Seeking Maximum Total Return In A Recession

The purpose of investment and speculation is to seek maximum total return, consistently, while minimizing the potential for loss. And as bad as 2008 may have seemed to be, this should still have been our goal. Yes, even in a recession, or bear market, or any other economic downturn. To what degree we achieve this (or not) is going to vary from person to person depending on the decisions we make.

 

When the market turns bullish and the economy starts growing we buy stocks to profit from the rise. No problem there, because we are following the trend. We all know the trend is our friend.  Our chances for success will be in our favor that way.  With that said, when the market turns bearish, and the economy slows down or turns negative, we should not seek stocks to buy for a rise. Too bad most people’s retirement accounts are set on auto pilot to continue buying, and losing money, in the name of dollar cost averaging (I’ll blog more about that and other do’s and dont’s in a later post). The problem with this is now the market and economy has turned, and you are trading against it. Against the tide. And your chances of trading for a rise in price, successfully, has turned in to a mere gamble. It’s like pissing in the wind. Odds are, you’re gonna get wet. So Whats the answer? Stop trading out of season. Always trade in season, never trade out of season. I can’t stress that enough. In times of a market and  economic downturn, we should be shorting stocks if we are advanced enough to do so. Riding them down for a healthy profit by following the down tend. If not we should look for alternatives that tend to go up when the market’s primary trend is down. Such as cash. You can always tell that cash is going up in value when commodities and assets in general are going down in value (deflation).

 

However we are seeking maximum total return. So we may want something with a better return than just sitting in cash or money market accounts. And a good alternative in times like these are debt instruments. Like bonds. It could be said that bonds are the competitor to the stock market, to some degree. When the economy is growing at a good pace, money flows in to the stock market, and rightfully so. In those time, it’s the best thing going; it historically gives you the best return for your money. But when money flows out of the market, a good place to park it is good old bonds, for a good safe return on your money, while we weather the storm and wait for the time to put it back in the stock market.

 

The easiest way to do that it to put it in a bond fund. For atleast the past 3 months to a 1year, PIMCO has offered some of the best returning family of bond founds out there. PIMCO Extended Duration Fund (PDEIX) has had a return of 49% in 2008 http://finance.yahoo.com/q?s=pedix&d=t. 

In summary, for this ressecion, you should’ve been shorting for the past year, or if you just needed somewhere to park that retirment money, bonds are the way to go. But before making any moves, always do your home work, and be ready to change when the primary trend does.

Fixing The Banking System

 

Time to Nationalize Banks? A “Bad Bank” for Toxic Assets? What is the FDIC’s Role? – Roundtable Discussion with Josh Rosner of Graham Fisher & Co., Catherine Mann of Brandeis International Business…

 

Is Cash King, Or Does Oil Make The World Go Round?

“From how high, to how low?” is the questioning title of an article in the Houston Chronicle on October 25, 2008, by David Ivanovich. The subtitle reads, “Oil’s boom is now a whimper, as demand slows and prices that once shattered records plunge”. I will summarize the author’s musings as he attempts to answer his own question. However, the price of oil is directly influenced by the value of the dollar.

The author chooses, like most, to view the topic from a tail wagging the dog perspective. He states, “Institutional investors and other speculators, who had waded into oil commodities and helped drive up prices to unheard-of heights, have largely fled the scene”. There’s no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they’ll be able to sell for a profit. However, they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks. Furthermore, easy and plentiful money is the fuel with which all would be investors and speculators use to buy up any commodity traded, thereby driving the price higher. Tighten the money supply and there will be not enough money with which to continue buying.

Ceteris paribus: when the value of a good or service falls, the quantity demanded increases, according to the law of demand. Barrels of oil are traded around the world in US dollars. When the value of the dollar goes down, more dollars are required to buy the same barrels of oil. The inverse is also true. When the dollar goes up in value, fewer dollars are required to buy the same barrels of oil, hence the price goes down; money becomes the dog that wags the tail. In this case, the tail is oil.

This would explain the bulk of the major price trends in oil. Watch the value of the dollar, and understand how it is strengthened and devalued. Understanding the money supply in relation to goods and services is the key to understanding where the price of oil is headed. Based on the data on the next two pages, it becomes even more apparent that the price of oil is directly influenced by the value of the dollar. In fact, we can say they are the inverse of each other, or move in opposite directions.

Click the link below to see the data…

Dollar Chart vs. Oil Chart

Are You Truely Investing… Or Just Gambling?

Let’s start with the three things one can do in the Market (any financial market). Gamble, Speculate, and/or Invest.

First off, gambling is betting on an uncertain outcome. It’s when the odds are against you, and you have no advantage. One has a 50/50 chance, or less, of being correct.With that said, you can gamble in anything, sports, casino, even with your life. Some use the stock market to do it. But the stock market in itself is not a casino or a gamble. If you truly thought it was, would you continue to contribute to your IRA , or 401k (your nest egg in your old age), both of which are heavily involved with Wall Street.

Secondly, speculation is the act of buying an asset (of any kind) at one price with the intention of selling it for a higher price sometime in the future. No matter if that’s 3 days, or 3 decades from the time you bought it. Buying low to sell high is the thought process. But that’s not all; you are only doing this when you are reasonably certain of the out come. An anticipation based on facts, or what you know to be true. This puts the odds in your favor. You see an advantage, and do not proceed unless you do. No diagnosis, no prognosis. No prognosis, no profit. Most companies speculate in the course of their daily business. For example, a company buy materials cheap, process them in to a product, and then sell it for a higher price. And do this over and over again. Or like flipping houses in the case of real estate.

Third, investing is buying an asset for a rate of return, a cut of the profits in other words. Like dividends in the case of stocks, rents in the case of real estate. Moreover, you are not doing this with any intention of selling the asset at a higher price; it is a permanent buy, which you may hand down to your future generations, possibly.

Hopefully, we now have a good understanding of what it is we are really doing when we attempt to make money in the Market. I wanted to make that understood, because, a lot of us in the investing community think we are speculating or investing when we are really gambling (no research, 50/50 chance) and just don’t know it. Then we blame it on the Market when we lose. And a lot of us think we are investing (research, permanent buy for a rate of return), when we are really trying to speculate (research, buy low, sell high). It is extremely important to know from the start of a thing, exactly what it is you are actually attempting to do if you want to achieve some real degree of success in it.

The Difference Between The Amateur And The Professional…

 

     First and foremost…the business of speculation is amazing. How many other legitimate endeavors can you get going with a stake of a few hundred bucks and work it up to millions, no, billions of dollars. No floor, and no ceiling. And don’t have to borrow any money to get started. The obvious answer to that is, not many. Theres no other game where real knowledge will pay as richly or as quickly as speculation.

   However, the reality of it is, only a few will amass fortunes. After all, only a few become really competent in any profession. But why? What makes some, great players on Wall Street, and others not? The answer is simple. The same thing that makes a person a great player in basketball like Michael Jordan, or software like Bill Gates, or sneakers like Phil Knight, or any other line of work you can think of.  One word. GAME !!!

Game? What do I mean by, game? Well, some of you may know what game is, but I believe most don’t  based on the very small number of people who make money consistently in the market. So let me expound on that for a second. and I’ll keep it short and to the point. What is game? Game is a combination of things. Knowledge, wisdom, and understanding. And you need all three of these things to become a real giant player. Especially in speculation. This is no game for the uninitiated.

You need knowledge. Which comes from the different changes (losses, and study) you go through trying to make money in the market. Years later, those experiences become wisdom (knowledge applied). Which then gives you a heck of an understanding of what to do as various situations arise. You learn how to execute strategy. Play for position. Which is why the professional concerns himself with doing the right thing in the market, rather than with making money, knowing that the profit will take care of itself.

Exercise game. This is the difference in the amateur and the professional. And how one becomes the other.