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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