An Update From Harry Dent

Harry Dent's June 2012 Update

Canary in the Coal Mine
The major problem I experienced with the crash that resulted in the last Great Recession was that everybody was afraid to come out and tell the general public just how bad they thought things could get, with one exception.  I watched Mad Money with Jim Cramer on CNBC and one night he told his audience that if they had money invested in the stock market that they might need over the following five years, they should sell that portion immediately.  I did just that, but it was already too late.  While I did not lose as much as most people, it was still a big hit to my portfolio (i.e.: life savings).

The Media?
As it turns out, there were a number of people who came forward, later, to tell us what they knew and how things looked pretty bad to them, well before it actually happened.  The trouble is, what they were trying to tell people was not very popular at the time - certainly not with the broadcasting media.  As for the rest, do you think they would actually say anything to you and me, even if they suspected the worst? (That is where the term "whisper number" comes from - they'll say it to close allies, but not publicly).

Odds Are
Cramer took a lot of heat for telling people to sell.  Many in the industry called him irresponsible.  I appreciated the fact he had the courage of his convictions and was one of the few people I have ever heard actually telling people to sell.  The Buy and Hold types may scoff at the warnings, but as Mr. Dent says in this video, if things don't get as bad as he thinks it might, then worst case is we miss a little to the upside.  If he is correct, we miss a lot to the down side.  Any time I find myself in a situation with little chance of gain, and a huge chance for loss, I will gladly sit it out until the odds are more in my favour.

Technically Speaking
When do I get back in?  When the technical indicators say so.  I'll be one of the first to say when I see the technicals showing me a good re-entry point.  I am no investment professional, and can not advise others what they should do with their money.  Personally, I have been short, or out of this market, since before the year began.  I see no reason to change now.  For other peoples' sake I hope Mr. Dent is wrong, but right now, it just isn't a risk I am willing to take.

How do you see your chances?

Buy Energy Companies?

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John Manley from Wells Fargo talks about his liking energy companies.  He says he doesn't believe oil prices will go as low as people are predicting.  He also thinks oil will stay more expensive longer than people think, and that natural gas will stay lower longer than people think.  He especially likes big dividend paying energy companies.


Myself, I would like to see a break in the longer term down trend in energy stocks before I would buy.  The way I personally would play it is with the Horizons leveraged energy Exchange Traded Fund - HEU on the TSX.  These leveraged ETF's are only for shorter term trades, so if I wanted to hold it for longer term durations I would likely use the iShares Energy ETF (XEG).


How is your energy level?

I am not really sure why I haven't posted anything here by Mr. Rogers prior to this.  From what I can tell he is one of the smartest people in the room.  His expertise is more in the area of commodities than equities, but that would make him an expert in commodity companies at the very least.

It would seem like common sense, but politicians and even too many economists believe the solution to too much debt is more debt.  Mr. Rogers disagrees.  He also talks about when the economic collapse will come, rather than if it will because of the snowballing debt world wide.  He states that competent people are supposed to be allowed to replace the incompetent ones who lost all their money.  Failing to do so, he says is "Absurd economics and absurd morality."  It reminds me of the author Stephen Covey who used to say we can't talk our way out of things we have (mis)behaved our way into.

Do you think Europe will survive intact?

An Update From Bill Strazzullo

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The markets are getting close to the levels Mr. Strazzullo from Bell Curve Trading talked about in this video at the end of May.  He said at that time he was expecting a tradable bounce from there.  At this point his prediction would seem to be supported by the technicals.  I think the key term he used was tradable bounce.  Given the situation in Europe as we make our way into the summer season, I see no catalyst to turn the markets around and reverse our overall downward trend in a significant way.  There is only so much the U.S. Federal Reserve can do between now and the U.S. elections coming this fall.

Where do you think we will go from here?

May 2012 Returns

Click To Enlarge

I would rather not spend a lot of time or energy being negative about the markets and how things continue to go from bad to worse.  I want to be more positive than that.  It is not difficult to understand why people would think stock markets are completely unregulated and out of control, or at least controlled by big money with nothing in it for the small, personal investor.  I still feel small is beautiful, especially under current conditions.  We can run rings around the big fund managers and still minimize our risk with Exchange Traded Funds.  That strategy can be  particularly effective during months like this last May when inverse ETF's allow us to profit while the markets are trending down.  The markets appear to be more oversold than last year, at this time, but that doesn't mean we can't go a lot lower.  It is the fourth year in the U.S. election cycle.  Markets tend to be stronger during the second half of that year than others.  We will have to watch and see!  


17 month return for TSX @ April 30, 2012 = -14.59 percent
Return for Basic Timing Model using XIU = 10.57 percent
Return for Advanced Timing Model (my returns) = -4.36
Money for charity = $0.00

Smaller Losses, Bigger Gains

Minimize Losses
I have said it before, and I am going to keep saying it.  I believe the single greatest advantage the personal investor has over fund managers is the ability to avoid taking big losses.  My favourite definition of insanity is when someone keeps doing the same thing over and over again, each time expecting a different result.  If we are losing money from our portfolio, we need to change what we are doing - quickly.  I know enough about human nature to understand the reasons it is difficult for most people to adopt such an approach, but it is not impossible to do, either.  Buy and Hold leaves far too great an amount of potential profits on the table for the personal investor.  At the same time it also exposes them to a vast array of expenses and fees at the hands of the financial institutions relative to what they receive in return.



The Nimble Approach
At the other end of the scale we can day-trade for quick, small profits.  For my money, options would seem better than stocks for such an approach.  Few people, though, have the knowledge and skill regarding options trading to actually do so.  The biggest options markets are also in U.S. dollars, so there are currency and tax implications to consider, as well.  So what is the regular personal investor to do?

Trend Watching
My best results have always come from following market trends.  Of course there are long-term trends, and very short-term trends.  Some are volatile, and others are as clear as a straight line on a chart.  But rather than trying to dictate what a trend should look like, I let the market show me.  Based on past trends in a particular equity and a particular market, I set realistic limits and cash in when the opportunity presents itself.  For instance, with a normal trend and a normal sized position in my own personal portfolio, if I make a profit of $1,000.00 on a single trade, I know to take the money and close out my position.  It isn't automatic, but I tolerate very little risk of giving the money back once I have reached that point.

Small Losses; Big Gains
It isn't like I always get the trend right, either.  In those cases, when a trend reverses, I have had to develop the discipline of exiting a position when it starts to lose money.  It has cost me a few wins, but it has also saved me a ton of losses.  Small losses and big gains are the keys to success.  There isn't a fund manager on the planet who can adopt this strategy simply because the amount of money they throw around is far too large.  That, my friend, is why Buy and Hold is the only thing you will ever hear about from the investment industry, backed up by countless academic studies funded by, guess who?

The Money Trail
On the latter point, I want to share that I just read a book in which the author points out that even many of the scientists believe we are chasing the wind when it comes to our theories on climate change.  It doesn't mean our actions are not having a negative affect on global climate.  What it really means is for a scientist to receive substantial funding in that field, their studies have to resemble the current thinking.  It is hard to find our lost keys in the dark if we only spend our time looking where there is a light shining.  Sadly, it is how the world works.  It is also how the Buy and Hold marketing strategy became the Buy and Hold investing strategy.  More on a profitable investing approach for the personal investor, later.

Do you find it difficult to avoid losses in your portfolio?



    

Trading Stocks

Trader, Not Traitor
I remember one analyst on BNN in particular as he looked down his nose at the commentator and said, "I am not a trader (emphasis on the NOT), I invest for the long term!"  In other words, he was better than any trader.  Trading, to him, was for the amateurs.  At the risk of repeating myself, surely you and I are playing a different game than any fund manager, let alone the talking heads that appear on television.  The major difference being, what they make from their stocks is mostly a side-show for them.  Most of them are compensated six ways to Sunday and get paid regardless of how well their stock picks are performing.  I have also seen analysts on TV who don't even have any of their own money in stocks!   (Conflict of interest LOL!)

Do No Harm
This blog is about my sharing what I have learned over many years of playing the markets.  I decided at the beginning of the year to publish my trades as teaching moments.  I hesitated to do so for a couple of reasons.  One, was because one trading style does not suit all.  Another was because my time horizon has become increasingly shorter.  I trade during the day.  I don't want to put people behind the curve, trying to imitate me while they can't get in and out as easily as I can.  I cut any losses extremely quickly in the current environment.

Bad To Worse
At that rate, I don't see the benefit of me sharing my trades with the average person trying to buy low and sell high as a means of making a reasonable return in these markets.  The regulators forgot the meaning of their role a long time ago.  High frequency traders manipulate prices in the name of so-called market liquidity.  Highly leveraged Exchange Traded Funds (ETF's) change how markets function.  Dark pools exist for the wealthy fund managers to hide transactions from the average investor.  Derivatives cause nuclear level shock-waves in the markets.  The rules put in place after the Great Depression to prevent it from ever happening again have either been revoked, or totally ignored.

Looking Ahead
Does that mean I think the personal investor should just give up, take what's left of their money and go home?  Not at all.  It just means keeping an eye on what's going on.  With the rate of change in technology and in society, obsolescence is guaranteed.  Buy and Hold has as much chance succeeding these days as the horse and buggy did outlasting the automobile at the turn of the last century.  Nortel, and Research In Motion are recent infamous Canadian illustrations of what has become the half-life of modern day success.

The Goldilocks Solution
If Buy and Hold can't work, and day trading is overkill, then what is today's personal investor to do?  In looking for an answer, I thought about the investing club I started.  If anything, it perfectly illustrates the need for a Goldilocks solution - neither too hot, nor too cold.  Investing clubs do not lend themselves to day-trading, and most fail to make money or serve to educate if the time horizon is too long.  My solution there is the same as here - use technical analysis to decipher medium-term trends and trade (yes, trade!) accordingly.  As a result, the trades I share on this blog are the trades we are making in my investing club.

Next Time
I want to remind people that I am not a professional, and as such cannot advise others what to buy or sell.  However, I have no difficulty sharing with others what I am doing, in the hope of serving as an example.  Next time, we will take a closer look at how we trade in my investing club.

What is your strategy in this changing and evolving environment?