You Have The Investing Advantage

[freddyv]

Over the course of my life I have seen only two really GREAT investing opportunities and the other was in 1982.

As small investors we have a big advantage over institutional investors (even someone like Warren Buffet) in times like these because we can easily move all of our capitol to short the market as a whole. If institutional investors could do so the markets would be crashing even faster than they are now. What we have is a slow motion crash. It's slow motion out of necessity and it's to your advantage...use that advantage!

IMO there is only one investment that makes any sense: short the market. Don't speculate and try to outwit everyone else. I have read too many posts about gold going to $3000 or oil shooting back up to $116; the only seemingly sure thing is that the market will go lower. Maybe not tomorrow or even next week but over the next year and probably for several yers the stock market will continue to destroy equity, as it must do in a deflationary period.

So if you continue to speculate on gold, oil or whatever you should not be angry when your money is wiped out. Choose how much you can afford to lose and buy some SDS and don't sell it until you see REAL capitulation, which will be when the windbags quit saying "capitulation is just around the corner and will be easy to spot by the huge volume." One only has to look at the volume during the 1930's to see that capitulation only came when volume dried up as the market sank ever lower.

1982 was also a good example of the type of capitulation we should see: I knew the market was ready to take off as PE ratios of 5-10 were common and some expert had published a book titled something like, "The Coming Stock Market Crash", AFTER the market had been undervalued for 10+ years!

Try to stay a step ahead of the pundits, who always seem to be surprised by what's happening. I love "Fast Money" but these people have been behind the curve for a year now and still seem unable to grasp that, yes, it's going to get MUCH worse and yes, the bull market REALLY is over. Remember, these people have spent their entire lives in a bull market and simply don't have the experience to know what to do. As well, the change required to succeed now is simply beyond most people. As "Generational Dynamics" suggests, a new generation is needed to get back on track.

So while MOST of our generation will get their heads handed to them those that are capable of seeing the truth about what is happening can adapt and prosper. This is YOUR opportunity! Usually you are at a huge disadvantage and for once YOU have the advantage...USE IT!

--Fred

[freddyv]

BTW, the "SDS" that I mentioned is an ETF that shorts the S&P 500. LIke everything these days it may evaporate into thin air but I see it as the only way to possibly profit from this market, especially if you are in a restricted retirement account where you can't sell short.

So far SDS has me up over 50% from a year ago and it's gaining momentum as the market moves ever rapidly lower. I've gained a majority ofthat 50% in the past two weeks.

--Fred

[TheCoinCollector]

So what are you saying, invest in options?

[freddyv]

So what are you saying, invest in options?

SDS is the symbol for an Exchange Trade Fund (ETF) that shorts the S&P 500. My suggestion is to buy this and hold it no matter what. Don't try to jump in and out because when the time comes you may not be able to trade.

Is the fund safe? I don't know. Perhaps it will disappear into smoke like everything else these days but it seems to be the best investment vehicle out there if you want to hedge against what may be a stock market decline of historic preportions. Gold should not increase greatly in a deflationary environment though it may have its moments as people panic. But as we are seeing, many fund managers are liquidating gold to raise cash as people cash out.

If what John J. Xenakis says is correct, and I believe it is based on much more than what he alone says, we should all take this very seriously and start getting our financial houses in order and step up and be the ones to lead the way through this. I recall hearing about people who succesfully navigated such hard times and it is now that we should remember those stories and draw upon them rather than panicking like all the other rats aboard the ship.

--Fred

[solaar29]

Freddy. I understand where you are coming from, and bought some sds today...good thought. I'm also long gold, just because it seems logical, but who knows. Wanted to know what you or john thought of the large cap gold stocks, like AUY..when gold rises, do you feel these will benefit, or is it a gamble to be long on this stock?

Thanks

[freddyv]

I am trying to keep my investing strategy as simple as possible and that means putting all my spare resources into the SDS ETF. I am no investing pro just a bright guy who has so far managed to be right about the major stock market trends of my lifetime. Gold sounds like a good idea, at least as a "sure thing" hedge. I base that on the fact that gold seems to be the one commodity that has held its value over thousands of years. How to invest in it? That I won't comment on because I am not sure.

I base my investment in SDS (shorting the S&P 500) on what would work in the Depression as well as during the worst downturn in the 70's. Of course this ETF (Exchange Traded Fund) may be risky in itself but I am trading out of a retirement fund and can't directly short stocks.

Also, I am willing to lose all that I am investing in SDS. If I do I hope it's because the economy is doing great and that means my business is also doing great, which is has been, at least until now.

My plan is to slowly siphon off the gains over time and put those to work long the market (QQQQ and/or SPY) so that when the market turns I will not get wiped out.

So take my comments for what they are worth. They are based on what is right for me and for the risk I am willing to take. I also own some gold and have a decent amount of cash on hand and luckily have been tightening up my business for the past two years and should be able to keep it profitable through anything less than a nuclear winter.

--Fred

My Investing Maxims:
Buy low sell high
Bulls make money, bears make money, hogs get slaughtered
It's NOT different this time!

[Rube]

Fred,

I greatly appreciate your posts and your opinions regarding shorting the market. I also believe this is probably the only way to profit in the short term in this volatile time. I would like to get your opinion on my individual situation, mainly to make sure I don't do anything drastically stupid! I realize you're not my financial advisor but I'll take your opinion for what it's worth.

I'm a young engineer currently employed at a stable public utility. I make a pretty good salary and I am debt free. All of my money outside of my retirement accounts is in cash or CD's. I am looking to buy a house sometime in the next year and I intend to keep enough cash set aside to make a minimum 20% downpayment. I will also keep some cash set aside for emergencies. I am thinking of taking the remainder, a fairly large chunk of cash and buying either SDS or SH shares. This is mostly a speculative play since I would be looking to liquidate my position within 12 months. I could afford to lose this money, although it would hurt of course . I have been pretty adamant talking with others about the market and how I think it's still heading lower and I figure now it may be time to put my money where my mouth is. I'm just wondering if I'm too late in trying to catch the downside. Any thoughts?

-Rube

[freddyv]

Fred,

I greatly appreciate your posts and your opinions regarding shorting the market. I also believe this is probably the only way to profit in the short term in this volatile time. I would like to get your opinion on my individual situation, mainly to make sure I don't do anything drastically stupid! I realize you're not my financial advisor but I'll take your opinion for what it's worth.

I'm a young engineer currently employed at a stable public utility. I make a pretty good salary and I am debt free. All of my money outside of my retirement accounts is in cash or CD's. I am looking to buy a house sometime in the next year and I intend to keep enough cash set aside to make a minimum 20% downpayment. I will also keep some cash set aside for emergencies. I am thinking of taking the remainder, a fairly large chunk of cash and buying either SDS or SH shares. This is mostly a speculative play since I would be looking to liquidate my position within 12 months. I could afford to lose this money, although it would hurt of course . I have been pretty adamant talking with others about the market and how I think it's still heading lower and I figure now it may be time to put my money where my mouth is. I'm just wondering if I'm too late in trying to catch the downside. Any thoughts?

-Rube

I should be asking you for advice as it sounds like you are doing everything right.

I do not believe it's too late to catch a lot more downside and one only has to look at the news (while ignoring the talking heads) to see that housing is still in its downward spiral with commercial real estate and consumer credit following close on its heels. After that we have to deal with all this debt that will surely drag down growth for years, if not decades to come. None of this is my opinion, btw, it is all fact that you can easily verify. As well, you can do some simple research on the long term mean average of the stock market to see that it is still over its fair value and can be expected to fall well below it.

Having said that I would love to see you not speculate with your money but if you do have some that you can afford to gamble with then I would suggest SDS, but I would buy close to a short term high. Friday (11/29/08) would have been a good day and even today should still put you in a good position, IMO, but don't chase the market, it will come back to you, so buy after we've had a big up day or a few good days in a row. Volatility is the key to the market right now so be patient and don't get greedy.

Having said that you should have a strategy to sell before you buy. The market has never moved straight down in all its history so if you catch a 10% move in the market, which is a 20% profit with SDS, I suggest you sell out and wait for another move up while setting that 20% on the sidelines to put towards your house or savings. At some point the market will turn and you need to have a strategy in place so that you are well positioned before it happens. Investing any profits long the market could be an excellent long-term strategy. I actually think that dollar-cost-averaging into the market from here could be a good strategy as long as you are disciplined and spread out the investment over at least 2 years, but that's a longer-term strategy.

Keep this in mind: bulls make money, bears make money, pigs get slaughtered. (don't get greedy)

Good luck!

--Fred

[freddyv]

I'd like to add some additional info that backs up my belief that this market is still overpriced:

There are only a few good bear markets to compare to the present so let's compare 1973 to the present:

The high of 1973 was only about 2.5x higher than the high in 1929 - 380 vs 1050 - in comparison the high of 2007 was nearly 14x that of 1973. The period between 1929-1973 is greater than the period between 1973-2007. If you accept the basic principle of "reversion to the mean" then you see how we have much farther to fall now as opposed to in 1973-4, when we were not so far above the mean average.

Demographics in the 1970's caused a high level of unemployment but also provided a growing wealth of industrious, young people who were hungry for bigger cars, bigger houses and all the good things in life. Any economist will tell you that new entries into the workplace is a must for a growing economy.

The 1970's are also known for high inflation; high inflation is a sign of growth and the 1970's was a time of growth interspersed with fairly short periods of contraction due to one crisis or another. Inflation is bad for stocks in the short term but forces prices (of everything) up in the long term. During the 1970's the valuation of the stock market dropped and stocks became cheaper and cheaper until they became a screaming buy in the early 80's, a time when those same baby boomers were entering their peak years of earnings and potential.

At the present time the demographics are the complete opposite; those same baby boomers are now ready to retire, which means that not only will they become a drag on the economy as they must be taken care of but they will now start drawing down on their retirement funds, the same funds that helped to fuel the stock market for over two decades of almost nonstop growth.

We are currently taking on massive amounts of debt as we bailout industry after industry. That, along with the debt load of the American people and many businesses, added to the load of caring for an aging population, puts us in a low-growth scenario once we get past the current financial crisis.

I rely on as many experts as I can in judging financial conditions and back up questionable statements with my own research, my most closely followed financial expert is Nouriel Rubini, who called this financial crisis so precisely it is scary, though he has often been a bit too optimistic. Nobody that I respect has yet to see a light at the end of the tunnel, I therefore expect the current economic contraction to continue for quite some time. Those who expect a bottom here all seem to base it on what they have seen in their lifetime and always seem to end with an "Unless the world is coming to an end" statement. I believe that the world as they knew it has come to an end and that is where Generational Dynamics comes in. I expect many of those "expert analysists" to be standing in soup lines not too long from now.

--Fred

[Rube]

Well, I went ahead and jumped into the market, shorting it of course with SDS shares. I'm not worried about the wild daily swings in the market, mainly because I agree with much of what is said on this site. All the fundamentals point to lower prices for equities in the near-term. And the only "experts" I listen to are the ones who thus far have been right. This is a very short list and includes names such as Meredith Whitney and Nouriel Roubini. But in the case of SDS, I think the greatest risk is counterparty risk. There's a good chance that if a generational panic and crash happens when I own those shares, I may not be able to sell them. Because of this, I intend to sell my position at a gain of 10% which equates to a 5% drop in the S&P 500. This is within the levels we have seen already and would still indicate a very high historical P/E of around 18.

My question is: Is there a safer way to short the market? Is there a "safe" way at all? Or should one stick to "boring" cash?

-Rube