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Discerning The Conflicting Investment Advice That You Hear

18 April 2011 One Comment

There is a wide range of thought being put into print, into blogs and into television interviews regarding how to invest right now.  Similar to our political environment, it seems like we’re as divisive as ever on the economy, and what that means for our money.

How do you discern between the varying forms of advice?  How do you know what is right?  Here are a few things to remember which might help you in this area:

#1 – Much of what you hear is from a trader’s perspective

If you watch CNBC or even read a range of articles on the internet, so much of what you hear is a short-term focus.  A major part of the nature of a trader is to pursue momentum.  If something is going up, you should buy it.  Man, what a dangerous idea that is, and what they don’t often tell you is that these professional “traders” are buying with one foot out the door already. The surest sign of a break in the trend, and they’re out of the position.

You can make money trading.  Lots of people do.  But, you probably won’t.  If do some ancillary trades on the edges of my portfolio – usually involving hedging my main positions (i.e. I bought some VIX calls a couple weeks ago as the market “feel” seemed to be nothing could take it down – these calls exploded today in value).  With that said, trading is a very small part of what I do.  I’m just not good enough at it, and frankly, I don’t watch every second of the market each day (nor want to).

Make sure you understand where the perspective is regarding trading vs investing when you’re listening to what someone says.

#2 – If not a trader, usually a perma-bull

The other major group are the perma-bulls.  The motivation for the ever-increasing optimism is often the fact that they work for the Wall St machine and are dependent on the public buying stocks.  This is the other group you have to be really cautious when you listen to them.

These are the people who said the Dow was going to 20,000 in 2007.  They are also the ones saying the economy is only going to continue growing and the Fed can easily exit their easy-monetary policies today.  Are they wrong?  Maybe, maybe not, but keep their opinion in perspective.

#3 – What about the perma-bears?

Many accuse me of being a perma-bear.  Well, I started this site in 2008, so a three year time horizon is hardly a long enough time to know whether or not I’m a perma-bear.  The answer is no I’m not.

I’m bearish on the masses.  The masses are going to find it increasingly difficult to maintain the standard of living to which they’ve become accustomed.

What I’m increasing bullish on is the opportunities ahead for the smart, hard-working, and innovative segment of society (which is a very small part of society).  Volatily can be a wonderful thing.  Volatily can equal distressed assets.  I look forward to the future very much.

#4 – Ignore the noise, hold on to the trends you KNOW are in place

There’s a lot of noise in the system.  Much of it is from the first two points above.  The reality is that you need to try and block much of it out, and focus on the long-term, multi-year trends that you KNOW are in place.  These are the trends that you want to be exposed to, regardless of short-term fluctuations.

The biggest trend we will see in coming years is what I just mentioned: the standard of living will decline for the masses in this country.  It should have started a long time ago, but it was put off by “real estate riches” and a massive increase in debt.  The government (right or wrong) is trying to ease this process by dragging it out across many years instead of people being forced to take the medicine all at once.  You can argue whether or not this is the right move, but if you’re honest, you can’t argue that this is indeed happening.

The other major trend that I believe is firmly in place is that the currency will be debased.  The cracks in the dollar as the reserve currency come each day as countries in the global economy continue to announce the move away from it.  This isn’t an overnight event, but a slow deterioration.  Meanwhile, the Fed prints money to fund our government to prevent the bond market from crushing the government with increased borrowing costs.  Even if formal QE stops, this deterioration in the dollar will not stop.

Where people get confused is when they compare it to the other currencies and claim dollar strength.  Two currencies racing to devalue each other does not equate to one being absolutely strong, but just relatively strong against the other.  This is why you have to look at the price of gold (and other hard assets).  This tells you what is really happening.  Today, the S&P cut the US outlook to “negative” – the dollar rose and the price of gold rose.  Why?  Because the dollar rose against other currencies and gold basically rose against all currencies.  Which showed absolute strength and which showed relative strength?

Invest the major macro trends that you know are firmly in place.  Understand the perspectives of those you listen to or pay attention to.

Thoughts? Reactions?

One Comment »

  • Bowmanave said:

    Good tip,thanks