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With instinct and talent guided by experience.

11/16/2010

Like I said in one of my first posts, there are lots and lots of ways to trade. Some good, some bad, some make money and some lose money. I don’t like to define myself as a trader. I don’t trade for the sake of trading. I make money (hopefully) and trading is the vehicle through which I do so.

That being said, how do you make money? You learn a system and stick with it. You take the trade when it sets up. When MA 1 crosses MA 2, and is still below Hr.MA 3 you do X… Maybe you listen to a few “market analysts” out there and they help influence the way you trade. Maybe you follow some signal service that says go short at this price, stop loss here and take profit here. I’m not going to knock any of these methods in this post, I’ll knock them all at a later date.

When we trade though, we need a reason. “Oh crap.. I just lost my ass on that last trade and need to make it up on this next one or I won’t be able to go out on Friday,” is not a reason. So, regardless of why we trade, if we want to make money, we need to understand what we’re doing otherwise we’re just gambling. I don’t know about you, but I am too much of a control freak and I hate gambling. I do like playing poker, but that’s a different story about psychology and statistics that doesn’t belong in this post.

If we enter the market to make money, we need to know why we’re entering the market and what our goal is. Even if we’re investing fundamentally we analyze the data and make an educated guess. So, lets talk about a great trade that’s performed incredibly well for the past oh, I don’t know 5 years minimum, maybe 10.

That’s right, Gold.

Way back in the early 80′s gold was the hot buy. Everyone was long gold. Gold was the way to curb inflation. It was legal to own again, and everyone wanted a piece. And why not? Nixon had just taken us off the gold standard so the “dollar was worthless” . Paper money wasn’t going to be worth the paper and ink used to print it. Hell, Jimmy Carter had just got done messing up the country. We were headed towards pre-war German style hyperinflation. And with interest rates near 21% there was some fire behind this smoke. Gold was the no-brainer trade. How do I know all this? Right around $800.00 / an oz. my grandma finally talked my parents into investing in gold. No, not a lot. Probably not even 5 oz’s. What happened from there? Something miraculous happened. The world didn’t end. The dollar didn’t die, and interest rates didn’t reach triple digits. Oh, and gold started a 10 year bear market. One might even say, it tanked. Sure, gold was still a hedge against inflation, rising real estate prices, uncertainty, and general Armageddon. The only problem was, Gold didn’t know all this. It was happy to spend from 1992 to about 2002 trading in a happy little range.

The story isn’t over yet. In 2004 I was fresh out of college. I knew everything about everything. (some things don’t change by the way). I started to hear adds on the radio that gold was in a new bull market. We were going to see new highs. We were going to break $1,000 an oz. You know, all that good stuff. So what do I do? Well, I’m a poor college graduate without any money. I can’t invest in gold. But my parents. Ya, they have money. Let’s get them to invest in gold. Well, they relate the above story to me and say no thanks. Sure, gold had been around $800 an oz. But that was a long time ago, and besides, it didn’t work out well the last time. That makes sense right? Gold is at $350 an oz, it had been almost $800 an oz, and it wasn’t going to get there again? No, of course it doesn’t make sense. But that’s how a lot of people think. What do I talk them into doing? Investing in Real Estate instead. At least that’s a good solid long term low risk investment right?

So, lets look at the math. If I’d invested $10,000 – unleveraged – in gold in 2004 at say $350 an oz. That would be 28 oz. If I had cashed it out last Thursday the whole thing would have been worth $40,685 or a $30,000 profit. Not bad. Do we want to leverage that now? Most brokers offer 100 / 1 leverage. an overpriced site monex.com offers 20/1 – and I think you can even take possession of your little nugget.

No, the point isn’t to bitch about the trades I’ve missed. It’s to talk about trading responsibly, with knowledge – or as my high school math teacher used to say “with instinct and talent, guided by experience”. What do we do now? We listen to the radio and NBC, and Mad Money, and Fox Business and all that good stuff.

We listen to our buddy Mr. Jim Cramer last Thursday on Twitter saying: “More like cue the Goldfinger for the purists–i love AU!!!!!”

Leave it to Cramer to tell his faithful sheeple to go long right before a $100 plunge in good old AU. Want to leverage that with one or two (or 10) standard positions at 100:1? I don’t, (and didn’t).

Just one more recent one. Gold is at $1,000 / an oz and has nothing but air in front of it. I had a little investment manager guy telling me that a little over two years ago. I thought we were a little overpriced. What happened? Gold hit $1000, then fell to $680. Was gold a good buy at $1000, sure. It’s now at $1340. 30% in two years isn’t bad. But, do I want to wait from April 08 – December 09 before I see a profit? That’s up to you. Is gold fundamentally still a good buy?

Is Cramer right? Is my investor friend right? Was my grandma right almost 30 years ago? Sure, they all are (well, Cramer might still be wrong). But, just how long do we want to wait to be right. What isn’t right is finding a one answer fits all. Is gold right for me, right now, at this price and time?

Is it right to bail on our long term investments and move the 401K into cash right after it tanks by 40%? If you ask a bunch of people at the time, sure it is. Things are bad and getting worse. In fact, the current little bull run is only because of Government stimulus, facilitated by low volume and speculation. It’s all going to crash. (um… err…. I mean.. again…)

Sure, don’t chase a losing trade, but when prices hit bottom, double down and hold on.

The point is, we need to know what we’re trading (or investing – because after hours of conversations with average people, and “investors” I can’t figure out the difference, except maybe investing is more risky.) And we need to know why. So, when the 5 ma crosses the 55 ma what do we do?

Or, maybe the point is: If you realllllly believe that the world is going to hell in a handbasdket, that the monetary system of the world is going to collapse, that the Chinese, Russians or Aliens, are going to invade, that Gold is the only thing going to be worth anything in the long run; you should probably invest in bullets. Because if you stockpile bullets you can always get food. If you stockpile food, well… Someone will have bullets. 🙂

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