Volatility Continues

Well, as Mandelbroit says, volatility begets volatility. The stock market was up a lot on Monday only to give it back again on Tuesday and gold stocks were no different. My actively trading/market timing friends are telling me that I should have sold back when certain trend lines were crossed, and I, if things keep going the way they do, I suppose they are right. Trend following works well when markets all move in one direction, as they are doing lately, but tends to generate lots of trades for small losses when the market drifts from one direction to the next and back again. Once, I used to be a trend follower, but I found I started underperforming the market at large. 

Then there are people like Warren Buffet They don’t really try to follow the market. They just feel that they are going to buy good stocks that will be “weighed” correctly in the long run. Or, as Bill Bonner puts it, “things that are out of whack have a tendency to get back in whack.” And that’s how I feel about gold stocks. Specifically the one gold stock I am invested in is Barrick gold (ticker symbol ABX). I hasn’t been doing to well lately and it’s down another 8% or so this morning, but I’ve found I’m not particularly bothered by its performance. Instead I’ve taken refuge in the slogans that I used to feel described bad investors- specifically that “it’s only a loss when you sell.” 

“What if it keeps going down,” some might ask. Well, in that case, I am prepared to buy more. I have a lot of money in bonds which is maturing in about three weeks, and I wouldn’t mind loading up on more Barrick gold. The company has been around since the 1980s, and is currently trading at the same price it was back in 1994. Since gold was bouncing around in the $200-$300 range around that time, and since its now bouncing around the $750-1000 range, I feel pretty confident that I’m making a good investment. In fact, I doubt I will be able to but it come mid-November for the price its trading at today, since they announce their earnings at the end of this month, but who knows. A recession may be on, but gold is still above where it was a year ago, even on that crazy COMEX market. So the company has been able to sell all the product it produces at prices higher than it did then, and it has expanding capacity coming up next year. So I’m not worried. Things will get “back in whack”.

It does beg the larger question about trading philosophy. In essence, would you rather invest like a Warren Buffet who picks good companies and sticks with them or like a George Soros who made his fortune by being on the right side of particular trades. There is no right answer to that question, its just a matter of personal preference. The advantage of being an investor with a longer time horizon is that you don’t have to monitor the market as much, but you do need to do your homework about the stocks you do like: study their markets, read their literature, listen to their conference calls. 

The one thing I would say though, is that if you are a Warren Buffet style investor, then you need to hang out with others of a similar mindset and vice versa. If a value based investor starts exchanging notes with an active trader, then they’re just going to mix each other up. It’s like a two dancers coming together and expecting each other to do radically different dances. And they tend to mess up each others timing. The value based investor will want to buy when stocks are down because, in comparison to their earnings, that’s when stocks are on sale. The trend following investor will never want to “catch a falling knife” and instead will admonish their friends never to buy a stock when it’s at or near it’s 52-week ago.  So when these two get together and talk one is saying that a stock is a buy based on Price-to-earnings and the other is saying its a sell based on technical analysis of the chart. The result of a collaboration between the two styles leads to the absolute worst kind of stock investing: buy high, sell low. 

I think what happens to the investing public at large is that they would like to be like Warren Buffet but don’t quite understand exactly what that means. They don’t read books like Buffett: The Making of an American Capitalist but instead just jump right in with the sense that they inherently know how this investing thing is supposed to work. So they go out and buy companies they like. When they go up, they feel good and talk about investing for the long term. When they go down, they get scared. “What if this company goes out of business?” they wonder. They talk to their friends about it. Eventually, they end up scared to death, so they sell out at what ends up being the bottom. 

John Maynard Keynes said that “the market can stay irrational longer than you can stay liquid.” I suppose that’s true, but if liquidity isn’t a problem, then you can afford to wait. That’s the way I look at it anyway. Or as Bill Bonner put it, he buys stocks because he “feels bad for them.” That they are so neglected and unloved. Well right now the market is neglecting gold stocks. They are unloved and abused. No one will return their phone calls… except me.

Ben Stein’s Money Bet on the Wrong Things

For market Bears like me, the current market environment is absolute heaven. I’ve been making money off of my short positions, but I decided to close those today (which should make the government happy) because gold stocks are starting to look very attractive to me. Specifically I’m thinking of backing up the truck and buying Barrick Gold (Ticker Symbol ABX). Gold stocks have been down quite a bit in the last few weeks and considering how much money the government has decided to throw at the financial bailout this week I’m thinking gold miners are going to make out like bandits. You see, the government doesn’t actually have any money to bailout anything. As I’ve been telling my friends, America is broke. And I’m not sure that foreign lenders are going to want to line up to loan another Trillion or so to us given how indebted we are and how our financial system seems to be imploding. Inquiring minds suspect that the government may have to resort to just printing the money for the bailout, and that would be VERY good for gold and even better for gold miners. 

GRRRR! Bear market profits are the best kind. But what can be even more satisfying is reading Ben Stein’s latest offering. For those of you who don’t follow him (and I recommend you don’t), Mr. Stein is known as a permabull for his perpetually sunny outlook on the American economy. So it is with special satisfaction that I read Mr. Stein as he tried to explain how exactly the US economy got into such a pickle, and I most confess a few moments of self-congratulatory laughter as he explains why exactly he was so wrong in saying a year ago that subprime mortgages were not capable of sinking the American economy. You see he reasoned that subprime mortgages were only $250 billion or so and could not sink a multi-trillion dollar economy. He is now admitting that he neglected to figure in the Credit Default Swaps that DID run into the trillions of dollars and how all of these unregulated debt instruments floating around that were pyramided on top of that debt are in fact causing a real problem. Oh well, Ben. I guess we all get them wrong from time to time.

Except it seems like all Ben would have had to have done to avoid having to scrap egg off of his face now would been to have visited some bear market sites and read what the bears were saying. Heck, even if he wanted to write us all off, he could have listened to Warren Buffett saying that credit derivatives were financial instruments of mass destruction. It’s not like nobody knew this was going to happen. I specifically remember reading Mr. Stein’s work a year ago in absolute astonishment that he did not seem to comprehend the ripple effect that these defaults would have.

Mr. Stein closes his financial advice column by asking what it is that we should all do. Which isn’t really any advice at all. Well, I’ve already told you what to do. Load up on gold miners. If you’re looking for more advice on how we got into this mess, how you can save money, and the best ways to invest for your future, why not buy a copy of my book.

I promise it doesn’t end with “What the heck is to be done?”