Sorry guys, I was suppose to publish this in Monday, but I somehow messed up this blogging software, so I finally got this working today. The market call is a little late, but still valid.

Last week, market leaders like Apple started to lag the overall stock market rally. Such an act is commonly considered to be a sign of a major stock market decline, but I don’t think so (which is why I bought Apple stock on Monday). I have to admit, even I was fooled into believing that 1470 (for the S&P 500) was going to be the market top, but I now believe I was wrong. A couple of reasons:

  1. The big one being QE3. Once QE3 helps the market break its old time high, the market will self fulfill its prophesy and soar higher.
  2. The economy and the job markets are stable.
  3. Home prices are stable.

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Bought Apple at $637. I got bearish when Apple hit $700, but now it’s oversold. Gonna bounce back…. just a trade.

A good friend of mine, let’s call him Mark, was kind enough to let me publish his trading rules here.

The basic rules are essentially the same, no matter what kind of an investor you are. Here’s his list of rules.

Do Not Speculate

Too many people jump into the markets as if they were at a casino in Las Vegas or Macau. They get in and out of the markets every time the market moves up a few points or down a few, without really knowing what to do. If you do this, you’ll be no better than the majority of gamblers at Luxor (for those of you who don’t know, Luxor is a pyramid-shaped casino in Vegas) – losers.

As long as you invest with sound judgement and don’t speculate, the markets will be more like a game of chess than a slot machine. The difference? Strategy and dedication makes all the difference.

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Suppose you had 2 scenarios:

Scenario A: 1 investment, $100,000, probability of being profitable is 68%, will have a 30% profit.

Scenario B: 100 investments, total $100,000, average probability of being profitable is 68%, will have an average 30% profit.

Now you have 2 choices: you either can choose Scenario A or Scenario B to invest in. Which one would you choose?

I’d choose Scenario B. By divserfiying among 100 investments that have the same (on average) probability & profitability as that of 1 investment (mentioned in Scenario A), you’re:

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Ray Dalio, a brilliant hedge fund manager, is a serious thinker who I deeply respect. Unlike PR machines such as Warren Buffett who try to appeal to the masses, Dalio actually voices his own thoughts and shows the public how the mind of a deep thinker really works. Recently on CNBC, Dalio explained his views on the world.

“Europe’s Going to Be In Big Trouble”

Southern Europe will be restructuring its debt towards more acceptable debt-to-income ratios; in short, a deleveraging. Deleveragings can be painful if not managed properly. The way to offset the negative real growth that comes from deleveraging is to print money: monetary policy. In a sense, the deleveraging is a depression, which the Europeans will want to offset by printing money, because inflation is positive for growth. The countries must stimulate enough via monetary policy so that growth exceeds interest rates. This deleveraging will last anywhere between 10 to 15 years.

Unlike what many believe, the Euro is not about to collapse anytime soon. It’ll stay together, because at the moment it’s controlled by the votes of the member nations, of which the PIGS control a big part.

“The U.S. Situation Is Tricky, But Manageable”

In order to properly recover, we need a right mix of monetary and fiscal policy. A wrong mix will lead to too much monetary policy, which doesn’t actually put money into the hands of consumers. The biggest worry here is that the politicians won’t get the mix right, although this risk doesn’t exceed 50%.

This is a really tricky situation, because too much stimulus from monetary and fiscal policy will lead to inflation, which will further wound the economy, but too little stimulus leads to a depression.

“China Needs Strong Growth”

The entire Chinese economic machine is geared towards high growth – anything less than 6% a year leads to financial problems, such as banking, lending, etc.

On a side note, the fact that China believes 6% growth per year is a “recession” while the U.S. is happy with 2% growth shows the difference in competitiveness.

“Own Some Gold”

Gold is an alternative to cash. The central banks are printing money to ease their debt pressures, which are still ballooning in countries such as the U.S. Gold is a nice alternative to cash, although it isn’t exactly a long term “investment”. The nice thing about gold is that, unlike cash, it can’t be produced off the printing machines.

Deep Thoughts On Currencies

By cutting the value of currencies, countries are able to quickly increase the competitiveness of their goods/services. However, this is problematic in a “fallacy of composition” scenario, in which all the countries devalue one after another, hoping to make their own exports more competitive.

On a side note, China is “manipulating” their currency. That’s just a word American PR uses to attack China (hell, American politicians manipulate the stock market themselves). Because capital is flowing out, the Chinese government is trying to prevent the Yuan from going down, whereas before they were trying to prevent it from going up.

The U.S. dollar, in the long term, is on the rise. Everyone needs dollars: those who lent money to the U.S. government. At the moment, the U.S. dollar is the least worst of the big three: the Euro, the dollar, and the Yen. So obviously people are going to want dollars.

“How To Invest”

So many people get caught in the “this never happened before! What am I going to do!” Truth is, a lot of things didn’t happen before. The Great Depression didn’t happen before, the Crash of ’87 didn’t happen before. The proper way of investing is to create a template. “If this happens, I’ll do this this this. If that happens, I’ll do that that that” etc.

Big Announcement Regarding This Blog

I’m going to cut straight to the chase – I (Tony) just sold this blog to Jack. But don’t worry, I’ll still be doing all the writing for A Young Investor as a staff writer – it’s just that I couldn’t handle all the technical aspects of blogging, which will now be done by Jack.

Stick around and enjoy the content! A few changes are taking place:

  1. We’re going to start putting up advertisements, albeit not many. And Jack promises that the ads won’t be obtrusive, like huge banner or popup ads that significantly slow down the site.
  2. Jack has agreed to split all the ad revenues 50-50, because the community here is what makes this blog run.
  3. This means that 50% of all revenues will be given away via Cash Giveaways!

12 years ago, everyone and their grandmother were quitting their jobs to become stay-at-home-investors. Fastforward 12 years, and the words “stock market” have become synonymous with “you-know-who (or more appropriately, you-know-what)”. So what happened?

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Wall Street’s earnings game reminds me of a political scene: the politicians are all sitting at a table, lying through their teeth, realizing that everyone else is lying, and grinning from ear to ear like some demented animal. For those who aren’t familiar with why earnings reports are called “the earnings game”, here’s how it works.

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The title says it all: how should macro investors invest, and how should they analyze the markets? (For starters, macro investors should use a systematic approach, not a discretionary approach). In previous posts, I have mentioned that the same fundamental information can mean different things in different market stages. Thus, we must categorize fundamental conditions into 2 x 2 categories:

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Colm O’Shea is a highly successfull trader who has opened my eyes to a totally new way of investing/trading. Here is his investment/trading advice.

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