Mr. Share The Agonized Agony Aunt

Ezra White

In a world of financial uncertainty, it’s good to have someone we can trust for reliable (if somewhat irreverent) advice. Once more we turn to our resident agony aunt for help with our investment woes.

My friend says I should invest in oil because, according to him, it’s the perfect time. What’s best, olive or vegetable?

Your friend is a wise man; you are not. As it happens, this could be a great time to invest in oil (although, not the sort you drizzle on a salad) but it could also be a terrible time. The crude oil market is very volatile right now and in the last year or so its value has fallen by close to 50%. Investors have been getting on board throughout this time, taking advantage of the low price and expecting it to climb, but it has continued to fall. Whether or not its current price is the “rock-bottom” one is anyone’s guess, but it could be expensive to speculate. One way to go about it could be to start taking small positions in relevant energy stocks and add over time.

Should I care about what’s happening with the stock markets in China? I mean, I live in and invest in the United States, so why would it affect me?

Think of it this way. The recent cluster-f**k in Greece was enough to send the markets into a free-fall not only in Europe, but also around the world. Well, we’re getting carried away. It was not really a free-fall, was it? Nonetheless, stock markets were impacted worldwide. Greece may be the cradle of civilization and the home of incredibly original soccer, but it’s still a tiny country with a GDP that is lower than several US states. China, on the other hand, is a global superpower, the second biggest in the world – well, by some measures, the first. If we draw an apocalyptic comparison (which seems apt) Greece is a serious case of the sniffles, one that made several people feel ill and then (hopefully) disappeared, whilst China is the Black Death.

How do the commodity markets work? I want to invest in several kilos of grain but have nowhere to store the mess.

This is tricky, but interesting nonetheless. The commodity markets allow you to invest in a number of commodities, such as grain. These markets began as a way for farmers to sell their harvest to investors and in the early days they would actually deliver a bag of grain to the trading floor so that buyers could sample it. This was a slow process, but the buyers soon realized that certain global events affected the price of the grain they had just bought, giving them an opportunity to sell it on for a profit or loss. From this, an entire market was established whereby trades were a form of speculation, as opposed to an actual purchase.

If you invest in a commodity you are sinking your money into the hope that it will retain its value or increase it, at which point you can sell it. You have no physical investment, but you are taking a position on a virtual market that has been around for more than 100 years, and in a product that is a big part of the economy and human civilization. It’s not like investing in stocks, though. The shares investors own may appreciate over time as their enterprises conquer markets and grow earnings. Betting the price of grain, chocolate, wheat, gold or oil will go up (or down) is mere speculation, not an investment in a wealth-creating venture. It’s a trade, period. Care to flip a coin instead?

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How Stocks Going Down Can Be Great News!

Frederic Marsanne

I know… Seeing your stock portfolio lose value is no fun. No fun at all. Who said there is anything to love about that? But one day it will happen. Yes, believe it or not, there will be another correction (defined as prices decreasing at least 10%) and another bear market (defined as prices going down at least 20%).

But a meltdown can be great news in many ways.

First, a stock market correction or a bear market bring valuation down and create true buy opportunities. Biogen (BIIB) lost more than 20% of its value on Friday, July 24. Chairman and director Stelios Papadpoulos, purchased 10,000 shares at an average price of $304.88 the following Monday. The Biogen big shot is also the Chairman of the Board of Directors of Exelixis, Inc. and Regulus Therapeutics, Inc., a member of the Board of Directors of BG Medicine, Inc. and the co-founder of Anadys Pharmaceuticals, Inc., which Hoffman-La Roche acquired in 2011. He retired as Vice Chairman of Cowen & Co., LLC, a financial services company, in 2006, after six years with the firm where, as an investment banker, he focused on the biotechnology and pharmaceutical sectors. (Source: www.biogen.com) The point is that he likely knows a good biotech investment when he sees one. Prices go down dramatically? If the asset has value, buy; don’t sell! As Warren Buffett put it, "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Second, a correction or a bear market will test your mettle, and that’s a very good thing! Are you a real investor or just a trader or speculator? Think about it this way. The shares of Amazon (AMZN) and Netflix (NFLX) have gone through tremendous ups and downs over the years. Yet despite the huge fluctuations, all that you had to do is stay invested in their shares and you’d have created huge wealth for yourself. In 17+ years, one dollar invested in AMZN would have accrued well in excess of 300. But the shares did lose more than 90% of their value after the tech bubble imploded. To quote Warren Buffett again, “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” It takes tremendous resolve and discipline, not to mention nerves of steel, to hold on to these shares, but if you do you’ll be rewarded. Do you have the b@lls, may we dare ask? LinkedIn (LNKD) recently collapsed. Did you sell or buy LNKD that day or shortly thereafter? Alibaba (BABA) is languishing after its IPO. Are you buying or selling? There is real satisfaction in showing courage and staying the course. Congratulations! You are getting rich. Just fasten your seatbelt!

Third, Investors should be aware that a market can’t keep going up forever; it needs to take breathers. If stocks keep rising, they may reach bubble territory. Once we’re in a bubble, the way down can be quite traumatic. The following bear market and reversion to the mean then have an end-of-the-world feel to them.  Crashes and crises can trigger recessions in their own right, disrupt economies and destabilize societies. Think 1929… Stocks go down? Enjoy! A healthy pullback is to be expected on the way to stardom and fortune. Even the implosion of bubbles eventually regenerates societies, economies and the process of wealth creation and (re)distribution. So be it.

Fourth, in the rare case you have invested in a losing stock (does it ever happen I wonder?), well selling it at a loss will reduce your taxable capital gains for the year and you won’t owe Uncle Sam and the IRS quite as much. Lucky you!

Fifth and lastly, experiencing firsthand the ferociousness of bear markets will try you, educate you and “better” you.  As Mark Twain put it, “A man who carries a cat by the tail learns something he can learn in no other way.” Corrections and bear markets produce, not only attractive valuations, but also the next generation of great investors.

The Great Depression had Benjamin Graham, Warren Buffett and Sir John Templeton. Will the next one have you?

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Currency Trading Is The World’s Largest Financial Market

At the core, all you need to remember is that betting on a currency’s direction is speculation, not investment. When you buy Pounds or Swiss Francs or Euros or Yens, you don’t buy an ownership right into a firm that can grow its top and bottom line, and thus its equity and the wealth of its shareholders over time. You just hope that the relative value of the currency you purchased will increase. It’s a trade, nothing more, nothing less. Twenty years from now, it’s quite possible that the Euro and the dollar will still be close to parity. What long-term return can you then hope for from taking such a position? Meanwhile, companies like Facebook or LinkedIn may have made their owners rich – very rich. Primarily because they grow profit and you owner own some of it. Lucky you!

Image source: google.com

I should have studied finance. I don’t even know what a devaluation is. Instead, I am the proud alumnus of a two-hour webinar that taught me I could become rich trading foreign currencies. Rich! Do you understand? Rich!!! But a foreign-exchange investor is like an... oxymoron. And if you remove the oxygen, he or she becomes a moron. My first wife should be doing this. After all, it’s for ex… Definitely not for me!

Yes, you learn a skill and hope to make a killing. But the murdered one in the end may be… you. Most retail currency investors lose money most of the time. FXCM Inc. and Gain Capital Holdings Inc., two leading publicly traded over-the-counter forex companies, have reported that, on average, nearly 70 percent of investors had a net loss from trading in recent quarters. The average OTC forex investor drops out of the market after just four months, according to the National Futures Association (NFA).
Currency trading is the world’s largest financial market; $5.3 trillion changes hands every day, according to the Bank for International Settlements. There are zillion of market participants. Pension funds and multinational corporations operate in the space of course. But also all sorts of speculators, brokers, weirdoes and people with broken dreams…

And then there is… me. Both my shrink and a friend of a friend of my dentist who said he knows someone recommended I get a piece of the action.

Damned, why did I listen and choose to enroll?

Can you believe I can supercharge my bets with 50:1 leverage? Stock investors are amateurs. The U.S. Federal Reserve limits individual stock investors’ leverage (margin requirements) to 2:1. I say, 50:1 or nothing! If I have $1,000 I want to bet $50,000’s worth minimum. The dream! This kind of juice can lead to monstrous wins -- even in a market that moves little. But of course investors – really, speculators – can have their entire position vanish in days. How about that for magic! Don’t overleverage, they recommend. But I’m saying 10:1 is for sissies… Or am I deranged?

Image source: google.com

Sure, leverage can blow me out. But if you don’t mind losing $10 instead of a mere $1, gambling the house, unsleeping at night, discovering the true meaning of conflicts of interest (Brokers often buy what I sell and sell what I buy so I guess they trust my judgment big time, don’t they?), enticing pitches by people who truly don’t care, piling up credit card debt for the wrong reasons (as though there ever were a good reason!), just help yourself! Do forex by any means.

Yes I’m going to max out my credit card. Oh yeah baby! That’s what FXCM suggested I do when I started with them. Fastest way to open an account, they teased. Why not? I have tons of credit cards I must be rich. The combination of leverage and plastic is a dream come true. I can end up paying an upfront fee, a transactional interchange reimbursement fee, a terminal fee (yeah, I’m about to die), a payment gateway fee, as well as debt with as high an interest rate as 25 percent. And the Fed is looking to boost rates; can you believe the dream? It’s like paradise! Who dared say I can lose it all?

Hold on! It’s already tomorrow and I forgot to make money. Thank God today is the day! Let’s go back to those Polish złoty and Mongolian tugrik…