Investment strategy – defensive or offensive?

Offensive or defensive investment strategy, which one will yield a greater ROI? That is the question. This is not a post based on statistical research, such  as asset allocation and diversification but more personal reflections and I am more looking for answers and asking questions.

What does it mean to be a defensive investor versus an offensive investor? What is your general investing plan of action? As a broker I knew a guy who almost had a million dollars in bank CDs. He said he always slept at night.  I knew another that only bought muni bonds.

Whereas I have known many people to lose a lot of money trading stocks and options.

However, that being said, I think the best way to invest is a stock strategy which is generally systematic and cautious, even defensive, but than makes bold strikes when the opportunity arises. It is similar to the idea of saving or investing to get wealthy.

Defensive is the best offensive strategy. Or is it? These are ancient defensive walls in my city.

Strategy in games

I have often played life with the strategy “the best offense is a good defense’. However, I have also noticed in life with this strategy, I am good at many things, but rarely at the very top-level. For example, I play chess almost to an expert level. I impress myself considering I have never really studied the game. I can dominate most players. And can certainly beat your average guy pretty easy.

I generally take a patient strategy and wait for my opponent to make a mistake and then attack. That is my strategy in many things in life and in chess, it is defensive. The result is I do well, but I am not world-class. To be a world-class anything you have to be on the offensive.

The great chess player Tigran Petrosian: World Champion 1963-1969 was the master of defense.  He was very frustrating to play. Although he was a world champion he was not as great as someone like Tal, Fischer or Kasparov who were masters of attack. Was it because Kasparov’s knights magically moved faster and with more agility on the board? Or his pawns had more staying power? No. It was Kasparov had a planned, practiced and perfected the idea of attack. Defense to him was only something to do while forming an attack.

I think chess is a good way to evaluate your own attitude to competition and investing, but only if you are a chess buff like I am.

I developed my basic defensive strategy in competition, as an extension of  my strategy games I played in my youth created by a company called SPI.

I realized that it usually took 3 to 1 odds in terms of firepower to dislodge and enemy position. If the position was fortified it took more. You could watch with vigilance while the enemy wasted resources on attacking, then strike back.

Think of playing the computer game Civilization and if you have an alpine unit fortified in the mountains, it is almost impossible to overrun.

My strategy to beat the computer at the highest level is fly beneath the radar until I had a technological advantage and then strike at the other civilizations. I could beat the computer at the highest level with ease.

Similarly, if you have played risk, it is easy to hang out in Australia and build armies most of the game.

Therefore, a defensive strategy is not ineffective for games or investing. It can work. You can muddle your way to victory and wealth via trench warfare.

You can avoid risk and do well in life. However, most likely never achieve greatness and this includes in investing.

Avoiding danger is in the long run no safer than outright exposure to it, life is either a daring adventure of nothing – Helen Keller

When I realized I needed to be more offensive in investing and chess

  • I was playing a female chess master and she was beating me constantly when she commented she liked to attack. And ask me what about me? That is when I realized maybe defense is not the best way in life. In fact, the adage is when you are down in material you have to go on the offensive. Offensive strategies tend to be what brings one to greatness. I realized she was not a better player than I, but she used her talent in a more strategically offensive way.

Strategy in history

I live in the city of Kraków, a  medieval fortified city. the pictures above I took of some of these walls. The city was under siege many times. How many times with little effort did Poles repel an aggressive enemy by wearing them down with a stiff defense, and then employing a decisive counter strike. Defense is only a time when you are probing the enemy and preparing for an offense.

The same goes for investing. You can have money in money markets and Muni bonds, but I think equity trading is where the money is. It is interesting to note that the fixed income market dwarfs the equity market for various reason, but also because people are fundamentally risk averse.

  • Poland rose to become the largest country in Europe because of its small élite Calvary units it used for offense. It was at a numeric disadvantage over its enemies it played an offensive tact, including capturing Moscow. The risk of playing defense was to great and was outweighed by the rewards of offensive thinking. The tiny unpopulated country of Sweden similarly did this under Adolphus Augustus. So again playing it defensive in life is safe, for a while but taking the offensive  is what changes your life.

Going on the offensive , even with great problems in life

Here are other examples of offensive thinking away from the military metaphors. My favorite thinker Hans Kung, wrote about how many mainstream thinkers are on the defensive against nihilism. This posture was ultimately as losing position as people would realizes there is not good defense except an offense.

He realized in his writing he needed to be more radical and not just build walls and apologies, but actually be bold and seek the true and be on the offensive against nihilism. His writing is brilliant, lucid and it make all the difference.

Psychology of investing in my own business

I think the way I invest might be a function of the psychogenesis of my personality. It is a reaction to the world and the way I live in general.  Take my own litte company I run out of Eastern Europe. Labor here is cheap however, I keep costs to a minimum and I am under leveraged in terms of employing people. I could employ a lot more and implement more ideas I have had on the back burner for years. However, I prefer to play it safe with a defensive strategy.

I wonder if my psychology of investing came from my upbringing in a home that was like many American stories rag to riches. My parents taught be taken the sure and steady route. I of course did not, as I live as an expat, traveled the world and am an entrepreneur. However, their fundamental attitude is still in my understanding of the world.

My investing strategy is defensive

I am a good investor. In fact, at this point as my  investing strategy has been perfected to a high level.  I am like I play chess, almost an expert. It is not just that I do not lose a lot but I can make steady consistent gains.

  • However, I am not a multimillionaire. In fact if I calculate the rate or ROI, it would take me many more years of long hard work. Therefore, I am coming to the realization that I need to go on the offensive more in terms of investing.

What this means I do not yet know. How do I translate this into my own personal investment strategy in terms of stock trading and my own ventures? How can I invest more aggressively without being reckless or simply applying leverage?

I do know offensive players do not take wild desperate risks. I have done this and always failed. High risk is like playing a long shot, it is a dream but rarely pans out.

Where does this leave me with investing tactics?

Therefore, for me to transform from a very good investor to a great one, I have to do more.  I have to do more self-reflection and strategic analysis of my habits and equity investors who have made money with an aggressive posture in investing. Further, to declare myself great, it has to be manifest by either high returns over the long terms and millions in the bank in my opinion. So I can say I realize the problem, that is like most people I tend to be too conservative or defensive but I am still working my way out to find what will make be an offensive investors.








Currency Trading – Should you trade Forex?

Forex trading is written about all over the web. The question is should you trade currencies? The objective of this post if to give you my personal perspective.

The reasons I do not trade currency directly for profit are:

  • Currency trading is zero-sum – It is a zero-sum game (or slightly negative minus transaction costs and opportunity cost). This is the most important point. You need to meditate what a zero-sum game is before you decide to invest. Think about it read about it, what is zero-sum vs. positive-sum. Who wins in zero-sum investing compared to positive-sum investing?
  • Everyone is trading on technicals – There use to be an adage, that is trade currency on technical not fundamentals. This is the mistake that every currency trader made, that is in the old days they tried to buy and sell based on macro movements in the money supply and demand and its relation to other currencies. Well people got the idea and every guy out there swinging is trading on technicals. I am in a quandary if this has not made the market more sensitive to signals and more efficient in terms of technical indicators. Maybe I believe too much in Paredo‘s paradox, that is you have to zig when everyone else zags.
  • Investing Disclaimer: I do trade in an informal way because I do business in two worlds, Europe and America. Since I am more on the sidelines of the market, I trade more on fundamentals, by trying to estimate a natural exchange rate between two currencies and look to see where it trades in relation to this. I simply move money rather than trade options or anything with time decay.

The reason you might trade Forex:

  • The largest market in the world – Good news about currency trading. The FX  market is the largest market in the world. And I do not believe that professional traders can manipulate currency the way they can other assets. It could be done on a country level, like if one day China decided to dump dollars, but professional players have little influence on this market, at least consistently.
  • Little guy’s trading tools are equal to the professional – Professional Forex software is not much different from what you, a small trader can buy. Think about Microsoft office, what you use at home is basically what you use at work. The world is different today. You can buy professional trading software as good as any company.
  • Professional traders are not different from you – There are no Einstein’s on Wall Street, only leveraged players. Sure you might have a guy who is a winner, for a while, but this could be a statistical anomaly more than connected to his trading ability. You personally by reading trading books and with your intuition have just as good a chance of making a profit like a professional trader. I worked around these guys all my life and they are no rocket scientists. They use leverage so it amplifies their profits. If there was a true secret, it would be out. Maybe with a rare exception, if you show me an FX genius, I would say I am from Missouri ‘ show me’.

The fundamental problem of trading currency today if you are asking yourself “should I trade” is this. Trading currency, whether day trading or long-term investing is a zero-sum game. Equal number of winners and losers. If you do have a trading system and want to leverage the returns, be careful. Everyone out there thinks they are smarter than then next guy. But like you, the next guy thinks he is smarter than you. If you are asking yourself “can I make money trading currency?” Ask yourself how will you beat the problem of it being a zero-sum game? And there is your answer.

I feel much more comfortable in the equity market which has a longer-term style and where you participate in the real growth of the great companies of the world, if you develop your own system you can leverage your system and amplify your returns. These companies are actively managed by dynamic people. Currencies, in contrast, are managed by governments and are zero-sum overall.

If anyone can overcome the fundamental problem of currency trading being a zero-sum game I am open to hearing the other side.


Bullionism – Economics of Gold Accumulation

What is Bullionism?

Bullionism was an idea that circulated in the courts of Europe in the 16th and 17th centuries. Why is it important? It is very important as many people today have the same idea about their own lives and it keeps them poor.

The idea of Bullionism was closely connected to mercantilism. It believed that money (gold) was the only form of wealth that was important. Countries hoarded gold and accumulated gold bullion in their treasuries. Ahoy matey and stack ye gold bullion.

How did this economic theory come about? People observed that England possessed large quantities of gold, yet had no mines. They observed England be rich and drew a causal relationship that gold equaled a way to wealth.

Is your government Bullionist?

Governments operating under this absurd assumption would pursue policies that would restrict gold from leaving the country as it was feared this would reduce the tax base. What would have been better than pursuing a policy of accumulation of gold at any cost would have been a policy which would have resulted in an increase in the productive capacity of the people. The latter leads to a wealth of nations, as pointed out by Adam Smith.

Bullionist sought to control the outflow of money by the use of currency exchange rate manipulation when currency exchange rates lead to trade deficits and currency outflow.

The main point which is wrong here is, money is money even if in the form of gold has less meaning than what is actually going on in the country.

In retrospect, this seems obvious. However, countries and individuals purse this policy themselves.

The players in this precursor of political economy were: Thomas Milles and Gerard de Malynes, who was opposed by Edward Misselden a mercantilist. This was one of the first published economic controversies.

Do any countries still believe in Bullionism? China, some Americans. China is more pursuing mercantilism. They are thriving despite their misunderstanding of economics because of they a slave economy. When England switch to free trade from hoarding gold and mercantilism, it really became rich, think of the Victorian era. That wealth included a middle class, not just the ruling elite. The USA has been free trade from the beginning, and I think we are doing pretty well, despite the crisis caused by reckless government.

Having a gold standard is a different idea, in fact if used correctly can restrain government.

The way no to get rich is to bury your talents

What you can learn from Bullionist ideas on how to accumulate wealth

  • Individuals who focus on the saving money and accumulating wealth in their households rather than spending money to develop their own talents are not as wealthy. I always have no problem spending money for self investment. Instead of a large house and nice lifestyle, I prefer to invest and develop myself or my capital. It is just more fun. Invest in the stock market or your own business or the development of your own personal talents. Despite the run up gold as an investment is not the best.
  • People and governments pursue policies of symbolic forms of wealth instead of real wealth are more smoke and mirrors politics that pursue less the optimal economic policies.

How to Trade Currency on Fundamentals

Forex on fundamentals

Look at this dollar vs Euro chart. How can you make sense of this erratic volatile market and react fast enough? However, if you go against conventional wisdom and choose a natural rate to trade off of sometimes you can make money. In this picture lets say it is .74. Start to sell when it is over .74 and start to buy when it is under .74. But currency trading is not for the

If you want to trade FX, people recommend trading on technical indicators. However, as many fundamentals (looking at the relative value of the currency instead of the trend) in currency markets have a terrible reputation, I still think with study, you can make Forex trades a profitable investment strategy in the long run based on fundamental analysis. The take away from this post is to find the natural fx rate between two currencies and then analysis the relative strength of the two economies.

How often do you trade foreign currency? I do every day, but not for profit. I live in Krakow, Poland. I transact business in both Polish zloty and US dollars every day, as well as Euro and other currencies from time to time. I watch the FX rates almost daily and watch both Polish and US business news. I have a pretty good pulse on economics in both countries.

My currency rule of thumb – equilibrium price

Because I use these currencies daily, I have grown familiar with the way they behave. Much like I know my neighbors. Their behavior, most of the time, is predictable. I watch my neighbors take out the trash on certain mornings and know when they will come home from work. I know that in the summer months, they get back earlier. Few surprises. This is the same way I see currencies. I can tell their habits.

Develop a currency rule of thumb

Over the years, I have developed a rule of thumb. I have a general feeling that when the Polish zloty is trading 3 to 1 to the dollar or higher, it is undervalued. When it is below 2.5 to 1, it is overvalued. The natural equilibrium rate being a little less than 3 to 1.

When the dollar is strong, I use my American bank account to transact business. When European currencies are stable, I use my European bank account to buy stuff.

Now, that is the extent I play currencies today. It is a fundamental approach. However, since I am on the ground in a foreign land, I have a pretty good idea of other significant factors, or at least as good as the experts, maybe better.

Experts are often wrong

For example, when top economists were calling for the Polish economy to go in crisis, I disagreed. My economist friends were sending me reports from around the world about the Polish economy, and I told them the guys who write these reports are wrong. In fact, this economy was the only one that did not yet fall. So often, the experts are wrong.

When considering currency fundamentals

I look at the interest rates compared to the two countries.

For example, at this time, the US is pursuing a loose monetary policy. Poland, on the other hand, has a tight money policy.

In addition, the US growth is weak, while Polish is healthy. However, there are other factors. For example, the currency here is highly correlated with the Euro currency, which is underwater. Also, the dollar is a symbol of trust, like gold, so even if beaten, it often comes back, especially with changes in the politics in the USA.

Getting to know a currency’s fundamentals are a lot like getting to know your neighbors.

Conclusion on trading FX on fundamentals

Even though FX trading works better using technical tools, you can trade exchanges on fundamentals. The way you do this is:

  • Choose two currencies you are familiar with for some reason, get to know them like an old friend.
  • Determine what the historic equilibrium point is. This is not just some historic statistic but generally a narrow trading range it likes to settle in. This is the natural fx rate, not a lifetime rate, but a 3 to 5-year rate.
  • Develop a theory about why the money market is away from this equilibrium point for some reason. Consider things like interest rates and the overall strength of the economy based on macroeconomic indicators and personal knowledge of what businessmen on the ground are saying.
  • Be patient. Trading on fundamentals is a long term form of speculation. It is not like trading on technical indicators like moving averages. If you choose to trade on technical indicators, understand it is a very violate market that often has sudden turning points. This is why a fundamental strategy with a natural rate can make sense. But in the end, I am slightly skeptical about currency trading as, generally, it is a zero-sum game at best.

How to invest in gold or silver

What is the best way to invest in gold or silver? I have a definite view on gold vs. silver and how to invest.  I do not think you will like it but read on. Before buying gold or silver first ask yourself why do you want to invest. If this is a small part of a diversified portfolio or for the novelty of owning coins, this is OK. But if you are looking to get a good ROI with precious metals, know that you are competing against the rest of the world and it is at best a zero-sum game, unless you use my alternative idea. Yes, that is right, your probability of making a profit is like flipping a coin.

Your choices of investment vehicles are:

  • Gold and silver physical assets
  • Precious metal stocks
  • Futures

Precious metals are not investments but speculation

You would think there is almost nothing safer than gold or silver right? Think again, if the price is $1,500 dollars an oz and it goes down to $500, and it could, you lost most of your money. I do not invest in metals. Why? They are not productive assets. Let me explain if you buy a share of stock you are participating in a dynamic company’s growth. This company can expand and create. If you buy gold or silver you own a nonproductive asset.

If you could invest in a farm that is producing something or raw land in a forest in upstate New York what would you invest in? The only way you can make money on a nonproducing asset is if demand increases and the price go up. This to be is price speculation not an investment of capital with the expected return.

It is zero-sum investing because for every winner there is a loser. Actually worse because of transaction costs. Precious metals have no dividends or growth. It is simple supply and demand and price, a mathematical equation, a coin toss.

My alternative to buying bars of gold or silver coins

This is an example of gold stock. It is something that is rich in valuation data and I might not have a problem investing in. I prefer shares of stocks to raw physical commodities or futures.

In the stock market in the long-run, there are always more winners than losers. I prefer that game to zero-sum investing. If you want to buy silver or gold it is better to buy shares in a mining and mineral company. Natural resource companies are often somewhere in politically stable Canada are better than South Africa. If the demand for precious metals increases, the stock price will increase in tandem. Mining companies actively manage risk and hedge price changes. It is a more conservative way to apply your equity capital. They take the nuggets out of the ground, but also explore new sources.

With a gold and silver mining company, you can use traditional valuation methods, like any stock. I wrote an article on how to invest in the stocks.  I owned  Canadian resource companies in the past and made a profit, with low stress.

Gold vs. silver – a comparison of natural value and price

Both metals have ornamental or jewelry value, this is their real worth. I buy gold and silver for my wife in small quantities in the form of earnings for example. So they both have subjective value, but for whatever reason, I think people put too big of a premium in their minds. It is not necessary for survival. Here is a basic review:

  • The demand for gold is based on the amount of uncertainty in the market and gold has some prestige value.
  • The demand for silver is not only based on uncertainty and prestige but it has intrinsic value because it has industrial applications. You can use it for medical, water purification, mirrors and coatings, and solar panels, etc.
  • Gold-silver ratio – That is, the spot price of gold vs the price of silver per oz. The price per oz is historically 16 to 1. That means the price of gold is 16 times the price of silver. The ratio is a natural value argument for investing. Silver is mined seven times more than gold. If you are trying to make sense out of this golden mean, don’t. Better spend your time with quantitative valuations of stocks.
  • Silver appreciates more than gold in times of uncertainty – Historically when there have been times of inflation or uncertainty actually silver and not gold appreciates more in value. So if you’re buying it on the rationale that these are the times that try men’s souls, silver is your answer.
  • Silver is lower priced and more volatile – Although an asset that is low-priced does not necessarily have greater volatility, it seems to be the case with silver. Greater risk, but also return.

The conclusion is if the price has not already been run up, buy silver and not gold.

Trading precious metals futures

If you still want to invest in just gold or silver and not some company that mines these metals, another alternative to holding coins or physical assets is trading futures. That is a paper asset that derives price from the underlying real asset value, factoring in time decay and exceptions. Companies buy these en masse to hedge risks, speculators try to beat the system.

Trading commodities needs trend analysis, not natural value

Pick up a book on trend analysis. People try to trade commodities and precious metals on some abstract valuation. This will not work, except in the long run, but ‘in the long-run, we are all dead’ (John Maynard Keynes). Better is find a moving average trend and trade futures with exits and spots, even if they are just mental stops. Stan Weinstein‘s stage analysis is a good investment book on this.

I do not speculate in this way as it is a different type of investing than equities. I am not saying that you cannot make money trading gold and silver, but you need a different system. It is also zero-sum.

If you still want to hold physical silver or gold bullion for other reason, such as if you believe that is a good hedge against inflation as you feel the currency is not stable and you need a store of value, then the question is which is better. Some people believe it will be a medium of exchange if the US collapses and the dollar is no longer accepted as legal tender. Under this doomsday scenario, gold bullion will be valued much fold what it is today. I do not believe America is doomed. But I have no problem with having a few golds or better silver coins under my mattress, but do not expect this story to have a silver lining. Better is to buy a good mining and mineral stock that supply us with these precious metals.


Investing books

Investing books – what I really want.

From an investing book, I want Excalibur. I want a supreme tool to lead me to victory on the investing battlefield. I am not saying this sarcastically. I, like everyone else swinging away out there is looking for Excalibur. However, in the back of my mind I know to be a successful trader, I need to use a Swiss army knife or have many arrows in your quiver instead. Let me explain.

Imagine you could open up a stock trading book and find the secrets of wealth and prosperity all laid out for you, in a specific way, in a road map. Further, this investing compendium revealed one main simple tool. That is, one main weapon you wield in battle. And furthermost other guys out there, even market experts do not know about this method. That is the dream.

However, my experience has been, even if, one great day trading or long-term investing book has a system, and many do, it is very hard to replicate these traders’ (authors’) successes. I do not know why? I have tried and not done as well. Maybe I did not follow their system to the letter or times have changed. That being said many authors have made millions of trading stocks. Therefore, I am not discounting them. It is just that I cannot use their system fully to put money in my pocket.

Reading investing publications are useful and I do buy books.

Three things I get from stock trading books:

  • Avenue to creativity – They open my mind to explore new ideas.
  • Pattern recognition – I look at patterns and trends. My brain experiences these in a book and 98% I will not encounter personally when I am holding a position, but for the 2%, I have seen it makes it worth it.
  • Motivation and pleasure – It is easy to lose heart when you have placed bad trades, but by reading other people’s personal accounts of loses and profits makes you realize Rome was not built in a day.

So the best I can do with investing books is understood the theory and build my own system for today and your style and portfolio objectives. What are the best investing books? What investment books will give you the edge? I would like to hear what other people think more than me as I have my favorites. My top three books are:

  • Secrets of Profiting in Bull and Bear MarketsStan Weinstein – Gives, in my opinion, the best concrete information in a simple way. I use a lot of his ideas, but more on a macro scale. Closest thing to Excalibur.
  • How Life Imitates Chess: Making the Right Moves, from the Board to the Boardroom – Gary Kasparov – Think like a winner from a quantified genius.
  • Reminiscences of a Stock Operator – Edwin Lefevre – Nice for motivation although the writing style is dated, it is a great story to read for bedtime. I love reading investment books in bed, while my wife is reading books on Tuscany or Provence.

Why I do not read value and earnings momentum books

Today a good software program or model can do in a split second what used to take hours of calculations and screening. I remember building models in Excel and importing data with scripts. Times have changed. All the books written in the past are dated because of new technologies and the speed of calculations and backtesting. This is a bold statement but hears me out.

I have read all the others that are noteworthy, from Market Wizards: Interviews with Top Traders – Jack D. Swagar to How to make money in stocks a winning system in good times and bad – Bill O’Neil, Peter Lynch’s books like One Up on Wall Street, etc. But they all predate 2011 quantitative testing. I like to think that with quantitative investing screens out there they incorporate all the collective wisdom of these books already so you do not need to reinvent the wheel. But these books are good for historical reference.

One of the hats my brother wears is he is Chairman of CFA UK (Chartered Financial analyst society). I am very proud of him for this. However, he might smile at my popular press reading list as he is more of a conservative fixed-income guy. At best (this is speculation as I do not talk investing with my brother) he might recommend things like Graham and Dodd – Securities Analysis. I think he does not read things in the popular press about investing, more research reports.

So my thesis is that most of the security analysis and valuation analysis can be found in something like ‘s research and stock screener or even MSN’s free quantitative search. These are academic think tanks that take into account these factors. They all have read Security Analysis and all the publications and look at these things scientifically. They contain the collective wisdom of those older books by Graham and Dodd and even tested claims of the new cowboys trading out there. It is their job to test and improve their portfolio models.

So there is no reason to knock yourself out learning everything from start. Leverage your time and studying either Stan’s book or general strategy books. Let the value pros do the initial screening for you. These guys are academics

Investment books are like Chess books

Think of this analogy. Few if any of the top-ranked chess masters actually go back and page through these encyclopedic books on Chess and setting up the pieces. Maybe some do for pleasure, but not like the old days. They use programs that calculate probabilities lines in milliseconds. Chess masters no longer look for dazzling tactics but boring positional understanding and this take a higher level of analysis possible at the champion level on computers.

Therefore, learn from this, let computers do the work and calculations and you do the high-level thinking.

A computer can do massive brute force calculations but does not have an understanding of what is going on. This is where you come into play. This is why understanding investment theory and strategy is better than a new system laid out.

So my point is read investment books, I do, but read them for fun, motivation and high-level strategy rather than to find a winning stock trading system, the secret to making money in the stock market.

My investment results – I have a winning system for me. I should one of these days publish my results, but I move money in and out of my account as I live partially from this money. So I need to set up one account just for demonstrating my results. Of course, as soon as I do this I will start losing money. But seriously, in the meantime look at the published and rigorous results of the quantitative screens, I start with. Look at the results of using something like the moving average on the market as a whole. I backtested this many years and you can too with any basic software. The last piece of my system is more of a judgment call. One day maybe I will write a book and publish my systems returns. But I have too many other things I am doing right now. So until then look at the results that have been publishing on the pieces of my system.

By the way, I am a bookaholic. I used to work in a few bookstores for many years and read all the time, I read on and off work, including investment books. In fact just this evening I placed another order for books but they were all kids books for my daughter. However, no investment books. I had a few queued up but could not justify the trade-off with my daughter’s books. But I think I will go back and order one investment book tonight.


Develop an investment strategy

Drawing up your personal investment blueprint

Computers are useless they only give you answers – Pablo Picasso

Too much investment information clouds judgment and this is what Internet investment data gives you. Your head will spin around because of too much choice. What you need is a strategy for buying and selling assets to make money. Instead of a flood of information in your brain, you need to always be asking ‘why’? You need to contently be asking yourself why am I buying and selling, and is this action in agreement with a general strategy. This is better than looking for some tactical win of making a good trade or day trade. Today everyone is looking for the best day trading program or some piece of information that will give them the tactical edge. My mantra is to develop a general strategy for trading; start thinking strategy over tactics.

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat’. – Sun Tsu

Do not believe the big investor has the edge over the small investor

The issue today is there is too much information. Even ten years ago to obtain the same stock market data, we have now at our fingertips , we would have to have been a professional. The good news is: now the little guys have the same information the big guys have, at least in theory.  Maybe with the exception of flash trading or unethical investing, that is acting on insider information. However,  investment guru has no edge on you in terms of information, nor do they have a monopoly on brainpower, trust me on this one. Therefore, there is no reason you can not get rich making money on trading stocks.

What I saw at 50 investment firms

Need more convincing? I set up investment systems for traders and portfolio managers. Over the years I spent time in almost fifty different investment firms. Most were in New York. I was intimately close to the details and flow of information as I was the one setting up their systems. I even designed workaround for the information, when the proprietary software did not have the functionality. Therefore, I was the key-master for investment. I know what I am talking about when I say most investment professionals are not geniuses. Further, they do not have better information than you have now.

They are just like you. The one thing stock market gurus have that you might not have is an investment strategy.

If you are a small investor there is no reason you cannot make more than Wall Street investment houses, hedge funds, in percentage terms. I know this is a bold statement but it is true.  You just need an investment strategy.

However, the challenge investors face is filtering the wheat from the chaff and not getting thrown off course with your investment strategy. Further many people are lazy in thinking and want to just charge ahead, rather than take time to develop a strategy. Here is the first and maybe the most important take away from this post:

  • If you want to beat the market, you need to stop looking for the edge in terms of information or day trading software and start having a concrete, even written plan for investing. You have to think more like a strategist than a tactician.
  • I can highly recommend the book by Gary Kasparov – How life Imitates Chess – Making the right moves from the board to the boardroom. It is not about investing but how to develop your own personal way of thinking about your goals, money or whatever. This book has made an impact on me in terms of the way I think about stock trading. And yes this guy is a genius.

Why investment strategies do not work

I use to play chess at Harvard square. One of the chess masters there explained to me, the reason chess is so hard is:

It is not just what white does but also what black does. – Harvard Square chess master

Such simple words that mean something. I think can have greats ideas and plans and my own style and strategy but they fail if I do not consider the dynamic nature of the playing field. It is just not what I am thinking but what is changing around me.

The problem many investment managers are they have a plan of attack, but it is not dynamic. It is one dimensional. Again like the chess master mentioned above, it is just not what white does, but what black does also.  They have a plan of attack something like ‘I like to screen for low P/E stocks’. Or ‘I look at earnings momentum’, or’ valuations now seem a little high’.  I can not tell you how many countless times I have herd fund managers repeat these mantras and their market returns were less than stellar. The stock market like the chessboard or battlefield is messy and rarely textbook.

Even if they react to the new market conditions, which is good, they do it with the same old investment strategy or thinking, which is bad. They have not changed their thinking process. This is why you can have a solid investment strategy that has worked for years but, then stops working under a new set of market conditions. The issue is most investment managers I know have huge egos (because of some title like chief portfolio manager for XYZ hedge fund) and pride blinds them. As a disclaimer, many do not and many do better than I do, but I am talking abstractly not personally.

  • Focus on changing your thinking to trade stocks better –  To get good returns in the stock market over the long-term (different market conditions) you need to change your brain’s software or pattern of thinking not just react. You need to stretch your brain and see the world different to be able to develop a good investment strategy.

George Washington and the stock market

Consider this example. George Washington was fighting in the French and Indian War as a junior officer. His commander General Edward Braddock who used traditional European British tactics. He lined up his men and fired volley after volley into the forest under the command ‘ready, aim, fire’. The enemy would be safely undercover at this time. If you saw the movie last of the Mohegan you will get the picture. It was a tactic that worked in one environment but not another. Braddock even changed the formations and the tactics in reaction to his environment, but still used his old 18th-century thinking. He was shot in battle and George Washington replaced him. Washington immediately started thinking like the native Americans, using the forest for cover. He did not just change his tactics but his whole way of seeing the world.

The same holds for investing. What works when you are in a bull market might not work in a sideways market. If you are getting beaten in the market, remember the lesson about Washington.

Changing your investment strategy too often

Changing your strategy all the time is like not having a plan.  This is clear and I do not have to go into this, other than if you are in the learning process, you will change a lot,  but you need a general plan of attack. But if you are learning do not worry about his as everything is new.

Not having an investment strategy – Many people buy a stock because they want to make money. This is like a chess player who starts to advance pieces in an attack, without knowing why he is moving the pieces. He knows how to move, but not why.

The person who knows how will always have a job. The person who knows how and why will always be his boss. – Emerson

The point is thinking and awareness takes humility. Asking ‘why’ am investing this way and is there any way to improve it?  I do. I am always reading books on everything from Fibonacci numbers to less esoteric trend analysis with moving average. I am always looking at other people’s strategies and learning them. Maybe someday I will see a situation I can deploy it, like a chess master or a battlefield tactician can respond to a situation.

Investing as a maverick – consider this

Trying to reinvent the wheel without having solid experience is a bit foolish – when I worked for Merrill Lynch I remember this new fund manager. He was trying to be a maverick. The first year he did great, by luck, the next three down and then he was out. Similar to chess, people try crazy things when they are inexperienced. Trying to pull something over on an advanced player. These unorthodox variations are not played for a reason. Kasparov would meet young guys trying to play unorthodox movies to trick him. These line of attack were not commonly played for a reason.

The virtue of innovation only rarely compensates for the vice of inadequacy. – Gary Kasparov

Yes innovate, but first, have many arrows in your quiver. Learn several different strategies and then you can deploy them in different market situations.

If you want to learn how to invest I again recommend the book by Gary Kasparov. This is not an investment book but gives you ideas on how to develop your own style of thinking strategically in business. For general advice or motivational business book, it is one of the best books I have read. It is brilliant in its simplicity and really motivates you to look at your thinking process.

How do I pick stocks?

My general plan is I use the moving average for the market as a whole, then use quantitative picks (not just stock screeners). Then from this pool of assets, I use my own judgment about the company, such as do I personally use the products. It is my basic plan, but from there I drill down with tactical ideas. But I need to start from something general. In conclusion, the purpose of this post is to get you to start thinking not how to make money in stocks but why are you investing the way you do.

If you have any book recommendations or investment strategies please leave a comment.


Are CDs a good investment?

Certificate of Deposits at the Bank as an Investment

The purpose here is to answer the question “are bank CDs good investments”? Further, what about CDs vs. Stocks. When I was a stock broker one of the most common ways to hook a new client was asking them what return their CDs were earning at the bank. When they told me, I would give them a disappointed expression, pause and then say, I think we can do better than that.  But that was long ago and not something I am proud of. CDs are good investments. Give me a chance to redeem myself and explain why.

One of my clients only bought bank CDs. He had a lot more money than most of my other wealthy investors. I asked him why he did not invest in the stock market. His reply was simple. Stocks are indirect investing. That is, you take part in capitalism though a distant form of ownership. You have little influence over the company and the profits you make are very dilute and mediocre, maybe 10% a year. It is better you stash your cash in something safe like a near-cash fixed income investment like a CD or Muni bonds. Next, focus your energies on applying your own creative talent and extra capital on your own business. Rather than getting distracted by the gyrations of the stock market.

When I did taxes and was a broker most of my clients did not make their fortune trading stocks but rather started small companies.  This is the reality. Granted a difference of 5% return on a fixed income investment and a 10% return in the stock market over time is a big difference if you consider compounding. However, the point is you should invest in your own company first. Passive indirect investing, even if you are a trader is the optimal way to get rich.  Investing in your own ideas and talents are better. That being said I am an active investor in the market, but it is not my primary source of income.

Fixed income vs. equities

If you are a conservative investor you might want to take your age and subtract it by 100 and this is the percentage you should be invested in fixed income like bank CDs.  You can shop around for the highest rates or just go to your local bank or credit union and buy a few at laddered maturities. You will not get rich with CDs.  However, I live in Europe and America and I have seen some really good rates up to 11% on Bank CDs when new banks are trying to get started and raise capital.  These are insured and it is a little like international arbitrage. This is better than an average annual return on the stock market.

I personally do not own one CD right now. Money markets pay close to CD rates and I am active in the equity markets. Therefore, I split my asset allocation between cash and equities leaving CDs (fixed income) out. I do this because I follow a pretty disciplined systematic approach to investing and it does not take a lot of my time, or mental energy to implement.

CDs are a good investment

Invest in a bank Certificate of deposit if you:

  • Are an entrepreneur and do not have the time to be a stock trader.
  • You are saving for something like a house or a major purchase and do not have the luxury of a twenty-year time horizon to smooth out your equity returns.
  • You are a conservative person and fixed income investing in a simple for is for you and provides income.

CDs are not a good investment:

Do not bother with these types of additions to your bank account if:

  • You are very patient and have the stomach for the ups and downs of the stock market and are open to various methods of investing including international investing and leverage.
  • You know how to find fixed income investments that are low risk in a diversified portfolio with a greater yield than a bank certificate, but it’s not too time-consuming.
  • You are young and not going to retire anytime soon.

Why gold is a good investment

Gold is a good investment if you invest for fun. That is it. If you are investing because you like to hold gold coins for the feel of it, it is an excellent investment. It feels great and secure to have a few in your closet to show your friends. However, do not expect to get a return on that investment. It is more for prestige and show. The aim of this post is to tell you, in general gold is a poor investment unless you:

  • Know how to trade it like a market wizard and speculate.
  • Find a good precious metals mining company or fund.
  • Besides that, I recommend not investing in gold and certainly not for the long-term and in every economic situation.

The reason gold is a bad investment is it is a nonproductive asset.  That is it plain and simple. That means it just sits in your draw and does nothing waiting for appreciation. On the other hand, if you invest in a company, for example, the company is actively trying to create a profit for you. Gold is just waiting for speculation to drive the price up. It is similar to holding raw land in the middle of nowhere, for appreciation in contrast to a rental unit in a city which has both income and appreciation.  Any productive asset can only increase in value by supply and demand.

The demand for gold is driven by a hedge against inflation (Not statistically proven) or economic instability. The supply is always increasing (this creates downward pressure in the long-run if not matched by demand) and output is steady, therefore, without a corresponding increase in demand, prices do not go up, but down. China is very actively involved in gold mining and exploration. It is not the 1970s where most of the gold just came from South Africa. New supply sources are being opened up and explored.

Based on the increasing supply of gold alone, it is a poor investment

Remember price is not just about demand but also supply. Look at the graph above and draw your own conclusions.

Ways to invest in gold

  • When I worked as a broker people would actually want to buy the gold coins. Things like the Canadian Maple leaf or the Australian kangaroo nugget, the American Eagle or Krugerrand from South Africa. I use to chuckle at this guy, but you know it is a fun way to invest as you have something physical and give it to your grandchildren for fun. You can even buy gold online.
  • Investing in jewelry – the design not the weight of Aurum or Au that matters as much.
  • Sure gold has industrial uses but it is not the type of metal that will appreciate based on that as there are low-cost alternatives. Think about it people are not getting gold fillings anymore.
  • Futures – this is just like trading any other futures options with a zero-sum game, for every winner, there is a loser.
  • You can now buy gold in vending machines in Germany and Dubai. You just use your credit card or cash for payment. I think this is very flashy and fun for high-end hotels.
  • The best way to invest in gold is by buying gold stocks. Why? You are buying a company that actively and professionally hedges and grows. Many people will disagree, but I do not trust buying a raw commodity.
Gold has been a good investment in a very narrow time horizon.

In my mind, there is only one way to invest in Gold as a speculative commodity and that is based on moving averages as discussed in Stan Weinstein’s classic book. Most other books are a waste of time. Although it is considered a special precious metal it still obeys the rules of all precious metals when trading.

I remember one guy I worked with at an investment firm was a gold bug, that was in 1997. Every day he waited and check the price of gold seven times a day. He was just waiting for a movie. He had to wait eight years before gold began to move. That is a huge opportunity cost and time wasted.  Just see it as any other investment, not for its glitter and allure.

Gold as a poor investment

  • From 1980 to 2008 the price of gold was down. That is it took 28 years for gold to get back to its high. For me, that is a lifetime. Do you really want to be playing that type of game?  Gold offers no dividends and just sits there.
  • Gold investing is a speculators game. That is it is traded like any other commodity. When it is flat it is really flat and there is not a movement, but when it is hot, it has a lot of volatility and you really need to know what you are doing. You could get burned by trading professionals who short and long it for short-term gain.
  • The risk/return ratio is not that great, for that level of volatility you can find better investments.
  • Some people like a small amount of gold for diversification or fun. This is certainly OK.  But if you are buying it as a hedge against a real crisis, remember, if there ever was a real doomsday people would be trading food, not gold. For goodness sake do not hold your breath for such a thing.

The price of gold has tripled

The price of Gold was 400 dollars an ounce in 2005. In 2010 it is now over 1200 dollars an ounce.  In five years you would have tripled your money. does that not sound good? Yes if you could have bought at the low and sold today you would have done well. But it was all based on this crisis. Could you have ever imagined in 2005 that in 2010 the markets would be in the shape they are today? Maybe you could have predicted the stock market fall with moving averages and technicals but to this extent, I think it would have been more luck.

You would have had to have nerves of steel to hold gold during this time and not sell at 500 or 800 dollars etc.  If you are a gold bug and want to buy bullion do not let me stop you. However, investing is for the sole purpose of making money. I would not play around with this asset class too much.

Remember that in 1980 the price of gold was 400 also. It is a high-risk speculative investment. If I am going to speculate there are more effective and fun ways to speculate. If you still really want to buy and sell bullion check out a Dummies book by Paul J. Mladjenovic on precious metals. Do not read books that are hype. Understand the market and trade on moving averages and hope for the best.

I would prefer a boring Canadian mining company any day, than simply buying gold outright.


My Disciplined Approach to Investing

In theory, I take a disciplined approach to invest. I have a basic system I follow and it has been very good to me. I have never calculated my returns however, my investment accounts have steadily increased and I have basically avoided the recent downturns in the market in the last few years.

How I got interested in investing

I started to first investing my teens with my summer job money. I can not believe I did not spend it on records etc and saved every penny and invested. I invested in the GT Asian Pacific Fund, then I bought stocks.  I do not think my Dad even knew about it the fact his skinny geeky son was taking his summer money and investing it and playing the market. I remember doing my tax return and all the trades made it very difficult to determine the cost basis on all my trades. This was before computers.

It is 30 years latter and after working professionally in the investment world for many years I do other things, but really still love investing.

The first book I read was “How to make money in stocks” – not the one by Bill O’Neil but one by the author I can not recall.  I think I was about 16 years old. I read scores of investment books from Market Wizards by Jack Schwager to Stan Weinstein book, which I think is the best. And of course the classics like Security analysis and the intelligent investor by Benjamin Graham. I wrote a paper for my high school English class called Stock options Put or Call.  I remember my teacher giving me a strange look.  I got a Master’s in economics and worked buying and selling stocks. I started my CFA like many people did, but go bored. I did not want to be an analyst or trade on someone else’s account (Although my brother is the President of the CFA association in the UK or something). I clearly decided I like to trade my own stocks, rather than just work for a big Wall Street company.

I really want just obsessed with the idea of the stock market and trading itself,  more than making money. Think about it. At any one given moment during the trading day, almost all the assets of the country are on the auction block for sale in the investment markets. Wow.

I perfected my system for investing with the idea that investing with a disciplined approach should be very simple and easy to implement as I have better things to do all day then watch the ticker quotes. Since I am also a programmer I thought of developing my own trading system but I have no interest in this. Why? A lot of this work has already been done and we are at the next generation of investing. Modern quant shops already incorporate and have back tested ideas. I did not want to try to squeak out another 1% after years of programming work. I decided my time would be better spend exploring applying leverage to investing or getting a more steady return than trying to hit a home run or a ten-bagger.

One of these days, I think I should someday calculate my returns but I am always adding new money in about out, therefore, it would take time. I would have to factor in a lot of variables like stock splits and dividends and the fact I have several accounts and in different countries. But where is the way I invest in the equity markets going long?

My disciplined approach to investing in the Stock Market

The bottom line is I have a system for investing.  Not a rigid computerized system of investing, but a basic plan and discipline.

  • Step 1 – I am in the market when the S&P is trading above the 12-month moving average and I start to pull money out as it drifts below this.
  • Step 2 – I use quantitative websites like valuengine (five-star stocks) or MSN stock scouter (top picks) to do the number-crunching or grunt work in narrowing the field.
  • Step 3 – Then in the universe of stocks,  based on my own selection criteria (usually companies would I personally buy from and has good management and cash) and I make some subjective investment decisions.

I do not think you can beat the big firms out there in flash trading or high-velocity trading. This is why I take a more easy-going strategy, using a long-term model with very easy to read buy and sell signals for trading with most of the work done by a third party.

The reality of my investment strategy

If I followed this system exactly it would be great. Investing would be a very simple thing and I would not worry too much.  I mean based on MSN stock scouter or you would do very well (they have incorporated a lot of the wisdom from the above-mentioned books on investing). But I have a few added twists.

The issue is I am not disciplined, at least 100%. Sometimes investing when the moving average is below the 12 months moving average for the S&P and sometimes choosing stocks that are not in the top stocks for these quantitative research shops. Why then do I not always follow a disciplined approach to investing?

Why I do not always follow my own trading system?

I am only human. I have ego, pride, I like to test new ideas(which is not all bad). When you go to the gym do you sometimes skip a day or you do follow a disciplined system of fitness?  However, I think the main reason is I have a system and a reasonable level of wealth so I do not have to worry too much. Therefore I like to test and experiment. In experimentation I feel I can improve, but if I follow the same old approach then I am stuck.

Lately, my experimentation has been more in the form on perfecting my system then using leverage. After a certain my point it gets harder and harder to increase your return by another percentage point. You can do it but for sure. But an easier way is leverage.

Stocks options or Leaps or margins are very dangerous. I have traded these in the past but at this point back to the experimentation phase. If you can find a disciplined approach to investing that works and then add leverage you would be rich much quicker as it amplified your returns. Think about it is you have a 20% return times 5 you have a 100% return. The only thing is you have a huge potential for loss. I use dollar-cost averaging and diversification and relay heavily on “quant shops” to give me a feeling of comfort. But I am still not sold 100% on leverage as I have seen many people get burned. I for the last 30 years have only been testing this.

These are my thoughts on a disciplined approach to investing and I am curious about yours or your approach or systems you might use.