I spent the weekend thinking about Totalitarian Governments. I was told by a family member that some of our family members are considering that a Totalitarian Government may be the only solution to our problems. This upset me greatly, for no one (not even in a Totalitarian Government) should want to be governed by Totalitarianism. However, what really upset me is that the Government of the USA is so close to being a Totalitarian Government while the vast number of citizens still believe in the facade of democracy.
That is discouraging to say the least.
Changing away from the negative to the positive.
There is a perfect formula to avoid losing money in the stock market.
As my newsletter subscribers know, I impress and reiterate the importance of having the "big picture" in Global Economics.
I contend, we should read and discuss all the macro stuff gong on, the Federal Reserve (which all attention is on this week), tax laws, Obamacare and interest rates.
Taleb, author of the Black Swan, suggested that when investing we forget all the marco views.
Then it follows that one should look for great businesses (in the US and abroad) trading at bargain prices, irrespective of the macro view.
This of course, is the Warren Buffet viewpoint. Mr. Buffet says he and his business partners have never discussed the economy. The company just buys bargains.
Taking this view is a long term investment strategy, and it also takes GREAT EMOTIONAL CONTROL.
I submit we must still have a global view in order to understand how to allocate risk across our portfolio. However, when you find a great business at a bargain price, then do not let the macro issues cloud your judgement.
I won't go into how to find these companies, but they are always right there for anyone. They are not the companies that are glitzy, with skyrocketing stock prices.
Of course most investors don't follow this line of reasoning, and if they do, they likely will fail to hold their investment when the whole stock market goes down.
Recently, the USA government shutdown fears caused stock prices to fall. All of a sudden, the big companies who pay excellent dividends over many years became cheap in relationship to small cap stocks.
Often, when discussing investing with the common person (friends and family) they lack a systematic way to invest. They do not know how to find an investment (except by hearsay). They do not know when to enter. They have no tactics for controlling risk and understanding how much to invest with the risk, and they don't know when to exit.
Well, dear readers, there is no magic bullet to any of those issues. What one finds when they read long enough is that every investor needs a trading plan.
Exiting an investment seems to be the hardest emotional issue (for me and everyone I know). Exits seem to be pretty arbitrary, but the common investor would be well served by have a stop loss. By having a stop loss when entering, you know the risk you are willing to take. This "risk" then tells you how much you should buy of any asset. Does that make any sense? If not, comment, and I will provide you with a simple calculation to calculate your position size.
However, my newsletter subscribers often take me to task about how they might automate trailing stops. In the stock market, most sophisticated trading software will allow you to set trailing stops that are good until cancelled. These are often based on some percentage of price. For those that do not have software like that, Tradestops.com provides a service where you enter your positions into TradeStops.com system. Every time a stop is hit, they send you an email. The basic service costs $149 per year.
China (as I've wrote about in this blog) has both opportunity and huge risk. One is tempted to invest in Chinese companies. However, Chinese accounting standards are not transparent and company reporting (as well as government reporting) is prone to fraudulent practices. I suggest it is best to invest in an ETF (exchange traded funds) that specializes in purchasing the best companies. Your job would be to set up entry, sizing and exit strategies for the ETF (not the companies who you cannot know if they report fraudulently or not).
In many ways at this point, the US Stock Market is overly exuberant and titillated about Yellen taking over the Federal Reserve. She is seen as someone believes in more stimulus - not tapering. There is significant reasons to invest in stocks in the USA and Europe as the economy improves.
But the perfect formula? Invest in large undervalued business; for example Intel. Study their financial statements (boring I know), and find those that are undervalued. Read "The Intelligent Investor" by Benjamin Graham. Mr. Graham influenced Warren Buffet, and there is much to learn from Mr. Graham's book.
Best wishes to you.
When you think about supporting some person who is touting a Totalitarian form of government, please remember this statement from Winston Churchill:
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