April 30th Meeting Notes

• Research techniques
• Good research is the key to good decision making. Good research is based on seeking those who have been able to accurately look ahead of the current conditions. Therefore, you will need to first go backwards to read old articles about the topic that you're interested in. Afterwards you'll need to verify if the person was generally right. Being 10% right and 90% wrong is acceptable if you retain the 10% and discard the 90% that was wrong. Follow these steps to get started on you research:
  
• First, go to your local library's website (for example Fremont Public Library)
  
• Next, find the articles and databases section
• Then, search the article or business database for whatever you're interested in.
• Always verify any information you get from at least 2 sources that are not related to each other. For example, if you got an article from the Wall Street Journal then you couldn't use Fox News, Barron's, MarketWatch.com, or SmartMoney.com since they are all owned by, or in partnership with News Corp.
  

• Quality writers of the economy and stock market
• What's the purpose of all this information if we can't verify the quality of the information. From my experience the following sources have been able to write thoughtful articles for their respective publications. My suggestion is that you pull articles from the library database that are written by the authors and see what they said before the stock market decline of October 2007. You'll find that they have a lot of good knowledge that will help you think about the economy and the stock market from a healthy perspective. Information is only good if it adds perspective or is generally accurate.

• Mises- Hard Core Economics
• John Reed -Real Estate
• Caroline Baum -Interest Rates
• John Rogers -small cap values
• Gary Shilling -big pic and stocks
• James Grant -big pic and stocks
• Steve Hanke -big pic and stocks
• David Dreman-big pic and stocks
• Richard Russell's Dow Theory Letters
• Prudent Bear -potential pitfalls
• Financial Sense- Book Author Interviews


• The discounting mechanism
• The stock market is known as a discounting mechanism (please read the first paragraph to get another sense of the concept.) This means that a stock or the stock market will go up or down based on future expectations. This explains why, even though the GDP news is really negative, the stock market doesn't crash. The fact that the stock market had already fallen nearly 56% from October 2007 until March 2009 means that somehow the decline in the GDP was anticipated. Take a look at when the stock market declined in 2000. It occurred long before the recession of 2001. This also affects individuals stock performance. We can see a company come out with good earnings but the stock doesn't move up on the day the news comes out. Well, in most cases the stock would have moved up in anticipation of actual news. In some instances, the stock will actually fall even though good news is reported. Again, discounting mechanisms help to anticipate the future direction of the economic and political events to the farthest know point into the future.

• Options are derivatives
• Options are often call a form of investment insurance. In fact, options are really a speculative bets on the direction and time that a stock will either rise or fall. When a person buys a stock they're only betting on the direction with no need to be right about the time the stock will go up. Options require you to be right about the direction and the time which is pretty difficult. Few people are able to make a living by using options, even though many investment companies say that unlimited wealth can be found in the use of options.
• Options are great if they make money however they don't have the same impact that a common stock shareholder would have if the company wants to share their profits with the investor. For example, if a company pays the shareholder $35 per share in cash, the people who hold the option don't get any of that cash. The benefit to option investors is that if they're right about the direction and price of the stock then they make huge profits. In our meeting today there was mention of covered calls, writing puts, writing calls and writing covered calls. All of these different types of contracts are available to you however the transaction costs, over time, make this approach a waste of money...unless, unless...you're using other people's money.
  

• Don't believe me, try it yourself
• Obviously, I'm only one person with some experience and a biased perspective. I'm only giving you one side of the equation. The other side of the equation is that you go out and try the things that I suggest you don't do. First, make 10 different trades on paper but don't put your real money at risk. For example, find the price of call or put contracts on any company you're interested in until you make a profit, loss or expiration. There are plenty of websites that will let you enter imaginary trades before actually committing money. This is the best way to know how using options works. I'm sure we can discuss this further in future meetings.
  

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April 23rd Meeting Notes

• The Importance of Compounding
• The issue that was brought up was that investing really doesn't work until a person has a lot of money otherwise investing can't possibly worth it until that time comes. Actually, the critical element to any wealth is the ability to compound small amounts of money now far into the future. One example was demonstrated on MoneyChimp.com where we used the compound interest calculator to determine what the impact would be if a person had money compounded at 8.5% for 30 years or 50%. Using $50,000 as the starting point we found that the difference was astronomical. $50,000 at 8.5% grows to $2,954,315.78 after 50 years. The same principal amount at the same rate of interest grows to $577,912.58 after 30 years. While $50,000 seemed like a lot, the amount is easily achievable. Using a smaller amount will have an equally large difference. Get started now so that you have no excuse.

• Making Easy Money isn't Easy
• While the idea of compounding income makes sense, it is very hard to resist investing in a company that has gone up 400% in a month. However, companies like Citigroup are able to go up so much because the fell to extremely low levels based on the fact that the company is in such dire condition. For anyone who has managed to get in at the bottom, getting out is almost impossible. The dilemma that a trader faces it the possibility that the stock might go up another 500%. A trader might want to hold on to such a stock in hopes of getting more. Another problem exists for those who are able to get out and lose money trading in and out of stocks trying to replicate their Citigroup trade. As time goes on the trader eventually gives back all the profits in the fruitless pursuit of "easy" money.

• History is our guide
• History is our guide in the financial markets because markets have clear cycles. In our meeting we reviewed how the stock market experiences bull and bear market cycles. Within each cycle we reviewed how bear markets have periods of significant gains. Bear markets of 1906, 1937, and 1966 have exhibited the ability to trade in a range for almost 18 years. While in a bull market there can be periods of large losses.

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April 9th Meeting Notes

• Wells Fargo

The discussion regarding WFC was about how the stock could continue to go up despite the fact that bank, in general, are in such an unhealthy position. It is safest for us to assume that any and all bailout money that has gone to the banks is boosting the company's earnings. The improved earnings cannot be expected down the road unless accounting rules are changed or new government money is pumped into the system. Wells Fargo is one of the better run banks and should have a quicker improvement as things turn around.

• Cycle Analysis

The purpose of attempting to understand cycles is to put our current circumstance in perspective so that we do not over-react in our investing. It would seem that much of what goes on is new however the underlying principles are generally the same. For this reason we would not need to panic when stocks crash or boom.

• Bull Markets

The best way to describe a bull market is to look at a chart of the clearest bull market periods of 1921-1929, 1932-1937, 1949-1966 and 1982-2007. While there are periods when the stock market has had significant increases during period outside of the years mentioned above, it is important to keep in mind that the duration of market increases outside of these periods are within a bear market. Also of importance is the fact the "real" bull markets take a long time to achieve significant gains.

• Bear Markets

Bear market are characterized by the periods of 1906-1924, 1929-1932, 1929-1950, 1937-1955 and 1966-1982. The charts below should assist you in visualizing that a bear market doesn't necessarily mean a falling market. The periods of 1906-1924, 1937-1950 and 1966-1982 had the stock market trading in a range. The hardest part of these market periods is that inflation killed the investor more than market declines did. One dollar put in at the beginning of each period would have resulted in it being equal to $1 at the end of the period excluding inflation. If inflation was included then the $1 would be less at the end of the period.

• The Ten Times Ten (10x10) Approach

In the book "Crisis Investing" by Douglas Casey he describes an investment strategy where a person breaks up their investment into ten unrelated and highly speculative groups. Of the ten unrelated areas each investment should move in the opposite direction of another investment. For example, gold v. bonds, short selling a stock v. going long a stock. The gold position would be owning the actual gold not gold stocks. When going long a stock it should not be a gold stock if you're already holding the physical gold. Do you have questions about this concept? Post them on the blog and I'll do my best to answer.

• Investment Vocabulary

All investment terms will be linked to Investopedia for an explanation. If there is a word that isn't clear then be sure to visit Investopedia for more assistance.

Click here to ask questions or send comments.

Speculation Opportunities

Because the stock market is up so much today, I want everyone to consider shorting the following stocks for the SMS competition:

• Wynn Resorts, Limited (wynn)
• Ameristar Casinos, Inc. (asca)
• Monarch Casino & Resort, Inc. (mcri)
• Penn National Gaming, Inc. (penn)
• Isle of Capri Casinos, Inc. (isle)
• LaSalle Hotel Properties (LHO)
• RC2 Corp. (RCRC)
• CYOU
• Force Protection Inc. (FRPT)

These stocks were among those that were up today and likely to be the ones that will fall the most in the coming days or weeks. Keep in mind that you wouldn't place the short sell until you see that the stocks are moving in a downward direction. If you start to lose more than 10% on the trade then you should get out of your short sell. Do not expect to be in these short sell positions more than 2-3 days.

Stocks to consider buying are those that have lost the most today. The following stocks are potential buy candidates:

• ANGLOGOLD ASHANTI LT (au)
• DRDGOLD Limited (drooy)
• GOLD FIELDS LTD ADS (gfi)
• KINROSS GOLD CP (kgc)
• AGNICO EAGLE MINES (aem)
• YAMANA GOLD INC (auy)
• GOLDCORP INC (gg)

These stocks were among those that were down the most and have the greatest chance of going up. In this case, you would employ the opposite strategy as short selling. You would wait until you see the price move up before you start to buy the stock.

Finally, listen to or download the following interview "Anatomy of the Bear" on the Financial Sense website. After listening to the interview add your comments or questions to the blog comment section.

• Click here to ask questions or send comments.