Discipline Your Securities Trading

Leave frequent trading to the very heavy volume pros on Wall Street who can profit from their insider position.

It’s that insider position, along with expensive software, that gives assistance; added to that ample capital, plus the extensive credit leverage that offers these insiders an odds advantage for awhile.

Average traders should avoid the temptation. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Risk of Investing

Left-leaning politicians and the media mistakenly, negatively criticize the risk of derivatives, losing sight of the fundamentals of the subject.

The truth is, many investors seek risk, the riskier the better. They weigh risk against the added return they get from that risk. Sometimes the added return comes from short selling, or betting prices will fall.

In every transaction there is a buyer who wants in and a seller who wants out. When sophisticated buyers and sellers are available, as in derivatives, why is the government the arbiter of risk?

As far as the non-sophisticated are concerned, the media’s job is to explain the basics, so the masses keep away from what they are not familiar. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Meaning and Importance of Repos

A repo transaction involves a firm selling assets to another company, while agreeing to buy them back at a slightly higher price after a short period.

This can take as little as overnight, so the transaction becomes a short-term loan with the assets acting as collateral.

Because the term is short, there is little risk the collateral will lose its value. The lender or firm making the purchase thus takes a low interest rate.

With repo transactions, a borrower can get funds more cheaply than it could with one long-term loan that would put the lender at greater risk.

Under standard accounting rules, ordinary repos are considered loans, and the assets remain on the firm's books, But if a borrower could find a way that removed the assets from its books, often just before the end of the quarterly financial reporting period, the move temporarily could make the firm's debt levels appear lower than they really were.

That is where investment banking bookkeeping disputes arose during the 2008/2009 financial debacle. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Why Indexed Mutual Funds and ETFs

Investors who buy managed mutual funds through most fund managers rarely beat securities averages. That is why more and more are turning to the use of indexed mutual funds and related Exchange Traded Funds( ETFs).

Index mutual funds and ETFs are generally much lower-cost than managed funds. Low cost is the most important investment factor you can rely upon for long-term results.

And when some managers do better than indexes in a particular type of fund, they sometimes get nervous. Then, they play it safe and merely attempt to emulate the averages the rest of the year. They may be afraid to defy odds of being successful, compared to indexes.

I have always suggested the use of index funds. Especially because large mutual fund portfolio managers tend to find it so difficult to outperform indexes. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Securities Analyst Estimated Earnings

My research on securities analysts has given me insights that have taught me much about them.

Wall Street gets excited about how companies and analysts estimate earnings and whether analysts can manage to hit their estimates closely, or not at all. In fact, there are strategies based on the percentages of closeness-to-estimates that analysts get.

The sharp pencil folks in the financial community can come up with anything that will attract believers. Their machinations add up to little in the real world. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Use of Investment Derivatives

Few fully understand derivatives; thus politicians misuse them for their purposes.

Derivatives are a financial necessity as a a form of side bet that helps reduce the risk of a financial transaction. It’s a device that has been in use by commodity merchants for over a century and a half. It protects investors against the possibility the price trend of an original investment goes wrong. It’s perfectly legal and ethical.

Some simple derivatives are easily listed on an exchange. And they contain collateral in case of a market downturn. But not all derivatives can be worded simply. Some insist that only bankruptcy courts can handle their settlement.

So forget the diatribes against investment firms who write derivatives and are on both the buy and sell side at the same time. It’s reasonable risk management.

Politicians and media who are ignorant of the process are deluding the public by carrying on about derivative fraud. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Yet Another Failure of the Dodd-Frank Act

Since the Reserve Prime money market fund was unable to keep its price at $1 a share in 2008 because it had invested too much in Lehman Brothers commercial paper, regulators have been on the lookout for similar occurrences.

Now, with a year’s worth of added, stifling regulation, in the form of the Dodd-Frank Act, there were still added reports that the Greek financial fiasco may have impaired certain European banks, especially French commercial paper, in which some, not all, money market funds invested.

As is the case with all these inept regulations, they stifle business activity more than they minimize risk. The risks persist. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Investment Risk Enhanced by the Dodd-Frank Act

The  administration and many liberals keep talking about preventing “systemic risk” from causing another financial meltdown. This is political talk for the mass vote.

They have absolutely no idea of systemic risk, though we have lived through a huge financial crises. No one was able to recognize such risk in the past. No one will be able to foresee one in the future, because of inept politicians.

The question of what is risk simply has too many variables: The size of a financial institution under study is one. Other institutions involved with any one bank will add to the risk-mix. Political implications are important because of the influence in Washington that financial institutions may have, and so on.

There is a list of potential complications and considerations that make it difficult to estimate risk and mitigate it. Poor psychology that festers and attends meddling just exaggerates the mess.

Much of the remedies of the past have been trial and error. The vast bulk have proven to be in error. Lehman Brothers and Bear Stearns were examples of foul-ups by government.

The Dodd-Frank Act has merely exaggerated the problem. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Pro and Con of Buy Low/Sell High Strategy

The buy low/sell high strategy is one of over 1,600 that I have studied. It has its advantage if it can be disciplined. The disadvantage is that many of the strategy’s followers aren’t disciplined.

Moreover, it’s not simple to use, particularly when applied by average investors, who usually have difficulty in its implementation.

Studies show that buy low/sell high strategy may return more than haphazard, in-and-out market trading, but only if it can be disciplined. That effort, however, can be a questionable undertaking.

The natural tendency for any trader is to stay attuned to the market. Few investors, even professionals, can master that discipline, in an attempt to determine highs and lows, amidst constant market chatter.

The main disadvantage: Many of this strategy’s adherents are not disciplined. They wind up mistakenly attempting to time what they feel are appropriate buying and selling points. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Ball Player Pay Represents Our Economy

 Federal stimulus funds had backed local and state entities with aid. Therefore, funds were indirectly but effectively made available to pay  athletes with subsidies.

Ball players play a kid’s game, yet can earn as much as $20 to $30 million a year, with multi-year contracts that guarantee income despite possible injury and incapacity or failure, At the same time. top executives, with honed skills are criticized if they get $1 million or so in income or bonuses.

Execs are easily fired if they don’t produce. Ball player salaries are usually not cut if they choke up in the clutch. Or have a losing season. Their jobs are simply traded away.

But  athletes work for ball clubs that also received stimulus and taxpayer funds. Each time a new ball park is built, some government agency has helped in the financing; tax abatement or bond funding, or a form of long-time subsidy.

Keep this trend up and the U.S. will change its economic growth characteristics. It will become a second-rate, European look-alike. With a permanent high unemployment rate to match.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Bank Stress Standards

Regulators constantly attempt to bulk up bank capital in the event of future financial meltdowns.

How important are so-called stress tests for banks anyway? Much of what comes from the regulators in Washington can be taken with a grain of salt after politics are removed. Particularly with passage of the Dodd-Frank Act.

Stress tests are actually a combination of individual financial evaluations. They can entail bank loss estimates, measured as percentages of holdings on first-lien mortgages, and second-lien mortgages, or credit cards, or commercial real estate loans. Estimated bank earnings are considered.

Added to the hodgepodge of risk percentages is the reserve status of each bank. The level of what is referred to as Tier 1 capital is important.

To complicate matters more, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted. Obviously, stress tests are not fixed so their results can give varying interpretations.

That is the basic fallacy behind stress testing, or regulation-upon-regulation imposition from Washington. It is too much about subjective, theoretical nothingness. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Practicality of Random Matrix Theory When Investing

The Random Matrix Theory has come into financial news; it’s the fancy term for an application of mathematical science used for securities evaluation. I have discussed it in past blogs with regard to how different types of securities act in various markets; how they are “correlated.” Or how different stocks within the S&P 500 relate.

The idea is to improve an investment portfolio’s risk management.

In practical terms, and to give a simple example, when stocks go down, bonds were usually supposed to go up. This supposedly mitigated market risk. Or when domestic stocks drop, overseas stocks rise. Or the opposite.

Of course, this doesn’t always happen. Both sectors in each instance can go down or up at the same time. The subject is complicated and indecisive. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Why Not Teach Basic Economics To All in College?

It seems, the more college students we have, the less knowledge the American public has about basics. Take fundamental economics.

College does not appear to educate its students to the dangers from politicians in office, and ensuing problems that will engulf them when  students leave school.

The media never adequately take up that educational function.

If youth were truly aware of the effects of the monetary inflation politicians are setting up for them and future generations, they would be up in arms at the government, to stop the economic mess.

Budget-busting spending at all government levels will have dire consequences for the present and coming American job future.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Increasing The Money Supply

The average increase in our monetary base has risen over 5% since 1961. For the supposed Y2K emergency and the 9/11 catastrophe, it rose 10%.

These days the increase is well over 100% and rapidly rising. Yet, we listen to administration and Federal Reserve officials who keep telling us all this will be taken care of.

The U. S. Treasury issues bonds to pay for its debts but those bonds will not easily be refunded. Also, there is little likelihood the economy will expand to soak up any of that paper the government is printing through the Federal Reserve system. Inflation will show up sharply as soon as the economy starts to fully recover. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Never Use Oil Reserve to Cut Prices.

The oil reserve we have is expressly for emergencies, and never should be used to affect price movements. That’s because tapping it is useless in combating the OPEC monopoly which can adjust its supply to demand whenever it desires,

The best way for America to cut oil prices is to use its in-ground, natural oil and related energy supplies.

But its political influences prevent this. For political reasons and the fact that leftists have little knowledge of how the economic laws of supply and demand work.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Gold Prices and Chinese and Indian Influences

Gold jewelry bars and coin ownership have lots to do with gold commodity pricing, as opposed to the influence of gold investors and traders who have no interest in the metal in the form of jewelry.

This preference varies by country. It’s been conventionally very high in China and in India, In the U,S, gold's use is primarily when inflation risk is high, but primarily when the dollar’s value becomes risky as a reserve currency.

The value of gold can go higher if the Chinese government begins to think more like Americans running from the weak dollar. India's population often buys and even sells gold jewelry in volume.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

College 529-Savings Plans

State 529 college-savings plans vary; not all states issue them.

Plans differ, depending on the options available in each state. I like only low cost index funds as investments; your choice ought to be made on any overall, net advantages your state plan may give you.

Another consideration should be the advantage or disadvantage for a student when seeking a scholarship, in having a 529. Is its tax benefit worth having, in view of the scholarship determination by the school, despite any investment benefits you may get?

Incidentally, some states offer lotteries to bolster 529 use. Such merchandising makes the program suspicious.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Poor Advisory Suggestions

Advisers make the same portfolio errors by often suggesting more stock holdings than corporate bonds in the investor’s earlier years, in the assumption that stocks will earn more.

This with the further hypothesis that there will be no heavy future inflation and that past high stock returns were accurate figures.

They also never utilize or even consider the principles of "duration", and that bonds will return higher income with future inflation. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Still Believe Investment Ads?

Remember that an investment ad will only tell you the good part of the strategy the ad is selling.

When I review the over 1,600 strategies I have researched, I come up with disadvantages of each, along with the advantages. It’s essential that you know both positive and negative viewpoints to view your particular goals.

So why listen to the ads? Most investors unfortunately do so.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Experts’ Investment Choices

Be careful of experts who claim how well they have beaten the averages by trying to time and trade the market. Chances are they have not been as successful as they say.

Apart from not providing accurate comparisons (whether dividends are or aren’t included in the figures compared) they invariably forget to tell you of tax bites of their short=term trades. Most folks have most of their investments in taxable accounts, so any short-term profits are severely reduced by IRS rules.

And remember, studies show that timing the markets is a fools’ game even among the supposed experts. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Should You Invest Overseas?

Many American companies do business overseas. Investing in the S&P 500 will therefore give you a measure of global diversification.

If you do buy overseas investments to broaden strategy, there are emerging or developing, as well as developed countries in which to participate. Using indexed funds or exchange traded funds (ETFs), you can invest around the globe with varying regional emphasis.

Use indexed funds which are not hedged against currency-value changes. This also helps diversify against inflation in the U.S. and acts as a currency hedge. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The U.S. Like Greece and Other Europe Nations?

When you add the total obligations of the U.S., you find them much higher  terms of GDP and other standards than that of Greece and the rest of Europe.
 
America is supposed to be the leader of the free world, not a tiny, struggling country. We are called on to be a global leader as an economic catalyst and a defender of democratic principles.

Unfortunately, the politicians responsible for the real financial crisis-to-come, as the result of U.S. debt, may be out of office when disaster occurs.

And the blame then will be placed on the shoulders of administrations who will be around to attempt to clean up the impossible mess.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Financial Bubbles and Meltdowns

Left-leaning politicians make a mess out of an ordinary economic cycle and blame it on others.

What was a simple sub-prime mortgage problem, that normally would lead to a minor recession, has become a near Depression, comparable in many ways to that of the 1930’s, because of political meddling and bumbling.
 
Great Depression observers see how Franklin D. Roosevelt over-reacted with over-spending. Then he over-taxed and over-regulated business and created a Depression psychology that prevailed until World War II, which acted as a giant economic stimulus.

The same political meddling and bumbling is occurring today. The extraordinary spending has produced a crises in the form of senseless, business-stifling regulation and taxes, and eventual over-powering inflation.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Businessmen and Athlete Salaries

Politicians don’t want to understand basic economics. Most never have to hire anyone within a free, supply-and-demand, employment market. Therefore, those who lean Left contribute nonsensical rules, opinions and regulations.

And neither does the brainwashed public. Especially the ardent sports followers.

Taxpayer money used to bail out banks and companies got public attention only when they considered executive salaries and bonuses.

Athletes probably get far too much salary for what they do. Yet the taxpayers never complain.

Yet, ball parks and thus ball clubs are invariably subsidized by state and local taxpayers. Each time a new ball park is built, you can be sure some government entity helped in its financing, whether it be in cash, tax abatement or bond funding.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

“”Penny” Stock Investment Traps

So-called penny stocks can’t be bought or sold for pennies any more. They can also be priced for a few dollars a share.

By definition, they are any shares of small companies whose values are often doubtful, at best.

Their managements or promoters issue large numbers of shares, whose prices are low, but with values that are often minimal, if any.

Yet, those who ought to know better buy them. They think something priced low has to be a bargain. That's the best way to get fleeced.

Does it always make any difference when buying higher priced stocks? Not if you still cannot determine value. And most analysts on Wall Street cannot truly do this from outside the companies, looking in. Analysts are often guessing at what goes on in the companies whose stocks they evaluate.

It’s the reason why I always suggest investment in low-cost, indexed mutual funds or exchange traded funds (ETFs). (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Media Ignorance

I constantly criticize mainstream media as being too politicized to properly educate the public. The financial as well as ordinary media bear guilt for this.

One example is the way they seek out scapegoats. Such as Wall Street or major companies and banks. In the form of bonuses paid; never athlete pay but only those to evil executives.

Another example: When someone in the financial community shorts securities while also buying for the long term, that investor is automatically deemed to be a crook. A decision by those who are not steeped in legal, risk control financial strategies. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Corporate Bond Buying Principles

Securities analysts and media pundits often warn buyers of the danger of holding corporate bonds with lower grade or “junk” status. They usually advise the public to beware of potential defaults, especially when times are bad.

That can often be investment nonsense.

Financial media go to optimistic or pessimistic extremes. Yes, defaults are bad. But potential defaults are always priced into the bond prices.

So when default rates sometimes go to 10% and higher in recessions, interest rates accommodate, and the investor may still be way ahead of the game. So, the adjusted return could be well ahead of other investment returns available.

The trick is to be fully diversified in a low cost index mutual fund or ETF, where the investor is alert to duration principles.

And most of all, diligently use those duration principles. I have commented quite a bit on the explanation of duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)

Trying to Outsmart the Next Investor?

I have done my independent research for years to accomplish, but the evidence is clear.

Investors don’t have to out-smart someone else. Investing isn’t a Zero-Sum Game where there is a loser for every winner. Yet, that is the way most would-be investing "experts" operate.

No one has a monopoly on smart strategies, or when to use them. For every seller, there is a buyer, probably just as smart, and informed.

There is also no perfect investment strategy. Sticking to one’s disciplined strategy is the answer. Discipline is the solution because it logically helps tilt odds for investment success in your favor.

Adjusting the odds for success favorably is the ultimate investment goal. Discipline of strategy, rather than constant changing of investment ideas does the trick over the long run. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewHole tweets.)