How to Really Ruin Your Financial Life and Portfolio Page 2

  No, they sell this stuff for one reason and one reason only. They want you to be rich. That’s their sincere motivation.

  And how do you get to be rich? Rapid, lightning-fast trading.

  After all, hasn’t everyone who bought those programs and acted on them gotten to be rich?

  So, listen to late-night infomercials. Watch them and pay attention. Order the software, and then go out and get rich.

  Or, maybe you don’t need software. Maybe you just need to watch CNBC starting very early in the morning, and then to trade on the rich golden nuggets they produce for you day after day, hour by hour, minute by minute. The people on those shows have the most up-to-date inside information. They can get you the 411 before the high-frequency traders or the hedge fund boys and girls get it.

  They are brimming over with tips and gossip that if acted upon speedily will make you rich.

  CNBC is free in most parts of America. It is like owning an oil well or a huge natural gas shale deposit. Just watch it, pay attention to it, and trade like the dickens.

  For example, if you see that a corporation is about to issue good earnings news, or has just issued good earnings news, buy that sucker and right now!

  Well, wait a minute. There is an old saying that goes, “Buy on the rumor. Sell on the news.” So maybe you should sell on the news of good earnings. It varies case by case. But in any event, do SOMETHING right away.

  Likewise, if a company has missed its earnings targets, you have to act on that, too. Now, there is one little problem: Sometimes companies that have just missed their earnings projections go down a lot and sometimes they go up a lot. This, however, is no problem for you, the devout CNBC watcher. You just watch and listen to see what the market is doing about the stock in question, and then you do the opposite. Or maybe it’s that you do the same.

  But no matter. You just do something right away. Maybe just go where the rest of the market is going. Or maybe go against. It is a bit confusing, but for heaven’s sake, do something.

  Then, of course, there are columns and columnists in magazines and newspapers. They often have tidbits about where certain stocks are going. Pay attention. These guys and gals are SMART. They didn’t get their little desk out in the middle of a floor in an office building in New York City by being stupid. They know things. They can shoot the eyes out of a fly at 100 yards as far as stock picking goes. Don’t worry that they are just being fed gossip about the market by men and women who stand to gain by what they whisper to the newspaper and magazine columnists. Don’t worry that the big boys are routinely trading against the very advice they whisper to the newspaper columnists. Just do something.

  Likewise, when there is any kind of news in the papers or online, trade. Is there war in Syria? That could mean something about oil prices. Do something!

  Is there the rumor of a showdown of Israel versus Iran? Again, don’t just pretend you can sit this one out. You can’t. You have to be in there trading, trading, trading. No ifs, ands, or buts. Is there a presidential candidate who seems likely to win and has announced a plan for a tax on oil companies? Then sell those suckers right this minute. Or maybe buy them because of that “buy on the rumor, sell on the news” thing. Is there bad weather in Guinea-Bissau in West Africa? They must sell something or make something there. Buy it or sell it. Scour the newspapers minute by minute and then trade frantically on the news. That is how the big boys do it. You want to wear the big-boy pants, don’t you?

  And keep close track of what CNBC and other reliable sources tell you about how the powerful hedge funds are trading. For example, once again—and I know this caution must be boring to a riverboat gambler like you—don’t worry that the billionaires are telling you to buy just as they are selling and telling you to sell just as they are buying. They wouldn’t do that. They are on Wall Street. That means their word is their bond.

  Like the people who are selling trading software, they are not doing what they do to make money. They do it to help you. What other motivation could they have? Surely it wouldn’t be to make money off a good guy or gal like you, right?

  The newspaper columnists are sworn to helping you, too. They are not interested in their own careers or what they can do to curry favor with these rich Wall Street guys so there might be a taste of honey for them down the road. No, they want to help you. That is their only motive. They are journalists. They live by their honor.

  Plus, don’t waste your time worrying that if the advice or the gossip is in that day’s Wall Street Journal or on CNBC, then about 100 million people have already seen the advice and acted upon it. No, no, no. That advice is still fresh and green and useful. Use it. Act on it. Have fun with it. Make money with it.

  Now here, perhaps, is a little secret of investing just for you: You may not need any guidance of any kind—not CNBC, not newspapers and magazines, not trading programs. Your own inner guidance and intuition may be more than enough to get the job done.

  Yes. Just by a feeling you get at the end of your fingertips when you see the name of a stock rushing by on a computer screen, you will know whether to buy or sell if you are in tune with what George Lucas aptly called “the force.” If the force is with you (and it is), you will know when (and much more vitally WHAT) to buy and sell.

  Why, your servant, moi, just happened to know a young man who came into an inheritance. He had a computer. He had broadband access. He was soon trading just because he felt like it. The results? Well, he was wiped out and his parents had to get a second mortgage on their home to meet their son’s debts. But this will not happen to you! Not a freaking chance in the world. You will make money from day one.

  So, don’t just sit there and watch the paint dry. Go out and trade, trade, trade.

  By the way, here’s an unexpected side benefit: Whatever brokerage you are using will love you for it. They will be your pals, and call you and thank you and send full-color advertisements so you can trade more and more often. They might even send you a calendar and a birthday card. They will surely send you a Christmas card.

  Trade early and often. That’s the way the alpha dogs do it, and you are the alpha dog!

  Chapter 2

  Trade Foreign Exchange

  Possibly you remember from The New Testament about the part where The Carpenter cleared The Temple, that is, He tossed out the money changers who had set up shop in the Holy Temple in Jerusalem? Well, guess what! They’re ba-ack. Maybe not in the Temple, but they’re back.

  Yes, the moneychangers, the people who exchange one form of money for another, are back in spades. (Also in clubs, diamonds, hearts, and no trump.) They are totally ready to welcome you to their elite brotherhood.

  And quite a club it is. You may not know this, but the foreign exchange (forex) market is by far the largest market in the world. It runs 24/7 all around the world. Christmas. Easter. Rosh Hoshanah. For those who like to make bets all around the clock and who like to particularly make big bets, it’s the best casino game on the planet. There are no sexy Keno girls and no one offering you free drinks to play card games and no free Buffalo wings, but it is an immense worldwide casino.

  And it’s so exotic. Much more exotic than Las Vegas. It takes place all over the world, man. The whole world.

  Faraway places with strange sounding names. Currencies from all over the world. Currencies from China and Japan and Taiwan and Russia and Argentina and the Eurozone and even from our own North America.

  They are all trading against each other around the clock. Just going, going, going. Yen. Renminbi. Peso. Dollar. Pound. Euro. Zloty. Forint. It’s everywhere. There are over a hundred currencies.

  And absolutely no one, and I mean NO ONE, knows where the hell they are going or in what direction or how much or for how many seconds, minutes, hours, or days.

  The smartest men and women, with the absolute most training in finance and international economics do not know where the currencies are going.

  The value of a currency of a nation depends upon the interest rates of that nation relative to other nations, to the trade surplus or deficit of the nation, to the economic health of the nation, to rumors and truths about minerals in that nation. There are political and military causes that move the currencies. There are health scares that move money.

  It gets a lot more complex than that. Because you are always buying or selling one currency with another currency, and often involving several more variables than that. All of them are fluctuating every instant of every day, like the blood pressure of a parent with an insolent and lazy child. It is like picking one ant out of a million ants and trying to bet on how long that ant will live and exactly where on the ant heap he will be in a given number of seconds or hours or days. No, it’s like picking out one grain of sand and trying to predict where, in a sandstorm, exactly, to within an inch, that grain of sand will wind up.

  That tells you that even the smartest, most well-trained minds can often be far off when telling you where currency prices are going. And that, in turn, tells you that no one, as I said above (and I mean NO ONE), knows where a currency will be a day from now or a week from now or ever. The highest ranked math PhD from M.I.T. has about as much chance of getting it right as he does of guessing the weather a month from now.

  Immense investment banks like Goldman Sachs and Morgan Stanley have the highest paid, smartest, most well-educated men and women on the planet working for them, many of them trading forex. They are in New York, Paris, London, Hong Kong, Tokyo. They have computers with speed and power beyond reckoning. They can generate scenarios and likelihoods the way you and I smear butter on toast. They can play with more or less unlimited funds.

  They collect inside information. They have webs of people who are fantastically well connected all over the planet te
lling them the latest info on how affairs are going country by country. They have everything that money and property and prestige can buy to make money on foreign exchange.

  And they STILL manage often to lose money. Sometimes a single trader can lose billions all by himself. Those rogue traders can be in New York or Tokyo or Paris. They get in the news, sometimes on the front page. But Goldman Sachs and Morgan Stanley and all of the others keep coming back to speculate in forex.

  Surely this tells you something. It tells you that how these trades turn out is largely a matter of fate or kismet, if you will. But—and this is a huge BUT—this means it could easily be you who figures out where the yen goes versus the renminbi or the pound or the zloty. If no one can figure it out, if even the best and the brightest at Goldman Sachs cannot figure it out, then (maybe) it’s just like buying a lottery ticket. It’s not art and it’s not science (maybe). It’s luck. And, speaking of luck, haven’t you often bought lottery tickets? And haven’t you occasionally won, even if only a few dollars?

  And deep down in your heart, don’t you consider yourself a lucky man or woman?

  That means you might as well sit in your attic night after night looking at a computer/Internet screen and try to figure it all out. And, once you do figure it out, you can pounce.

  You can set up trades that involve many different currencies at once. You can set up trades that involve shorting one currency, or betting it will go down while you go long on other currencies and bet they will go up. There will be trades where you can even go on margin and borrow to make your profits. You can set up a long string of trades where if everything goes right, you can make a jillion dollars. You can make trades that involve currencies, bonds, stock, commodities, options, you name it, and there will be someone there to take your bet. The whole world is one huge bookie joint today, and that goes double where foreign exchange is concerned.

  Yes, I know what you are asking. “Are there perhaps software programs that will allow me to just let the computer and its brains, the software, do the hard part without my having to figure it all out? After all, I have to watch the football games.” Why, yes, indeedy. There are plenty of these. Available by the bushel. You can even buy more than one and see if their suggestions, all made possible by online streaming of the very most up-to-date data for everything the human mind can contemplate, go for the same smart trade. If that happens, it’s like shooting fish in a barrel. Like shooting fish in a barrel after the water has drained out and the fish have stopped flopping, to use a Buffett analogy.

  So, yes, yes, yes. Trade forex and make trades in forex a big part of your portfolio.

  Chapter 3

  Believe in Your Heart That You Can Pick Stocks

  Do you sincerely want to be rich? That was a question that Bernie Kornfeld, a latterly convicted swindler, used to ask his audiences as he pitched them on the merits of buying his product, a “fund of funds” that used investors’ money to buy several layers of mutual funds. At most or all of the stages, Mr. Kornfeld charged steep fees to the investors when those same investors could have just bought the funds themselves for modest fees. (Of course, those fees were chump change compared with what hedge fund managers now charge, but that’s another story.) Mr. Kornfeld himself did sincerely want to be rich. He used his winnings to buy lavish homes and beautiful women—or at least so he considered them. Eventually, he went to prison for fraud in faraway Switzerland.

  But that is a digression. His basic question still makes a lot of sense. Do you sincerely want to be rich?

  If you do—and who doesn’t—then you must step up to the plate and swing for the fences. That means you have to try to pick the stocks that will outperform the market. You do not want to just buy the broad indexes like the Dow Diamonds, an index that replicates generally the performance of the Dow Jones 30 industrial stocks. Yes, just buying and holding this index over the postwar period would have given you returns vastly superior to those of almost any managed mutual fund or portfolio of wealth managers. The data is overwhelming on that point.

  There is simply no way that even the most well-trained, most intelligent investment managers have been able to beat the Dow over long periods except in the rarest of cases.

  But that means that your investments would be merely keeping up with the market. Your investments would be performing at best in an average way. You are not an average guy. So why should you shoot to be average in your investment returns?

  Never mind that just keeping up with the average of the Dow will give you returns stupendously superior to the returns of almost every stock picker over long periods. Your friends at the golf course will still consider your returns “average,” and what is there to brag about in that?

  Likewise, you don’t want to buy the Spiders, the index that closely (not exactly) replicates the returns of the Standard & Poor’s 500 Stock Market Index—generally speaking, the stocks of the 500 largest publicly traded corporations in America.

  Yes, true, data has been amassed showing that while there will be years in which many stock pickers outperform the S&P 500 Index, over long periods almost no one outperforms buying and holding that index. Yes, just recently in the chaos and terror following the banking and real estate crisis of 2008, there were a goodly number of money managers whose funds outperformed the Spiders. That was because the Spiders were heavily weighted toward banking and financial stocks and those were deeply wounded in the Crash of 2008 while nimble money managers might have been able to get out of that sector before the worst damage was done.

  Nevertheless, over long periods, even over the period following the crash until now, as I am writing in spring 2012, the S&P 500 has greatly outperformed the huge majority of mutual funds as well as most hedge funds that report results.

  Still, that incredibly powerful record of the large indexes beating the stock pickers will not save you from the accusation that you are no better than an average investor. Again, you are doing neither more nor less than settling for average performance.

  Of course, “average performance” might be better defined as the average results of average investors, rather than the average returns of the whole market. By that measure, the performance of the indexes beats the achievements of investors by a truly staggering margin.

  A genius professor at Emory University named Ilia Dichev and several other geniuses have documented the long-standing truth that rapid trading by the ordinary investor of individual stocks does not yield returns even close to those of buying and holding the broad indexes. The differences are so large as to make stock market investing by picking stocks barely worthwhile. They are so large as to make even being in the stock market at all seem questionable if you are going to jump all around all over the place.

  In fact, as your humble scribe writes this, the true super genius of investing, Warren Buffett, is out with his annual Berkshire Hathaway (BRK) report. In it, his letter reaffirms what he has been saying for decades: that even a genius like Buffett cannot outperform the market for long. Indeed, his long-term results for picking stocks, which were once staggering, now barely exceed the S&P 500s performance since the founding of BRK. This, by itself, is hair-raising news. It should make every stock picker unable to sleep at night.

  Still, the schoolyard bullies and teases will tell you that you are a chicken and a wimp, and that you are—again—settling for no better than average returns.

  You could go for an even wider index—an index that includes virtually every stock of any size at all in the United States, such as the Russell or Wilshire indexes. They would reach into the corners of investing and make your performance even better. Your performance (in particular if you buy and hold) versus the performance of the average stock-picking, trading investor would be spectacularly superior. The differences would be breathtakingly in your favor if you bought and held the widest possible index for all of your working life.

  There are even indexes for the whole world. There is, just for example, the Vanguard Total Stock Market Index (VTI), which includes almost every public corporation of any size anywhere in the world. You can buy that and get pieces of the action everywhere, from Switzerland to South Africa to Spain to Sweden, and from the United States to Uruguay and Ukraine, and from Great Britain to Israel. This index would be subject to effects from regional crises such as the current Eurozone problems, but over time, if history is any guide, your results would put to shame the results of men and women who were ordinary or even very good investors.