Tag Archives: Investing

The Next Stock Market Collapse: Are we There Yet?

April 3, 2016

It seems that we are entering a decisive period for the stock market. The S&P 500 is right at the top of a channel between 2,100 and 1,920. Although I don’t like technical analysis, it is pretty clear that if it rises significantly about 2,100, then a new bull market will start. Conversely, if it drops below 1,920 a major market crash may follow.

S&P 500 10 Year Chart

S&P 500 10 Year Chart

Although anyone with limited knowledge of technical analysis would come to the same conclusion, I imagine 100,000,000 would-be retirees don’t look at this chart. And even if they did, they would not be able to see its importance.

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Markets go Up and Markets go Down

Although this may seem incredibly obvious, many people say that markets always go up. I remember during the real estate bubble that popped in 2008, agents were saying,

Real estate always goes up.

It’s pretty obvious now that is a lie. But it works for them. The clueless would-be investors that believed them bought up properties like there is no tomorrow. And for them, there wasn’t much of a tomorrow. Most of the properties went into foreclosure and were repurchased by more savvy investors.

Shanghai Composite Index

Shanghai Composite Index 2011 – 2016

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Are you Ready for the Financial Crisis?

A wise man once wrote:

Markets top slowly and bottom quickly.

When I read this and anlyzed some of the major market tops over the last 100 years, I was surprised by the accuracy of this statement. (One major exception was the 2000 Tech Bubble, which was quite different from other market dynamics.)

S&P 500 Jan 2011 - 2016

S&P 500 Jan 2011 – 2016

The theory behind this is that the “smart money” figures out that a market is topping long before the average Joe. I’m not sure if I agree with the theory, but it does seem to me that the “stupid money” gets out way too late, after the market has dropped significantly.

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Chaikin Analytics Review and Free Trial

One of the biggest hurdles that the individual investor faces in trying to create a nimble, smart portfolio is the competition.

Investment bankers, quants, mutual fund companies, and big Wall Street firms are employing Ph.D. researchers with degrees in everything from finance to physics to create model portfolios. They use the latest and most powerful technology to guide their buys and sells.

The little guy doesn’t have a chance.

That’s what I thought, until last week. George and I had a chance to see a demonstration of Chaikin Analytics, probably one of the most complete set of investment tools and stock market model-building technology that’s available for the money. Or at least I’ve ever seen.

The Chaikin Analytics Dashboard

The Chaikin Analytics Dashboard

How does Chaikin level the playing field?

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Is Investing Really a Zero-Sum Game?

Zero-Sum Game ContraryBrin

Zero-Sum Game ContraryBrin

Investing — in anything stocks, bitcoins, goat futures, whatever — is a zero-sum game, according to most critics and proponents of investing.

Someone buys, someone sells. Someone wins, someone loses.

In a very broad sense, this is true, but if we look a little more closely we can see that the zero-sum game does not exactly fit investing because of the timescale involved. In fact, investing is rarely a zero-sum game.

We like our models. No, not super models. Humans use models to improve the efficiency of thinking. Guesswork, it turns out, is what being intelligent is all about. That’s why when we one of our investments sours, we immediately equate that to a game, like baseball or football. We struck out. We lost.  But baseball and football — or whatever game you’re into — have finite time limits: innings, quarters, periods, etc. But many investments do not.

Take a stock trade. You may buy stock in a company and the price begins to go down. You sell your stock and someone buys it. According to the zero-sum model, you lost: you bought high and sold low. And the other guy bought it lower, so he won.

However, you have yet to hit the ninth inning. What if you take that investment and buy another stock and it soars? What if the winner in this trade — the investor who bought your stock — finds that the company continues to underperform and its value continues to crater?  These trades — that seemed to be a winner-loser type of thing — can be seen as only one play in a much longer, much more complex game that we call the “market.” The buying and selling of an investment are usually seen as “the game.” As we can see in the above scenario, they are not. They are just plays within the game.

Only finite limits define a zero-sum game and, as long as people are in the market and companies are being created and sustained — then, the zero-sum game heuristic does not fit. In fact, it can be debilitating. People who fail at certain investment strategies immediately exit the game.

In other words, investing isn’t so much a zero-sum game as investors are zero-sum thinkers.

Obviously, there are much better examples of the zero-sum model in investing. Off the top of my head, I see that options — which can expire at a certain time and be essentially valueless — is a type of zero-sum game. If you don’t exit in time, or the underlying security doesn’t perform to your expectation, then your investment goes to zero. You lose. (However, I would point out that option trading has become a thing-in-itself and not what the strategy is most ideally intended — as a hedge to non-zero-sum game trading. You should use options to guard against risk on your main options.)

There are probably other types of investing that are better understood in the zero-sum model.

The point I would like to pass on is to be careful of our models. They become self-fulfilling prophecies — and not just for us. They can spread and infect other people’s thinking. They can lead to the most horrible type of model-making called “policy changes.” A policy change is when a government entity decided to make bad heuristics into the law of the land and there is only one true law in this case — the law of unintended consequences.

What do you think? Do you think zero-sum investing is still a good model? Do you know of other investment models, or perspectives, that have similar faults?



Investing in New Businesses: The Ripple Effect

Given the state of current affairs, you may be a bit skeptical to invest your money in a new business that may or may not succeed. Essentially, you are putting money that could be used towards your own improvements to help improve the business affairs of someone else. It can be intimidating if you don’t have a lot of money. However, the rewards could be great if the venture succeeds.


Image courtesy NKNS

Beginning Expenses
After an individual invests money into a business, this goes towards various expenses in order to help it succeed. This could be anything from paper for invoices and receipts to hiring local graphic designers for logos and signs. Landlords, utility companies, office equipment stores and more will receive additional sales due to the fact that the new company needs specific supplies and equipment. As long as the new establishment can maintain itself, this income could become residual for other companies in the area that need the income.

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On Record Highs: The Dow and Paranoia

flickr--creative commons

flickr–creative commons

We’ve just witnessed a historic event.

Last Tuesday, the Dow — a benchmark for stock market strength — cruised to 14,285, well passed the former record set in Oct. 2007. As of Friday, the Dow rested at 14,397. And there was a collective shoulder shrug.

That reaction was in contrast to the heady days of stock market gains in the 1980s and 1990s when each Dow and Nasdaq record was reported breathlessly for days. It was a moveable feast.

So, what’s different about this record?

First, people are paranoid because the last record in Oct. 2007 was soon followed by an almost complete economic collapse. Within months of this record the Dow plummeted, losing half of its value and bouncing along those bottoms for years. Investors are wary of the same happening again.

They have statistical reasons to be wary. Raw economic numbers — GDP growth and employment, for instance — are not even close to the strength that led up to the rally in 2007. The housing market? It’s still a basket case. Also, the stock market gains are based a lot on government — especially the Fed — tampering with the numbers. Cheap dollars have fueled the rally.

However, it may be a mistake to hold this view on the economy exclusively. Remember fear can be just as damaging to your portfolio as greed. Also, remember that time has a way of balancing prices. What was up, might come down a little; what was down, may end up higher.

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Why Emotionless Investing Doesn’t Work

Flickr--Creative Commons

Flickr–Creative Commons

The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.

It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.

Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.

Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.

A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.

In short, the best investment system understands emotions. It just isn’t ruled by them.

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Weekend Wisdom: Quantitative Easing, Link-style

Creative Commons -- Tax Credits

So, the Fed is trying to give another bolt to the economy.


It didn’t seem to work before, but if there’s one thing that we have all learned is that if a tactic continually fails, you should keep doing it until it works.

Sort of like smashing your head into a wall repeatedly if you need to make a household repair.

Well, here are some lessons I have found around the internet. Just like the Fed knows they can always print more money, I know people will always publish more posts.

So relax! These do not require you to smash your head into the wall. Just give them a read.

Wall Street JournalManagement Secrets of the NFL

Dumb Little Man13 Warning Signs That What Your Delegated Won’t Get Done

Financial SamuraiA Day Job is Much Easier Than Entrepreneurship

Finance FoxDo You Need a Career Change?

Invest It WiselyYou Don’t Need to be Born an Entrepreneur

UntemplaterWhat is eHealth Insurance?

The Digerati LifeSkip Commercial Banks! How Cash Only Living Can Work



Ego Depletion and Your Bottom Line

Flickr Creative Commons

Here’s the thought experiment: You come home on Friday evening after a hard week at the office, do you…

1. Immediately order a pizza and pig out.

2. Have that pizza on Sunday evening after a few days rest.

Most people go right to number 1.

According to a guest post by Professor Dan Ariely on Tim Ferris’ blog, this is called ego depletion. Basically, there’s a connection between exhaustion and consumption. In this case, when you’re exhausted — a state called “ego depletion” — you tend to be more drawn to bad food choices, like junk food.

“I’ve always suspected that we start each day with a limited number of decision-making points that, once depleted, leave us cognitively impaired. This is part of the reason that automating minutiae, adopting rituals, and applying creativity only where it’s most valuable (e.g. not deciding what to eat for breakfast) is so important to me.”

Ego Depletion and Personal Finance

I’m wondering whether this doesn’t work for bad personal financial decisions. One of the reasons that I’m interested in automated trading is because there are human weaknesses — like ego depletion — that can interfere with trading, investing, and spending.

So, let’s explore how ego depletion may affect your personal financial situation.

Check out this scenario.

You’ve been trading all week long. You’ve been trying to maintain your discipline and set strict stop loss rules. But things are turning south by the end of the week. You see a pretty risky trade brewing.

Do you:

1.) Cut your losses and re-charge your batteries.

2.) Take a stab at turning a quick win before the week ends.

I’m suggesting that most would take that trade.

Here’s another scenario we probably all can relate to.

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