Thursday, June 29, 2006

Acknowledging A Resource - Bastiat Free University


Bastiat Free University is One year old today - this is also birthday
205 for the great economic philosopher C. F. Bastiat.

The courses at Bastiat Free University are chosen for learning about the real world - not for the self aggrandizement of professional students that became university professors.

Of interest here are the Bastiat
College Of Human Interaction and the BFU Master's Courses.

The college of human interaction eschews complicated math and emphasizes rational thought - a much better process for understanding our world. The soft sciences are best treated as what they are - social interaction - rather than cumbersome and inaccurate number problems.
BFUniv does just that.

The Master's Courses are a real treat. Here successful masters of their subjects share what has influenced them in their route to the top. You will not be reading their books - although their books are recommended - you will be reading what
they read on their own journey to success.

When a best selling business writer and thoughtful speculator like
Jim Rogers offers to pass on his illumination of the path to investment success - it is worth taking the torch he offers.

When a serial entrepreneur such as
Dottie Walters ascribes her success to more than the obvious talent and hard work - any business person would be remiss to ignore her hard won insights. "Success is not a doorway, it's a staircase."

There are others - take a look.

Happy Birthday Bastiat
- and many happy returns.


Tuesday, June 27, 2006

Did Mr. Market Get A Sex Change?


If you read Bill Bonner's humorous indictment of market analysts you might conclude that rather than being trans-gender, analysts have just been confused about Mr. Market's sexual identity.

Just one more error on their part.

Of course I too try to analyze the markets for my own profit, and hence I'm prone to being wrong quite often. I am secure in my own analytical sexuality - but I'm amused at rumors about Mr. Market's new sexual orientation. But that is not the type of speculation this journal exits to pursue.

If you know you will be wrong almost as often as you are right, why go to the trouble at all?

If you work for a brokerage the reason is simple - that's how you earn your living. Each time you guess in public someone will follow your advice, the resulting sales and purchases of securities results in commissions for your company. You keep your job.

If you are a speculator, you guess according to rules. If by your rules you will discover quickly if you are wrong - the speculation just might make sense. You can then get out with a small loss if you are wrong - and let the profits run if you were right.

A few independent analysts might be worth reading - as long as they do not attract too many followers. Once they become too big they become part of the market psychology - their authority is soon to evaporate.

Like a long run on a craps table in Vegas - they may defy odds for a while - but eventually they will lose. If someone seems to have a winning streak - follow along - but don't over commit.

The speculation rule of the day is a bit more complex than usual:

watch the correlations between your speculations - you do not want one event to severely damage your wealth.

If the advice you get all follows the same investment fashion trends - your speculations may be over correlated.

With sufficient wealth - anything more than 2 or 3 % of you money in one type of investment may be too much.

Big name analysts tend to spout the same ear pleasing advice - this alone should be enough correlation to raise a danger flag.

If Mr. Market is female, expect the nonlinear event.


Sunday, June 25, 2006

Wealth Is Preserved Through Diversification --

but wealth is created through concentration.

Do you really want wealth?

That is not a rhetorical question. You, not society, should decide where success exists for you.

Wealth is sometimes earned by accident but is seldom retained if that is its source. Dot Com millionaires disappeared and now housing flippers have had a day in the sun - most will soon be back where they were.

(my guess is gold still has a huge bull market ahead of it - this is my guess, not a recommendation. I will not be financially destroyed if I am wrong)

You alone must decide if success is worth the risk. Real success carries with it a substantial danger of failure. If you are willing to dedicate yourself - to focus yourself - you can overcome many of the dangers by sheer determination.

And the journey will be exciting.

Michael Dell is a good example, Dell provides a decent product and fair service in a very crowded field with narrow margins. Focused on innovation with his products and their overall systems he has pushed many companies out of the field that just dabbled to see if they could make a buck.

Innovation by the entrepreneur, argued Schumpeter, led to gales of "creative destruction" as innovations caused old inventories, ideas, technologies, skills, and equipment to become obsolete. The question, as Schumpeter saw it, was not "how capitalism administers existing structures,... [but] how it creates and destroys them." This creative destruction, he believed, caused continuous progress and improved standards of living for everyone.

But the key too see here is what Michael Dell apparently also understands -- wealth is made through concentration and preserved through diversification. Dell made regular sales of his Dell company stock during the dot com madness - he potentially diversified his wealth so no single event could undo him.

If you have dabbled in investments, following a tip here, an analyst recommendation there, it is time to concentrate. Find a part of a market that you can appreciate and learn how to play that market. Knowledge of the underlying fungible security is important - far more important is knowledge of the interaction of the players themselves.

With such knowledge you would soon discover that most option models price options for the players on the floor. Once you develop an option model for yourself that follows different constraints regarding time and correlation - you may start to win.

Here is the speculation rule:

There are a million ways to make money in the markets - all of them are hard to find and short lived.

Only those with focus will be able to both profit - and to move on when the time comes.

Once wealth is secured - diversify to protect it.


Friday, June 23, 2006

The Wrong Investment Rules

Investment rules will get you in money trouble.

Percentages of this - success in that - fundamental trends - the type of fancy investment rules that lull you to sleep while your wallet is being emptied.

All of these are spoken knowingly by analysts on TV. The important point to realize is that analysts on TV work for investment companies - not for you.

If they suggest something, or provide an investment rule, it is to make money for their employer -- and themselves.

"No one cares more about your financial future than you do - unless they can use your assets to improve their financial future." - Allan Wallace

Mutual Funds tell you to invest for the long term - while they create short term profits with your cash.

There is an alternative.

Learn to manage your own money. Don't follow financial rules put forth by closet salesmen. Learn to speculate to protect your wealth. (financial analysts don't like speculation because you won't need them.)

Instead of investment rules use the principles of mass psychology.

Psychology is what moves markets.
-- How do you parse The/Masses?

The best independent market analysts use psychology in one way or another. Instead of investment rules they use procedures to limit losses when they are wrong - they speculate.

Go to a used book store or Amazon and pick up a book by Richard Ney or Doug Casey - the basis of their logic is psychology. Use Elliott Wave Theory, cycles, or Dow Theory - the basis of their long term success is the ability to recognize psychological patterns.

Make the study of group dynamics the key to your success.

As a first lesson in mass psychology bear in mind the description of the masses can be parsed as the/masses or far more accurately as -- them/asses.


Friday, June 16, 2006

Your Own Business Can Be An Excellent Speculation

A primary set of Speculation Rules is

  • keep losses small
  • &
  • let profits run

When trading the markets this usually means taking a bunch of small losses quickly while letting the fewer winning trades keep growing. In balance this has proved to be a winning formula overall.

Now suppose that you could start an international Internet business with no up front costs, very low overhead, and great potential. An added plus is that this business can be run from virtually anywhere in the world.

If you want to read a free e-book as a part of judging a prospective business, read this.

As to my new business -- was it worth the better part of a day setting it up so I could explore the potential?

Ya Betcha!

I've looked at hundreds of programs and businesses opportunities for my daughter and I to start. This is the one we have chosen. There is a full marketing system included ----

well if you want the whole story visit my personal small business story.

If you want to take a look at the business for yourself or a friend - check it out here.

All I can add is that I am real picky - this meets my conditions for being a worthwhile use of my very limited time.

It may well be worth your time also.


The Power Of The Individual Investor

As an individual investor you have many advantages over asset management professionals and mutual fund management.

An individual investor that eschews packaged investments and pursues research on personal speculations has a huge advantage.

  • Individual investors don't have to invest - cash is a valid asset class for you
  • time is on your side
  • you are not limited in style
  • you are not limited by geography
  • you are not judged on a monthly or quarterly basis
There are other individual investor advantages also, some of which I've covered in previous investment articles.

Professionals get their MBA and dive right into a specialized financial niche. As a private investor you will not be better at analyzing bonds than a bonds pro, or better at trading wheat than a wheat specialist. You can be good at guessing what's next, and learning how to profit in the almost now best sector to invest. If you think metals will take off as China's growth accelerates, you can research iron, gold, and uranium. The bond and wheat trader will still be great at their niche, but that's it. When in a decade or two you decide everyone hates stocks and bonds, you can switch back and by some stocks. If the professional bond trader is still in business, he'll still be great at bonds.
Cash is an asset class. In times of inflation "cash is trash" is a popular phrase - but there are many ways to hold cash - and many currencies to hold it in. A public fund manager normally is expected to be close to fully invested even in dangerous times - as an individual investor you can pick your own exposure and times.

Instead of being committed to investing, you can taste of many styles and markets, small sums that teach you the risks. Each book you read amplifies your knowledge over time - increasing your effectiveness. We are seeing a sea change in investment today by asset class - you can rise and fall with the tide while professional investment managers may be swept out to sea due to inflexibility.

There are many more benefits - start small and learn them for yourself.


Saturday, June 10, 2006

The Problem With Mutual Funds

We can describe the major problem of investing in mutual funds with just one speculation rule.

No one cares more about your future than you.

A mutual fund manager will run their mutual fund with one goal in mind -
their income.

Yes their future income is enhanced if they can create higher returns and so grow the fund, but they have outs if they don't succeed with your money - you just lose.

survivability is the name of the game for the mutual funds themselves. They can take risks to grow, and if those risks hurt the fund, they can play games and hide the losses.

If a fund family has one hundred funds, and ten of them beat the averages, these mutual funds will draw most of the new investment dollars. Those that lose will not be closed - their investors will be transferred into the "successful" mutual funds - the losing funds thus disappear from statistics. New mutual funds will be created to replace those that were absorbed - hoping the new ones beat the odds and the markets.

There are other games to be played - but taking risks with your money for short term gains - while telling you there is safety in a long term investment approach - is where most their profits originate.

Mutual fund investments are very risky because they seem very safe.

All investment is dangerous, big or small, managed investment or self directed speculation. All investment has layered risks, some visible -- some hidden.

As Shrek might have said, "Mutual fund investments are like onions. Of course some of them stink and can make you cry - but that's not the point." There are layers of expenses, dangers, and bureaucracy to be peeled back before considering investing in a mutual fund.

To speculate is to acknowledge investment risk and try to manage the dangers. To blindly follow an
investment plan is trusting others to protect your assets -- rather than consistently profit themselves.

Any bureaucracy
always seeks to insure its continued existence before it deals fairly with its constituents.

There are tools, asset management software and online advice, that will help you
take control of your own finances.

Read some good books on investment and keep your money out of the markets until you know how to let profits run and cut losses short. Keeping your money in cash is also a form of investment - and at times a much better strategy than mutual fund investing.

No one cares more about your money than you -- unless they intend to take some of your money.


Monday, June 05, 2006

iBanking - Investment Banking Basics

Investment banks may not effect you directly - but the actions they perform are large enough to effect the world economy.

Without getting too specific, investment banking salesmen create and distribute "asset management product" to huge investors. Government agencies, international corporations, hedge funds, and very wealthy investors are parties, and counter parties, to these special products.

Quantitative analysts, or quants, play with finance numbers and relationships so as to match products with a client. Investment banking traders take positions and dissolve them as they seek optimum return with minimal capital exposure - they hope.

Occasionally some of the products or the parties to the products blow up and there is a scandal or major bankruptcies - or both.

As sophisticated financial products are traded some of the parties may not understand all the consequences of unraveling their positions. Some of the positions may not be able to be unraveled in a timely manner. If your counter party fails, your position may drag you under also.

There have been major disruptions in the past decade with derivatives created and traded by investment bankers - but no first world countries have collapsed in the modern era.


Some of the major bank mergers over the last few years may have been engineered by investment bankers to decrease counter party risks between the banks, or to rescue a bank in trouble due to derivatives. We do not know - they would not tell us.

If you think the quants and the government can control this huge, unbalanced system, keep in mind that
no one fully understands it.

Two or more parties frequently enter into a product swap engineered by investment banks - and all the parties show a profit on their income statement.
Is it worth spending a million of real cash to show a twenty million paper profit - even if you do not understand the convoluted math? Many companies think so. There is no real way to value these illiquid investments, so i-banker quants invent numbers that make everyone happy.

Until the next implosion.

This web of relationships creates extremely complex systems - even if each of the concepts and relationships seem straight forward when established (they aren't) - over time they change. With the end of the Glass-Seagall act in 1999, the levies have been lowered, a class 5 financial hurricane may be overdue.

If you want a job as an investment banker doing financial research and asset management for an investment bank; it is a very well paying job with lots of challenges. There are occasional large layoffs that sweep the employment field clean - so timing may be important. I'm sure any MBA college will offer you information on investment banker training.

If you are an investor, be aware that large shocks to the investment landscape are inevitable. Consider speculations and protective positions before an investment banking engineered earthquake hits.

The next one may be "the big one."


Friday, June 02, 2006

Doug Casey And The Greater Depression

I don't know when I first read a reference to a greater depression.

It is a safe guess that I did not invent the phrase "Greater Depression." It is also a distinct possibility that I read it first from one of Doug Casey's best selling investment books. The phrase has seemingly been around for decades.

The concept though is sound.

Depressions are caused by egotistic government officials thinking they can control a complex system like the economy with a few poorly understood tools. Their ignorance, and a firm belief that they know how to run your life better than you, leads them to pursue power. That power perverts their judgment even further as they pursue financial manipulations - and the rewards they think they have earned.

Governments today can make larger errors than their predecessors, and can also compound those same errors faster. These are dangerous and interesting times - it is unlikely we will muddle through successfully.

Back to the potential for a greater depression.

Doug has shared with us his views on a coming unpleasantness and a possible greater depression. He is of course more balanced in his delivery than myself - but the point is much the same. Reading of his ideas is highly recommended.

One of our standard speculation rules is: inevitable does not imply immediate.

Eventually the inevitable will happen.

It is time to prepare - just in case.


Thursday, June 01, 2006

To Thine Own Self Be True


Neither a borrower, nor a lender be;
For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.

This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man. - William Shakespeare

Modern western society now lives on borrowed money and time.

A reckoning is due.

Now is a great time to cut yourself free from financial entanglements that would drag you down in a recession or a world wide depression. Do not take on any new liabilities that will not show an immediate return justifying the risk.

This is not the time to buy gratification through conspicuous consumption.
This is a time to store up food for a long financial winter.

The purpose of a depression is to take money from the fools and knaves of easy money and return it to its proper owners - those that know wealth quickly gotten is a vapor quickly lost.

The governments of the world have printed easy money to their own ends. Those that have profited from it have believed in their brilliance based on the short term success of a financial Chimera about to meet its Bellerphon.

It is not yet too late to prepare.

Above all - to thine own self be true.