Posts
I knew this would be an interesting month, but this is epic.What is happening here is similar to the Cuban missile crisis, in that we don't know how close we are to financial Armageddon. And we won't know, at least until history tells the whole tale.
Fannie, Freddie, Lehman, AIG Wow!
I am not a doomsday kind of guy, however, this is serious. The amount of money involved in this meltdown is so large, that nobody can comprehend it. If you win a million in the lottery, well, that's a number we can grasp.
What about a thousand million? That's a billion. Now that is an interesting number. At 5% interest, that's what? 50 million a year in interest payments. What about a trillion? you guessed it 50 billion! This banking crisis will be counted in the trillions before all is said and done.
They (the Government) are already throwing around numbers like 200 billion, 85 billion, even a trillion. Now this would be fine if we were running surpluses in the Federal budget, but, , , we have a massive deficit and massive debt. In other words, the money just doesn't exist.
So what is the Government handing out in all these bailouts?
Freshly printed checks. Checks written on an account that has a massive negative balance.
Now all of this will probably work out just fine. This is still the greatest country in the world and offers the best environment for capitalism and opportunity. Is it perfect? Of course not. Can it collapse financially? Who knows. History tells us that no currency in 4000 years of monetary history has ever survived after it has been debased. We've been slowly doing that for a long time now.
So what does all this mean to me?
I'm going to apply straight common sense.
No body knows where the banking and financial markets are going, but it doesn't look good.
Commodities have been hammered recently in the markets. And are now, in my opinion, on sale.
I'm exchanging those Government checks for something solid.
Gold and Silver are solid and they are on sale!
But not for long.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Wednesday, September 17, 2008
Sunday, September 7, 2008
Covered Calls
What are covered calls?
Options contracts.
But first things first, what is a call option?
There are two basic categories of options, Calls and Puts. For now we are only concerned with Calls.
If you believe that a stock(or virtually any other traded asset) is going to rise in value in the future, you can enter into a contract with another person or entity, that will guarantee that you have the right, but not the obligation, to purchase that asset at a preset price any time on or before a preset date. But to secure that deal you have to pay a premium.
Lets see an actual example:
CHK is the ticker symbol for Chesapeake Energy Corp.
Today is September 7th 2008
Chk's price is $44.34
If you believe that CHK will increase in price to 60 dollars within the next 3 months.
you can buy an Call Option with a target price(strike) of 45 dollars that expires on the third Friday of January 2009.
This contract will cost you $580.
So what does all this mean?
If the price takes off and climbs up to, lets say $55 a share in two weeks, you can then opt to purchase shares of CHK for $45 dollars a share. How many shares? Each contract is for 100 shares. Or in this case $4500.
Wow! Buy 100 shares of a $55 stock for $45 a piece? A thousand dollar discount? whoo hoo! sign me up!
If you wanted to take an immediate profit you could then take those shares and sell them in the open market for the going rate of $55 per share or $5500 for a profit of $420 (Remember that the contract cost $580 in the first place). And don't forget commissions and exercise fees.
Or, you could just sell the contract itself.
That is generally what most traders do.
Well what's the contract worth now?
It isn't possible to know exactly to the penny but a pretty close estimate is around $1170, that works out to a profit of $590! That is before commissions and there are no exercise fees.
Much better huh?
So why not rush out and do just that?
Odds.
The odds are that over 90% of the time this contract will expire worthless because CHK will probably not rise that much in the specified time frame.
And that 90% applies to all option contracts! In other words most options buyers guess wrong.
So logically you would ask why not be on the other side of that trade?
Now that's a good question.
And the answer is that there is no good reason you can't.
IF, you do it carefully.
And there is a very safe way you can do it. And there is a way that practically guarantees profit.
Check this out;
First you buy 100 shares of CHK at the market price of $44.34, or $4434.00.
Then you sell (write) 1 call option contract.
This is called a covered call.
But what does it mean?
First you pick a price that you would be willing to sell your 100 shares. lets not get greedy how about 50 bucks a share? That's a nice $566 profit. and let's make the expiration time short, say 40 days, so we don't have to wait a long time to spend our money.
What money?
A 50 October call will cost the buyer $155. As the writer(seller) of the contract, you get that premium deposited in your account! and here's the best part, if the price of CHK doesn't hit $50 in the next 40 days you get to keep it and your 100 shares!
So what if it does hit $50?
You still keep the $155 dollars but you must sell your 100 shares at $50 per share, which is what you wanted to do in the first place. Only now your profit is not $566, it's $721 because of the premium you received for the contract. And that effectively lowers your initial purchase price to $42.79 per share which helps insure your initial investment if the price of CHK drops. You've got a built-in $1.55 cushion. And you can do it again every 40 days or sooner, or later. You pick the price and the time frame. But each time you do it you essentially lower your initial cost for the stock. Do it enough times and you can totally pay for the stock and get 100 shares of CHK for free!
So what are the drawbacks?
There really aren't any unless your tax situation is such that making a profit within the time frame puts you in a higher tax bracket or some other tax reason. But this is so rare that it hardly warrants mention. The only other risk here is the same as owning any stock. It can always fall in price. But as I pointed out, this trade only adds protection to the downside. You should only do this trade on a stock you want to own anyway.
OK, disclaimer and full disclosure time. Although I have, in the past, owned Chesapeake Energy Corp. I do not currently. I may in the future. Because I like the company. I am not recommending, for or against, any of the trade examples listed above. These examples are real world and current as of the time of this posting. The only thing I left out is the costs of commissions and fees, and that was strictly because it would have muddied up the water. Those costs must be accounted for in any trade you make. Furthermore, most of the online brokers offer training and learning centers that will go over Covered Call writing and you can always call your broker with questions, that is what you pay them for. If they don't or won't help you, find a new broker. I encourage you to research this strategy for yourself and understand it completely before you make this trade.
In closing this post I would encourage you to employ the power of covered call writing. It will bring in consistent income and add downside protection to your portfolio. If you change your mind and want to keep your 100 shares you can always buy back your own contract and by doing so, close out your contract. Depending on what the price of the underlying equity(the 100 shares of whatever) is doing, it may cost you more or less than the initial premium that you received. But I would recommend against doing this in most cases. Buying back your own contract is part of a good long term strategy but don't do it just because you think that you'll miss out on future higher returns. One in the hand vs. two in the bush and all that stuff. This strategy encourages you to take profits and keeps the gambling bug from stealing your profits. It is a great way to enforce self discipline. And if you've read my stuff in the past you'll remember that I believe that investor psychology is the biggest hurdle any investor faces. This Helps conquer that beast.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Options contracts.
But first things first, what is a call option?
There are two basic categories of options, Calls and Puts. For now we are only concerned with Calls.
If you believe that a stock(or virtually any other traded asset) is going to rise in value in the future, you can enter into a contract with another person or entity, that will guarantee that you have the right, but not the obligation, to purchase that asset at a preset price any time on or before a preset date. But to secure that deal you have to pay a premium.
Lets see an actual example:
CHK is the ticker symbol for Chesapeake Energy Corp.
Today is September 7th 2008
Chk's price is $44.34
If you believe that CHK will increase in price to 60 dollars within the next 3 months.
you can buy an Call Option with a target price(strike) of 45 dollars that expires on the third Friday of January 2009.
This contract will cost you $580.
So what does all this mean?
If the price takes off and climbs up to, lets say $55 a share in two weeks, you can then opt to purchase shares of CHK for $45 dollars a share. How many shares? Each contract is for 100 shares. Or in this case $4500.
Wow! Buy 100 shares of a $55 stock for $45 a piece? A thousand dollar discount? whoo hoo! sign me up!
If you wanted to take an immediate profit you could then take those shares and sell them in the open market for the going rate of $55 per share or $5500 for a profit of $420 (Remember that the contract cost $580 in the first place). And don't forget commissions and exercise fees.
Or, you could just sell the contract itself.
That is generally what most traders do.
Well what's the contract worth now?
It isn't possible to know exactly to the penny but a pretty close estimate is around $1170, that works out to a profit of $590! That is before commissions and there are no exercise fees.
Much better huh?
So why not rush out and do just that?
Odds.
The odds are that over 90% of the time this contract will expire worthless because CHK will probably not rise that much in the specified time frame.
And that 90% applies to all option contracts! In other words most options buyers guess wrong.
So logically you would ask why not be on the other side of that trade?
Now that's a good question.
And the answer is that there is no good reason you can't.
IF, you do it carefully.
And there is a very safe way you can do it. And there is a way that practically guarantees profit.
Check this out;
First you buy 100 shares of CHK at the market price of $44.34, or $4434.00.
Then you sell (write) 1 call option contract.
This is called a covered call.
But what does it mean?
First you pick a price that you would be willing to sell your 100 shares. lets not get greedy how about 50 bucks a share? That's a nice $566 profit. and let's make the expiration time short, say 40 days, so we don't have to wait a long time to spend our money.
What money?
A 50 October call will cost the buyer $155. As the writer(seller) of the contract, you get that premium deposited in your account! and here's the best part, if the price of CHK doesn't hit $50 in the next 40 days you get to keep it and your 100 shares!
So what if it does hit $50?
You still keep the $155 dollars but you must sell your 100 shares at $50 per share, which is what you wanted to do in the first place. Only now your profit is not $566, it's $721 because of the premium you received for the contract. And that effectively lowers your initial purchase price to $42.79 per share which helps insure your initial investment if the price of CHK drops. You've got a built-in $1.55 cushion. And you can do it again every 40 days or sooner, or later. You pick the price and the time frame. But each time you do it you essentially lower your initial cost for the stock. Do it enough times and you can totally pay for the stock and get 100 shares of CHK for free!
So what are the drawbacks?
There really aren't any unless your tax situation is such that making a profit within the time frame puts you in a higher tax bracket or some other tax reason. But this is so rare that it hardly warrants mention. The only other risk here is the same as owning any stock. It can always fall in price. But as I pointed out, this trade only adds protection to the downside. You should only do this trade on a stock you want to own anyway.
OK, disclaimer and full disclosure time. Although I have, in the past, owned Chesapeake Energy Corp. I do not currently. I may in the future. Because I like the company. I am not recommending, for or against, any of the trade examples listed above. These examples are real world and current as of the time of this posting. The only thing I left out is the costs of commissions and fees, and that was strictly because it would have muddied up the water. Those costs must be accounted for in any trade you make. Furthermore, most of the online brokers offer training and learning centers that will go over Covered Call writing and you can always call your broker with questions, that is what you pay them for. If they don't or won't help you, find a new broker. I encourage you to research this strategy for yourself and understand it completely before you make this trade.
In closing this post I would encourage you to employ the power of covered call writing. It will bring in consistent income and add downside protection to your portfolio. If you change your mind and want to keep your 100 shares you can always buy back your own contract and by doing so, close out your contract. Depending on what the price of the underlying equity(the 100 shares of whatever) is doing, it may cost you more or less than the initial premium that you received. But I would recommend against doing this in most cases. Buying back your own contract is part of a good long term strategy but don't do it just because you think that you'll miss out on future higher returns. One in the hand vs. two in the bush and all that stuff. This strategy encourages you to take profits and keeps the gambling bug from stealing your profits. It is a great way to enforce self discipline. And if you've read my stuff in the past you'll remember that I believe that investor psychology is the biggest hurdle any investor faces. This Helps conquer that beast.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Monday, September 1, 2008
Okay, so what's up with options?
Options? OK, here we go.
Everyone is afraid of options and futures. First things first. Options and futures are not the same thing, but unfortunately people lump them together quite often. And as such, they think that both are very risky. This is absolutely false. For me Options are a way to reduce or eliminate risk and maximise profit.
However for certain people options can be as dangerous as a Vegas casino. So , , , if you've got the gambling bug , , , please please, don't read any further because you are the people that options traders prey on. And I do mean to use the term "prey".
I have a love for trading and for capitalism and for freedom and especially for America. There will always be people that abuse their freedoms. But that is at the heart of freedom isn't it? That is part of the cost of freedom, among other more consequential things. But in this country we have a right to waste our money by making risky and stupid speculations. If you want to waste yours, then jump right into options and futures without taking the time to educate yourself. Conversely we also have the right to educate ourselves and take advantage of opportunity. That, is precisely what options provide, opportunity. With the caveat of self education firmly in place, I can honestly say that Options are much less risky than most other investments. So what are Options?
(As I am writing this I am listening to Martin Sexton; Black sheep, and understanding that if I keep on with my explanations this might be part I of II)( But I will attempt to shorten it).
The Purpose of options is insurance. Plain and simple, nuthin' more nuthin' less.
This insurance allows entrepreneurs to hedge their positions, take on and manage risk, invest capital with less downside risk, expand into new markets with relative impunity, protect themselves from unexpected market conditions, natural and man made, etc.
Without getting into too much detail, here is an actual legitimate, capitalistic use of options and futures. This actually happened recently and the trader that did this had his or her 5 minutes of fame.
Southwest Airlines had forecast higher energy prices (fuel prices) and entered into a trade that guaranteed that they could buy fuel at a set level. No matter what fuel prices rose to. They guessed right!
This was a smart trade, but to guarantee that price, they had to pay a premium.
In essence they said, "I'll pay you a fee, if you guarantee to deliver fuel to my airlines at today's prices, if, and only if the price rises on or before a set, future date. If the price doesn't rise in that time frame, you keep the fee and the contract expires.
That Is a contract, No?
Yes it is.
It is an option contract.
But what if prices fall?
This happens every day with Corn, Cattle, Pork, Cotton, Wheat, etc. It is what makes your food, clothes, auto parts, lumber, etc. so cheap and readily available.
Not so evil, the speculators? Huh?
One other feature of options;
Lets say a wing crack develops in one airplane (purely hypothetical) and the FAA decides to come in and ground all of Southwests' airplanes, for inspection. They no longer need the fuel in question, right? So what happens to the contract? Remember the clock is ticking and the speculator is only responsible to payoff "on or Before" the set date. That contract premium is becoming less valuable, in time value, every day. The genius of options is that you can sell the contract, it's transferable to another party! They have the right to sell that contract to someone who does need that fuel. Now that the contract is"in the money" (meaning that oil prices have already increased within the specified time frame), that premium would rise accordingly due to it's "intrinsic" value(the dollar value of getting cheap fuel) even though the time value is dwindling daily
So this is essentially the purpose of Options, but how do you and I trade them? The safest, easiest and most important way to do this through the use of covered calls. And this is the topic for my very next blog, see you then.
JT
Everyone is afraid of options and futures. First things first. Options and futures are not the same thing, but unfortunately people lump them together quite often. And as such, they think that both are very risky. This is absolutely false. For me Options are a way to reduce or eliminate risk and maximise profit.
However for certain people options can be as dangerous as a Vegas casino. So , , , if you've got the gambling bug , , , please please, don't read any further because you are the people that options traders prey on. And I do mean to use the term "prey".
I have a love for trading and for capitalism and for freedom and especially for America. There will always be people that abuse their freedoms. But that is at the heart of freedom isn't it? That is part of the cost of freedom, among other more consequential things. But in this country we have a right to waste our money by making risky and stupid speculations. If you want to waste yours, then jump right into options and futures without taking the time to educate yourself. Conversely we also have the right to educate ourselves and take advantage of opportunity. That, is precisely what options provide, opportunity. With the caveat of self education firmly in place, I can honestly say that Options are much less risky than most other investments. So what are Options?
(As I am writing this I am listening to Martin Sexton; Black sheep, and understanding that if I keep on with my explanations this might be part I of II)( But I will attempt to shorten it).
The Purpose of options is insurance. Plain and simple, nuthin' more nuthin' less.
This insurance allows entrepreneurs to hedge their positions, take on and manage risk, invest capital with less downside risk, expand into new markets with relative impunity, protect themselves from unexpected market conditions, natural and man made, etc.
Without getting into too much detail, here is an actual legitimate, capitalistic use of options and futures. This actually happened recently and the trader that did this had his or her 5 minutes of fame.
Southwest Airlines had forecast higher energy prices (fuel prices) and entered into a trade that guaranteed that they could buy fuel at a set level. No matter what fuel prices rose to. They guessed right!
This was a smart trade, but to guarantee that price, they had to pay a premium.
In essence they said, "I'll pay you a fee, if you guarantee to deliver fuel to my airlines at today's prices, if, and only if the price rises on or before a set, future date. If the price doesn't rise in that time frame, you keep the fee and the contract expires.
That Is a contract, No?
Yes it is.
It is an option contract.
But what if prices fall?
Had prices gone the other way, they would have given up the premium and just paid the lower fuel prices in the market, and then explained to the boss that the insurance policy had expired and it was time to renew it with another further dated policy(option).
Would the boss be angry about the loss of the premium? Probably not. Are you angry when you don't get into a traffic accident and don't "get" to use your auto insurance? Of course not, this was a legitimate business expense and a correct and prudent use of Options
On the other side of that trade was a legitimate speculator willing to take the risk that oil had peaked and wouldn't go higher. Guess what? They lost! Big time! They were buying oil at $140 to provide Southwest oil at a ridiculously low price. OUCH! There are, of course, many more details that went along with this trade and it is far more intricate than this simple explanation. The point is in the legitimacy and necessity of Options, the people that use them and the speculators that provide them.This happens every day with Corn, Cattle, Pork, Cotton, Wheat, etc. It is what makes your food, clothes, auto parts, lumber, etc. so cheap and readily available.
Not so evil, the speculators? Huh?
One other feature of options;
Lets say a wing crack develops in one airplane (purely hypothetical) and the FAA decides to come in and ground all of Southwests' airplanes, for inspection. They no longer need the fuel in question, right? So what happens to the contract? Remember the clock is ticking and the speculator is only responsible to payoff "on or Before" the set date. That contract premium is becoming less valuable, in time value, every day. The genius of options is that you can sell the contract, it's transferable to another party! They have the right to sell that contract to someone who does need that fuel. Now that the contract is"in the money" (meaning that oil prices have already increased within the specified time frame), that premium would rise accordingly due to it's "intrinsic" value(the dollar value of getting cheap fuel) even though the time value is dwindling daily
So this is essentially the purpose of Options, but how do you and I trade them? The safest, easiest and most important way to do this through the use of covered calls. And this is the topic for my very next blog, see you then.
JT
Sunday, August 24, 2008
The Diversification Myth
I am proud to say that my investments are not diversified.
A client said to me, the other day, after looking at my portfolio, "that's not diversified!" An indignant finger pointing at my computer screen. As if he had caught me with my hand in the cookie jar.
To which I replied, "So?" After a moments consideration I saw the lights go on in his head. Seeing that there was a mind in there willing to hear a new point of view, I continued with another question, "Should I have some of my money in Financials?, how about real estate? Home builders?"
"Well, I suppose not, at least not right now" Came his reply.
"Good thinkin'" I said.
Being diversified means several things to me that some financial advisers may not agree with.
A portfolio that is too broadly diversified lacks commitment and shows a deficit in research and maintenance. A portfolio is a living breathing thing and it requires care and feeding and constant attention.
I know of several cases where, during this credit meltdown, many money managers have let their clients ride the elevator right down into the basement. And they did it under the mantel of diversification. Why? because that is what they where told to do in "Investing 101"
Well that's not what we do here. We are engaged, tuned in and turned on. This is fun, it's not about following a formula. We look for whatever is working and employ tools to take the greatest advantage of opportunity.
To me being diversified is an inferior method of insurance and it practically guarantees a mediocre return on investment. You want insurnce? Buy some options, Put on a spread trade, use an inverse ETF, employ some leverage. There are so many great products and tools out there, that hiding behind portfolio diversification just means that you don't know about them or how to use them.
Time to enroll in "investing 102"
Get educated. I do this myself constantly. As a matter of fact, Just this week, I picked up an Options strategy book that I haven't looked at in years. It's old enough that it refers to options pricing in fractions, but it contains some really good techniques that I had forgotten about.
Market conditions are constantly changing and so should your portfolio and your strategies. Stay tuned in, turned on and energetic. If not, just put it all in a mutual fund and forget it. If you are lucky you might just manage to keep pace with inflation.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
A client said to me, the other day, after looking at my portfolio, "that's not diversified!" An indignant finger pointing at my computer screen. As if he had caught me with my hand in the cookie jar.
To which I replied, "So?" After a moments consideration I saw the lights go on in his head. Seeing that there was a mind in there willing to hear a new point of view, I continued with another question, "Should I have some of my money in Financials?, how about real estate? Home builders?"
"Well, I suppose not, at least not right now" Came his reply.
"Good thinkin'" I said.
Being diversified means several things to me that some financial advisers may not agree with.
A portfolio that is too broadly diversified lacks commitment and shows a deficit in research and maintenance. A portfolio is a living breathing thing and it requires care and feeding and constant attention.
I know of several cases where, during this credit meltdown, many money managers have let their clients ride the elevator right down into the basement. And they did it under the mantel of diversification. Why? because that is what they where told to do in "Investing 101"
Well that's not what we do here. We are engaged, tuned in and turned on. This is fun, it's not about following a formula. We look for whatever is working and employ tools to take the greatest advantage of opportunity.
To me being diversified is an inferior method of insurance and it practically guarantees a mediocre return on investment. You want insurnce? Buy some options, Put on a spread trade, use an inverse ETF, employ some leverage. There are so many great products and tools out there, that hiding behind portfolio diversification just means that you don't know about them or how to use them.
Time to enroll in "investing 102"
Get educated. I do this myself constantly. As a matter of fact, Just this week, I picked up an Options strategy book that I haven't looked at in years. It's old enough that it refers to options pricing in fractions, but it contains some really good techniques that I had forgotten about.
Market conditions are constantly changing and so should your portfolio and your strategies. Stay tuned in, turned on and energetic. If not, just put it all in a mutual fund and forget it. If you are lucky you might just manage to keep pace with inflation.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Sunday, July 27, 2008
How bad will it get?
How bad will it get?
I don't know.
Any one that tells you that they do know, is delusional.
So what is an investor to do in this, shall we say, "challenging environment"? First and foremost, remember that there is always money to be made in any environment.
You can;
1). Buy the dips and sell the rips:
In a consolidating or falling market, recognize that no financial instrument, goes straight up or straight down. Watch and wait for a pause in the down side, buy small amounts and wait for a mini rally. Sell on any positive movement and TAKE PROFITS! This is my least favorite strategy. It is very risky, requires great discipline, constant attention and yields minimal results. Some would argue this last point with me and my answer to them is, "I guess you're just better than me, oh well".
2). Use Put options and short selling to bet on obviously weak sectors.
This is probably the most profitable on a day to day basis but requires great discipline, constant attention, and plenty of research. For me short selling is very risky and should be approached with caution. I don't put on short positions through the borrowing of shares, I buy Put options. Contrary to popular myth, options are not risky investments. (More to come on options in another blog)
3). Identify the next trend, buy into an investment when it is on sale, build a large core position, then wait patiently.
This is obviously easier said than done and also requires great discipline and massive research, but is much less risky.
4). Identify other financial vehicles that are working and work with them.
This requires the most amount of research and tends to be a bit more boring and less profitable and will probably require more self education. It is however a must for any investor to know where to put their money when nothing else seems to be working. This could include money market accounts, bonds, REITs, etc.
5). Do nothing.
While this is rarely necessary in large measure, it is useful in small measure at most times. I know that sounds confusing but remember that "sometimes the best trade is no trade". I am not sure who to credit the latter phrase to, but it is true.
Which approach do I recommend?
All of them.
I even advocate the use of shorting through borrowing, IF and only if, you educate yourself, protect yourself and can demonstrate flawless discipline. I fall short on the discipline side. Which is why I don't short through borrowing. And as Clint says, " a man's gotta know his limitations".
Each of these approaches have their time and place. Most of them apply in all markets, up, down or sideways. This is because within each market there are sectors which move in opposite, complimentary and confusing directions. The common threads between all these points are discipline, research and paying attention. Remember investing is a job, a profitable, fun and intellectually rewarding job, but a job none the less. If you approach it with professionalism and passion, you will be compensated accordingly.
JT
I don't know.
Any one that tells you that they do know, is delusional.
So what is an investor to do in this, shall we say, "challenging environment"? First and foremost, remember that there is always money to be made in any environment.
You can;
1). Buy the dips and sell the rips:
In a consolidating or falling market, recognize that no financial instrument, goes straight up or straight down. Watch and wait for a pause in the down side, buy small amounts and wait for a mini rally. Sell on any positive movement and TAKE PROFITS! This is my least favorite strategy. It is very risky, requires great discipline, constant attention and yields minimal results. Some would argue this last point with me and my answer to them is, "I guess you're just better than me, oh well".
2). Use Put options and short selling to bet on obviously weak sectors.
This is probably the most profitable on a day to day basis but requires great discipline, constant attention, and plenty of research. For me short selling is very risky and should be approached with caution. I don't put on short positions through the borrowing of shares, I buy Put options. Contrary to popular myth, options are not risky investments. (More to come on options in another blog)
3). Identify the next trend, buy into an investment when it is on sale, build a large core position, then wait patiently.
This is obviously easier said than done and also requires great discipline and massive research, but is much less risky.
4). Identify other financial vehicles that are working and work with them.
This requires the most amount of research and tends to be a bit more boring and less profitable and will probably require more self education. It is however a must for any investor to know where to put their money when nothing else seems to be working. This could include money market accounts, bonds, REITs, etc.
5). Do nothing.
While this is rarely necessary in large measure, it is useful in small measure at most times. I know that sounds confusing but remember that "sometimes the best trade is no trade". I am not sure who to credit the latter phrase to, but it is true.
Which approach do I recommend?
All of them.
I even advocate the use of shorting through borrowing, IF and only if, you educate yourself, protect yourself and can demonstrate flawless discipline. I fall short on the discipline side. Which is why I don't short through borrowing. And as Clint says, " a man's gotta know his limitations".
Each of these approaches have their time and place. Most of them apply in all markets, up, down or sideways. This is because within each market there are sectors which move in opposite, complimentary and confusing directions. The common threads between all these points are discipline, research and paying attention. Remember investing is a job, a profitable, fun and intellectually rewarding job, but a job none the less. If you approach it with professionalism and passion, you will be compensated accordingly.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Sunday, June 29, 2008
Why Do I Always Miss The Bubble?
Why Do I Always Miss The Bubble?
Have you asked yourself this? Did you buy Tech stocks right before the crash? Buy a house at the top of the market? Well you are in good company. Lots of intelligent people did this. But as Lt. General Russel Honore famously said "don't get stuck on stupid".
You can turn this around to your advantage.
You can educate yourself to the point where you can catch the next bubble at the right time.
You can use your past experience to guide you on what NOT to do.
There are definable stages of a bubble and once you know about it you will never do it again.
The first stage is the stealth stage, this is where the insiders, analysts and big money move in. There is generally a lot of easy money to be made in this phase.
Once it is played out, usually a very brief amount of time, the wall of worry stage begins. This is the long drawn out phase where the majority of the professional investors move in and start "playing chess". Accumulating shares for their their position by buying the dips. The smart advisers, analysts and brokers lead their clients carefully into positions. And always in this phase, there is the endless debate as to whether or not a bubble is about to burst. This phase could also be called the "correction, consolidation, and rally phase", and can last for years. Building up energy.
The next stage is the mania stage, and it is the "Holy Grail" for the professional investors. This is the moment that investors spend years setting up for. There is a tipping point that occurs seemingly overnight where everybody starts buying anything and everything even remotely connected to the investment in question. Driving the price skyward. They will employee any investment tool they can, especially buying on margin(borrowing). Some mortgage their homes, others take from their retirement or children's college funds. It truly is a mania that grips people and they will do whatever it takes to jump on board the profit train.
How does it end? Some have used the shoeshine boy analogy as the harbinger of the coming crash. Once it has become so widespread that even the shoeshine boy starts advising people to invest, it's time to sell because the mania has come full circle.
In reality there are two crashes or bubble bursts in the correction phase. There is an initial "pop", Which is a sharp drop in price on extremely heavy volume, but inevitably, the dumb money tries to re inflate the bubble, stopping the first crash and driving the price back up slightly, but never to the previous high. Finally the "shorts" (Investors betting the market will crash) move in in a massive way and start to devour the dumb money. This is the second and final drop and is also referred to as the denial stage, and it is the most devastating point for the inexperienced investors. It is where, tragically, these people watch their life savings go down in flames. Instead of bailing out and cutting their losses, they feel that they can't afford to sell and believe the price will turn around, but it never does, in fact it overshoots to the downside and often stays there for years.
Sadly these events scar people forever and they may never recover financially or emotionally, and they will surely never invest in anything ever again.
This scenario has played itself out over and over again for hundreds if not thousands of years. And it will likely continue to play itself out in the coming years. In fact I believe we are still in stage two of one of the largest bubbles the world has ever seen. We have been in the correction, consolidation, rally mode in precious metals for two to three years now and it could be getting dangerously close to the mania stage. If you are not in position to take advantage of this, you may be missing the grand daddy of all bubbles. We are currently in a "dip" in metals pricing and it appears that, this is about to turn to the upside maybe as early as Monday the 30th of June.
More specifically I like silver, but gold will likely share in the mania stage and if you like gold better, fine, you will still be taking advantage of the best investment opportunities of our lifetime.
The important thing to realize here is not to try and time the mania stage, no one knows for sure when it will begin. It could begin tomorrow it could take another three years to build the necessary energy. Begin building your position right now! Even if it is just a few coins from your local coin shop.
I will continue to write about the merits of precious metals in further essays but for now start accumulating.
Have you ever wished someone had let you in on the Microsoft story before it's price went ballistic? Well I just did.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Have you asked yourself this? Did you buy Tech stocks right before the crash? Buy a house at the top of the market? Well you are in good company. Lots of intelligent people did this. But as Lt. General Russel Honore famously said "don't get stuck on stupid".
You can turn this around to your advantage.
You can educate yourself to the point where you can catch the next bubble at the right time.
You can use your past experience to guide you on what NOT to do.
There are definable stages of a bubble and once you know about it you will never do it again.
The first stage is the stealth stage, this is where the insiders, analysts and big money move in. There is generally a lot of easy money to be made in this phase.
Once it is played out, usually a very brief amount of time, the wall of worry stage begins. This is the long drawn out phase where the majority of the professional investors move in and start "playing chess". Accumulating shares for their their position by buying the dips. The smart advisers, analysts and brokers lead their clients carefully into positions. And always in this phase, there is the endless debate as to whether or not a bubble is about to burst. This phase could also be called the "correction, consolidation, and rally phase", and can last for years. Building up energy.
The next stage is the mania stage, and it is the "Holy Grail" for the professional investors. This is the moment that investors spend years setting up for. There is a tipping point that occurs seemingly overnight where everybody starts buying anything and everything even remotely connected to the investment in question. Driving the price skyward. They will employee any investment tool they can, especially buying on margin(borrowing). Some mortgage their homes, others take from their retirement or children's college funds. It truly is a mania that grips people and they will do whatever it takes to jump on board the profit train.
How does it end? Some have used the shoeshine boy analogy as the harbinger of the coming crash. Once it has become so widespread that even the shoeshine boy starts advising people to invest, it's time to sell because the mania has come full circle.
In reality there are two crashes or bubble bursts in the correction phase. There is an initial "pop", Which is a sharp drop in price on extremely heavy volume, but inevitably, the dumb money tries to re inflate the bubble, stopping the first crash and driving the price back up slightly, but never to the previous high. Finally the "shorts" (Investors betting the market will crash) move in in a massive way and start to devour the dumb money. This is the second and final drop and is also referred to as the denial stage, and it is the most devastating point for the inexperienced investors. It is where, tragically, these people watch their life savings go down in flames. Instead of bailing out and cutting their losses, they feel that they can't afford to sell and believe the price will turn around, but it never does, in fact it overshoots to the downside and often stays there for years.
Sadly these events scar people forever and they may never recover financially or emotionally, and they will surely never invest in anything ever again.
This scenario has played itself out over and over again for hundreds if not thousands of years. And it will likely continue to play itself out in the coming years. In fact I believe we are still in stage two of one of the largest bubbles the world has ever seen. We have been in the correction, consolidation, rally mode in precious metals for two to three years now and it could be getting dangerously close to the mania stage. If you are not in position to take advantage of this, you may be missing the grand daddy of all bubbles. We are currently in a "dip" in metals pricing and it appears that, this is about to turn to the upside maybe as early as Monday the 30th of June.
More specifically I like silver, but gold will likely share in the mania stage and if you like gold better, fine, you will still be taking advantage of the best investment opportunities of our lifetime.
The important thing to realize here is not to try and time the mania stage, no one knows for sure when it will begin. It could begin tomorrow it could take another three years to build the necessary energy. Begin building your position right now! Even if it is just a few coins from your local coin shop.
I will continue to write about the merits of precious metals in further essays but for now start accumulating.
Have you ever wished someone had let you in on the Microsoft story before it's price went ballistic? Well I just did.
JT
Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.
Monday, June 9, 2008
Why "RICH" ain't a four letter word.
Think about the last couple of movies or TV programs that you've watched. I'm willing to bet that the bad guy was some corporate Fat Cat. What about the latest political rants? Have you heard about the evil, rich "speculators driving up the price of oil"? How about "the rich getting rich off the backs of the poor"? What about taxes? That the rich should be made to pay their fair share? "The rich get richer and the poor get poorer"?
I'll guess that you are familiar with these statements or maybe you've even repeated these things to other people. It's okay, this sentiment is everywhere, unfortunately they are not based in fact. Just a couple of facts that argue with these statements; on taxes, The top 5% of wage earners in this country pay 75% of all tax revenue that the government receives. The top 10% pay over 90%. At the other end of the spectrum the poorest aren't paying any taxes apart from sales and local taxes. In fact they are receiving money through "Earned income tax credits" which is a phrase designed to hide the fact that wealth is being taken from the rich and given to the poor. I'm not making a value judgement on welfare. My only point here is to dispel the myth that the rich aren't paying their fair share, or that they are getting rich off the backs of the poor.
So what is my agenda here? Why am I defending the rich? Well it sure as hell ain't because I'm one of them. I aspire to be. I think that this country should continue to be structured to allow as many people to become rich as possible. I think that demonizing the rich insures that a person will never become wealthy. Why would anyone want to become a greedy, money grubbing miser?
Here is why; when has a poor person ever built a hospital, created a scholarship fund, supported a church, saved the animals, protected the environment? Whatever your favorite cause it takes a wealthy society to do these things. That's why we have such a great country.
I'll say it again, I'm not making a value judgement against the poor. I'm just trying to point out that instead of believing that "it takes money to make money" (which is another way of saying that only the rich can make any money), the saying should read "it takes money to give money". When you are worried about putting food into your children's mouth, you're more than likely thinking, "screw the spotted owls, I gotta get a better job".
I'm sure I've just offended a lot of people who are not rich and yet have donated to different causes. For those of you who are offended, we are making this distinction between rich and poor, not between rich and middle class. And yes I understand that poor people tithe to their churches too. Okay I get it. The thing that I want people to get, is that part of the greatness of this country lies in the fact that anyone can get rich here. But only if you do certain things. And one of those things is to stop hating the rich. Change your perception.
As motivational speaker Jim Rhone is fond of pointing out, "Find out what the poor people do and DON'T DO IT! Find out what they read and DON'T READ IT! Find out how they speak and DON'T TALK THAT WAY!
The opposite if this is equally important. If you constantly blame your place in life on the greedy rich people, and despise them, how can you emulate them and copy their success? You can't. Find out the good positive things they do and make it part of your life, it worked for them.
Hiding behind old stereo-types about the rich only insures that you will never join their ranks.
And don't forget that when you are successful, you'll be able to be as generous as you want to be.
JT
I'll guess that you are familiar with these statements or maybe you've even repeated these things to other people. It's okay, this sentiment is everywhere, unfortunately they are not based in fact. Just a couple of facts that argue with these statements; on taxes, The top 5% of wage earners in this country pay 75% of all tax revenue that the government receives. The top 10% pay over 90%. At the other end of the spectrum the poorest aren't paying any taxes apart from sales and local taxes. In fact they are receiving money through "Earned income tax credits" which is a phrase designed to hide the fact that wealth is being taken from the rich and given to the poor. I'm not making a value judgement on welfare. My only point here is to dispel the myth that the rich aren't paying their fair share, or that they are getting rich off the backs of the poor.
So what is my agenda here? Why am I defending the rich? Well it sure as hell ain't because I'm one of them. I aspire to be. I think that this country should continue to be structured to allow as many people to become rich as possible. I think that demonizing the rich insures that a person will never become wealthy. Why would anyone want to become a greedy, money grubbing miser?
Here is why; when has a poor person ever built a hospital, created a scholarship fund, supported a church, saved the animals, protected the environment? Whatever your favorite cause it takes a wealthy society to do these things. That's why we have such a great country.
I'll say it again, I'm not making a value judgement against the poor. I'm just trying to point out that instead of believing that "it takes money to make money" (which is another way of saying that only the rich can make any money), the saying should read "it takes money to give money". When you are worried about putting food into your children's mouth, you're more than likely thinking, "screw the spotted owls, I gotta get a better job".
I'm sure I've just offended a lot of people who are not rich and yet have donated to different causes. For those of you who are offended, we are making this distinction between rich and poor, not between rich and middle class. And yes I understand that poor people tithe to their churches too. Okay I get it. The thing that I want people to get, is that part of the greatness of this country lies in the fact that anyone can get rich here. But only if you do certain things. And one of those things is to stop hating the rich. Change your perception.
As motivational speaker Jim Rhone is fond of pointing out, "Find out what the poor people do and DON'T DO IT! Find out what they read and DON'T READ IT! Find out how they speak and DON'T TALK THAT WAY!
The opposite if this is equally important. If you constantly blame your place in life on the greedy rich people, and despise them, how can you emulate them and copy their success? You can't. Find out the good positive things they do and make it part of your life, it worked for them.
Hiding behind old stereo-types about the rich only insures that you will never join their ranks.
And don't forget that when you are successful, you'll be able to be as generous as you want to be.
JT
Subscribe to:
Posts (Atom)