by Alexander Green, Investment U Chief Investment Strategist
Monday, January 16, 2012: Issue #1687

Make no mistake. Investors are petrified right now. And they’re telling their investment advisors about it.

The question is: “What is he or she doing in response?” If the answer is adjusting your asset allocation, focusing on your long-term investment goals, or doing a bit of handholding, you probably have a good one.

But if they’re preying on your emotional state with unsuitable investments or all-or-nothing advice, beware.

The story is as old as equity investing itself. When times are good, investors get complacent, take too much risk and generally regret it. When times are bad, investors become anxiety-ridden, take too little risk and generally regret it. Seasoned advisors know this and try to keep you on the right track. But less knowledgeable or less scrupulous advisors may try to take advantage of your worries.

For instance, your investment advisor may recommend that you load up on variable annuities in this uncertain environment. Not a good idea. Some annuities are right for some people. They offer tax-deferred compounding (like an IRA) and a principal guarantee. But the typical annuity is ridiculously expensive, offers mediocre insurance coverage, restricts your investment choices to so-so mutual funds, lacks liquidity and comes with enormous surrender penalties.

Too many investors learn these things about annuities after they’ve plunked for one. Hence, you’ll often hear investors complain that they are “stuck in an annuity” for several years. Investigate these insurance contracts before you invest. On the whole they are oversold, frequently misrepresented and completely inappropriate for many folks.

Another sign that you have a misguided (or unethical) investment advisor is if he suggests that you abandon proven investment principles. For example, if your investment plan is based on a broker’s economic forecast or market timing advice, good luck. You’re going to need it.

No one can accurately predict the economy with any consistency. And it wouldn’t really matter if they could. Stocks routinely rally during the bad times and sell-off during the good ones. If your investment advisor doesn’t know this, you shouldn’t be using her. If she does and is still trying to convince you to flee the market, that’s even worse.

Also beware investment advisors who are paid on a transaction basis and therefore have an incentive for you to trade more frequently. Some brokers today are telling their clients that the old rules no longer apply, that you need to jump in and out of the market and from stock to stock. For a commission-based broker, this can be entirely self-serving advice. And it is almost certain to end badly… at least for the client.

I know it’s tough to buy – or just hang in there – when the outlook is dark. But look back at history. The market was a screaming “Buy” after the crash of ’87, the bear market of 1990, the tech wreck of 1994, the Asian Contagion of 1997, the 2000 to 2002 bear market, and even during the depths of the financial crisis in 2008.

If you’re using an advisor who insists that “this time it’s different,” you might reasonably examine his experience, his ethics and his disciplinary history. And seek out more-qualified advice.

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 09, 2012: Issue #1682

Not long ago, my colleague Mark Skousen asked a roomful of attendees at an investment conference how many of them owned gold. Virtually every hand in the room went up.

“And how many of you have ever sold any of your gold?”

Virtually every hand in the room came down.

For many investors, gold is their “forever investment,” the one asset they never plan to sell. That could be a mistake, a big one.

I can assure you that the institutional investors who have bid gold up the last few years consider the metal a “hot date,” not a long-term marriage. And that bodes ill for prices in the short to medium term.

Yes, I was bearish on gold a year ago. But I’m more bearish on it today. After all, the trend is your friend.

True, gold went up in the first half of 2011 and didn’t peak until August. But take a look at a five-month chart.

It’s not a pretty picture.

Of course, gold is hard to value under the best of circumstances. It has very few industrial uses. It generates no earnings, pays no dividends, accrues no interest and provides no rental income. That means the best any of us can do is guess where it’s headed next.

So why am I guessing it will be lower? Let me count the ways:

1. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?

2. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.

3. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.

4. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.

5. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Soros and several other major speculators are openly forecasting outright deflation. That would not be good for gold.

6. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.

7. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.

I’m not suggesting that anyone bail out of gold. You should hold at least 5% of your liquid assets in gold and gold stocks, and perhaps more. But if you’re one of those folks I meet who has 30%, 50% … even 80% in the barbarous relic, you’re really sitting at the roulette table at 3 AM.

No one can say unequivocally that the bet won’t pay off. But there could be a steep price to pay if it doesn’t. The last time gold was a bubble, investors were down more than 60% two decades later.

As Mark Twain said, “History may not repeat itself. But it rhymes.”

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677

Investors are scared right now and it’s not hard to see why.

Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.

We have all heard these negatives repeated daily and cycled endlessly in the national media.

However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)

Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.

This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.

If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…

Contrarian Investing Works

It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.

A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.

In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)

Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.

I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”

I’m trying to contain my glee. Who says no one rings a bell in the stock market?

The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:

1. Is logic or emotion governing my decision making about my portfolio?

2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?

We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.

Good Investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, December 5, 2011: Issue #1657

In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers…

I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.

Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.

Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.

My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.

“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …

For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.

If you don’t already own stocks, it’s tough to catch the train after it has left the station.

Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily, often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.

That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)

As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)

The Oxford Club has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.

True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.

You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.

Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.

The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.

If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.

Good investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Thursday, November 24, 2011: Issue #1650

In December 1996, I sold some shares of Best Buy (NYSE: BBY) to offset gains elsewhere in my portfolio.

I still consider it the most boneheaded investment move I ever made. A year later, the stock was up more than five-fold. A few years further on, it was up more than thirty-fold.

The worst part is that I didn’t dislike the business prospects for Best Buy at the time. Quite the contrary, in fact. I sold it only because I had substantial capital gains and was cleaning out my portfolio to offset them.

I don’t always do that any more. And you shouldn’t necessarily, either. Despite what your tax advisor may tell you, you should never sell an investment for tax reasons alone. Nor do you have to.

Here’s why…

The IRS allows you to offset realized gains with realized losses each calendar year. If you do, however, you must wait at least 30 days before buying the same shares back. (Otherwise you run afoul of the wash-sale rule.)

Offsetting gains at the end of the year is often a sensible move. Most stocks aren’t appreciably higher 30 days later. And if you still like them, you can buy them back then.

There is a risk, however, and it’s called the January effect. The first month of the year is traditionally a strong one for the market. A lot of pension and IRA money gets invested early each year. Plus, there’s often a rebound from the tax-loss selling that goes on each December.

If a stock you own soars in January, there’s a natural reluctance to buy it back. The temptation is to wait until it comes back down. But what if it doesn’t? You’ve taken a limited loss but sold an investment with unlimited upside potential.

There’s a way around this problem, however. And you can take advantage of it – but only if you’re willing to move this week.

In late November each year, I look at my entire portfolio for any companies that are trading below my entry price but NOT near my trailing stops. If I still like a stock, I often make the decision to double down on it for 30 days.

Why? Because I can sell the original shares at the end of December for a tax loss. And if the stock rallies in January, it’s not a problem. After all, thanks to my purchase in November, I own the same number of shares as I bought originally.

What if you don’t have the cash to double down on your position? Use margin. Again, I’m recommending this only for a 30-day period. Your margin interest charge will be minimal.

The risk, of course, is that your shares will be worth less in late December and you will have a paper loss on the second purchase.

However, just the opposite may happen. Remember, the January effect is often preceded by the Santa Claus rally, the tendency of the stock market to do well in the second half of December. As a result, you could end up with a smaller loss in your original shares and a paper gain on your second purchase.

(The Santa Claus rally is never certain, of course, and another reason why you should only add to those companies whose earnings prospects remain strong.)

Bear in mind, when selling for tax purposes, the IRS requires that you buy those identical shares AT LEAST 30 days before you sell the others. So if you want to use this strategy for 2011, you must act this week.

If we have the traditional mid-December to early February rally, you’ll thank me. And then perhaps again on April 15.

Good investing,

Alexander Green

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 21, 2011: Issue #1647

If you needed heart surgery, you’d try to find the most talented heart surgeon around.

If you were about to be subjected to a full audit by the IRS, you’d hire the most capable tax advisor you could find.

And if you needed investment advice? I hope you’re not one of them, but I know some folks who would read financial blogs by complete unknowns, take hot tips from friends and colleagues, or listen to a sales pitch from someone selling insurance or other financial products.

Big mistake. It makes a lot more sense to listen to the world’s smartest investors, instead. And one of the very best – if not the best – is Berkshire Hathaway Chairman Warren Buffett. (Ten thousand dollars invested in Berkshire Hathaway when Buffett took the helm in 1965 is worth well over $65 million today.)

And thanks to disclosures last week, we now know what Buffett has been doing during the last few months of crazy market activity. He’s been buying.

Specifically, Buffett has plowed $10.7 billion into IBM. He has increased his stake in Wells Fargo from 361.4 million shares to 352.3 million shares. He has boosted his Dollar General stake to 4.5 million shares from 1.5 million. And he has increased his holdings in insurer Torchmark to 4.2 million shares from 2.8 million.

There are a few interesting things to note here. The first is that while most investors have been either running to cash or nervously sitting on their hands lately, Buffett has been actively capitalizing on fresh opportunities. You should be doing the same.

Second, it’s worth mentioning that Buffett has generally avoided technology stocks like IBM. But upon reading not some super-secret briefing but rather the firm’s annual report, he learned that IBM enjoys an entrenched position providing technology services to major businesses.

Buffett likes companies with a “moat” like this and has famously said that his favorite holding period is “forever.” Indeed, he recently told The Washington Post that “IBM fits all my principles … it’s something we’d like to own indefinitely.”

Then there’s the price he paid for IBM. I often get emails from readers who are baffled that I sometimes recommend companies trading at or near their highs. Buffett bought IBM as it hit new highs – even as the broad market was cratering. Indeed, the stock has more than doubled since the depth of the 2008 recession.

Buffett’s response? He says the fact that IBM has doubled doesn’t bother him. Indeed, over the years he could have bought the firm at a tiny fraction of its current price. “What matters is what the company does in the future,” says Buffett.

There are a number of important lessons here:

1. As Buffett often points out, you should be greedy when other investors are fearful.

2. You shouldn’t be reluctant to modify your investment approach a bit (as Buffett has with one of his first significant forays into technology).

3. You shouldn’t fret about how much cheaper a stock was in the past if the business is sound and growing today.

And when it comes to investment advice, history shows it pays to listen to the best of the best. That’s one reason we’ve owned Berkshire Hathaway in our Oxford All-Star Portfolio for well over a decade.

Good investing,

Alexander Green

The other day I was speaking with a friend who’s too nervous to invest in the market.

“I just can’t pull the trigger,” he said. “How can you buy stocks when the Fed is priming the pump, real estate is in a tailspin, the dollar is in the tank, the Euro zone is teetering, the Middle East is a powder keg and Congress – as always – is spending money the way my wife does in Vegas?”

I know just how he feels. After all, like most investment analysts I spend my days marinating in the news cycle. I see all these terrible headlines, often several times a day. It’s hard to turn a blind eye.

But if you want to be a successful investor, you may need to do just that. Let me explain …

The national news backdrop is always unsettling. Americans experienced plenty of good times over the last 80 years, but they were punctuated by recession, depression, inflation, war (including two big ones) and almost limitless scary scenarios.

But, through it all, there’s always been plenty of money made owning the fastest-growing, most-profitable companies in the nation.  Everyone knows that the best way to get rich is to own a business making money hand over fist.

Yet if you strike out on your own, you’ll find there are more than a few hurdles. For starters, you need a significant amount of capital to start a business. You have to have a lot of entrepreneurial skill, a talent for dealing with customers, employees, suppliers and regulators. And if you meet these first two requirements, strap yourself in. Because it’s a well-known fact that 85 percent of new businesses fail in the first five years.

Fortunately, you don’t have to have this kind of money or take these kinds of risks to get rich in business. You only need to own shares of companies that are – in the words of my 25-year-old nephew – “killing it.”

I’m talking about companies experiencing double-digit sales growth, sharply higher earnings and fat returns on equity. These companies tend to be innovators, continually launching hot new products and services. (Apple is a prime example.) You’ll find that institutions are taking big positions in these stocks. The companies themselves are often buying back their own shares. And the chart – which shows technical factors like price and volume – generally gets an A+.

It’s called momentum investing. And it works. Just a few weeks ago, for instance, we bought shares of internet security company Fortinet (Nasdaq: FTNT). Last week the company reported a blockbuster quarter.  Sales jumped 34 percent. Operating income more than doubled. And the CEO Ken Xie pointed out that the pipeline is full and the company is achieving “significant momentum.”

Our shares jumped over 14 percent in one day. And I see plenty more upside ahead.

Of course, we never would have bought this stock if – instead of looking at the fundamentals of the business – we spent our days worrying about the state of the world.

I’ll let you in on a little secret. As an investor, it’s not your job to envision solutions for the political arena, the world economy, or the financial markets. And that’s a good thing. Because the world is way too big and complicated to figure out anyway.

And it’s not necessary. If you want to make money in the market, forget about the “macro” picture. And focus instead on identifying businesses that are likely to post huge earnings surprises in the weeks and months ahead.

That’s how all the great investors – from Buffett to Templeton to Lynch – did it. And that’s how you can do it, too.

Good investing,

Alexander Green

by Alexander Green, Chief Investment Strategist
Monday, March 14, 2011: Issue #1468

My publisher recently forwarded me a note from an Investment U reader…

“You guys are recommending a 5% gold allocation in your model portfolio. That’s not nearly enough. I currently have an 80% gold allocation. Given the sorry state of the world, I’ll bet I’m going to make a lot more money than you will in stocks.”

I’m tempted to take that bet.

Sure, gold is up five-fold over the last decade and three-fold over the last five years. But that tells you nothing about where gold will be a year from now, or a month from now.

True, gold may go higher. Perhaps a lot higher. But would I bet 80% of my portfolio on it?

Not a chance. This investor – who clearly lacks experience more than confidence – may be right about the near-term direction of gold. But he’s taking a boatload of risk.

More importantly, he’s making a fundamental investing mistake…

Successful Investing Comes Down to Two Choices

When it comes to the financial markets, no one knows for certain what the future holds. That means every investor faces a stark choice.

• Either: Run your portfolio by making a series of guesses about what lies ahead for the economy and the stock market, jumping in and out of stocks, or bonds, or gold, or sector funds.
• Or: Invest according to proven, time-tested principles.

It amazes me just how many investors opt for the former, following some dubious analysis or making outlandish guesses. It’s even more surprising when you consider the stakes.

Protect and enhance your investment capital over time and you can live a life with all kinds of choices, plenty of financial security and the peace of mind that goes with it.

On the other hand, if you gamble with your savings, you might find that not only have your savings vanished but, more importantly, you no longer have enough time to make up for your mistakes.

People who grossly mismanage their portfolios almost always make the same mistake. They forget to ask that one basic question: What if I’m wrong?

A Powerful Statement From the World’s Greatest Investor

Given recent events, I understand why there’s a lot of skepticism about the outlook for stocks. The media harps on unrest in the Middle East, the spike in oil prices, the real estate slump, high unemployment and unwieldy federal deficits.

But they spend much less time on rock-bottom interest rates, low inflation, an improving economy and record corporate profits.

Listen to different sources and you can come up with completely different conclusions about the future. But here’s someone worth hearing:

Warren Buffett – the world’s greatest investor – recently told CNBC: “I’m 100% enormously optimistic about the future for this country. There’s no way you can bet against America and win… We’ve unleashed human potential and will continue to do so. Twenty years from now, your kids and grandchildren will live far better than you live.”

Most Americans don’t agree with this. Some find it completely unbelievable. That’s why The Oxford Club has put together a special report explaining why America’s best days are still ahead – and inviting you to take full advantage of a more optimistic investment outlook.

Good investing,

Alexander Green

Publisher’s Note: There was a problem with the data featured in Friday’s Investment U article, “Electric Vehicles: Green Power or Just Adding to the Pollution Problem.”

The data came from the North American Electric Reliability Corporation and indicated where power for electric vehicles would likely come from in the future, once the electric vehicle fleet has matured. We wrongly implied that the data referred to the current power grids of various U.S. regions. We regret the error and thank our readers for helping to point it out. We have corrected the article.

~ Jay Livingston, Publisher, Investment U

by Alexander Green, Chief Investment Strategist

Monday, February 28, 2011: Issue #1458

Two weeks ago, I spoke at The World Money Show in Orlando – one of the largest investment conferences in the country. More than 11,000 investors registered to attend.

(Unfortunately, the conference room was far too small. It filled up half an hour before I spoke and we ended up turning away a couple of hundred people. Not good.)

In my talk, I argued that the only certainty in the world is uncertainty. Then I demonstrated how investors can effectively capitalize on this uncertainty, starting with the seven factors that determine the future value of your portfolio…

Seven Factors That Shape the Value of Your Portfolio

Those seven factors are:

• The amount you save.
• The length of time it compounds.
• Your asset allocation.
• Your security selection.
• Your annual compounded return (as a result of 3 and 4).
• The expenses you absorb.
• The taxes you pay.

As I walked around the event, however, I listened to other speakers talking instead about the outlook for the stock market. And I kept hearing the same thing.

No, not persistent bullishness or bearishness. There’s always plenty of both at a conference of this size. The universal part was analysts confirming just how right their previous market forecasts had been.

Count me as skeptical.

“I Wasn’t Wrong… Just Early”

If I flipped a coin and said “heads” and it came up heads, would you be impressed? If not, why not?

What if I flipped it again and said “tails” and it came up tails this time. Would that impress you?

Maybe on the next coin flip, I get it wrong. Then I remind you that no system is perfect and that no one bats a thousand. Does that add to my stature and make my next prediction more credible?

The idea is laughable.

Yet listen to some market gurus and you’d think they’re all a bunch of smart guys who never get blindsided by events. Even those who missed the boat generally claim that they weren’t wrong… “just early.”

I suspect that more than a little revisionist history is going on here. The truth is that even the market forecasters who are right are generally dead wrong.

Let me give you an example…

The Bear Philosophy: Every Silver Lining Has a Cloud

I know a famously bearish investment analyst – one who has been bearish not just for years but for decades. He sincerely believes that every silver lining has its cloud.

Just before the financial crisis of 2007-2009, he let his readers know that we were on the edge of catastrophe. He predicted that inflation would soar, the dollar would crash, foreigners would repatriate their assets and the stock market would keel over.

And it did.

Today, he insists he “called the recent market crash.” It’s true he was bearish before the market tanked – and I hate to quibble – but…

• Inflation is 1.2%.
• The dollar is up against the euro and the yen.
• Foreigners have clearly not repatriated their assets.

Yet he crows about how much money you would have made if you’d listened to his analysis before the recent meltdown. Of course, you’d also have made a ton if you’d bet large on my first call of “heads” a few minutes ago.

What? You say my forecast had nothing to do with the result, that my success was meaningless?

That brings me to analysts who are busy claiming that they called the recent spike in oil and gold prices…

The Core Principles for Investment Success

Think about it: Who foresaw that a frustrated market vendor in Tunisia would set himself ablaze in the street – a move that would ultimately bring down the Tunisian government? In turn, who knew that would lead to a successful uprising in Egypt and then anarchy in Libya – developments that would cause oil (and thus gold) to soar?

Who? Precisely no one.

There’s a lot of money to be made in the prophecy racket… I mean, the market forecasting business. But here’s the industry’s dirty little secret:

Real investment success doesn’t come from following the right predictions. It comes from following the right principles:

• Allocate your assets properly.
• Diversify your portfolio broadly.
• Buy quality investments.
• Reduce your investment costs.
• Tax-manage your portfolio.

Yes, you can make it a lot more complicated than this. But you really don’t need to.

Good investing,

Alexander Green

by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, February 22, 2011

Six weeks ago, I wrote a column advising short-term speculators to sell their gold.

Since that time, the metal has drifted lower. But the brunt of the decline is likely still ahead.

As I’ve said before, gold is difficult to value under the best of circumstances. It pays no interest, has no earnings, provides no rent. What gold will be worth next week or next month is whatever buyers will pay for it at the time. And that, in technical terms, is a guess.

I’ve heard gold bugs make their case. Some are based on emotion. Others are based on political fantasies about the Federal Reserve turning us into the Weimar Republic circa 1923, or modern-day Zimbabwe.

What I rarely hear them talking about is pedestrian stuff like supply and demand…

When Buyers Become Sellers, Look Out Below

Billions of dollars have been spent building gold mines over the last few years, so it’s not inconceivable that supply could begin to outstrip demand.

Of course, demand itself is fickle.

In 2005, investors made up just 16% of total demand for gold. Today, it’s more than 40%. Gold ETFs have taken in more than $50 billion since 2004.

What will happen to the price of gold when these buyers become net sellers, as many will when it becomes clear that the party is over? Paulson & Co., a hedge fund, now holds more than $4 billion in the SPDR Gold Trust ETF (NYSE: GLD). I wouldn’t want to be standing in front of his eventual liquidation. And, like most hedge fund managers, Paulson is not a “buy-and-hold” investor.

Some bulls justify buying gold at these levels because it briefly traded at more than $800 an ounce in 1980. And they say if you simply adjust for inflation, gold should be trading at $2,300 today.

That’s weak. Here’s why…

Don’t Be Blinded by the Gold Light

Gold badly underperformed inflation – not to mention stocks, bonds, real estate and burying your money in a hole – for 20 years after 1980. Why is it suddenly destined to catch up now?

Or look at it another way: On August 25, 1999, gold traded at $252.55 an ounce. Adjusting for inflation, gold should be trading at $339.65 an ounce today.

Granted, my starting point is the 30-year-low. But then, a calculation based on the 1980 high is just as arbitrary.

It’s understandable that gold spiked during the 2007-2009 financial crisis. Gold is an excellent barometer of investor anxiety. But that crisis is over. The recession – defined as two straight quarters of negative GDP growth – ended in June 2009. And inflation is running at just 1.2%.

So why is gold still in the stratosphere?

What to Do With Your Gold Holdings Now

Yes, I know the price of food, gasoline, health care and college tuition are all going up much faster than the official inflation rate. But let’s also concede that the price of cars, computers, appliances, electronics, furniture and, not insignificantly, homes – the biggest asset most consumers will ever buy – is coming decidedly down.

Experienced investors know that after an asset has made a huge run, the little guy – forever a day late and a dollar short – starts clamoring for a piece of the action. At that point, the bloom is off the rose. It’s too late to buy and generally high time to sell.

Take my old neighbors, Sam and Brian. They lost their shirts in Internet stocks in 2000-2002. Now they’re stuck with huge negative equity in Florida condos that they bought pre-construction – a “no-brainer” in 2005.

So what are they doing with their rapidly vanishing capital today?

You guessed it. Now that gold is up five-fold in the last 10 years and three-fold in the last five years, they’re convinced that a big move lies just ahead.

Maybe. But what’s certain is that one lies just behind.

My advice? Keep your gold bullion and blue-chip mining stocks that you own as an inflation-hedge or part of your long-term asset allocation.

But if you’re counting on gold to dash higher, note that the last time investors bought into a gold mania it took more than 25 years for them to break even – not counting inflation.

As Mark Twain famously said, “History may not repeat itself. But it rhymes.”

Good investing,

Alexander Green