Some Straight Talk On the Stock Market
Yesterday I went into a local bank. Some guy working there I knew in high school stopped me on the way out. He wanted to know what I was doing in the market. He looked nervous. Maybe he was worrying about his 401k.
I told him "nothing." "I've got a little position in something, but I have a lot of cash and I'm not doing anything. Hopefully it will go up," I explained.
He wanted to know if I thought it was a bottom. I told him I'm not going to try to buy the exact bottom. I've got a lot of money and I'll buy a few months after it comes when I know it is in, because "no one" knows when the exact bottom is coming and everyone is losing money trying to guess it.
I don't know if he understood what I was saying. He just looked scared. I left quickly, because I didn't want to be around his nervous energy. No matter what I told him he was not going to listen to me, what he was looking for his reassurance and I can't give that to him, because it would require lying. All he needs to do is cut on the TV to get that.
This market is a mess. And I need to tell you something really important. This is a bear market and no one really knows when it is going to an end.
First of all it has already dropped faster than anyone expected. I don't know anyone who thought it was going to fall this bad. I was bearish myself. In May and again in August I shorted the market and told people I thought the market was going to have a meltdown in the Fall due to Fannie Mae going broke. At the same time though I thought that would make gold go up, because the Fed would print like mad to buy Fannie and Freddie.
Well I was short into the drop and covered in September right before the big collapse happened. And of course gold stocks fell with the rest of the market.
The point is I was right more than most people. I actually made money in the drop and got stopped out of my gold positions before they collapsed so didn't lose much money there - but despite being right more than practically everyone else I was still wrong about some things.
The market fell more than I thought it did and gold stocks dropped too.
Well flash forward to right now. I have a heavy cash position. For the past few weeks I've been looking for signs that the market was stabilizing to put in a rally and have been planning to go long for a trade once we saw them.
I had thought we might see this process happen this past week - which would have lead to a nice rally around the corner. But those signs don't look like they are going to happen at the moment, because the market fell right back down to support the other day.
There is a risk that the market will break down and fall again unbelievable as that may be. But even if the market holds up here it will take longer for it to rally. It got damaged more by falling back to support and will have to base more now before it can have a sustainable rally.
There is no way we can be sure that is going to happen, because this is a deadly bear market and in bear markets the surprises are to the downside. What is more I don't see a new bull market beginning for probably at least a year, because this economic recession is just picking up steam. I don't see it ending until real estate prices bottom and the futures markets aren't projecting that to happen until 2010. Any moves up we get until then will be just temporary rallies.
So bottom line is that this is a big bear market and that means it's very difficult to trade on the long-side. Most people right now are desperate for a bottom and take any positive day in the market as hope that it is here.
But in reality no one knows when or where the bottom is going to come in.
That is why even though I thought - and perhaps hoped - we were bottoming and going to have some sort of rally I did not act on that. I did not have proof that a bottom was in or a rally was right ahead of us and I don't commit money in a market like this until the market shows me proof that a trend has changed. What I knew was that one would think we'd get a bounce after this big drop - and if so I knew what the market would have to do to rally.
That is what I looked for. I knew the signs we would see before a rally began and simply kept my eyes out for them.
Well, the recent drop has made them disappear for now.
That means I'm just going to have to wait and continue to be patient for the market to do its thing.
I'm willing to do that, because I like to make money. And making money in the market means not guessing and making wild predictions based on hope of what you want to happen, but waiting for the market to come to you and show you the technical signs that indicate a real turn has taken place.
We are in dangerous times.
And there is a final thing you need to know - while the Wall Street experts calling for bottoms really have no evidence for one and are just talking their books - the rulers in Washington have no idea what they are doing.
They do not know how to stop this bear market or economic recession. It is not because they are stupid or incompetent - although there is plenty of that to go around - but because it is simply impossible to use command and control methods to move the economy in the way you want to.
Joseph Stalin tried to use 5 year plans to build up the Soviet economy and all he did was succeed in starving people to death. When they revolted on hungry stomachs he would throw them in gulags.
Central planning when it comes to economics does not work, because the economy is simply too complicated for one person to understand. Everything the government does to try to interfere in the economy has unintended consequences.
Remember the big bailout bill Bush, Paulson, and Democrats crammed down our throats? The one that they said had to be passed or we would go into a Depression? The one that was going to be used to buy up worthless mortgage securities off of the books of the bankers?
Well yesterday Treasury Secretary Hank Paulson said that he wasn't going to buy the mortgage securities after all. Now he thinks it won't work. He isn't sure what to do.
Never forget that it is the central planning of the Federal Reserve under Alan Greenspan that has brought us this current crisis. We are living with the unintended consequences of a Fed that for twenty years has worked on behalf of international bankers and against the interests of the entire country. A central bank that bailed out Wall Street bankers over and over again in crisis after crisis. Each crisis simply got bigger until we are now at this final moment.
And now more central planning is not going to fix it. It will simply take time and the natural workings of the economic cycle to pave the way for the next boom. Unfortunately that means lots of bankruptcies in inefficient businesses are going to occur over the next year.
I am involved in several businesses besides my website and trading accounts - the latter making the most money for me. Both businesses(and I consider my trading account a business) are doing great. The website is doing better than ever with more and more people signing up to my email list every week.
But one of my other businesses is not doing so good. It is a small limo business I started up with a friend for fun really five years ago. It never has made a real profit and just broken even. It is going to get in trouble and start losing money unless we make big changes.
Here is the deal. I believe the economic slowdown is really just starting and is going to get worse. I expect a trough in the downturn to come in about a year, but the road from here to that trough is going to get worse.
What this means is that for 90% of the businesses out there revenue is going to decrease. Businesses that do not or are unable to cut costs will simply go out of businesses. The business with a huge profit margin is rare.
Smart businesses will streamline themselves right now and begin to reduce costs right now. That is why companies are laying off people. The US post office announced they were letting go 45,000 people.
But most businesses - and especially small businesses - do not really see what is coming. They are not thinking of cutting costs. They see a slowdown right now. But they are simply hoping that things will pick up and get back to "normal" again.
Those that do not think about getting costs now will eventually be forced to cut costs to zero all at once when they go broke.
That is why there can be a huge wave of bankruptcies next year - especially when it comes to small businesses. Mix this brutal truth with the likelihood of higher taxes and you have a dangerous recipe.
In the next year the strong will survive. The businesses that can actually grow in the next year will become leaders in their markets afterwards.
That is what I see happening with all of the businesses I'm involved in except this limo business.
Ah now this applies directly to trading and investing.
The downturn is already wiping out people who don't cut expenses. And when it comes to trading expenses are losses. Those that did not cut losses months ago have lost money and if the bear market continues those that do not cut losses will end up losing lots of money over the next - perhaps enough to knock them out of the stock market game completely.
Those able to be patient and maintain heavy cash reserves will make a fortune in the next bull market by buying right as it begins.
Many small businesses are inefficient. They live by month to month and hang on a thread. When it comes to traders and investors most people just throw money at the stock market with no game plan. When they buy they just think things are going to go up forever and make them money. They have no plan on when they will sell for a profit or cut their losses if things go against them.
Those that develop and stick with a plan make fortunes in the stock market. It is markets like this that will transfer money out of the hands of the masses and eventually hand them to the smart and nimble in the end.
How does this happen?
The masses try to hold on and then eventually sell out and give up on the stock market. It is then that the people who make the real money in the stock market step in.
Are you one of these people? If not then it is time to be serious about making money in the stock market. It is time to read my stock market course if you haven't already. It is time to read the Stan Weinstein book.
In business the businesses that succeed the most usually do so by doing one simple thing - they do a little bit more work than their competitors. They satisfy their customers more. That's why this website is growing while most financial websites are about to face tough times. A lot of market analysts are going to disappear. By providing more value than my competitors I will grow and may even become a market leader when this is over.
And when it comes to investing the successful investors are those willing to do the work it takes to learn. They are willing to read a few books and use their brain.
They make up a very tiny fraction of the people in the stock market. Think about the people you know. How many of them have retirement accounts? I'm sure you know hundreds of people invested in the stock market. How many of them have taken just a few days of time to read a few books and learn how the market works?
That's why just about anyone can succeed in the market, but almost no one does. People simply are too lazy or do not believe in themselves enough to think they can use their brain and think for themselves. Almost all of the money in the market is in the market because someone literally threw it in there with no thought at all. It will be yours for the taking.
Right now that may mean you need to learn about the market, cut some losses, and come up with a plan to make a fortune in the next bull market. Think ahead. If this was 2002 before the start of the last bull market what is a game plan that you could have used then to identify the start of that bull market and be able to sell and take your profits before this bear market began?
If you can come up with an answer to that question you can make a fortune in the next few years. It's laid out in the first few lessons of the stock market course. We'll apply the concepts together when the time comes.
I know one day next year or in the first half of 2010 I'm going to see sector after sector line up to start a new bull market. It is going to be an incredible day. And when everyone is down and scared about the market now that is what I think about. I think about this huge opportunity that I know is going to come.
I'll be able to take advantage of it and help thousands of other people do so too and that is an exciting thing to think about.
Until then I need to get as many people as I can ready for it. And in the meantime to make money that means some short-term trading on the long-side when things line up right, maybe one more rally to short into sometime in the next few months, and a careful eye for some sector or market in the world that goes into a bull market before everything else. Maybe that is commodities, but we will see.
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