good, but degrade when the market is down. When I see the market is coming down, I would park more cash and I only use leverage when the market is going up.

·         Retail investors have a lot of advantages over fund managers. However, I advise not to be traders especially day traders for beginners. Statistically most amateur traders lose money as they cannot compete with experienced, disciplined traders. No books can replace the actual trading experience.

However, discipline, knowledge and due diligence will make you money in the long term as a turtle investor.

13  Invest responsibly

We work hard, save money and invest. Our investing in stocks serves two primary purposes:

1.       Good return on our money (as in any investment), and

2.       Provide jobs and taxes for the government. However, in reality, the stock market is being changed to a big casino. 

Companies need our investing money to develop new products and hire employees. When the company makes money, it supposedly pays taxes and in theory hires more employees. We would not have Apple paying taxes and hiring thousands of employees if we did not finance it initially via IPO. However, global companies can hire anyone in any country at the least costs (labor cost, regulation cost…).

This is the ideal purpose for investing. Investors choose the companies that produce the proper products and / or services mix that would be profitable and at the same time are good for society and the world.

We ought to pick companies that promulgate the society. Here are some evil industries:

·         Tobacco companies.

Do you invest in products that kill? Even if you do not smoke, the second-hand smoke (and even the third-hand smoke for unborn babies) still kills. We discourage smoking in U.S.A., while our tobacco companies are making great profits in Russia and China.  The recent legalizing of an illegal drug will bring more deformed babies.

·         Defense (offense is more appropriate) companies.

Why do we need a carrier generated by two nuclear generators? We already have weapons to destroy the entire world by pressing a button. Boeing is partially OK with a small division in offense.

After shooting in Newtown, most stocks in gun manufacturing companies went down in prices (profits went up initially due to fear of the ban). Their P/Es based on past earnings will be exceedingly low. This is another example that P/E does not tell the outlook of the industry.

Unfortunately they are legal products. Special interest groups control our politicians like puppets.  However, the children in Newtown will not die for nothing and even politicians cannot cover their eyes and conscience any more.

[Norman, my good friend, has a counter opinion:

Disagree with your premise on military companies.  The United States has made a lot of money by upholding capitalism around the world.  If we had no military, we could not protect our property rights here and abroad.  Chamberlin proved that a weak country has no rights when the fascists come knocking.]

·         Casinos, wine, fast food, soda...
These are border line cases. They provide good services and products, if you do not take it to the extreme. They only hurt you but not others except from drunk drivers.

Money is not everything in life once we have the basics. We should invest wisely and responsibly in products that will not harm us. 

What's good if you made millions in a tobacco company that kills you via the second-hand smoke? How about the young kids killed every day by guns?

Stop counting money with hands dripping in blood.

Afterthoughts

I had a tough time in arguing with a doctor. He cared about the dividends from his tobacco stock more than your health. I wonder whether money was his original motive to choose this noble profession. CVS has done a good deed by not selling tobacco products.

Again, the legalized drug kills!

14  Are investors parasites?

First most of our initial investment money is from our hard-earned money during our work life unless you're lucky having money via inheritance or marriage.

The retired rich could live a decent life with the money accumulated without investing in the risky market. However, we invest for better return for ourselves, work our own way (vs. paying mutual fund managers to do the same), and take some risk ourselves.

We do not think we're the parasites to the society. Our investments have helped many businesses grow. In turn, these businesses pay taxes and hire workers who again in turn pay taxes. We, the investors, also pay taxes too on our profits from selling our winners, sales taxes and estate taxes when we pass away. The society should benefit a lot from our investment.

If we live to 70s or 80s, we will still be physically able to work on our investments, but most laborers can't. Hence, we will contribute to the society longer as a group. 

We also reward companies with good management and/or profitable products and punish companies with poor management and/or unprofitable products.

Buying future options helps the farmers to have insurance for crops the plant and/or tells them whether the crops will be profitable when they’re harvested.

It is unfair for the hard-working, rich folks less chance going to heaven than the lazy, welfare recipients.  The majority of the free loaders (also known as the able welfare recipients and cheaters) are the actual parasites. The gate keeper of heaven, please take notes.

It is politically correct to help the poor and punish the rich (via excessive taxes). When we tax the rich excessively and unfairly, the rich will give up the citizenship and move to countries with less taxes. It could be the last straw that breaks the camel’s back. We are experiencing the greatest exodus for the rich in the last few years. Many countries welcome our rich with incentives and open arms.

We treat the middle class unfairly. I invest my hard-earned money and pay taxes on my profits. When the rich are gone, we would be the group supporting the government and the poor. Our entitlements such as social security are paid by ourselves during our work life. Unlike the rich, we cannot abandon these entitlements and move to other country.

I do not object to help the poor, but should the middle class be taken care of first? I do object giving our taxes to the rich bankers for bringing down the economy when some should go to jail. Margaret Thatcher once said, “Socialism is destroyed by giving to the poor until we have nothing left to give”. When the host dies, the parasites will die too.

Can anyone explain the following?

·         The poor get 100% free health care (say in Mass.), while the middle class like me are very careful to decide whether to see a doctor or not. I have to pay a lot even after the insurance.

·         The poor can go to nursing home free of charge and we only go when we have no choice as it is very expensive.

·         Last time a lady in front of me in a super market with a real Gucci bag bought the best cut of steak with her food stamp card. She may be driving a BMW too. Welfare cheating is too common and too easy.

One common comment to me is: “Tony, you can spend all your money and be poor.”  Is he stupid or am I stupid?  Or, our society encourages folks to be poor, lazy, dependent and stupid.

I do believe in fair taxing and redistributing our wealth. The able welfare recipients should be ‘forced’ to work, and his/her benefits should not be taken away the welfare benefits for taking a job. Welfare frauds should be punished. Clinton’s work initial is good but it also has more holes than the Swiss cheese.

I belong to the middle class, which is being squeezed by the 40% who do not pay Federal income tax and the top rich 5%. The top 5% are the geese that lay the golden eggs and can fly away to places where taxes are lowered.

Afterthoughts

·         Norman’s (my good friend) counter point.

Tony--You have come upon the current structural change in the global society.  I don't agree with how you have addressed it, almost a racial slur on the lower working class.  In many people's eyes, the capitalists are the parasites on society and they don't pay taxes, but hide the money in Ireland and Switzerland.  When this depression is over, there will be a better distribution of wealth or the elite will suffer the same fate that Marie Antoinette did.  In my opinion, there will have to be redistribution of wealth in order to maintain the demand for goods and services.  99% of this country is poor!

Tony: More than 40% of our population do not pay Federal income tax. Representation without taxation is worse than taxation without representation. Guilty as charged? You decide.

·         Why I love investing.

I learn most disciplines in investing via common sense. Even if you have a Ph.D. from a prestigious college or how tall and handsome you’re, your accomplishment in investing is only measured by the performance of your portfolio.

I spend about two days a week now (after all those testing and readings in the last 10 years) in investing. That's why I can spend so much time in forums, write books and enjoy life too. I can afford to make a mistake once a while and no one dies because of my error. Everything I learn now can be useful for the rest of my life. I work in any place I want and any time I want.

I'm my own boss. There is no one to report to me and I have no one to report to. There is no company politics. No one discriminates against my yellow face. I do not care about others' feelings when I trade except my own when I lose.

I can play offense and defense without asking for permission. I do not have to follow any regulation, any dress codes, any work hours... My commute is from my bed to the couch.

I would like to share my experiences in this book. For one who never writes more than three pages in my entire career and in a foreign language (I bet my English is better than your Chinese), it takes me to a new challenge. The main reason I wrote this book is I cannot find one that would benefit the retail investor from actual experiences.

From my profitable investment, I can afford to take an early retirement and concentrate my effort to find new and profitable strategies in stocks investing (my hobby now). Today and for my frugal living, I do not have to bet big to accumulate more money but to protect them. There are many ‘great’ investors died almost bankrupted. We do not want to follow their footsteps. Be conservative! 

This is my payback to the society besides my taxes as I do not expect make money from selling books.

###  Filler:

I’ve written several books on investing. It is fun to comment in financial sites. It helps me to kill time (especially when the market is too risky to invest) and learn from others. In marketing my books, I made a lot of enemies. For me, it is not worth it as my objective is helping my fellow retail investors and contributing to the investing world not to upsetting anyone.  Today, Amazon.com promotes my books for free. In addition, they handle all of fulfilments that I cannot afford to do it myself. If I have to handle more than 100 orders a month, I do not have time to enjoy life. So, thanks to Amazon.com.

###

Advice to a friend starting a new business

http://tonyp4idea.blogspot.com/2014/05/starting-music-business.html

One voice.

http://tonyp4idea.blogspot.com/2014/07/one-voice.html

15  Retirees, take notice

When we retire or are being laid off, we have plenty of time. It is bad not to do anything financially and mentally. However, the worst could happen to us: We invest in some venture without due diligence and lose our entire savings. There are so many real-life examples.

Everyone enjoys eating out. Some believe they can make money in opening a new restaurant. Wrong. It is the human nature to be overly optimistic even on the toughest business. Their friends and family members do not want to dampen that enthusiasm. Most new ventures fail miserably.

 
Investing in stocks is another popular one. Many take a course in day trading. If their system works that well, why do they want to show it to you? When you want to invest in stocks, you should have many years of investing experience and do not gamble with the money you cannot afford to lose. In either case, start with paper trading before committing real money.

One retiree lost all his money in the stock market which has too much volatility, and died because of worries. After several years, the market revived but he did not.

One retired headmaster worked as a partner in a small brokerage firm. Despite having fame and fortune initially, never-the-less he eventually lost all his money. He executed an order without checking his client’s maximum bet allowed. The bet was a total loss and this verbal order based on trust could not be legally bound.

The retired and famous baseball player from Boston lost all his money by owning a company that made video games. Even though he was an excellent baseball player, he was not a business man and his failure was almost a sure thing. For every successful story, there must be more failures that are not publicized. In most cases, no ambition is the best ambition during our retirement years. Investing in something we do not understand will likely cost us money, effort, frustration, and even our health.

Withdrawing 401Ks and IRAs.

(http://tonyp4idea.blogspot.com/2012/09/withdrawing-iras.html)

16  Is Social Security going to survive?

Contrary to popular belief, Social Security will not run out of cash. However, it will be cut down in purchase power even it is supposed to adjust to inflation. The inflation rate has been manipulated by the government by using the CPI that does not account for food and energy. 

Our politicians will not allow Social Security to bankrupt otherwise they'll not be re-elected. Some simple steps with some comic relief are:

·         Move money to Social Security from budgets in other areas. The Constitution does not require our leader to balance the budget.

·         Printing more money and/or beg China or anyone to loan us more.

·         Tax more on citizens like the extra tax for Social Security, Medicare, any taxes… and add a new tax called VAT.

·         Tax the rich until they move out of this country. Then we will have a new tax named exit tax.

·         Import more young and hard-working foreigners. Ensure not to import their parents to collect welfare Social Security Supplement which could defeat the original purpose.

·         Selective immigration would allow more income and investment and the right skills that we do not have enough.

·         Reduce the aged population with fast food deals for seniors, early bird specials, more legalized, addictive drugs specific for seniors, unlimited alcohol for seniors (killing seniors in the car and other seniors on the street), guns for recreation for seniors, free sex for folks over 70 every night at all senior centers... J

As long as they die happy, everyone is happy.

·         Incentive to die early.

If they suffer, let them die peacefully. How about one extra percent exemption for each year below life expectancy? They may not know there is no requirement to file income tax on the year they die. The last two years usually requires the most expensive health care, not to mention the physical suffering. J

·         Give seniors Viagra free.

It will make prostitutes fully employed with new customers from this age group. Excessive sexual exercise will end their lives earlier but happily.  Not a personal experience but an observation. J

Afterthoughts

Most points are valid but some are just for your enjoyment. I wrote this in a rainy day and needed something to cheer me up. Sorry if this blog offends anyone.

Articles on Quirks. http://www.marketwatch.com/story/how-to-profit-from-social-securitys-quirks-2014-08-07

 

17  Advice for a 70-year old

Why do you being a 70-year old want to be richer? By statistics, which never lie, you have about ten years (actually more by contingent statistics) to live plus or minus five daysJ. Investing is very emotional and it can damage your health. Inheritance is good for the next generation, but it should not be your primary reason to make more money. In addition, it would take out their objective in life and fun in creating wealth. They should inherit enough to start something and nothing more.

I agree that we ought to constantly keep our minds active. However, you're competing with veteran professionals in the stock market. Do not turn your life savings into a very expensive hobby. One way to beat them is to invest when everyone is selling and vice versa. It is easier said than done as most of us let emotions make our investing decisions.

If you could live to your eighth decade, you've beaten the odds and the social security system which was designed that a population will not live that long. Just have a big smile and a fulfilling day. Do not let the market control your mood. Like my late mother said:  Every day you wake up alive and feel no pain, you've earned another day that is more important than all the gold in the world J.

Afterthoughts

·         Bala said:

Great words from your late mom. Even at 70, learning never stops and I learned something today. Thanks.

·         Norman:

Many of us in the 70 year old category are forced to support our children and their children during this depression. My reason for making money is to keep them eating and allow the children to go to school and college.

[Tony: I have been living in my own cave for too long.]

Advice to a friend in starting a new business: Advantage, niche and hard work.