Introducing BIG Change, Part 1: What Is Already Here?
September 28, 2008 by Vagabond Investors · 2 Comments
Big changes do happen.
They happen very gradually. They go unnoticed. They are missed by most people who focus on weekly performance results. They are hardly noticeable until the symptoms become acute. As big changes happen, the rules of the game change. A new set of threats and opportunities arise.
Between 1998 and 2000 oil prices tripled, but nobody paid attention to it even though it outperformed Nasdaq index. Why should they? It was the New Era. Right?
The crisis in the banking sector was gradually becoming evident before it hit the markets. When Northern Rock had a bank run, not many people reacted. Even when Bear Sterns was bailed out, most people didn’t get it. Even when Fannie Mae and Freddie Mac were nationalized some people still didn’t take it seriously. It was only after Lehman Brothers went bankrupt that it really hit the last one of investors.
“What the BLEEP, the financial sector is toast!”
Yes, it has been for a long time. Don’t expect a quick rebound either.
As investors, we have to adjust our thinking. When the rules change, we have to change our thinking and actions. The best part is that big changes provide huge opportunities to become wealthy! It’s not only about surviving. It is about profiting from that change, too. To every market move there is a counter.
For example, just a few hundred dollars on put options on banking sector would have made you a load of money by now. That’s the power of seeing patterns and the courage to act on it. I admit that on this particular case it didn’t take that much visionary skills to that, but many people still didn’t do it.
Every time the rules of the game change superior opportunities to become wealthy are presented. We, the US government, central bankers or anybody else can’t stop it. There is no more powerful force than an idea, whose time has come. The waves are going to come no matter what we do. Instead of blaming, I suggest we learn to SURF the waves. It’s a low-risk idea.
We can’t control what happens in the market, but we have absolute control over our response to what happens. To every market move there is a counter. To every counter there is a counter.
So What Is Here Already?
The brief financial history of the 21st century could be summarized as follows:
1. The bursting of Nasdaq bubble in March 2000
2. Commodities bottomed out in 2001
3. The great housing boom, and the end of it
4. The end of a 20 year global equity boom
5. Credit bubble collapses
How many of these did you capitalize on? I doubt that anyone got them all. I know people who have made millions with the changes listed above, but none of them utilized them all. Still, if you’re a professional investor, don’t tell me you didn’t get any of them 
Some of these changes are under suspicion by some parts of the investor community. Many will fight hard and long before they admit that the equity boom came to an end. As to us, for you and me, it would seem to be true.
The most overlooked and misunderstood big change is the bursting of the credit bubble. It was very clearly signaled by the market when the total collapse of financial firms happened. It has changed the rules of the game big time. In my opinion, it is as important as the crash of 1929.
The old rules said that in the United States credit growth can outpace GDP growth. Under the old rules, for 20 years, three forces boosted asset prices:
1. Strong credit growth
2. Falling commodity prices
3. Low interest rates
The crisis is not nearly over yet. What we have seen is the first wave. More waves will come. The US is hit. Rest assured, Euro are will be hit too. So will the emerging markets. Many people will be stunned by the outcomes of this change. I believe that those who believe strongly in emerging economies will be staggered within a year. As a surfer would say, the ultimate wave is upon us, let’s surf!
To every market move there is a counter. To every counter there is a counter. Let’s keep our eyes open now! Judging from the blood on the streets, somebody is making a killing.
Let’s join the party!-)
Jaakko
Blood On The Streets? Time To Make A Killing.
September 22, 2008 by Vagabond Investors · 3 Comments
The very best time to find new and profitable opportunities is when the market goes bad. In other words, when the news is full of gloomy data, it’s time to get excited. That day has come.
Successful investors keep on seeing opportunities when the markets are deeply in red and stormy clounds fill the horizon. Financially intelligent people see problems as opportunities. Solve a problem and you reap a profit. For example, Warren Buffet is looking for to buy some parts of Goldman Sachs on discount at the moment. While it’s true that you and I can’t put together deals like that, we can make other outstanding deals in the market.
How can an average person like you and me benefit from the down market?
First, identify the direction. It doesn’t matter which way the market is going as long as we can recognize it. Second, take proper action. For example, let’s say that you’re expecting the stock market to go down. You can buy put options, short ETFs or short stocks on sectors that are going down. This is just like buying call options, ETFs and stocks on a bull market. It’s just that now we’re doing it in the opposite direction. You have to let go of the obsession that you can only make money when the markets go up. The truth is you can make money in good and bad times.
Personally, I like bad times better. Public panic is more electrifying than public optimism. Why is that?
Down movements in the market are typically more aggressive than the up movements. They offer faster profits. If you’re like me, you prefer to have your profits sooner than later. Anybody who invested a couple of hundred dollars in the financial sector put options last spring has made tens of thousands in profits by now. Their total risk was limited to those couple of hundred bucks all the time.
How could these people see the coming crash of the financial sector?
Difficulties in the financial sector have been in the news headlines for more than a year now. It didn’t take a rocket scientist to find the companies that have been on a bad shape. After Bear Sterns was rescued and the mega bailout of Fannie Mae and Freddie Mac was announced, even the rest of us should have understood that the situation is going to get a lot worse (and it did). These troubles were clearly announced and it is a perfect example of a problem turned into a huge opportunity.
What about real estate? Do the same principles apply there too?
Yes! It’s no different. Forget the price speculation. Focus on the essentials. Keep looking for deals that give you positive cash flow. There is a sustained period of exceptional opportunities in the market! There are a lot of people who suffer and they’re desperately trying to get rid of their houses, because they’re late on their payments. They want you to buy their houses –at almost any price! Help them move on in their lives and make a fortune on the process. That’s a great way to help people. Think about it.
My message is simple. Keep your eyes open and try to figure out, what kind of opportunities Mr. Market is offering you today. It’s your job to find them, and the best news is, they’re always there! The deal of the decade comes along about once a week, if not more often. Now is the time to find your opportunities and take a GIANT step closer to financial freedom.
Now is the time to make big profits. There will come a day that the sun is shining again, and the best opportunities are gone. Are you going to say “I’m glad I did” or “I wish I had?” One these days you’re going to have to answer to that question.
Matias
Update - Comment on Forecast: Oil $60, Recession
September 15, 2008 by Vagabond Investors · 5 Comments
Dear Readers,
You can rest assured that the credit bubble has burst. I don’t think anybody is trying to deny that anymore. The reward of a correct bearish forecast is questionable. One can feel intellectual satisfaction for that, but the true test of one’s character is if he can refrain from saying “I told you that was going to happen!”
The r-word is on everybody’s lips. The financial sector is not keen on saying it aloud. Let’s just face the facts that we’re in the middle of an unusually large meltdown.
Mr. Edwards had a highly bearish forecast on the market. I have some reservations about his forecast. I think that if S&P 500 would approach that 500 points level, US bond yields would be far from 2%. This is because the US Government and the Fed would probably arrange large bail outs. This would boost the US budget deficit, which I believe would put the dollar under significant downward pressure. US bonds would likely go down to BBB or CCC rating. Under that scenario, I don’t think that 2% yields are very realistic.
So the global liquitity is tightening.
Do I believe that it’s going to lead to a recession? Yes. I think the result of this mess is a global slump with all asset markets hit one way or another. I would even say that the USA is in recession already, although traditional Slump-o-Meters don’t show that. For the average person, though, rising unemployment is recession. It gets very personal and very negative when you lose your income streams no matter what the GDP figures say. In my opinion, it might be time to check if traditional ways to measure recession are up to date anymore.
So what’s new? Lehman Brothers faced bankruptcy less than one week after the video post. Bank of America announced that it would buy Merrill Lynch. American International Group is in big trouble. Rumors of Washington Post bank run shake confidence. Central banks and the market have reacted accordingly – making the show even more exciting and hilarious!
Movement is lovely for the technical momentum investor. I can’t say that a put option play on banking sector was a bad idea. I hope our fellow readers profit from this volatility. It may take time before we see such great opportunities in such a short period of time again. Not to worry, though, it’s not even nearly over yet. The results of this mess are yet to be seen and are likely to surprise many people.
Now let’s see what Mr. Bernanke and Mr. Paulson are up to. I’m sure it’s a blast! As the song from Pointer Sisters says “I’m so excited and I just can’t hide it!”
Let’s keep an eye on the market. Now is the time of great wealth transfers. The collapse of the banking sector was without a doubt The-Biggest-Investment-Opportunity-Of-The-Year.
Successful investing!
Jaakko
Investments Will Not Make You Rich
September 3, 2008 by Vagabond Investors · 4 Comments
Dear readers,
I want to share something with you. I’m going to talk about a problem. In fact, not even a problem. I’m going to issue The-One-Big-Mistake-That-People-Make-With-Financial-Matters.
Please, pay close attention now.
The most common mistake people make with their money is that they think that their business or investments can make them rich. In other words, they think that stocks, bonds, mutual funds, gold, real estate, hard work or a good business can make them rich. It isn’t so. None of them can make you rich.
It’s not about what you have. It’s all about two things:
1. What you know about money, investing, business etc.
2. How you apply that information to benefit yourself and others.
This is exactly what we mean by financial intelligence. This is the key to a more abundant life. It is the only key.
We all face financial problems. Problems will never go away. The only place where you don’t have problems is the cemetery. Problems are a sign of life. They are hidden opportunities that challenge us to learn.
The only way to increase your financial IQ is to solve financial problems. The better you get at it the bigger problems you can solve. Bigger problems mean better opportunities to learn. Problems can be converted to income, if they are solved in a creative way.
The wealthy tend to think that each problem has a hidden opportunity in it. They turn their problems into questions. How fast can I turn this around? What can I learn from this?
We live in a world of cause and effect. We choose to do something and it leads us to some outcome. If you’re in a good physical condition, you’ve chosen something different from the individual who looks like a Michelin man.
Wealth is a result of specific causes. The lack of money is never the problem. It’s just an outcome of some causes that inevitably lead to it. It may be something as common as doing nothing. Many a problem has come about when good people have done nothing. That is an active choice as well. There are always lateral options to do something.
So what is intelligence? It is the ability to find causes behind desired results and act on them. We need both information and action. The ability to act is also called personal power. In most cases, wealth creation requires massive action in few critical areas. One of them is increasing your financial IQ so that you know what you should do in the first place. There is no more important investment than that.
Let me give you an example. Let’s say you have a stock portfolio which has taken some serious beating on the market. You decide to take responsibility (response-ability). You ask how you could have protected yourself from the downturn. You come to realize that you could have used protective stop-loss orders or change your strategy after noticing that the support level has failed. The options are virtually unlimited. Personally, I think that owning a stock without stop-loss orders is like having casual sex without a condom. It could be exciting and adventurous for a while but there comes a day that things will go seriously wrong.
How do you increase your financial IQ? The quickest way is to study the subject. Go to the market and get some experiences (might be learning experiences at first). Then analyze it. Ask good quality questions and learn from your experience.
Focus on one asset class at a time. Find a working strategy, keep learning until you master it, and then learn a new one. Then open your mind for a different view on some other asset class or instrument.
For example, you can start with long-term buy-and-hold real estate deals with excess cash flow as your goal. You can then move to flipping houses, if that catches your attention. You could turn to trading stocks or building automated businesses. The game of money is fantastic, because there are zillions of ways to make a ton of money and have fun doing it! Expand your view. You can never learn less.
I hope this clarifies that it’s not about the investment but the investor. The investor is far more important than the investment. Ultimately, all profit and risk lie on the investor, not the investment.
Take care!
Matias
