12-15-08

The Secret Formula

           You make decisions that will affect your life, sometimes in a profound way, based on the information you receive and perhaps even more so, based on what 'feels right'.

            If you make the right choices, you get rich. Make the wrong choices, you get poor. Make no choice at all, get even poorer.

            When you look at it like that, it's actually quite exciting I think. If there is a 'secret formula' to wealth, we're on the right track; we need to ensure then that our information is of good quality and that what we feel is right, truly is the right thing to do.

            We're going to talk about trading in this context but you can apply this to any part of a successful living.

            We stand on the brink of a time that will make or break people- a genuine once in a lifetime opportunity to become rich... or desperately poor. So let's examine this...

            First, quality information. There seems to be so many pundits out there! How can you possibly tell who are the good ones and who are the bad?

            This really is a minefield because so many pundits have so many agendas. Let's take television pundits. Television is essentially locked into their sponsors. Sure, they do have to report what happens, but you should be aware of this fact. Plus, if a TV commentator really knew that much why are they on TV every day instead of quietly retired on their yacht?
 
            Consider this: the media are effectively a REFLECTION of what people WANT to listen to. If the masses don't like what they hear on TV they switch it off and that's not good for ratings. Because people have biased views, so does the media. You can't blame them really when we are the cause.

            Meanwhile, a lot of people are saying they predicted this crisis. And they're right (if they genuinely did say this was coming). But predicting something that any intelligent person could figure out isn't the trick; the trick is predicting WHEN this event will happen. For example, I can make a prediction right here and now and I ONE HUNDRED PERCENT will be right. Would you like this prediction?

            Okay, here it is...

            The price of gold will go up.

            So you, dear reader, listen to this and buy a heap of gold. Next month the price of gold drops by 20% let's say. Was my prediction wrong? It depends on your timeline. An ounce of gold buys today what it did 2,000 years ago because gold keeps up with inflation. As we know inflation will continually rise, we also know gold will continually rise. That's why I could make that prediction.

            This is how certain 'gurus' can say they 'called' this crisis. From me to them: No you didn't. Stop lying.

            Nobody has a crystal ball; all we can do is make intelligent guesses. As I said last time, the money is made or lost in the fog, not the sunshine. So why not just stay in the sunshine? That's what most people did in the build up to this crisis and now their 200.5k (formerly a 401k) is severely damaged.

            So now whenever you hear a commentator or any opinion at all about the future direction of markets (their predictions in the fog), ask yourself this: "If they are so good, how come they didn't see this financial crisis coming?" Did any of the talking heads on any of the financial news networks predict this?

Hmmm... how about... NO.

            They may have invited a few people on to offer the gloomy thought, but that was purely for ridicule and they were promptly 'booed' off the stage. Viewers want opposing speakers sometimes of course as long as they get their 'just desserts', much like children want to see a villain in a pantomime get put down. It's just good TV.

            Warning signs were everywhere and I was pleased to report some of those, but nobody could have said when this storm would come exactly.

            Last week I said the price of oil was way too low. It has since risen almost 20% as I write this. Sure, you could have made 20% gain on this 'tip', but I won't completely take credit because I couldn't say WHEN exactly. That's why the best thing to do is often go against the crowd as and when they reach extremes and hang on in there. The great thing about commodities for example is they can't go broke- hanging in there for long enough is a reasonable prospect.

            "Going against the crowd" sounds simple doesn't it. But if it's that easy, why don't you go and buy a load of stocks right now?? Ah, you see, it's not that easy...

            So next I want to talk about doing what feels 'right' as this is also a big factor in your decisions. More often than not, what feels right is what everyone else is doing and what the mass media are telling you to do. This is how most people are; it's how the herd think.

            Quite often then, doing what feels right is often doing what is completely wrong.

            A question to test another facet of this feeling right about something: I believe the US dollar is about to undergo a sharp depreciation in the next 12 months. Do you think it would be unpatriotic to bet against the dollar?

            If so, you need to think again. Government destroys a currency, not a country. The American Constitution says the only true money is gold. Governments since have created this paper IOU-fest that is weakening the country.

            Government and country are two different entities. You CAN love your country but disagree with your government. This very fact was at the heart of the American Revolution- we loved America but hated the government.

            But I digress. Regarding that dollar depreciation situation, the thinking behind that all started with the recent rise of the dollar. Because the dollar is seen as the world's reserve currency, it's seen as the safest and right now people are scared out of their skin; people have fled en masse to the dollar. But dollars are also subject to the forces of supply and demand. The government printing more of the currency than ever before in history affects the supply/demand equation and devalues the currency.

            Incidentally, the latest bizarre twist in all this is the Federal Reserve lending money to itself! That's right; they're buying their own treasury bills. If that isn't a case of robbing Peter to pay Paul, I don't know what is. By the way, you're Peter and the Fed is Paul.

            This whole saga came about because of easy credit. What does the Fed think the solution is? More easy credit. Go figure.

            Anyway, the HERD is in US dollars. The HERD thinks Armageddon is around the corner. The HERD thinks oil and commodities is going nowhere but south.

            So now I'm shifting away from them. I'm betting the dollar tanks over the next year, thus causing the price of gold to rise. As you know I'm positive on oil and wheat. I'm also betting we're about to get a surprise somehow from the stock market...

            You see, if the stock market was an individual, he would be a totally psychotic monster. He has a perverse tendency to do what you least expect when you least expect it and fly in the face of all sound analysis.

             Right now, the market is entering a calm period it seems. Historically, this is bullish. We also know that all bear markets have spectacular rallies on the way down, often these rallies feel like a bull market (just to suck you back in before the death blow is delivered).

The bear likes to toy with its prey before he eats it.

            Fear and greed drives markets. Right now, fear is in control, but that can change fast. As soon as some gains start getting reported and the herd start talking about a "bottom", watch out for the rise. And when that time comes in the future when people in the locker room, coffee shops and offices start saying: "Hey, it looks like we're through the worst with my 401k almost back to where it was!" it's time to get out the parachute again.

             And when I'm sitting in a bar and people angrily demand that the bartender switches the channel from CNBC to something else, that's when I'll start looking for the rise once again.

             Money is made if you're on the right side of a 'surprise' event at the right time. 'Surprises' are what the herd continually have because they have poor information and do what everyone else is doing.

            I'm here to keep you informed about those 'surprises' as I see them coming. And I have no agenda by the way...

           ... well there is one small agenda: not looking like an idiot with my predictions...

Best Regards,

Mark Patricks - Publisher

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