Stock market analysis is a brain-power business. It’s not at all touchy-feely. At least, that’s what the analysts would like us to believe.
They love to grind the facts and figures of the latest news stories through the discipline of logic. Right now, the main focus of analysts is on Europe. A cloud of volcanic ash has played havoc with the tourist industry and a sovereign debt crisis is rocking the credit markets. Logically, none of this news is good for the world’s complex economy: the financial world is a riskier place than we had thought. On the other hand, the once bankrupt General Motors recently announced refits for several of its factories. Corporate profits seem to have rebounded from the depressed levels of one year ago. Logically, this is good news for the stock market: the economy is not as sick as we had thought. To what investment conclusion would our logical brains come, based on this analysis of current economic events?
Right now just over 70% of investment managers are bullish on the stock market. That’s the conclusion they came to. (The other 30% are either bearish or neutral.)
What should we do?
For every good-news story, there is an equally compelling bad-news story. And the Canadian stock market has gone sideways for the past month, reflecting the inconclusiveness of logical stock market analysis. So what should we do? Should we invest in the stock market right now? Logic doesn’t help much, does it? Instead of relying exclusively on our intellectual brain for guidance, let’s try another faculty: our instinctive gut feel.
Remember how we felt in the winter of 2008-2009? The market had utterly collapsed, down almost 50% in nine months. Our guts were in knots, growling over the losses. That’s the mysterious thing about gut feel: in the investment world, it’s a contrary indicator. When we feel least confident (as we did in the winter of 2008-2009), it’s the best time to buy. Contrarily, when we collectively feel most confident, it’s the best time to sell.
Determine your gut feel ― and act against it
In my investment book, Beyond the Bull, I explain how the Theory of Contrary Opinion works: the best time to buy is when everyone is negative and the best time to sell is when the crowd is optimistic. This is the irony of using gut feel to make our investment decisions. Once we determine what our gut feel is, we should act against it. When we feel most bullish about the market, we should sell. When we feel most bearish, we should buy. No wonder so few successful investors use gut feel in their buy-sell decisions. It’s like betting against ourselves.
How do you feel about investing in the stock market right now? Remember, about 70% of investors believe the market will be higher in six months than it is now. Logically, this is a time to be thinking ‘sell,’ not ‘buy’. But logic is not what we are being asked to use right now. The question is: How do you feel about investing in the stock market? Feel ― not think. In the investment world, it is difficult to separate our feelings from our thoughts. It is hard to separate our brains from our guts.
Let the Computer Do the Thinking
In the stock market, money is made by buying and selling, not by thinking and feeling. To assist in the buying and selling process, we use objective investment models ― an objective way of determining whether the stock market is going up or down. Once we have found that objective model, we let the computer do the thinking and feeling. We do the buying and selling.
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
Friday, April 30, 2010
Thursday, April 22, 2010
Price Tag on a Viking Curse
It feels like some ancient shamanic curse has been unleashed on the descendants of the Vikings!
In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.
Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.
Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?
The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.
In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.
We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.
And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.
Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?
There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!
Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.
Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.
The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.
Ken
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.
Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.
Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?
The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.
In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.
We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.
And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.
Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?
There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!
Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.
Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.
The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.
Ken
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
Wednesday, April 14, 2010
Trudeau was Right!
Years ago Prime Minister Pierre Elliott Trudeau said the twentieth century belonged to the USA and the twenty-first century belonged to Canada.
And now, as the Canadian Dollar (CD$) flirts with the US Dollar (US$) on equal terms, it looks like his prophecy is coming true. Canadians have become economically smug these days. Here’s why:
1. Our banking system has held up better than the American’s.
2. Our economy suffered less in the down turn and has expanded more in the up turn.
3. Our real estate market is still in an up trend; theirs is in a hopeless down trend.
Canadians are not used to being smug. In international circles our citizens are know as polite and unassuming people. Our soldiers are well trained and fierce fighters. We have a good reputation. But, if Mr. Trudeau was right, Canada will soon be stepping up to the plate as a world leader.
Could this be real?
Are the reasons I listed above as to why Canadians are economically smug be the same reasons foreigners are willing to pay the same price for a Canadian Dollar as they are for a US Dollar? The sceptics are saying the high CD$ is temporary, caused by a short term surge in oil and metals prices, and it will cool back down once the current commodities boom is over.
In my book, Beyond the Bull, I discuss the idea of over-analysis. Sometimes we ramble on about what we think we know; we use the same tired old thinking patterns that worked in the past, to sort out what might happen in the future. And, if the rules change, as Mr. Trudeau prophesied, the old ideas don’t help us. If this is Canada’s century, we’ll have to learn to think Canadian instead of American.
Beyond the Bull encourages us to “feel” as well and think. Rather than run in mental circles of out dated logic, just kick back and say: “How does this feel?” Lets try it.
Review: CD$ came into the twenty first century in a down trend. It hit the bottom in the winter of 2002 at 72 US cents. By autumn 2007, it ripped upwards through par to $11.1 – then reversed and dropped back to par within only a few weeks. It fluctuated between $1.00 US and $1.05 US for four months before dropping to 77 cents again, one short year after our glorious run to $1.11.
We Canadians weren’t used to having such a strong currency. Somehow, we felt relieved that CD$ had returned to normal; a CD$ selling at a huge discount to the US$.
But now CD$ has crept back up to par against the US$ again, it somehow feels different. Last time, in early 2008, there was a flurry of Canadian buying of US cars with their high priced CD$. It was as if they wanted to cash in on their short term good luck and buy up those cheap US cars. This time there is no feeling of “temporary” or “short term” around a Loonie at par with a US Green-back. This time it feels different.
What should we do?
Well, let’s do the typical Canadian thing: doubt our new found prowess as world economic leaders and buy a cheap US car with our high priced Canadian dollars… just in case. Feels right, eh?
The Financial Philosopher
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
And now, as the Canadian Dollar (CD$) flirts with the US Dollar (US$) on equal terms, it looks like his prophecy is coming true. Canadians have become economically smug these days. Here’s why:
1. Our banking system has held up better than the American’s.
2. Our economy suffered less in the down turn and has expanded more in the up turn.
3. Our real estate market is still in an up trend; theirs is in a hopeless down trend.
Canadians are not used to being smug. In international circles our citizens are know as polite and unassuming people. Our soldiers are well trained and fierce fighters. We have a good reputation. But, if Mr. Trudeau was right, Canada will soon be stepping up to the plate as a world leader.
Could this be real?
Are the reasons I listed above as to why Canadians are economically smug be the same reasons foreigners are willing to pay the same price for a Canadian Dollar as they are for a US Dollar? The sceptics are saying the high CD$ is temporary, caused by a short term surge in oil and metals prices, and it will cool back down once the current commodities boom is over.
In my book, Beyond the Bull, I discuss the idea of over-analysis. Sometimes we ramble on about what we think we know; we use the same tired old thinking patterns that worked in the past, to sort out what might happen in the future. And, if the rules change, as Mr. Trudeau prophesied, the old ideas don’t help us. If this is Canada’s century, we’ll have to learn to think Canadian instead of American.
Beyond the Bull encourages us to “feel” as well and think. Rather than run in mental circles of out dated logic, just kick back and say: “How does this feel?” Lets try it.
Review: CD$ came into the twenty first century in a down trend. It hit the bottom in the winter of 2002 at 72 US cents. By autumn 2007, it ripped upwards through par to $11.1 – then reversed and dropped back to par within only a few weeks. It fluctuated between $1.00 US and $1.05 US for four months before dropping to 77 cents again, one short year after our glorious run to $1.11.
We Canadians weren’t used to having such a strong currency. Somehow, we felt relieved that CD$ had returned to normal; a CD$ selling at a huge discount to the US$.
But now CD$ has crept back up to par against the US$ again, it somehow feels different. Last time, in early 2008, there was a flurry of Canadian buying of US cars with their high priced CD$. It was as if they wanted to cash in on their short term good luck and buy up those cheap US cars. This time there is no feeling of “temporary” or “short term” around a Loonie at par with a US Green-back. This time it feels different.
What should we do?
Well, let’s do the typical Canadian thing: doubt our new found prowess as world economic leaders and buy a cheap US car with our high priced Canadian dollars… just in case. Feels right, eh?
The Financial Philosopher
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
Consequence of Error
Saturday’s tragic plane crash in Russia took the lives of many important military and government officials in Poland. And now, the obvious questions are being asked: why were so many top officials on the same plane, whose fault was it, what can be cone to prevent this type of national tragedy from happening again? We send our sympathy to our Polish friends.
But we also wonder about human nature. Is there some lesson we can glean from this event that will help us manage our own lives more prudently?
The key lesson from the Polish pilot’s now obvious mistake is to reassess our understanding of risk. What is risk? How can we realistically assess the risk in a situation BEFORE a tragedy? How can we avoid tragedy before it happens?
When I was a young officer in the Canadian Armed Forces, the pilot trainees were taught about the consequence of error. “If I make a certain choice and that choice eventually proves to be an error, what will the consequences be?” So, if a pilot were advised to go to another airport because landing at this foggy airport was too dangerous, the consequence of using another airport would be that all his passengers would have to be bussed to the correct destination: they would all be late. And if he decided to try the landing in the fog, and that proved to be an error, the consequence would be a crash. Canada’s student pilots would have had no trouble making the decision to choose the alternate airport because of the huge difference between the two consequences of error.
In my book, Beyond the Bull, I discuss the use of the military mind in managing our investments. Let’s see if this consequence of error method can be used to help us improve our investment skills.
Financial planners and mutual funds salesmen tell us that we should buy good quality stocks and hold them indefinitely. The problem with this approach is that it hasn’t worked for ten years. Today, the Dow Jones Industrial Average is approximately the same as it was ten years ago. The Standard and Poore’s 500 Index is about 15% lower than it was ten years ago. Canadian investors did better: we made an average of about 2% per year for those same ten years. The investment industry’s “buy-and-hold-for-the-long-term” choice has turned out to be an error. And the consequence of making that error has been a sub-standard rate of return for ten years.
But, what about the future? What would the possible consequences be if continuing to hold stocks for the long term proved to be an error? What if we simply sold our mutual funds and kept the money. What would be the consequence of that approach, if it proved to be an error?
Choice #1
If we continue to hold our equity mutual funds, and that proves to be an error, we run the risk of losing our retirement nest egg. The stock market dropped over 45% twice in the past decade. It could happen again: and if it does, the consequence of holding our stocks through that period is losing half of our retirement savings. (NOTE: this is not only a problem for small investors: big pensions lost many billions of dollars of retirees’ money in the two monumental stock market declines of the past ten years. It’s not just about your RRSP – it’s HUGE. If the stock market drops again as it did in 2008-9 or 2001-2, it will seriously affect the retirement plans of almost all Canadians.) This is the consequence of error of holding stocks when the stock market falls.
Choice #2
What if we sell out; and selling out proves to be an error? Selling out would be an error if the stock market went UP and we were not invested because we had sold. And the consequence of that error would be that we would earn only 2 or 3% on our cash instead of a much large return if we had stayed in the stock market.
This consequence of error exercise helps us develop judgement. In the case of the Polish airplane crash, there was an error in judgement that killed too many people. In the case of the stock market crashes, an error in strategy will impact the retirement plans of millions of Canadians. But the goal of the consequence of error exercise is valid: to help us assess risk properly and to reduce the effect of the errors in our lives.
Obviously we have more than just two choices in the investment world. I encourage investors to take advantage of the errors of other investors and to limit the effect of our own errors. Try to do what the mutual funds industry tells us can’t be done. Try to invest in securities that are rising in price and not in securities that are falling in price. Then we should plan the type of errors we want to make.
And what type of errors do we plan to make? (Obviously, we are trying to NOT make investment errors.) But, when we DO make an error, we’d like it to be the type of error illustrated in choice #2 above: an error where we earn a lower rate of return that we could have. And what type of errors do we plan NOT TO MAKE? The error shown in choice #1: holding investments in down trends and losing our capital.
In a perfect world, we wouldn’t make errors. But we live in this world. And in the investment world, we spend a lot if time flying in the fog. So we need to plan our actions in full awareness of the consequences of possible errors – and then be prepared to live with those consequences.
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). This article and others by Ken are also available at http://kennorquay.blogspot.com. Contact Ken directly at ken@castlemoore.com.
But we also wonder about human nature. Is there some lesson we can glean from this event that will help us manage our own lives more prudently?
The key lesson from the Polish pilot’s now obvious mistake is to reassess our understanding of risk. What is risk? How can we realistically assess the risk in a situation BEFORE a tragedy? How can we avoid tragedy before it happens?
When I was a young officer in the Canadian Armed Forces, the pilot trainees were taught about the consequence of error. “If I make a certain choice and that choice eventually proves to be an error, what will the consequences be?” So, if a pilot were advised to go to another airport because landing at this foggy airport was too dangerous, the consequence of using another airport would be that all his passengers would have to be bussed to the correct destination: they would all be late. And if he decided to try the landing in the fog, and that proved to be an error, the consequence would be a crash. Canada’s student pilots would have had no trouble making the decision to choose the alternate airport because of the huge difference between the two consequences of error.
In my book, Beyond the Bull, I discuss the use of the military mind in managing our investments. Let’s see if this consequence of error method can be used to help us improve our investment skills.
Financial planners and mutual funds salesmen tell us that we should buy good quality stocks and hold them indefinitely. The problem with this approach is that it hasn’t worked for ten years. Today, the Dow Jones Industrial Average is approximately the same as it was ten years ago. The Standard and Poore’s 500 Index is about 15% lower than it was ten years ago. Canadian investors did better: we made an average of about 2% per year for those same ten years. The investment industry’s “buy-and-hold-for-the-long-term” choice has turned out to be an error. And the consequence of making that error has been a sub-standard rate of return for ten years.
But, what about the future? What would the possible consequences be if continuing to hold stocks for the long term proved to be an error? What if we simply sold our mutual funds and kept the money. What would be the consequence of that approach, if it proved to be an error?
Choice #1
If we continue to hold our equity mutual funds, and that proves to be an error, we run the risk of losing our retirement nest egg. The stock market dropped over 45% twice in the past decade. It could happen again: and if it does, the consequence of holding our stocks through that period is losing half of our retirement savings. (NOTE: this is not only a problem for small investors: big pensions lost many billions of dollars of retirees’ money in the two monumental stock market declines of the past ten years. It’s not just about your RRSP – it’s HUGE. If the stock market drops again as it did in 2008-9 or 2001-2, it will seriously affect the retirement plans of almost all Canadians.) This is the consequence of error of holding stocks when the stock market falls.
Choice #2
What if we sell out; and selling out proves to be an error? Selling out would be an error if the stock market went UP and we were not invested because we had sold. And the consequence of that error would be that we would earn only 2 or 3% on our cash instead of a much large return if we had stayed in the stock market.
This consequence of error exercise helps us develop judgement. In the case of the Polish airplane crash, there was an error in judgement that killed too many people. In the case of the stock market crashes, an error in strategy will impact the retirement plans of millions of Canadians. But the goal of the consequence of error exercise is valid: to help us assess risk properly and to reduce the effect of the errors in our lives.
Obviously we have more than just two choices in the investment world. I encourage investors to take advantage of the errors of other investors and to limit the effect of our own errors. Try to do what the mutual funds industry tells us can’t be done. Try to invest in securities that are rising in price and not in securities that are falling in price. Then we should plan the type of errors we want to make.
And what type of errors do we plan to make? (Obviously, we are trying to NOT make investment errors.) But, when we DO make an error, we’d like it to be the type of error illustrated in choice #2 above: an error where we earn a lower rate of return that we could have. And what type of errors do we plan NOT TO MAKE? The error shown in choice #1: holding investments in down trends and losing our capital.
In a perfect world, we wouldn’t make errors. But we live in this world. And in the investment world, we spend a lot if time flying in the fog. So we need to plan our actions in full awareness of the consequences of possible errors – and then be prepared to live with those consequences.
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). This article and others by Ken are also available at http://kennorquay.blogspot.com. Contact Ken directly at ken@castlemoore.com.
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