Thursday, August 18, 2011


Dr. Renee Heffron of the University of Washington discovered that women who use hormone-based birth control pills or injections are more likely to spread AIDS to their non-infected husbands than women who do not receive the injections or take the pill. The study was done in seven African countries. Western charities have been trying to help Africans deal with a very large AIDS problem and a rapidly expanding population. But it looks like this one backfired. Providing women with hormone based birth control methods may solve one problem, but it causes another.
What complex beings we humans are. This tragic African problem illustrates how difficult it is to fix things that break. It’s better to prevent it from breaking in the first place. Too late for that; Africa is broken; how can we fix it? Add poverty and racial tension to the mix, and we see an even greater tragedy. How can anyone fix that?
African problems make our economic problems seem small. But the same Mr. Fix-it situation applies. In my investment book, Beyond the Bull, I point out how everything is connected to everything else. Our attempts to fix one economic thing affect the rest of the economy. For example, in 2008 and 2009 the western nations instituted a coordinated package of economic stimulus in an attempt to save a collapsing banking system and revive weak economies. And they actually did save the banking system. But the economic growth they had hoped for never materialized. Instead they got inflation. Metals, food and energy prices all went up. And now, Europeans and Americans are instituting austerity programs, cutting government spending in the hopes of balancing their budgets. Even the City of Toronto is cutting spending. Austerity is the economic fix-of-the-day now, just as stimulus was the fix- of- the- day in 2008 and 2009. We can only hope it doesn’t backfire like the African birth control fix.
What’s your personal economic fix-of-the-day? During the “Roaring ‘90s” (1991 to 2000) the Buy-and-Hold investment concept became more and more popular. By late 2008 – early 2009, people realized it no longer worked. Their ten-year stock market returns were abysmal. Some gave up and put their money in the bank. But, much to their dismay, the world banking system became quite shaky. Others gave up and put their money into treasury bills. Much to their dismay, they achieve almost no return. How can we get a reasonable return on our money without risking serious loss? What should investors do to fix their problem?
Maybe we can learn from our African neighbours. If we lived in Africa, our problem would be to not get AIDS. Seems pretty straightforward, doesn’t it? Everyone reading this article can easily figure out a plan to not get AIDS. Hint: It’s something to do with your sex life. Easy fix. We all realize it’s not 100% guaranteed, but any African can take measures to avoid AIDS and dramatically reduce their risk.
Is there some obvious way we can live our lives as investors without exposing ourselves to serious risk of loss? Yes, there is. We can own investments that are in up trends and not own investments in down trends. For example, during the dramatic August 2011 decline in the stock market, gold went up and bonds went up. Because everything in the economic world is connected to everything else, there are times when a decline in one area of finance actually causes a rise in another area. There is no need to sit idle and watch your losses mount up. You protect yourself by selling. We have to be vigilant and active, not passive. By becoming an active investor who protects against loss, we can thrive in times when others don’t.
Sex in an African country is a lot like investing in a western country: it is our responsibility to protect ourselves. In the arenas of health and wealth, we can’t save the population from its fate. But we can protect ourselves.
Ken Norquay, CMT
CastleMoore Inc,
“Buy, Hold and Know When to Sell.”

Monday, August 8, 2011

Precious Metals August 2011 Top

Friday August 5, 2011. Thursday’s price action in the price of gold and silver was a short term top. Investors who are planning to buy gold should postpone their purchases for a few months. Speculators should sell now and realize their gains. More aggressive speculators can bet on the decline.
Technicians refer to yesterday’s chart pattern as a Key Reversal Day or an outside reversal day. The price went up in the morning to a new high, then reversed and closed below the low of the previous day. And all this was done on a day of huge volume of trading. Check the charts of the ETFs for Gold and Silver. (Symbols GLD and SLV) See what a Key Reversal Day looks like. It was Thursday August 4, 2011.
This particular reversal was underlined by another statistic: the percentage of investors who are bullish on gold. This is a contrary indicator. When investors are excessively bullish, it’s time to sell. When they are excessively bearish, we should buy. The US financial research firm, Ned Davies, reports that recently there were more gold bulls than any time in the previous five years. Excessive optimism accompanied yesterday’s Key Reversal Day. Rarely is a sell signal so clear to a technical trader.
In my investment book, Beyond the Bull, I suggest that individual investors should improve their own investment techniques by studying the techniques of others. The opening dialogue to this article about trading gold based on Thursday’s price action is a good example. Many investors dismiss technical trading. They try to use economic data and financial events as a way to help them make investment decisions. If they feel, as now, that the US economy might be weak for a while, they may decrease their holdings of stocks and increase their holdings of bonds. For these investors the idea of selling because of price action seems crazy: we should sell because of economic action. And, human nature being what it is, they will often argue why their approach is good and someone else’s approach is not. Instead of pondering the performance of their portfolio and searching for investment techniques that improve performance, they use their intellects to defend their ego: my way is better than your way.”-Buying and holding for the long term is better that trading.” “-A diversified portfolio is better than a focused portfolio.” “-It’s always better to have all your cash working for you.” These statements all come from one’s ego, not from one’s desire to make money in the investment world. Rather than thinking from an ego position, I recommend using scientific methodology to develop your investment judgement. Scientists ponder a theory, and then test it by conducting experiments and making observations. In the investment world, we could ponder the theory that “Key Reversal Days” herald declines. Then we would take note of last Thursday’s action; then sit back and observe what happens over the next few months. We would test the idea.
If we were more ambitious, we could examine many stock charts, looking for Key Reversal Days in the past, and see if, in fact, the price did go down after such an event. We would look for proof in the real world, rather than defending our own theory.
One of the reasons why most investors resort to ego gratification rather than scientific observation is because of the competitive nature of the investment world. In a competitive world, we compare ourselves to everyone else. This is especially true for investment professionals. They all want you to believe their truth, not the truth of the other professional who is competing for your business. They are proud of their reputations. They enjoy being right. So intense is this competition that it draws ego driven clients to the investment world. When I attended Merrill Lynch’s training program in 1976, they talked openly about the kind of personalities that made the best stock brokers; competitive, intelligent, aggressive, ego driven personalities. The investment world is a world of big egos.
In order to add other investors ideas to your own repertoire of investment techniques, you have to be open, objective and respectful – the exact opposite of egotistical. One of the most successful investors of the modern era was Sir John Templeton. His book was entitled: The Humble Approach. If you have occasion to see videos of today’s investment icon, Warren Buffet, you will see a portrait of a humble man. Re-read the first three paragraphs of this article: they seem to have been written from an ego position, don’t they? Cocky, confident, full of advice. Don’t be seduced by that egotistical manner. Observe the author’s theory objectively and humbly. Make a few notes and observe the price of gold, silver and precious metals mining companies over the next few weeks and months. See if the notion of a “sell signal” can be useful in your investment world.
Monday August 8, 2011. Gold opened at a new all time high price, negating Thursday’s egotistical sell signal that was “so clear.” Gold went higher in the short term, not lower. The sell signal didn’t work. Will the technical trader who gave his advice in such a cocky confident manner become more humble? More importantly, will you become more humble? My book, Beyond The Bull, challenges investors to learn from other investors’ victories and defeats. What can we learn about using sell signals in our own investing? The arrogant and the cocky like to show you those times when their signals worked in order to persuade you to do business with them. What can you learn from a person who shows you the time the technique didn’t work in order to persuade you to do business with him?

Thursday, August 4, 2011

It’s a Dog Fight: a comment on recent volatility

I am an officer at the investment firm CastleMoore Inc. My partner and I wrote the following report to our clients: CastleMoore Special Midsummer Report
"Commentators sometimes refer to “the dog days of summer,” because the hot weather makes market participants behave like dogs in a heat wave: they just want to go and lie down in the shade. Not this summer. Financial commentators agree – there are no lazy slow moving dogs in the investment world.
European governments have been fighting with their citizens to implement constraint and reduce deficits. American Republicans have been fighting the same fight with the Democrats. And all this is set against a
backdrop of faltering economic news: western economies are not as strong as expected. Bond markets have been sharply higher and stock markets sharply lower. The price of gold went straight up, but oil went down. And the financial media loves to fan the flames of the financial fires.
Rather than participate in the excitement, let’s sit back and observe the action from an intellectual distance. Let’s be objective.
Three things are happening this summer: investment volatility, weakening economies and a continuation of debt/banking instability. The volatility is new, but the other two problems have been around for a long time. How are your investments positioned for the new part: the resumption of financial volatility?
CastleMoore accounts currently hold a large percentage of assets (40-70%) in the bond markets. This past two weeks, when volatility heated up, both the Canadian and the US bond markets surged up. Our preplanned strategy worked.
CastleMoore accounts currently hold gold (8-14%). This past week, gold also went up sharply. Again, we were well positioned.
But the stock market dropped like a stone. How were we positioned for that? We had been shifting out of resource stocks into health care, consumer and utility stocks. Of the nine stocks or equity ETFs held in our Focus (Tandem Active) or Class accounts, five were the same or higher during the steep decline of this past week. During that week, the S&P 500 Index dropped approximately 450 points. Only four of our nine picks declined with the market.
In addition to picking the right stocks, we had been cautious about increasing our exposure to equities,using a “go slow” strategy to increase our holdings of stocks while also maintaining cash reserves (5 – 23.5%).
Our message to our clients has been one of over caution for quite some time. Now it’s starting to pay off."