Savvy Investor

There are countless examples were a minority of savvy investors and hard-nosed business people actually prospered handsomely during sharp economic downturns, wars and financial corrections. 

During my journey I have actually had the fortune or misfortune of meeting such people. For example, the stubby limbed, ruddy faced multi-millionaire Australian business man who monopolized the retail local meat market. Hanging on his office wall I noticed a vintage photo of a young man standing on what appeared to be a soapbox and handing out small parcels wrapped in newspaper sheets. The man was surrounded by crowds young and old, but there was one thing that the people in the crowds had in common; their clothes all seemed too baggy and a size or two too large. “That's my father standing on the soapbox”, said the ruddy faced Australian proudly and then he proceeded to tell the story. “During the great depression, like most people my parents were struggling for the bare necessities, including putting food on the table. Never having enough money to buy meat, he would buy offal instead, (the internal organs of a butchered animal). ” “He then realized that if the hungry masses couldn't afford meat, then offal would make an affordable substitute.” It was a winner and the business grew from there onwards to being the most successful meat retailer in the country. That's just one inspirational example of someone flipping adversity on its head and making a success out of it. 

Then there is another example of a shoulder length haired angelic faced man who amassed more than one million USD during the 1960s Vietnam War selling, this is slightly unpleasant, nevertheless a true story, body bags to the US Government! Softly spoken, the man said, “Did you know that I was an active protester against the Vietnam war..... I just saw a legitimate need for my product and supplied it....” He admitted to giving some of his profits to injured servicemen charities. 

Maybe a less palatable and inspiration story, however, it is an example of how some people turn adversary around. Given a miserable situation these people remain optimistic enough to spot opportunities that others are completely oblivious to. 

During the last century's great depression two Wall Street investors Alfred Lee Loomis and his partner and brother-in-law Landon Thorne managed to amass a fortune after the stock market crash of 1929. The two had been leading financiers for the new electric power industry in the 1920s. Loomis was also a scientist, and he became a major supporter of some of the century's greatest scientific minds at his Tuxedo Park home. By early 1929, the two partners had liquidated all their stock holdings and put the gains into long-term Treasury bonds and cash. The reaction by their peers, so many of them forced out of business, seemed more like envy than admiration since "in the midst of so much despair, with the economic situation deteriorating day after day, Loomis and Thorne continued to profit handsomely," writes Jennet Conant, author of the Loomis Biography Tuxedo Park: A Wall Street tycoon and the Secret Palace that changed the Course of World War ll.

So during the last great depression bonds performed well. We know there is an inverse relationship between interest rates and bond prices. Moreover during economic down cycles interest rates are kept deliberately low by central banks with the aim of stimulating investment and the economy. So interest rates were low during the depression and bond prices also soared. High bond prices also pulled bond yields sharply lower during the last depression. For instance, the prime corporate bond yield average went from 4.59% in September 1929 to 3.99% in May of 1931. By June of 1938 the average corporate bond yield fell to a new low of 2.94%. Bonds returned 6.04% during the 1930s securities or bills returned 3.39% over the same time period. You might be right in believing that there are some striking similarities with the way interest rates, bond prices, gilts, treasuries and yields are performing now to that during the great depression. 

The obvious risk of investing in debt is that the debtor might default and that regretfully also happened during the great depression. The history books identified a number of cash-strapped corporations and municipal governments defaulted on their debts during the great depression.

Perhaps if the economy takes a turn for the worst and investors see central banks shy away from interest rate hikes, the gilt and treasuries might still continue its rally. Why? Simply because it’s a safe-haven play. Bearing in mind UK and US sovereign debt score top credit ratings and are formidable nuclear military powers the likely hood of them being invaded by a foreign power is so remote it’s probably not worth considering as a risk. So if investors flock into gilts and treasuries the trend of a gilt/treasury rally will probably continue with a corresponding fall in yields.

Owning your own property without a mortgage or managing rental properties is considered sound during a depression or recession. A place to live is a necessity, irrespective of what economic cycle we are in. With banks hesitant to rent during a sharp economic downturn there's usually a pool of good renters. Although real estate is less of a liquid asset, particularly so during a recession/depression it’s harder to liquidate, nevertheless history shows in the long-term it has been a good asset. Obviously, location is important with tenants paying more if it’s near good schools.

Precious metals such as gold, is another recession, depression proof asset which also performs well in times of geopolitical tensions. However, buying into an already inflated asset has its risks, If you can pick this precious metal up at the support levels, even better. Silver, seems to be neglected at current prices USD19.5 spot troy ounces and might represent value if things go pear shaped. However, silver is a smaller market and can be more volatile than gold.

Keep aside three to six months of living expenses in cash if something unfortunate happens, such as a job loss or unexpected expense might help you keep a cool head to invest wisely and try and spot opportunities were others don't.

Trading Information

 A volatile market for the trader is like waves for the surfer, without it neither can get a free ride. Facts, rumours and economic data all contribute to volatility in the market; they are the trader’s waves. With that in mind, having your eyes focused and ears tuned to the type of information that’s likely to be market sensitive can be rewarding for the trader. So being able to gain rapid access to this type of information from a reliable and accurate source not only makes a lot of sense, but it could also make you money and enhance your trading performance.

The Regulatory News Service (RNS) provided by the London Stock Exchange is an excellent and reliable source of news information for traders, furthermore, it is free. For the last three hundred years the London Stock Exchange has produced detailed information for companies and investors alike. Moreover, the advent of technological innovation over the past decade has transformed this service from a twice-weekly paper publication for the London business community to a real time news flow of continuous electronic information to the world’s financial markets. In 2008 RNS redeveloped its technology platform which improved data submission and display of announcements to the market in XHTML formatted data output. Today, RNS is the leading specialist provider of regulatory disclosure distribution services to UK listed and Aim companies. For companies, RNS is a one shop stop for them to fulfill their regulatory obligations and communicate with global investors and for the investor RNS is the authority for reliable and accurate corporate news. Approximately, 250,000 announcements are published by RNS per year, according to their website. Additionally, over 70% of all regulatory and potentially price-sensitive UK Company announcements, emanating from leading FTSE companies, originate from RNS. RNS is used by many financial journalists for reliable news providers such as the FT and Reuters. RNS website can be found at; http://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html .

Having rapid access to information relating to directors’ dealings in their company shares is also useful; this is known as “insider trades,” or “insider dealings.” Don’t confuse this with the other illegal activity of insider dealing, which is when the trades are made on information gained prior it being released to the market. The rules on insider trading are complex and do vary from country to country and enforcement varies greatly, depending on the jurisdiction where the white collar crime was committed. Nevertheless, we will concern ourselves with the legal insider dealing. What distinguishes this from the other illegal market activity, in a word, is when the trade was made. If you trade on publicly available information then that is perfectly legitimate trading. There are literally thousands of insiders trades, directors buy or selling their company’s shares on a daily basis. As the saying goes, “the view at the top is always better.” So when a director increases their shareholdings in their own company this is often perceived by the market as a bullish signal and visa versa. However, it is not always a master plan when deciding whether to go long or short on a stock because it may be the director’s strategy to buy stocks with the aim of propping up the company’s share value. So the increase in share price may be tied to no real fundamental reasons, such as the improved competitiveness and profitability of the company. Or a Director may be selling his own shareholdings to buy a holiday home, a luxury yacht etc. Nevertheless, insider dealings could be a useful gauge, particularly when it’s combined with technical analysis. Additionally, this information is publically available for free. The website; http://tiptrades.com/ provides daily updates of insider dealings. “We keep you connected with insider buying and selling alerts directly to your mobile, device,” claims the founder of the website and it prides itself of giving you the data without having to spend hours trying to find it. 

Mergers and acquisitions activity moves the market. The idea is to try and identify target companies, those likely to be taken over, and buy stock in them before they have been acquired, often by a rival company. It’s not uncommon for the share price of target companies to rise by double digits during the course of just one week. So by keeping abreast with mergers and acquisition activity, then acting appropriately on the information might turn out to be a lucrative trading strategy. For mergers and acquisition news relating to US stocks checkout the website http://www.streetinsider.com/Mergers+and+Acquisitions. It has been recommended as the best source for mega merger and acquisitions on Wall Street. The founders claim to have been tracking Mergers and acquisitions of companies on Wall Street since 1999. The premium service provides email alerts with the aim of giving you a trading edge. 

Then there is macroeconomic data that can also be useful. It’s always best to drink at the source, so check out the government websites. For the UK; The Office for National Statistics (ONS) is a reliable source and it can be found at the following address; http://www.ons.gov.uk/ons/index.html. For US; Marco economic data the most reliable source is the Federal Reserve Bank website; http://www.newyorkfed.org/research/calendars/nationalecon_cal.html. This will provide you with the date and time of the key economic events and the available links will direct you directly to the data source.

It might also be prudent to reconcile your trading decisions with some technical analysis. For example, take a hypothetical case where you receive a news alert about insider dealing, a company director buying shares in his company, but the charts are indicating a clear sell signal. The share then falls due to a negative trading statement, later released by the company. Had you not decided to buy you would have avoided a loss. This simple example underscores the importance of combining your trading decisions with analytical software. Typically the best analytical software available is designed by traders http://winwaycharts.com/Tradingexpertpro.html is gaining rapid popularity.

Fear And Greed - The Ongoing Battle For the Trader!

Let’s imagine a simply game, where participants are enticed to play it due to the potential rewards on offer. The players are not required to make anything useful, or provide any needed service, nevertheless a few of the participants, maybe less than 5 per cent of them consistently win at it reaping huge rewards.  Perhaps you are wandering how this could be; bearing in mind that in this hypothetical games no tangible products or services are being created. It occurs because the winners' profits are generated from the losers’ losses.  This type of game is known as a zero sum game, in which the winners, a small minority of the participants, enjoy huge profits from playing it, which incidentally equates to the losses of the other 95 percent of the participants. Put simply, Bob’s win is Jill’s loss.

Naturally, for this game to continue functioning it would need to draw in a constant stream of new participants, since many of the players would either give up, believing that they can’t make money out of playing it. Sadly, for a few they may even be expulsed by the game, playing it to the bitter end, kidding themselves that a big win was around the corner, but in realty finish up, penniless, hopeless and in the poor house.  

Now assuming the game has been deliberately designed to tap into the two most powerful human emotion; fear and greed. Then, new participants could be drawn into playing, enticed by the perception of huge wins.   So greed would ensure a steady stream of new suckers to the game.  Moreover, both emotions could be extremely useful in bamboozling players to make the wrong decisions, to hand over their hard earned money in the form of losses to the fortunate winners of the game. To spice things up a bit a few entertainers, such as clowns, magicians, charlatans and glamour beauties could be hired to further seduce the players, make them even more bewildered, but keep them eager and playing.

This game isn’t fiction, it actually exists and probably if it were masterminded by America’s best known gangster, Al Capone, he would have been arrested by the authorities and charged for running a racket.  But that is not going to happen because this game is played by those respectable, eloquent, suited and booted men and rubber stamped by our own political masters.

So the stock market, like in the game mentioned above, is driven by similar emotions, fear and greed. Emotional investing/trading is akin to holding a match to a stick of gelignite. The results can be equally damaging to you and your wealth. 

So those who invest using their logical analytical side of their brain, rather than their emotions tend to perform better than their rivals. These types of alpha investors are different to the rest, in a sense that they tend to have a well thought-out plan by their side, ready to implement should things go pare shaped.  By doing this, somehow they have managed to suppress the primitive side of their brain, which controls the emotion of fear.  

Somehow, and perhaps this is due to the forces of natural evolution, way back when homosapians lived in caves and carried clubs they had to react fast, for survival reasons, to the sounds of a roaring lion. So modern humans are hardwired to respond to negative event, which tend to spark off stronger emotional behavior and a cognitive response, than positive event. Perhaps this explains why sharp falls on the market are often steeper, rapid and more violent, than rises. Indeed, that shear blind panic, as people are desperate to avoid losses can be devastating, resulting in a stock market crash.  

Nevertheless, if investors over react to bad events and oversell the market due to their irrational fear this could also offer a buying opportunity for cool headed bargain hunters.  Again another strong emotion, greed would draw the bulls in.  

Keep an eye on the FTSE big losers of the day and track their share price the following day, notice how the big losers yesterday sometimes are the big winners the following day.

But over optimism can equally be detrimental to investors’ decision making, as can excessive pessimism.  Are we now witnessing over optimistic investment in parts of the technology sector today with some companies exhibiting colossal PE ratios with titanic market capitalizations.  Have you heard the expression a “suckers rally?”  Fair enough, keep dancing while the music plays, nobody likes a party-pooper but make sure you’re near the exit door when the bulls make a dash for it.

On the other hand, investors with well thought-out investment plans, which clearly outlines what they should do if the financial markets move against them. Who offset potential losses that they may occur from other investments in their portfolio, an investment strategy known as hedging; tend not to panic in a market crash because they have already factored in their tolerance to risk. Moreover, by not acting on their emotions they tend to make better investment decisions and outperform their competitors. They are able to see buying opportunities in an oversold market and profit from the fear of others. They are also able to avoid buying bubbles. Indeed, these alpha investors profit from the erratic mood swings of the market.   

So the cost of emotional investing to an investor is huge, moreover it fuels the profits of the others who act with their head rather than their emotions. By having a plan in place you won’t be like a startled, rabbit staring frozen at the headlights when the market moves against your investments.      

US STOCKS-Wall St set for slightly higher open after payrolls report

NEW YORK, May 2 (Reuters) - Wall Street was set for a slightly higher open on Friday following a better-than-expected payrolls report that suggested a sharp rebound in economic activity early in the second quarter.
* U.S. job growth increased at its fastest pace in more than two years in April and the unemployment rate dived to a 5-1/2 year low of 6.3 percent, the Labor Department said. The payrolls gain of 288,000 was the largest since January 2012 and beat Wall Street's expectations for an increase of just 210,000.
* The unemployment rate tumbled 0.4 percentage point, touching its lowest level since September 2008. The Labor Department attributed the decline to a drop in the number of unemployed people reentering the labor market as well as a fall in new entrants into the labor force.
* The strong numbers come after data Thursday showed the number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but the underlying trend continued to point to improving labor market conditions.
* S&P 500 e-mini futures added 5 points and were slightly higher than fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 3 points and Nasdaq 100 futures added 13.25 points.
* U.S. drugmaker Pfizer Inc 's sweetened 63 billion pound ($106 billion) bid for AstraZeneca Plc was promptly rejected by the British company Friday. Pfizer shares were little changed in premarket trading.
* LinkedIn Corp shares slipped 1.5 percent in premarket trading, a day after the social networking company forecast 2014 revenue below Wall Street's expectations, underscoring concerns about its ability to sustain its rapid growth and helping to drag its shares lower.
* German drugmaker Bayer AG is nearing an agreement to buy Merck & Co Inc's consumer healthcare unit, people familiar with the matter said, in a deal that could value the business at around $14 billion. (Editing by Bernadette Baum)
http://uk.reuters.com/article/2014/05/02/markets-usa-stocks-idUKL2N0NO0FZ20140502