Recent stock market activity, especially the reaction post-elections, might suggest that the worst is behind us. So many of us made investing mistakes and suffered over the last 18 months. Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again. – Reuters
Dominant Social Theme: Lessons learned. Wisdom passed down and received.
Free-Market Analysis: This Reuters articles goes through five points on how to invest "this time." (Post crash, we assume.) Let's examine them one by one.
1. Don't be unrealistically optimistic: Markets can come down as well – don't believe the cheerleaders who only give you the positive picture of markets going up.
Yes, it is increasingly evident that current markets, worldwide, have been at least partially re-inflated by central bank money printing. Yet for the same reason, markets can go back down just as fast. The underlying problems of mal-investments have not been worked out. Derivatives may still unravel. The commercial mortgage market has yet to recover. There is talk of another wave of subprime mortgage defaults.
2. Understand your risk appetite – you cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.
Does superior stock-picking (based on patience and skill) really offer a panacea? Two years ago, one could get away with arguing that markets were efficient and provided fairly reliable returns over time. These days, one can still argue marts are efficient, but not that they are reliable. After all-but-collapsing, both stock and bond markets have literally been brought back from the grave only through energetic money printing. The system was very obviously revived artificially. Understanding this, do you want to trust what is left of your wealth to Ben Bernanke et. al? Are you sure they will ride to the rescue next time? Or have fully pulled it off this time?
3. There is no substitute for quality: Invest in good quality stocks or mutual funds. Don't speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.
Marts shed up to 50 percent of their value in the past year or so (before rebounding somewhat). So what exactly constitutes "good quality?" And even more importantly, how can we build our portfolio "on a strong foundation?" This implies we should seek out the best and longest-lived of blue chip stocks. Stocks like GM or AIG? Certainly, as we are led to believe, one should never invest in a small stock, like a junior mining stock. But if we retain this lesson, we shall be ignoring entirely the very obvious turning of the business cycle. We are in the stimulative phase right now, and central banks have launched so much money that the prices of precious metals are almost bound to rise. You know, at the end of these sorts of business cycles, with price inflation soaring, people have made fortunes investing in gold and silver. Meanwhile, blue chips have soured. A confusing world indeed.
4. Don't invest blindly – invest towards meeting your financial goals: Don't just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter's wedding or son's overseas education. This will help you match the right investment product with the right goal.
OK, this is an interesting point. If we pay no attention to inflation, to central banking policy, to paper money overprinting (which almost ruined the world's economy recently) – if instead we merely close our eyes and visualize our goals and then match "the right investment product," we shall become successful, wealthy and even wise. This takes the power of positive thinking to a new level, in our opinion.
5. You cannot successfully time the market: If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world's leading investors, so don't try this strategy at home!
We disagree with this as well. The business cycle exists. At the beginning of the cycle, paper money-investments are more valuable because central banks are pumping up a deflated market. At the peak of the market, whenever that is, people can fairly well expect a bust because too much paper money has caused mal-investments. Then, once the market has collapsed, central banks begin to print even more money, causing price inflation, especially for gold and silver. You may not be able to time the market, but you can certainly POSITION yourself over time to take advantage of the great wheel of the investment cycle.
Inexplicably, this Reuters article steadfastly avoids any kind of free-market analysis. The article, in fact, seems almost a throwback. For decades, this kind of advice has been dispensed by the major media, and people have believed it and strained every fibre of their beings to conform. And what are they left with? Vastly reduced retirement funds and sour regret that THEY are somehow responsible. Yet back they go to read yet more articles like this one – stories that make no mention of the role of central banks in economic booms and busts, how paper money generates price inflation or the promise of gold and silver going forward in such circumstances as we are currently experiencing. No wonder many remain broke and hopeless.
