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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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For years my approach to investment was regarded as a little unusualEpilogue It is a profound mistake to think the horizon is the boundary of the world. Antoine Marin Lemierre In my newsletter, I have always taken a totally holistic approach to investing, because what is the point of making money if the country in which you live has a weak rule of law, or feeble human rights and freedoms? Money has no value of itself. Its value is measured only in what it can do/ buy. When it buys you a lifestyle in a society where the rule of law assures freedom and basic human rights for all citizens, it has great value. But if you are a billionaire, and/or a member of the elite in an autocratic regime, though money can buy you things, it cannot buy you the intangibles that even a middle-class lifestyle can in a free society. For years my approach to investment was regarded as a little unusual. But slowly, my holistic approach has gained acceptance, as ever more economists, even a few Nobel Laureates, no longer see their profession as a purely inductive dismal science, but are incorporating sociology, psychology, philosophy and, in the case of economist Robert William Fogel, 1993 Nobel Prize winner, in his book The Fourth Great Awakening, even religion into their economic projections! SOCIETY IS A RELIGIOUS PHENOMENON Alan Ebenstein, in his book Friedrich Hayek, writes: The order of society is an abstract order. It is an internal vision held by members of a society as to how a society should physically look, what patterns of relationships should exist in a society and what the material outcomes of these patterns will be. Capitalism, Hayek thought, is the physical manifestation of the historical western moral code. the ancient world, religion was not a set of dogmas that all must believe. It was a set of images (metaphors) that gave substance to the set of abstract values by which society operated. A kind of proto-Constitution. The word religion comes from a Latin word which means to bind together. In its original meaning, religion was what today we call civic religion, and public religious worship was a similar activity to modern nations pledge of alliance to their flags. It was an act of solidarity with group political values, not a statement of theological belief. In this sense, Americas Founding Documents, the Communist Manifesto, Mein Kampf, and Maos Little Red Book are as much Scripture as the Christian Bible, the Jewish Torah and Talmud, the Koran, and the Analects of Confucius. But the difference between traditional religions and Religious Fundamentalism, Nazism, Fascism, and Communism is that none of the founders of the worlds traditional religions were fanatics. The Talmud reads more like the arguments that must have gone on between Americas Founders during the Constitutional Convention than a single, static absolute truth for all time. The New Testament offers four different Gospel perspectives on what Jesus taught, which shows that early Christians were not so much concerned with dogma as with a general set of values. And Mohammed was much more tolerant of other beliefs than many modern Islamic clerics. The war that began in 1914 has been ongoing for the last 88 years. World Wars I and II, the Cold War, the Korean War, Vietnam, and the many acts of terrorism over the last 30 years are all individual battles in the one great ideological war by self-appointed leaders who believe they know how to create Utopia, who devise new civic religions by which to govern an ever-changing world. But the problem with any religion once it becomes absolute dogma is that it ceases to evolve. Yet, life is an evolving process. The brilliance of Americas Founders was that they were realists, not Utopians, so they put a political structure in place to offer maximum freedom, while curtailing the tendency towards anarchy. Though they may have disliked organized religion as much as Marx did, they supported individual beliefs and merely prevented any particular religious dogma from forcing people to live according to its world view. The US Founders returned religion to its ancient Roman meaning, of civic virtue rather than a control of national ideology. UTOPIA OR JUST MUDDLING THROUGH The term Utopia was first used by Sir Thomas More in 1516, to describe his idea of a perfect society. The word Utopia comes from two Greek words, ou meaning no, and topos meaning place. Hence, Mores Utopia was about no place and was probably an ironic, even sarcastic commentary on the massive bloodshed of the Reformation, where Europeans killed one another with abandon over unprovable theological differences. But, this was the first time in history that the idea of a perfect society in this world was deemed either possible or desirable. Prior to the 16th century, life was considered a vale of tears, which if accepted and endured would guarantee a better life after death. But, as a result of new shipping technology, new lands were discovered, and the standard of living for all Europeans increased sufficiently, that perfecting life on this planet was deemed possible and became the aim of some intellectuals and theologians. Modern Marxists and religious Fundamentalists are heirs to this transition. The folly of this thinking is that life is an evolving, not a static enterprise, where each person has what Nobel Laureate economist Frederick Hayek calls unique information to contribute. This creates dynamic spiritual and economic progress. But if nations are controlled from the center, that progress is severely impeded, and it denies the individual the right to find his or her own salvation, to become what economist Russell Roberts calls essentially human. Fundamentalism within traditional religions, and the modern ideologies of Communism, Fascism, Nazism, and other isms, are all cults. They delude their followers into believing there are easy and instant answers to the problems of the human condition. But, those who espouse such answers are setting themselves up as demigodsan arrogance that all traditional scriptures condemn. The human race learns slowly and tends to take one step backwards for every two steps forward. But, our progress over millennia has been upwardsthough that uptrend has a more gentle gradient than we believed it to have in the somewhat self-deluding 1990s. But, now, we are in a consolidation periodeconomically, socially, and politically. A time when our belief systems and social organizations are evolving to better fit a 21st century world view of Ultimate Reality. Modern so-called secular societies are, in my view, more religious in the traditional sense than the cultist self-styled saviors of society, whether they be members of al Qaeda, Iranian clerics, communist revolutionaries, or those Christian Fundamentalists who bombed abortion clinics, or the Federal building in Oklahoma in 1995. All new religions are accused of being atheist or secular when they first appear, because they see Ultimate Reality in more abstract terms. Early Christians were accused of being atheists because they refused to worship the many very human-like gods of the ancient world, and instead worshipped an abstract God and a dead Jewish teacher. Secular societies who encourage all religions, but favor none, are more, not less religious than theocracies like Iran, Israel, or the recently deposed Taliban government. Whatever our personal beliefs, we should never lose sight of the fact that government is not, and can never be, an all-knowing God-like caretaker. Utopia can never be achieved. The most we can do, as economist David Landes says in The Wealth and Poverty of Nations, is: The one lesson that emerges is the need to keep trying. No miracles. No perfection. No apocalypse. We must cultivate a skeptical faith, avoid dogma, listen and watch well, try to clarify and define ends, the better to choose means. Americas Founders would have agreed. They built in checks and balances to prevent government from setting itself up as god-like, or claiming to rule by divine right. The US lack of political/religious dogma, while specifically defining societys basic values, has given America unparalleled dynamism over the last 200 yearsbecause it gave every American room to become fully human. We must never forget that the society we have in the West is not and never can be Utopia, nor the final answer to individual freedom. Though it achieves the greatest prosperity combined with the greatest (relative) freedom of any generally known and accepted systems of government, it is only the best we have come up with so far! Our system of government is, as Churchill put it in 1947, The worst form of government except all those other forms that have been tried from time to time. Only if we keep this in mind, and constantly adjust our societies, using the special knowledge that each of us have, will we continue (on balance), to advance in prosperity and relative freedom. And only then will there be free securities markets for us to invest in, and a world where we will want to spend our profits. And if I have done my job well in this book, you dear reader, will be ready to buy at the start of a new, hopefully long-term period of stability and economic growth, which will not only make you richer, but which will enable you to buy a truly fulfilling lifestyle in a world where increasingly the rule of law and basic human rights will be part of national constitutions. Meantime, enjoy bear market opportunities when they occur. They too can provide prosperity. Glossary of Terms and Tactics for Market Mastery Advance/Decline (A/D) Line: A line created from the difference between the number of stocks that went up and the number that went down for each trading day (on a weekly basis). Stocks unchanged are not counted. Shows what the great mass of stocks are doing, in contrast to the limited number of stocks contained in any stock index. Its especially noteworthy when it diverges from the stock averages, particularly the S&P or DJIA. If the Dow is making new highs while the A/D line is falling, it shows that only a few stocks are leading the market, making new Dow highs suspect and increasing the odds of a reversal. American Depository Receipt (ADR): Instruments issued by US banks as counterparts for non-US securities. In practice, they are the same as shares of a corporation, except ADRs are traded on a US exchange, not the exchange in which the corporation is domiciled. Are also used for international arbitrage when price of ADR diverges from price of stock in country where domiciled. At-the-Money: An option that has a strike price the same as, or very close to, the market value of the underlying security. Automatic Reinvestment: Automatic reinvestment of shareholder dividends in a corporations stock. The corporation usually does this without brokerage fees and may even offer a small discount from the current price. Average Down: To buy more at a lower price than the original purchase. For example, if you bought shares at 100 and later buy more at 90, you averaged down. Not recommended unless an experienced investor. But a tactic that can turn a loss into a gain, especially if adept at discerning chart support and resistance levels. Average Up: (1) To sell more at a higher price than the original purchase. For example, you sold short at 70. If you sell more short at 80 you averaged up. Not recommended unless an experienced investor. (2) Infrequently used to describe additional buying at higher prices. Basis Point: (1) 0.01% of yield in a fixed-income security. For example, if the T-Bond yield drops from 7.05% to 6.40%, its declined 65 basis points. (2) Used in referring to changes in price in other than fixed-income securities. For example, if Yen futures drop from 98.10 to 95.50, the drop will normally be described as 260 ticks rather than basis points. Bearish: Having the opinion a market is going to go down. Bearish Divergence: Most commonly, a new high in price without a corresponding new high in a related price, average, index, or other technical indicator. For example, if a stock makes a new high, but a technical indicator doesnt, it points to a loss of upward momentum and possible correction or change in trend. Beta: A measure of a stocks volatility in comparison to the S&P 500 index. The S&P 500 index is given a value of 1. If a stock is more volatile than the S&P, it will have a beta greater than 1. If less volatile, the beta will be less than 1. For example, if the S&P 500 index moves 5%, a stock that usually moves at 7.5% will have a beta of 1.50, indicating that its 1.5 times as volatile as the S&P. Betas are useful in constructing portfolios of greater or lesser volatility than the S&P 500 index. Bid/Ask Spread: The difference in price at which you can buy and sell. For example, if a stock has a bid/ask spread of 159 at 1594, youd pay 1594 if buying and receive 159 if selling. The Bid/Ask spread is not unique to financial markets. If you were to purchase a numismatic coin from a coin dealer, youd pay the Ask price. If you wanted to sell the same coin to the dealer, youd receive the Bid price. The Bid/Ask spread is the price of doing business in any market in which you are not in the business yourself. Also called Bid/Offer spread. Blue Chip: A term originally designating a chip off a blue stonea diamond. The term was also adopted for high-value poker chips. Its used to describe shares of first class corporationsthose which are large and have a good record of earnings and paying dividends. Theyre usually old and well established. However, their prices go down as well as up, so dont expect to escape a major bear market by only buying blue-chip stocks. Bond: A long-term debt instrument issued by a government or corporation. The term in years of various bonds varies, but is usually 5-10 years. Can be longer. Debt instruments with a shorter term than 5 years, but over 1 year, are usually referred to as Notes. Bullish: Having the opinion a market (in anything) is going to go up. Bullish Consensus: Generically, a survey and compilation of the percentage of advisors or investment areas that are bullish or bearish. A number of companies do these surveys on a daily and weekly basis. Investors Intelligence is a widely followed stock-market consensus. Market Vanes Bullish Consensus is widely followed in future markets. Bullish Divergence: Most commonly, a new low in price without a corresponding new low in a related price, average, index, or other technical indicator. For example, if a stock makes a new high, but a technical indicator such as Stochastics doesnt, it points to a loss of downward momentum and possible correction or change in trend. backs: Some companies buy-back their stock in the open market. This reduces the number of shares outstanding, which in theory increases the net earnings per share. The ethics is debatable and the SEC (Securities and Exchange Commission) frowned on it in 2000 and early 2001, though they OKed it to help the US stock market after September 11. Buy backs are illegal in many countries, and in my opinion should be in all. Its an artificial way of growing earnings, aimed at giving the appearance of higher earnings even though the company did not increase their sales. A major drawback is that companies use up their cash reserves this way and can find themselves cash short when business declines or is in a recession. Call (Option): (1) A type of option. A call option gives the buyer the right but not the obligation to buy a stated number of shares of a security at a stated price on or before a specified date. (Also used for bonds and futures contracts.) For example, a December 85 stock call option gives the owner the right to buy 100 shares of that stock on or before the December expiration date of the option (usually the third Friday of the month) at 85 regardless of the actual price of the stock at the time. More frequently, if the option is in the money (i.e., the stock is above the 85 strike price), the owner will simply sell the option and collect the profit. If the stock is below 85 and/or the option expires, the call buyer loses all of the money (premium) paid for the option. The advantage of buying options is leverage. For several hundred dollars, you have the right for a limited time to participate in the advance of a stock, which if you bought the stock directly would require a much larger investment. The big disadvantage is that you not only have to be right about the direction of price movement, your timing must also be correct. (2) The action by which a company decides to redeem a security before its maturity date. Cancel/Replace: Canceling an order and replacing it with a different order for the same security or contract. Cash Charts: Price charts reflecting the cash or spot price of a commodity in comparison to a forward price in the futures market. Chicago Board of Trade: US futures exchange on which financial instruments (T-Bonds, T-Notes, Municipal bonds) and the Grain Complex (corn, oats, soybeans, etc.) are traded. Called CBT. Chicago Mercantile Exchange (CME): US futures exchange on which the S&P index, cattle, and pork bellies are traded. A division of the CME, the International Money Market (IMM), trades currency futures and the Eurodollar. Closed-End (Mutual) Fund: An investment company that manages a mutual fund with a limited and fixed number of shares. Listed on an exchange, it is very similar to a stock, in that you can place buy and sell orders, stop-loss orders, limit orders, etc., which are not possible in an open-end fund. Commodity Exchange Inc. (COMEX): US futures exchange on which copper, gold, and silver are traded. Common Stock: A security representing an ownership interest in a corporation. Common stock holders have claims on assets of the company only after claims of bondholders, other creditors and preferred-stock holders. Common stockholders control management and company policy via voting rights. Confirm: To validate or increase the validity of a particular market movement, usually a new or significant high or low. For example, if the Dow makes a new high but the Dow Jones Transports do not, the new high is not confirmed. Can also use it with other market indices (e.g., A/D line). More generally, confirmation has to do with comparing a number of technical indicators or studies to see if most are in agreement as to future price movement. Contingency order: An order that depends/is contingent upon some other parameter occurring first, usually the execution of another order. Contrary Opinion: A market theory based on the concept that the crowd is usually wrong. A contrary opinion is a minority opinion (and a small minority at that) that is the opposite of what most people think will occur. Convertible Bond: A bond that can be converted into common shares at a price or rate and/or date specified upon issuance of the bond. Correction: Any temporary reversal or retracement in price movement in the opposite direction of the price movement/trend that just occurred. Normally used when referring to a price movement not in the direction of the medium term or primary trends. Cover: The action of buying after initially selling (shorting). Day Order: All orders are considered day orders unless specifically stated otherwise. Day orders are good for that trading session only and expire at the end of the trading session. Divergence: Failure of the price movement of one security, average, index, or technical indicator to confirm the price movement of another security, average, index, or technical indicator. Diversification: The reduction of risk by investing in non-related securities and different types of investment, such as stocks (or stock groups), bonds, CDs, money market accounts, currencies, precious metals, etc. Risk spreading ensures that if an area goes sour, one may still be doing well in another. Dividend: Payments made by corporations to their shareholders in cash or stock, out of corporate earnings. Dow Jones Industrial Average (DJIA): A market average of 30 widely-held NYSE-listed stocks. It is not weighted for capitalization of the stocks. It is computed by taking the sum of the prices of the 30 stocks and dividing by an adjusted denominator. As the denominator gets smaller, the volatility of the Dow increases. The DJIA is the worlds most widely followed and quoted stock market index, but increasingly the S&P is preferred as more representative. Dow Jones Transportation Average (DJTA): Originally the Rail Average, the DJTA is composed of 20 stocks consisting of airlines, freight, railroads, etc. Per Share (EPS): A corporations net income after taxes and payments to preferred shareholders divided by the number of outstanding shares of stock. Emerging Markets: Markets in countries that are not well established economically/financially, but are making progress in that direction. Eurodollar: US dollars on deposit at European banks and used for overseas business transactions. Ex-Dividend Date: When a stock trades ex-dividend, it means on that day a dividend was paid on the share and this amount is deducted from the share price. Fundamental Analysis: One of the two broad categories of market analysis (the other is technical) used to obtain indications of future price movements. It is based on a companys balance sheet, profit and loss statement, earnings, industry trends, economic and managerial data, supply and demand of product, etc. Futures: A contract that contains an agreement to buy a specific amount of a commodity or financial instrument at a particular price on a stipulated date. It obligates the buyer to purchase and the seller to sell, unless the contract is offset before the settlement date. Gap: A span in price between the close of the previous trading session, and the open of the subsequent trading session, either up or down. GTC: Good till canceled order. Means what it says. See also Open Order. Gilts: Securities of corporations that have shown over time their ability to pay continuous dividends or interest. Most commonly used to describe bonds. In-the-Money: Phrase used to describe any option in which there is intrinsic value. That is, the amount the market price of the underlying security is above the options strike price in call options. For put options: The amount the market price of the underlying security is below the options strike price. Leverage: In the financial sense, making a given amount of money do more work than is normal (e.g., buying stock on margin, or buying options rather than the underlying stock). Long Bond: A bond maturing in more than 10 years. Margin: (1) A loan from a broker to buy stock, hence buying stock on margin. Loan is usually up to 50% of the price of the stock purchased. (2) Good-faith deposit on a futures contract. Margin Call: A brokers request for you to put up more money (margin) because your stock/bond/futures have dropped below your margin. If you dont come up with more money, or sell some of your position, the broker will sell all or part to meet the call. It is also a wake-up call that something is very wrong! It is usually a sign the account is undercapitalized, and/or you are not using stop losses to limit losses, and/or you are over-leveraging your investments, often a problem with having too many futures contracts. Market Order: An order filled as soon as possible at the best obtainable price at that time. MIT (Market If Touched) Order: Used mainly in futures markets. An MIT order becomes a market order when the specified price is reached. MOC (Market On Close) Order: An order to be filled at the end of the session. Usually in the last 30 seconds of trading in equities or last 2 minutes in futures. MOO (Market On Open) Order: Works the same as an MOC order except it is executed when the market opens. Moving Average: Average price of a security, index, etc. over a period of time. For example, a 39-week moving average is the sum of the last 39 weeks closing prices divided by 39. Each week, the oldest price is dropped and the current price added before the average is retotaled. Not-Held: (1) A stipulation by a broker that he or she is not held responsible if an order is not executed, or not executed at the desired price. The order is accepted solely on a best efforts basis with no guarantees whatsoever. (2) A qualifier that allows floor brokers to use their discretion with respect to the time and price of an orders execution. Open Order: An order that doesnt expire at the end of a trading session. An open order will remain active until the order is executed, canceled, or changed. Some brokerages limit the time theyll keep an open order (e.g., 30 days). So, when you place an open order, check how long it will be valid for. See also GTC. Open-End (Mutual) Fund: A management investment company in which new shares are issued according to supply and demand of investors. Not listed on stock exchanges. Biggest drawback is inability to place stop-loss orders. Also, some require notice before withdrawing shares. Selling at the market midsession is not usually possible. Open Interest: Total number of options or futures contracts that have not been liquidated. An open interest figure represents both the buyer and seller of a particular option or futures contract. Overbought: Term used to describe a security that has advanced appreciably and for which the probability of a corrective decline is high. Many technical oscillators, such as Stochastics, are used to try to determine at what point an overbought condition exists. Oversold: Describes a security that has declined appreciably and in which the probability of a corrective rally is high. Penny Stock: A relatively low-priced, highly-speculative security. Loosely defined as any stock under $5, but traditionally under $1. Preferred Stock: Part of the stock of a corporation that has priority over common stock in the distribution of dividends. In the event of a bankruptcy, preferred stock holders are ahead of common stock holders with regard to the distribution of assets. Premium: The price of an option consisting of the sum of its time value and intrinsic value. Price-Earnings Ratio: The quotient obtained by dividing a stocks current market price by the current yearly earnings per common share. Also called multiple. Pyramiding: Adding to your position in a particular security, often using profits from an earlier purchase. For example, if your initial purchase was at 30, and the share rises to 40, you buy more. Record Date: Date on which a shareholder must own shares in order to receive the next dividend. Resistance: A price level or range of prices at which a security stopped advancing in the past or is anticipated to stop advancing should it rise to that level in the future. Shorting Against the Box: A short sale. If, near the end of a tax year, you feel a certain stock you own might go down in price and it ought to be sold, but you do not want to pay the capital gains tax in that year, you can short it your long against the box. You sell short the same number of shares as you hold long. Thus, you lock in your profit without actually selling your stock. Short Squeeze: A situation in which traders who have sold short feel forced (by rising prices) to buy to cover their short positions. The amount of forced buying drives prices even higher than they would normally go. Stochastics: A technical indicator that functions as an overbought/oversold oscillator. It is based on the premise that when a price is rising, it will tend to close near the high of the day on daily charts. For an advance to stop, it must first slow down. Thus a change in the momentum of an advance occurs before the price reverses. Stochastics attempts to identify this change in momentum. Stock Split: (1) Forward split: An increase in the number of shares of a corporation without any change in the shareholders equity. Usually done to make a stock more marketable by reducing its price. (2) Reverse split: A decrease in the number of shares of a corporation without any change in the shareholders equity. Done to raise the price of a stock, usually to above the level of a penny stock. Strike Price: The stated price of an option at which the owner can buy the underlying security in the case of a call option or sell in the case of a put option. Unit Trust: Same as Open-End Mutual Fund. British term. Yield: General term for the percentage return on an investment. |
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