I am retired and take educated guesses on all things financial.

January 14, 2008

January 15, 2008: Investment Advice (you already know)

picture: have to love the "morans" (sic)

Wading through many financial and quasi-investor blogs, including mine, I regularly have to take stock of a financial truism and apply it.

The "First Rule of Trading Systems": The system or fund that worked perfectly up to now will not work well when you stake your money on it.

A system's apparent success may be due entirely to coincidence or luck. Unless the investor can point to a reason, based upon economic principles, that the system should work, you should not expect success to continue. The very best of technical and fundamental analysis systems at some point break down. The same "can't miss" approach hawking the newest ETFs, parsing the parsed, seem to take their marketing cue from the schlickmeisters of the past, backdating results to predict the future and/or filtering data and total expenses.

For sure, some systems may appear to be very appealing - especially to the mathematically inclined. But at some point, the system will break. Having a balanced portfolio, including assets out of stocks and bonds, is wise for the experienced investor, and a must "Avoid Financial Ruin" card for the novice.

Do not fall into the contrarian trap. The idea that the investing public is always wrong is an arrogant thought that offers no insight into the occupation of investing. No one in my life has ever told me why the majority must be wrong. Factually, the majority isn't always wrong. In 1940, contrarians would have placed their bets on the Nazis. In 1959, against Castro. Last Sunday, against the Chargers. History is filled with examples of contrarians being wrong. And correct. Thus, the contrarian position is factually unsupported.

I believe that the original book on contrary thinking was the THEORY OF CONTRARY OPINION (1954) by Humphrey Neill. He clearly stated throughout the book that contrary thinking is only CONSIDERING the other side of an issue - to look at all sides of a question. For some reason, this book started a wave of financial gurus to deduce that too much bullish sentiment implied that there is too little buying power left to push stocks higher. This evolved into a third stage of the contrarian investment approach which is not factually supported - the simple minded idea that the majority is always wrong.

If you speculate, do it with funds you can afford to lose. Use courage to act upon factually supported reason and judgment with all investments regardless of asset class. It's your money.

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