Bonds & Interest Rates
This little-known asset class allows you to invest in some of the world’s fastest-growing companies… before they go public.
It’s all over the headlines. You can’t turn on CNBC or open an issue of The Wall Street Journal without hearing about it.
I’m talking about Facebook (Nasdaq: FB). Yes, Facebook.
Over the last couple of months, Facebook has been trashed. The stock is down almost 50% since it first started trading in May.
If you’re a regular Dividend Opportunities reader, Facebook’s woes shouldn’t be a surprise. We warned you about the company’s impending troubles before the stock even went public.
So why bring it up then?
I’m telling you this because despite Facebook’s problems as of late, there are still tons of people that have made money off this stock. They’re cashing in their shares and making millions of dollars… even from what’s being called “the worst IPO of the last 10 years.”
For example, just this past week Peter Thiel — one of Facebook’s first investors — sold 20 million of his shares of the company for a $400 million profit… and that was after he had already made another $640 million selling shares in the initial public offering.
And then there’s the story of David Choe… an artist who painted murals on the walls of Facebook’s office. Rather than take his fees in cash, Choe took it in Facebook stock. Choe’s stake was recently valued at close to $200 million.
For these early investors, Facebook has been a goldmine. These guys are literally millionaires because of the stock.
The big difference? They acquired shares of Facebook BEFORE the company went public…
Thiel gave the company $500,000 in 2004, back when it was still known as “The Facebook.” And Choe? He got his shares in 2005, long before the world was obsessed with newsfeeds or relationship statuses.
Back then, shares of Facebook weren’t listed on any exchange. As you can imagine, for people like you and me to buy a stake would have been almost impossible. Normally, these kinds of investment opportunities are reserved for “elite” investors and company insiders.
But the good news is my colleague, Andy Obermueller, has found a way for investors like you and me to get in on the action. Simply put, he’s found a unique set of securities that let investors like us buy into some of the world’s fastest-growing companies (including Facebook beforeit went public) while they’re still in their most lucrative growth stages.
The secret?
It’s a little-known asset class called business development companies, or BDCs.
Business development companies loan money to small private businesses in order to fund their growth. In exchange for the loans, BDCs normally receive interest payments, or an equity stake in the company they’re loaning to.
In other words, when you buy shares of a BDC, you’re investing in a portfolio of the world’s fastest-growing businesses… while they’re still private.
For example, Facebook just went public about three months ago. But Hercules Technology Growth Capital (NYSE: HTGC), a publicly traded BDC, bought over 300,000 shares of the company when it was still private — giving investors a stake in the shares long before its IPO.
To be fair, given the recent drop HTGC is down on its original Facebook investment. But there is no denying the power of investing in BDCs. In a world where small private companies — only available to some of the richest and well-connected investors — are at a big advantage, business development companies help level the playing field.
And while you won’t become a millionaire overnight, the best part is BDCs are required by law to distribute 90% of their earnings to shareholders. That means if a company in its portfolio is acquired or goes public, the BDC has no choice but to distribute the profits to its shareholders.
That means BDCs usually carry rich dividend yields. For example, right now HTGC is yielding 8.5%. And MGC Capital (Nasdaq: MCGC) yields more than 12%.
Of course with investing, nothing is 100% risk-free. And the same goes for investing in business development companies. But what might surprise you is that investing in a basket of small, private companies isn’t nearly as risky as it may seem.
For one, due to government requirements, BDCs look to build a diversified portfolio where no single investment accounts for more than 25% of its total holdings. Typically, a company will hold more than 50 different loans spread out over 20 or more different industries.
They are also required to maintain a low amount of leverage. The government prohibits BDCs from acquiring more debt than equity. By law, the highest debt-to-equity ratio allowed is 1:1. For comparison, investment banks are often levered as high as 30:1.
I want to make something clear. I’m not saying you should run out and invest every dime you have into business development companies. There is plenty more to learn about them before investing than I can include in a couple pages here.
But there is no denying that with BDCs, you can share the same advantages as insiders that own shares of the world’s fastest-growing private companies… long before the rest of the crowd even gets a chance.
[Note: Business development companies aren’t the only way that retail investors can access the previously untouchable private market. In fact, another investment gives you a backdoor into the market where Mitt Romney made his millions. For years, this arena has been off-limits to investors like you and me. But thanks to StreetAuthority’s latest research, we’ve found a way you can access this underground market. You can learn more about BDCs — and this “second” way to access the private markets — by clicking here now.]
Regards,
Bob Bogda
Managing Editor, StreetAuthority.com
P.S. — Don’t miss a single issue! Add our address, Research@DividendOpportunities.com, to your Address Book or Safe List. For instructions, go here.
Disclosure: StreetAuthority owns shares of HTGC and MAIN as part of the company’s various real-money portfolios. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.
Far from icebound, Greenland is wealthy in rare earth elements, precious metals and oil. Already, says Aheadoftheherd.com owner Rick Mills, companies are beginning to outline major discoveries at just pennies a share. And that’s just the tip of the iceberg. Read more in this exclusive interview with The Critical Metals Report.
The Critical Metals Report: Let’s start by talking about growth in developing nations, where populations are starting to demand the good things in life that we in the developed world have long enjoyed. That means continued growth in the commodity markets, specifically in mining. What are the implications of that?
Rick Mills: Easy and cheap access to basic materials like food, fiber, energy and minerals has driven recent growth in global prosperity. Throughout history, supply shortages in these materials have led to prices high enough to support further increases in production. We have always counted on supply eventually exceeding demand and forcing prices to drop.
Now, we are seeing a paradigm shift. Scarcity, jurisdictional risk and energy costs may result in declining production. Remember, margins, not price, motivate investment. As the cost of production increases, margins might not be sustainable.
TCMR: Is this specific to metals or other materials?
RM: I am talking about everything: food, fiber, energy and minerals. As far as metals are concerned, we have already picked most of the low-hanging fruit; now we have to go to more remote locations. We have to go to countries that are a little bit sketchy: the Democratic Republic of the Congo, Zambia or South Africa, which seems to be imploding.
For 10 years now, supply has struggled to keep pace with demand. The supply of metals is finite and subject to compounding demand from developing nations. Discovery and development are increasingly challenging and expensive. Average ore grades for most minerals are in decline, yet their production has increased dramatically.
The most important metals, copper for example, are suffering from declining ore quality and rising extraction costs. Eventually, the quantity of resources used in the extraction process will be 100% of what is produced. At existing mines, costs are increasing while production rates are stagnant or in decline. And the rate of discovery is not keeping pace with the rate of depletion; we are not replacing the reserves we are using.
TCMR: That would seem to increase the value of some of the near-term production stories that have defined ounces. Do you see a general increase in mergers and acquisitions (M&A) activity in the metals industry?
RM: I think that will have to happen. When was the last time you heard of a major making a discovery? The majors’ business is to produce, whereas the juniors’ place on the food chain is to explore, find and develop to a given point.
As reserves get more difficult to replace, juniors with deposits will become more valuable. The only way for a major mining company to replace its reserves and grow its resources is M&A. And, because there are very few mid-tier companies left, the majors will have to dip into the junior pool.
TCMR: You pay close attention to areas of the world now being explored. Do you have any ideas for investors, particularly in terms of lesser-known jurisdictions?
RM: Greenland is one place that will be increasingly on investors’ radar screens. It is vastly underexplored and yet, it has some of the best potential for mineral discoveries that I have ever seen. Greenland is the largest island in the world; it has 5,800 square kilometers (sq km) of coastline. And yes, about 84% of Greenland is icecap up to 3 km thick. But the ice-free area surrounding the icecap is up to 300 km wide; roughly 400,010 sq km. Compare that to the size of Germany, which is slightly less at 357,000 sq km. That is where the prospective mineral discovery areas are. Most companies are working on the southwest coast.
Travel by sea is possible throughout the year from Nanortalik, in the south, to Sisimiut in the northwest, where the ports have a year-round shipping season.
The Earth’s “cryosphere”—its frozen places—are melting. And there’s no place on Earth that’s changing faster than Greenland. The World Meteorological Organization reported that December 2011 was much warmer than usual, with rainfall instead of snow recorded for the first time in Kuujjuaq. NASA recently reported that ice all across the vast glacial interior of the world’s largest island was melting.
Greenland is no more rugged than Canada’s north. When you consider that the southwest coast is ice-free year round, shipping by sea would be cheaper than roads or exporting out of Canada’s north.
TCMR: Why is it so prospective from a mineral exploration standpoint?
RM: Because Greenland is geologically part of North America, its geology is continuous with that of Canada and Northern Europe. It has cratons, which gives you the potential for diamonds, gold and rare earths. There’s a Paleoproterozoic mobile belt, which gives you the potential for base metals, platinum group metals (PGMs), gold and tantalum. The Skaergaard intrusion, a lower territory intrusive complex, is tremendously important in terms of gold and PGM potential. Greenland also has lower Paleozoic sediments, which have the potential for other base metals. Carboniferous cretaceous settlements have the potential for coal.
Its offshore geology is highly prospective for petroleum. In 2007, the U.S. Geological Survey estimated that the East Greenland Rift Basins Province could hold more than 31 billion barrels oil, gas and natural gas liquids. It also estimated that the waters off Greenland’s west coast could contain the equivalent of 42% of Saudi Arabia’s oil reserves.
TCMR: What about permitting and ease of development? Do the Greenlanders welcome this type of activity?
RM: Greenland has had self-rule since June 2009, including control over its minerals and petroleum. It is a politically stable democracy, open to foreign investments and mining. Right now, fishing and grants from Denmark are its major sources of revenue. Greenland wants to cement its financial independence from Denmark and sees mineral mining and oil and gas production as good sectors to achieve this. The permitting process takes a very commonsense approach. Greenlanders want to get mines going, to have people working and to get the revenue generated by operating mines.
Greenland’s Bureau of Minerals and Petroleum (BMP) is the nation’s authoritative body for all administration related to mineral resources. It is a one-stop shop for anyone who wants a license. The BMP has the regulatory authority to review, evaluate and approve all licenses and to facilitate the public hearing process.
TCMR: So there are no hoops to jump through for local, provincial or national governments?
RM: That’s right, and the BMP is aggressive when it comes to marketing Greenland’s geologic potential. For example, the BMP designed and executed its own resource awareness marketing strategy focused on Australia and Canada, the two biggest mining countries in the world.
TCMR: What companies are operating there?
RM: Hudson Resources Inc. (HUD:TSX.V) controls 100% of the Sarfartoq carbonatite complex in west Greenland. This is one of the world’s largest carbonatite complexes, approximately 13 by 8 km. The minerals of economic interest include pyrochlore, a niobium and tantalum oxide. In the core of the complex there are high uranium levels corresponding with exceptionally high concentrations of niobium and tantalum. The Sarfartoq project has produced some of the highest-known niobium intercepts. Uranium is directly associated with the niobium in the pyrochlore and is an effective prospecting tool used to identify other pyrochlore occurrences on the project.
Greenland currently has a moratorium on uranium mining. Hudson is sitting back and letting Greenlanders decide whether they want uranium mining or not. Instead, it is concentrating on the rare earth elements (REEs). There seem to be an awful lot of them with extremely high grades.
TCMR: Right now, it seems that the heavy rare earth elements (HREEs) are the most sought after. Does Hudson have a deposit with any of the HREEs?
RM: It has a deposit of what is arguably the most important REE, neodymium. Neodymium is the key to making REE magnets, those superior, high-strength permanent magnets used for energy-related applications. For example, wind turbines require 1,000 kilograms of neodymium for each megawatt of electricity they generate. The shift away from electromagnetic systems toward a permanent magnetic-based, direct-drive system in hybrid cars is increasing demand for neodymium. It always seems to be in short supply in the global marketplace, so prices have held up fairly well.
Hudson collected a five-ton, bulk metallurgical sample from its main zone, the ST1. It graded 2.5% total rare earth oxides (REOs). The neodymium oxide averaged 20% of total REO. That is a phenomenal number, and it bodes well for the extraction of neodymium.
TCMR: Neodymium is on the U.S. Department of Energy’s (DOE) list of most critical rare earth metals.
RM: Five REEs—dysprosium, neodymium, terbium, europium and ytterbium—are considered to be the most critical of the elements in the DOE’s Critical Metals Strategy report issued in December 2011.
In a REE deposit, the distribution of the individual REOs as a percentage of the total REOs is very important. You want to be sure that you can pull the metal that is the most in demand and extract it at the most advantageous cost.
The high-grade rare earth oxides on the Sarfartoq project are associated with low levels of thorium. As a result, the thorium radiometric signature is an effective prospecting tool for identifying additional REE occurrences.
Hudson is still defining the deposit, doing infill drilling and working on the metallurgy side, but also continues exploring in and around the project area.
TCMR: Does it have a preliminary economic assessment (PEA)?
RM: Its PEA shows a net present value of $616 million (M) and an internal rate of return of 31.2% with a 2.7-year payback period. The study was based solely on the company’s NI 43-101, Inferred resource of 14.1 million tons (Mt) at 1.5% total rare earth oxides (TREOs).
It put another 8,000 meters (m) of drilling into it so far this year. It is going to enter 2013 with $7M in the treasury.
There is a lot of news coming from Hudson. It has potential not just in its neodymium project, but all of its claims in the whole project area are highly prospective. There is blue-sky discovery potential with Hudson.
TCMR: Since Greenland shares some of its geology with northern Canada, what other minerals does it host?
RM: North American Nickel Inc. (NAN:TSX.V) is working on what could be a whole nickel camp up in Greenland. Its Maniitsoq property is a district-scale project 4,800 sq km in size. Its mineral exploration license covers numerous high-grade nickel-copper-sulphide occurrences associated with norite and other mafic-ultramafic intrusions. It is part of a belt more than 70km long near Greenland’s southwest coast. We know there is nickel there because we have historical results. However, I look at it as a new discovery, one that could actually put Greenland on the map.
If investors buy North American Nickel at $0.20, they are getting what is a shot at a district-size play, owned 100% by North American Nickel. For sheer size, plays like this do not come along often. I see this as a pure discovery story. It does not matter whether it is nickel or another metal. A discovery of this size and potential richness, in a politically stable, mining-friendly country, will be rewarded enormously. Discovery plays get rewarded, no matter what the market is.
TCMR: Any final thoughts, Rick?
RM: Sally, all of the juniors we have talked about in this and previous interviews have a deposit and are working their way down the development path. Sooner or later, one of the majors will have to look at these juniors as opportunities to replace their reserves and grow their resources. That will happen not because the majors want to, but because they need to.
Since my last interview with The Gold Report, a couple of the companies mentioned have done very well for their investors. I fully expect both companies mentioned here to do as well.
TCMR: Rick, thank you for your time and insights.
Richard (Rick) Mills is the founder, owner and president of Northern Venture Group, which ownsAheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing on more than 400 different publications, including The Wall Street Journal, Safe Haven, The Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews.com, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, UraniumSeek, Financial Sense, GoldSeek, Dallas News, VantageWire andResource Clips
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There is a fine Chinese saying: The best time to invest in real estate was five years ago.
The second best time? Now! That has been true, particularly in Vancouver, for 50 years.
In real estate investment – the only time to act is now. Always.
Most of the questions I get these days are on the following subjects:
“Is this still a good market?”
“Should I wait till it crashes?”
“Is the boom over?”
“Can I write a low offer in today’s market?”
In 38 years of experience, I have never seen the “great deal of a lifetime” advertised (or if I did, it turned out it wasn’t).
I have never seen a realtor who really liked lowball offers, including myself.
I have never read in the paper that “this is without doubt the best market ever,” when it really was. I also have never subscribed to the theory that one should defer actions to a better day.
There are no perfect markets, no perfect situations, and no 167 secrets to make that great buy. You are not buying a market, you are buying a well-researched home for your family or an investment you intend to keep for years.
In fact, often the best deals come in slower markets.
What matters are the actions that you take:
– Identify your goals. Do you want to resell at a profit? Do you want to create a passive stream of income?
– Look at the market cycle – at a high? At a low?
– Understand that timing is more important than location.
– Identify the kind of property you’d like to own.
– Identify a neighbourhood that has those properties in it.
– Look at everything that is for sale there.
– Look at everything that sold there.
– Look at all the price reductions.
– Look at all the ‘by owner’ sales.
– Get on the ace condo marketers’ lists.
– Keep reading and learning.
– Keep doing it till you find a deal.
All the deals are not gone; they are still there waiting to be found, looked over and – most of all – created. As investors, we must look for cash-flowing properties in B.C., low down payments, good ’employment’ areas, a good base of tenants. That means that if we want certainty of return and low risk we need to find cash flow properties that are priced under $150,000. And yes, these deals are still every-where in B.C. – from Port Hardy (3 bedroom, 3 baths fixed upper – $55,900), to Kimberley (ski condo $72,900), to Nanaimo (four-plex for $489,000).
Of course, what investing in real estate really needs is – work! It takes work to find the deals, and work to get your investment-oriented realtors, qualified mortgage brokers, bankers and home inspectors lined up.
All good deals are created and negotiated. So, storm the net, hit hard, and keep shooting on the net. Don’t ice that puck.
In real estate investment – the only time to act is now. Always.
Ozzie Jurock is a senior real estate adviser and the publisher of Jurock’s Real Estate Insider. He can be reached by at oz@jurock.com“>oz@jurock.com or Jurock.com.
In the Investor Alert, our investment team shares charts and data that we believe provide readers with a first mover advantage. While markets don’t always move like we anticipate, recognizing historical trends can provide an edge if you act quickly.
Last week, gold bugs were rewarded with the long-awaited positive momentum in the yellow metal, and on Friday, bullion rose to about $1,670. After falling below the 200-day moving average, gold had been stuck in quicksand for several months. With the jumps in the price last week, bullion swiftly rose above this critically important long-term moving average.
Bloomberg reported on Thursday that gold investors were the “most bullish in nine months” as its survey of 29 of 35 analysts indicated that they expected prices to rise—only three were bearish toward the metal.
One chart that might turn those three bears to gold bulls was featured in a recentInvestor Alert. I noted that gold’s 12-month rolling return in standard deviation terms triggered an extremely low sigma event, dipping below a reading of -2. To our investment team, this signal means that investors should expect gold to experience a significant price reversal.
Price reversals, of course, work both ways—the oscillator above also tells you whether gold has climbed too quickly and should be expected to fall. If you take a look at the previous “peak,” when gold rose above 2 sigma, the chart sent out a chilling warning signal that gold was due for an eventual correction.
Last August, when the price of gold was reaching all-time highs, I reminded investorsthat it would be a non-event to see gold decrease by 10 percent. In fact, I felt that this correction would be a healthy development for markets, because it would act to remove the short-term speculators while the long-term story remained on solid ground.
Gold still hasn’t made it back to its all-time high, but Stifel Nicolaus’ gold-to-crude oil ratio suggests gold climbing to $1,900. According to Stifel’s research, the gold-to-oil ratio based on the price of Brent has historically “shown a tendency to run to around 16.5x.” In other words, the price of the yellow metal is usually about 16.5 times the price of a barrel of Brent oil. With Brent trading around $116 per barrel last week, the math tells us that gold could go to $1,900.
The long-term fundamentals for gold stand on solid ground. Way back in March, Ian McAvity stated that the “extreme behavior of major central bankers and the absurd ‘risk-on/risk-off’ surges of liquidity across all markets fueled by those liquidity injections sloshing around markets rather than reaching any economy is frightening, and the most bullish fuel they could throw at the gold market.” Liquidity keeps flowing today, as central banks have continued their massive global easing cycle throughout the summer. In McAvity’s opinion, “The gold price volatility is more a reflection on the U.S. dollar and euro paper and the madness of an asset bubble. Gold will be the last man standing on the other side of the valley.”
Even the Love Trade—gold buying out of China and India—isn’t over, despite rather tepid quarter-end results from the World Gold Council. In his latest Greed & Fear document, Christopher Wood from CLSA says that he believes the media overreacted to China’s gold demand. With gold demand totaling nearly 800 tons from June 2011 to June 2012, he points out that the country “is still buying a lot of gold.”
As for gold demand in India, his team hears that people are buying gold with cash to avoid the higher duties. “As a result, these cash purchases will not be recorded in the official data,” says Wood.
In addition to these factors, there’s a new growing demand coming from central banks. Wood sums it up for investors: “The conclusion for investors is stupefyingly simple. Stay long gold.”
U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.
For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel atwww.youtube.com/USFunds.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
This week’s Stockscores Market Minutes video looks at how to use the Stockscores Market Scan tool to find trading opportunities plus my regular market analysis. Watch it by clicking here.
I have spent my summer writing a book about trading, look for “The Mindless Investor” this Fall!
Here are 10 things that every trade should keep in mind,
1. Know that not every trade is profitable.
Since the stock market can not be predicted, every trader needs to accept that they will be wrong some of the time. What separates good traders from the rest is their ability to throw in the towel when the market proves them wrong and take the loss.
Doing this allows them to maintain their financial and emotional capital. Don’t leave money in a loser that is more likely to continue to be a loser, it is too deflating and expensive.
2. Know what your tolerance for risk is.
Traders who are able to make smart decisions can beat the market. However, the greatest hurdle to doing so is overcoming the emotional traps that cause traders to make bad decisions.
The reason we succumb to our emotions is because we are afraid of losing. It is the risk we take that creates emotion; take too much risk and you are likely to make bad decisions.
Therefore, you need to know what your limits are. What dollar amount of risk causes you anxiety? If you can not make a trade with out fear then you are taking too much risk. For some, that means never trading since they simply can not handle the risk of financial loss. However, over time and with success you will begin to build up your tolerance for risk, just take it one step at a time.
3. Know who is in control of the stock you are trading.
Never ever buy a stock that is going down. Stocks in downward trends are controlled by the sellers and they will continue to go down until the sellers lose control. While it is tempting to get a deal on a stock, to try and buy it at bargain prices, the actual act of doing so is very challenging. The market is not always rational and the bottom is difficult to predict because we do not know what is motivating the sellers to act.
Making money is simple. Buy stocks that are going up, short stocks that are going down. If the stock chart has rising bottoms, the buyers are in control. If the tops are falling, the sellers are in control.
4. Know who is in control of the overall market or sector.
A big factor in a stock’s performance is the performance of the overall market or the stock’s sector. If the oil industry is strong, individual oil companies will be able to do better.
Any trader who has a hold time frame beyond a few days should first consider the sector and focus their attention on the sectors that are outperforming the market. Strong stocks in weak sectors are not as likely to do well as a moderate stock in a strong sector.
5. Know the price point where the market proves you wrong.
If we accept that we can not be right all of the time then we need to have a plan for what we will do when we are wrong. Arbitrary stop loss orders are not effective, they must be based on past opinions of the market.
Remember that the stock market’s job is to put a price on fundamentals. This is difficult since fundamentals are always changing but we do find that the market is good at putting upper and lower boundaries on the fundamentals over a period of time. The lower boundary of fundamental value shows up on a stock chart as a price floor while the upper boundary will be a high price point that acts as a ceiling. Breaks through these price ceilings are caused by a change in the perception of fundamental value. So too with price floors, if a stock closes below a well established price floor then we can guess that the market has found a fundamental reason to accept lower prices.
So, when you buy a stock, understand where the price floor is. Look for well established low price points and plan to exit a buy if the stock closes below that low point. The reasoning is simple; if a stock closes below a psychological floor then it is likely that investor perception of company fundamentals has changed.
6. Know what the expected value of the trade is.
Good traders do not fly by the seat of their pants. They develop a set of rules and then test those rules to determine the expected value of trades using that strategy.
The expected value of a trading strategy is the probability of being right times the average profitability when you are right minus the probability of being wrong times the average loss when you are wrong. Using this equation you should see that success trading is not just about whether you are right or wrong but how much you make or lose when you are right or wrong.
A trader can make a lot of money only being right 10% of the time if they capture very large gains when they are right and only small losses when they are wrong. In the same way, a trader can lose money even if they are right 80% of the time if they have big losses on individual trades.
7. Know that the media knows nothing of value.
While there may be entertainment value in the media, using it as an information source is doomed for a couple of reasons.
First, the media tends to react rather than predict. Trading the stock market well is far more lucrative than reporting on it so it should be difficult to trust the analysis provided by financial reporters.
However, to be fair, there are some financial reporters who are able to uncover valuable information that could be lucrative if only you and a few friends knew about it. The reality is that the media is speaking to a large audience which means the information that they distribute will be priced in to the stock almost immediately.
It may be interesting to hear some like CNBC’s David Faber report on a merger of two companies but capturing the value of the trade around that transaction will be difficult because the market will move so fast once he announces his discovery. The market is efficient, making the media’s voice merely entertainment.
8. Know that the market never lies.
I have met so many liars in the stock market business over the past 20 years. I think that many of them actually believe what they are saying but, the truth is, people’s judgment is clouded by greed.
The stock market is a giant polling mechanism allowing people to cast their opinion with their money. If you think the stock market is going up, you buy. If you are right, you make money. It is a simple and powerful machine that determines value and, since no one wants to lose money, it is very efficient at telling the truth.
The truth may change from one moment to the next but one thing will not change. Arguing against the market is a fast way to lose money.
9. Know the difference between pullbacks and reversals.
The profit is in the patience. Very few stocks go up day after day after day; with all strong trends there are pull backs against the trend. These pull backs are important because they shake out weak hands and recharge buyer interest. So long as the pull back is not an indication of a change in the perception of fundamentals.
Stocks do not go up forever; there will come a time when the trend must reverse as money moves out of the stock. Learning to know the difference between a pull back and a trend reversal is important if you want to maximize your overall profitability.
Generally a reversal comes when a trend line or important area of support is broken. Allow for the short pullbacks so long as the primary trend remains intact.
10. Know yourself.
If you do not know yourself you can not know success as a trader. Trading well is a matter of mastery over emotion. While very simple, trading is hard because our emotions get in the way and we succumb to fear and greed. If you know what motivates you and understand how you react to risk and reward you can begin to succeed as a trader.
The market is very slow right now, partly because it is the tail end of the summer when most traders would rather be enjoying the weather than sitting in front of a screen and partly because the market is waiting to see what the US Federal Reserve does in terms of monetary stimulus. The market expects some sort of action by the September meeting of the Fed, much of the strength over the past few weeks has been pricing in that expectation. Now that the market has speculated on QE3 happening, investors want to see the proof. That is why stocks have stalled at resistance.
That means it is harder to find Alpha stocks, those that move faster than the market. One sector of the market that has been strengthening and looks to be in the early stages of a long term turnaround is the US Housing market. Consider the XHB ETF to participate in the recovery of the US Housing market.
1. XHB
XHB is making a break on the long term monthly chart this August, it should continue higher in the months, and perhaps years, to come.
References
- Get the Stockscore on any of over 20,000 North American stocks.
- Background on the theories used by Stockscores.
- Strategies that can help you find new opportunities.
- Scan the market using extensive filter criteria.
- Build a portfolio of stocks and view a slide show of their charts.
- See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.
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