J Christoph Amberger, Hot Trading Secrets .pdf
Nombre del archivo original: J Christoph Amberger, Hot Trading Secrets.pdf
Título: J. Christoph Amberger : Hot Trading Secretsâ„¢ âˆšPDF âˆšeBook âœ”Download
Autor: How to Get In and Out of The Market with Huge Gains in Any Climate
Este documento en formato PDF 1.4 fue enviado en caja-pdf.es el 24/01/2016 a las 05:02, desde la dirección IP 114.120.x.x.
La página de descarga de documentos ha sido vista 2397 veces.
Tamaño del archivo: 5.5 MB (321 páginas).
Privacidad: archivo público
Descargar el documento PDF
Vista previa del documento
J. Christoph Ambergerâ€™s
Hot Trading Secrets
J. Christoph Ambergerâ€™s
Hot Trading Secrets
How to Get In and Out of the Market
with Huge Gains in Any Climate
J. Christoph Amberger
Joanna, Maximilian, Sebastian, and Sophia
Foreword by Michael Masterson
INTRODUCTION: A VISIT FROM THE FBI
DYNAMIC MARKET THEORY
CHAPTER 1: MARKETS RISE, MARKETS FALLâ€”
IT MATTERS NOT
CHAPTER 2: WHAT EXACTLY IS VALUE?
CHAPTER 3: A STORY IS JUST A STORY . . . UNTIL
THEREâ€™S A PROFIT
CRISIS AND OPPORTUNITY
IN THE GLOBAL MARKETS OF 2006â€“2009
CHAPTER 4: THE LAST PHASE OF THE BUBBLE
CHAPTER 5: STAGNATION AND DECLINE:
THE INEVITABLE IRRELEVANCE OF
THE EUROPEAN UNION
CHAPTER 6: DRAGON OUT OF FIRE
THE TRADING SECRETS
CHAPTER 7: TRADING SECRET NUMBER ONE:
HOW TO PROFIT FROM CYCLICALITY
CHAPTER 8: TRADING SECRET NUMBER TWO:
THE PERFECT VALUE TRIFECTA
CHAPTER 9: TRADING SECRET NUMBER THREE:
FOLLOW THE MONEY!
CHAPTER 10: TRADING SECRET NUMBER FOUR:
â€œPROFITS AT THE SPEED OF NEWSâ€
CHAPTER 11: TRADING SECRET NUMBER FIVE:
STONE-COLD PROFIT PREDATOR
CHAPTER 12: TRADING SECRET NUMBER SIX:
CHAPTER 13: TRADING SECRET NUMBER SEVEN:
PROFITS FROM THE RED ZONES
CHAPTER 14: TRADING SECRET NUMBER EIGHT:
PLAYING THE â€œFLYING Vâ€
CHAPTER 15: TRADING SECRET NUMBER NINE:
THE TRI-DIRECTIONAL INDICATOR
CHAPTER 16: TRADING SECRET NUMBER TEN:
TRADING THE MONEY-FLOW MATRIX
CHAPTER 17: TRADING SECRET NUMBER ELEVEN:
PROFITING WITH THE WAVESTRENGTH
OPTIONS TRADING SYSTEM
CHAPTER 18: TRADING SECRET NUMBER TWELVE:
THE SECRET STRATEGIES OF CBOE
CHAPTER 19: TRADING SECRET NUMBER THIRTEEN:
BRYAN BOTTARELLIâ€™S SIX TRADING RULES
The 55 Rules of Trading by Christian DeHaemer
About the Author
I have an intellectual weakness for contrarian investing. Buy quality
when it is unpopular and prices are cheap. Sell it when the crowds
have finally caught on and prices are zooming.
This is the sort of moneymaking philosophy that appeals to a certain snobbish tendency in me: that most investors, the lumpeninvestoriat (as Bill Bonner calls them in his Daily Reckoning) are financial
lemmings who donâ€™t have the sense to recognize value when they see
it. Instead, they buy on hype and frenzy and contribute to bubbles
that inflate and burst, as bubbles must do, and are justly punished for
Or, to paraphrase Mick Jagger: You canâ€™t always get what you
want as an investor, but if you live long enough you will get what
As I say, thatâ€™s the way I like to think about the financial markets
and when I talk about investing and investors, thatâ€™s the sort of perch
Iâ€™m happy to acquire.
But when I look at what I have actually done as a businessman and
investor, I have to admit that most of my wealth has been accumulated by doing almost exactly the opposite. Of the considerable
money I have made in my lifetime, the great majority of it has come
from investing in trendsâ€”not foolishly running behind the herd (Iâ€™d
like to think), but shrewdly going with the flow.
I once heard it said that there is a rule of probability that states
that there is a seven-to-one chance that any trend that exists today
will continue to be in place tomorrow.That dovetails with my experience as a builder of businesses.Yes, trends change. But most of the
time they go in exactly the same direction that they were going in
Betting against the trend can provide rich emotional rewards, but
itâ€™s generally bad for the pocketbook. If kids today like low-cut pants
so that their boxer shorts can show, chances are they will like them
tomorrow. Sometime in the future higher-cut jeans and cotton briefs
will be back in vogue, but Iâ€™m not going to invest in a business that is
starting to manufacture them now.
If you look at the history of the stock market over the past 25 years
(since Iâ€™ve been more or less involved with it) you will notice that
there have been about a half dozen major trends.The pattern of investing during those trends is pretty well documented: as one trend gradually or somewhat suddenly comes to a halt another trend almost
immediately takes up movement. Those who get in the new trend at
the beginning do very well, but those that get in toward the end often
The secret to becoming wealthy as a trend investor is timing.And for
every trend there are at least a half dozen investment theories that aim to
profit from it. As a consultant to the financial publishing industry, Iâ€™ve
been studying those theories for almost three decades, and if there is one
thing Iâ€™ve learned about them, it is this: there are all sorts of investment
strategies that work, but very fewâ€”if anyâ€”that work consistently.
Which brings me to Christoph Amberger and his exciting new
book Hot Trading Secrets.
There is an inside secret in the investment advisory business that
goes something like this: if the investor likes the shade of your glasses
he wonâ€™t care so much that the numbers heâ€™s looking at donâ€™t add up
to that much. Put differently: if your reader likes your political and
economic worldview, he will stay with you when your track record
for recommending winning stocks is in the toilet.
As someone who has watched the investment advice business for
many years, I believe that perspective is largely true. And thereâ€™s a
good reason for it. Most investorsâ€”most peopleâ€”are not all that
concerned about what return on investment they get. They feel that
they should be. And it can indeed affect their purchasing power. But
when you consider all the uncertainties that are incorporated in the
world of investing and after youâ€™ve had the experience of seeing your
winning streak turn bad on you several times, you gradually start to
pay attention to other things.
Those other things are often more philosophical in nature: Why,
for example, is there such a variance between the average income of a
new family in the United States and the average cost of a start-up
home? If the world were a reasonable place, youâ€™d think that there
would be a clear and calculable connection.
Or, given the fact that most new wealth in America is created by
small companies, shouldnâ€™t investors who put their money in smallcap stocks do better than the rest of the investing public?
Or, considering the fact that God created the world and itâ€™s meant
to have some sublime order (though we may not know what that order is), shouldnâ€™t good investorsâ€”that is, investors who put their faith
in solid, value-producing companiesâ€”be rewarded in the end when
the universe rights itself?
Such speculations are endlessly entertaining for those investors
who have (subconsciously or wittingly) given up the goal of attaining
wealth through stocks (or even, in many cases, the much less ambitious
objective of beating market indexes.) But Mr.Amberger is not content
to merely entertain. A compelling theoretician and amusing lampooner, he has spent 15 years as the publisher of the Taipan division of
Agora Publishingâ€™s financial newsletter empire excoriating fools, lambasting intelligent dimwits, and poking fun at pundits whose theories
are always richer than those who follow their recommendations.
That said, he has never given up the goal of finding investment
theories that actually work. In fact, heâ€™s been so dedicated to what
seems to most industry insiders to be an impossible task that he has
practically invented a process of hiring, training, and then testing
young people with a talent for this game and has, in the process, developed an enviable record of gurus and investment newsletters with
A few years ago I had a conversation with Christoph about his
success. I told him I was impressed with the individual results of individual writers who had matured their game under his direction, but I
still wasnâ€™t convinced that any one of them can sustain their records
â€œAnd thatâ€™s why I start them young,â€ he explained. â€œBecause I
want them young enough to change as the market changesâ€”to correct and refine and, if necessary, entirely reinvent their systems in order to get those good returns.â€
I wondered aloud whether that would be possible.
â€œLook at it this way,â€ he said. â€œDuring every market trend, isnâ€™t
there always one predominant investment theory that is working?â€
â€œYes,â€ I said. â€œBut thatâ€™s exactly my point. As the market changes,
so do the investment systems. What worked ten years ago doesnâ€™t
work today, and whatâ€™s working today wonâ€™t be working ten years
â€œIn fact, you are making my point,â€ he said. â€œMy program is
meant to take advantage of that one irrefutable fact about the stock
market: that it is endlessly changing. In an endlessly changing environment, only a fool or zealot would stick to a single, unchanging
system for dealing with it.
â€œMy system is dynamic. Itâ€™s a dynamic market theory.â€
â€œYou should write a book on that idea,â€ I told him.
And so he did.And thatâ€™s why Iâ€™m excited to introduce you to Hot
Trading Secrets. In this book, Christoph not only lays out the analytical
approaches of his ambitious young team of editors and analysts, but
also provides you with his big-picture view of how he sees the next
five years unfold in the global markets. Itâ€™s no pretty picture. Worse
even, Christoph has an uncanny track record of being right in his
analyses and forecasts.
But despite the looming crisis in the financial markets, this book
has a very optimistic message: By explaining how his analysts harness
each move in the markets for fun and profits, he provides you with
the tools needed to meet this crisis head-onâ€”enabling you to come
out not only wiser, but potentially vastly richer.
We at 247profits, the Taipan Group, and its affiliate publications and
web sites consider ourselves researchers, compilers, and publishers of
independently assessed information and opinion.We do not nor will
we ever accept compensation, fees, or payment for promoting or publicizing a company, stock, or any other entity as part of our editorial
content.All opinions we publish are the result of independent analysis
on the part of our editors.
The Taipan Group and 247profits are services for readers with
a strong sense of individual responsibility and the ability to perform their own risk assessment before acting upon the information
Every effort is made to ensure the utmost accuracy of all information, opinion, research, and commentary contained in our publications, web sites, monthly bulletins, and special reports. But while this
information is obtained from sources believed to be credible and reliable, such credibility and reliability cannot be guaranteed. Forecasts
and projections of events are based on the subjective evaluations,
analysis, and personal opinions of our editors. The maxim of caveat
emptor appliesâ€”let the buyer beware!
The Taipan Group and 247profits do not provide personal investment, financial, or legal advice to individuals; act as personal financial,
legal, or institutional investment advisers; or individually advocate the
purchase or sale of any security or investment or the use of any particular financial or legal strategy.
Before pursuing any legal or financial strategies discussed in this
book, our monthly publications, or on our web sites, you should consult with your legal or financial adviser or CPA. Investments discussed
in any form should be made only after reviewing the prospectus or
financial statements of the respective company.
Some of the information our editors and associates gather could
be considered â€œinsider information.â€When we get it, we publish itâ€”
because regulations prohibit us, or anyone else, from trading on insider information not available to the public.
Members of the organization, its officers, directors, employees, and
associated individuals may have positions in investments referred to
herein and may add to or dispose of the same at any time. But while we
encourage our editors and analysts to put their own money where their
mouths are, the editors, staff, and associates of 247profits and the Taipan
Group, as well as its directors, employees, and associated individuals, are
prohibited from trading on this information until after such information is publishedâ€”that is, at least three days after the publications have
been mailed to our subscribers or posted to our web sites.
Our network seeks to take advantage of the disparity of knowledge and the inequality of its distribution to maximize investment
profits for our network associates and subscribers.And even though in
the past certain investment recommendations from the Taipan Group,
247profits and their affiliates have produced huge gains, past performance is no guarantee of future gains.
No work successfully undertaken and completed by man is ever the
result of one personâ€™s efforts.Writers especially rely on other peopleâ€™s
intellects to come up with something worth sayingâ€”copying, adapting, adopting, and developing (sometimes even pilfering!) thoughts
and ideas from thousands of sources until theyâ€™re convinced itâ€™s all
This book in particular owes its publication to the direct and indirect influence of many friends and colleagues: the editors and staff of
the Taipan Group: Sandy Franks, Christian DeHaemer, Siu-Yee Ng,
Erin Beale, Ian Cooper, Bryan Bottarelli, Alex Chinn, Martin Denholm, Brad Colburn, Briton Ryle, Abe Said, Adam Lass, Sarah Nunnally, Ann Sosnowski, Mike Wiles, Zhan Caplan, Amy London, Mia
White, Jerome McLennon, Sherri Green, Sheryl Ivey, Alexa Landrus,
Ned Humphrey, Howie Ng, Erick Hienz, and Alex Ferguson.
I am greatly indebted to my boss,William R. Bonner, for entrusting me with the responsibility of developing the Taipan Group into
one of the most successful international trading publication groups
in the world, and paying my salary during that time; Michael Masterson and Mark Ford for showing me how to create and run a business
based on good products; and my mentor and Taipanâ€™s founding editor emeritus Robert W. Czeschin for guiding me in the early years of
Special thanks go to John â€œW.â€ Forde, Don Mahoney, Bob Bly,
Brian Hicks, and James Passin for originally putting into words
many of the ideas we came up with and have expressed in the pages
This book would not have been written without the valiant efforts of Wayne Ellis and Michael Ward, and the critical eye and indispensable hands-on help of Michael Thomsett.
Thanks also to my aikido senseis Brian Sutherland and Jeff Mims,
without whom I never would have grasped the complex concepts of
flow, and to my fencing coach Bin Lu, for teaching me more about
timing and positioning than a library of trading literature can offer.
And my special gratitude to Dan and Phyllis Strayer for always asking
the right questions.
FROM THE FBI
Social mood trends represent changes in human attitudes.
Changes in social mood trends precede compatible changes in history and culture, indicating that the former causes the latter. Thus,
there is powerful evidence that the pattern of mood change produced by social interaction of men is the underlying engine of
trends of social progress and regress.
â€”Robert R. Prechter, Jr., The Wave Principle of Human Social
Behavior and the New Science of Socionomics (2002)
In retrospect, it seemed like it was a particularly gray and depressing
day. Outside, there was just enough of a drizzle coming down to
make the late fall chill unpleasant.You heard car tires hiss on the asphalt and yetâ€”when traffic had stopped and you happened to listen
closelyâ€”windshield wipers were squeaking on glass that was neither
quite dry nor quite wet enough for them to do anything but leave
broad, sticky smears of whitish residue.
Inside our headquarters at 808 St. Paul Street in downtown Baltimore, the mood was tense. My colleague Adam Lass, our in-house attorney Matt Turner, and I were seated uncomfortably in our glass-enclosed
conference room. At the head of the table, a stern-looking visitor, a
Washington, D.C.-area FBI field agent, was readying a ballpoint pen. In
front of her were a stack of papers, printouts of our daily e-mail letter,
the 247profits e-Dispatch, and various printouts of our web pages.
â€œWe all know why weâ€™re here,â€ the agent began the conference.
She handed photocopies to all of us.
I didnâ€™t have to look at the papers. I knew exactly what was
Dated September 10, 2001, they contained an urgent warning that
we had broadcast to the 400,000 readers of the Taipan Groupâ€™s e-letter,
the 247profits e-Dispatch.This is what we wrote:
We were seeing a rally in the NASDAQ today. Donâ€™t, however, confuse that with a RALLY. Rather, it is a completely predictable move
from the bottom of the 10-day trend. Expect this short-lived upward move to peter out between 1,725 and 1,750 when it hits the
top of the short-term trend.
Then put your head between your legs and kiss your gains
goodbye: WaveStrengthTM indicates this will be followed by a geometrically accelerating arc down toward my target of 1,619, now less
than 75 points away.
But beware! 1,619 is no longer the worst thing you have to
worry about. I am now working on my next long-term
WaveStrengthTM prediction, and my preliminary studies are indicating a move so gruesome, ambulances will be cueing up below Wall
Street brokerage windows.
How could we possibly have known? Did we have tip-offs from
people who were in the know about the attacks to come the very
next day? If yes, who were they? Why exactly did we choose these
words to convey our message?
I must say that Iâ€™ve had more than a few sleepless nights since we
sent that message. Even for us at the Taipan Group, it is no everyday
occurrence that our financial predictions unfold in as horrific and literal a fashion as the terrorist attacks of September 11, 2001. After all,
we had no prior warning outside our own resources. No mysterious
phone calls. No e-mails from anonymous servers in Yemen or Russia.
There was no stranger in a parking lot dropping an envelope before
disappearing in a dark SUV with tinted windows.
All we had were data. Reams of data. Charts as long as scrolls of
wallpaper that took up the entire length of our polished mahogany
conference table. And we had Adam, who translated the muddle of
pencil lines, curves, and annotations into probabilities according to
the principles he established for his WaveStrength analytical system,
the macro perspective tool of our Dynamic Market Theory.
Two long hours later, the agent leftâ€”and I like to think her goodbye was a bit more cordial than her hello. Did she understand all the
mathematical intricacies of Adamâ€™s theories and methods? Frankly, I
doubt it: I myself occasionally have problems following when Adam is
on a roll. But she seemed satisfied that this particular bunch of geeks
she had just spent the better part of the morning with had no involvement with terrorism whatsoever, just an uncanny knack for
making the right call at the right time.
Which still doesnâ€™t explain just why Adamâ€™s prediction was so
eerily correct, or why we managed to turn one of the most horrifying
crimes perpetrated on American soil (and one of the most drastic market drops) into hands-on investment opportunities for our subscribers.
MONEY, MARKETS,AND MAYHEM
In this book, I try to explain how our investing and trading philosophy
works, how over the years we have established one of the best batting
averages in the financial publishing industry, and what methods and
tricks our analysts use to create superior profits not only in days of
global crisis, but day in and day outâ€”methods that will help you profit
handsomely in the markets in the coming years, independent of where
the various domestic and international indexes are headed.
At the Taipan Group, we have been doing just that since 1988.We
took our name from the swashbuckling entrepreneurs who amassed
great fortunes from the China trade during the nineteenth century.
The Chinese called these ambitious, moneymaking men â€œtaipansâ€ or
The name suits us because we, too, are after great fortunes. Our
flagship publication Taipan, a small-circulation bulletin that is available
by private subscription only, has always understood itself to be a window on the future, a preview of what is to come, an accurate source
for advance information on the big ideas that will change the way we
work, live, and play in the years ahead.
We call our trading philosophy Dynamic Market Theory. Like the
theory of evolution, it is a convenient and descriptive rather than a
specific handle that we use to reduce the complexities of market phenomena and the human behavior that cause them and translate them
into dynamic new trading opportunities. Much like the theory of
evolution, Dynamic Market Theory is based on an explanation for a
set of facts that has been repeatedly tested and that can be used to
make predictions about those phenomena.1
As such, the individual facets of Dynamic Market Theory that we
let you in on in this book are part and parcel of a constant process of
evolution and adaptation themselves; data patterns that translate into
excellent buying and trading opportunities rarely remain undetected
by a wider circle for long. This system is subject to change. With
growing volume caused by a further permeation of an â€œexclusiveâ€ set
of indicators, the dynamics of the pattern itself can and do evolve dramatically.A new pattern emerges, with different segments that, at least
for a time, can be analyzed and translated to create the basis of yet another (modified) trading strategy.
This flux creates a conundrum for the writer: Books are rather static
objects that can only provide a snapshot of the current conditions. A
year from now, market psychology and the further permeation of informationâ€”such as a wider public use and application of the unique constellations of catalysts our editors use to determine entry and exit
opportunities of particular tradesâ€”may have created new challenges to
be addressed and harnessed by further adaptation to the new parameters.
Despite having been in the business of publishing trading and investing information since the late 1980s, this is the first book the
Taipan Group has ever produced. Itâ€™s not like we didnâ€™t have enough
to say. There is a very good reason for this: being part of a dynamic
market environment and being steeped in the daily, even hourly, flux
of information. Accordingly, we specialize in instant communication
of these opportunities to the readers of our free e-letters and to the
subscribers of our electronic trading information services.
This book is an attempt at putting on paper the principal ideas
and thoughts that have gone into creating these services and to enable
you to apply them for your own benefit.We make no claim that ours
is the only or perfect way of profiting in the markets in the crucial
years that lie ahead. But forgive my self-centeredness when I say it is
one of the most successful and yes, most fun ways Iâ€™ve seen so far.
PA RT I
IT MATTERS NOT
(As Long As You
Are Making a Profit)
A ruler placed on a globe will give one answer; the same ruler applied to every indentation as one traverses the coast will give a
vastly different one.
â€”Robert R. Prechter, Jr., The Wave Principle of Human Social
Behavior and the New Science of Socionomics (2002)
â€œBulls make money, bears make money, pigs get slaughtered.â€
The idea at the core of this old chestnut of a trading rule is simple: If you pick an investment strategy and stick with it long enough,
youâ€™re bound to make money at least half the time. Only the greedy
pigâ€”the one who chases profits without any strategyâ€”loses money
all the time. Likewise, the nervous chickenâ€”one who flees the market even with a well-formed strategy as soon as it ticks downwardâ€”
cannot expect to profit. The concept, at least, that you can profit at
least half the time, is fine . . . assuming that you are satisfied with just
DYNAMIC MARKET THEORY
Unfortunately, that concept has one major weakness. It would
have you accept that you lose money half the time.Thatâ€™s something I
find both distasteful and unnecessary. Besides, whatâ€™s wrong with a bit
of greed? Hunger, when properly controlled and channeled, is a fine
motivator. So after the bull, the bear, the pig, and the chicken, I would
like to introduce a fifth investment creature to our little menagerie:
the wolf, Canis lupus, a predator equally competent at catching mice
or elk, an animal that will dine with equal fervor on bears, bulls, pigs,
To become this kind of market wolf, the first thing you need to
do is stop caringâ€”at least morallyâ€”whether itâ€™s a bull or a bear market.To
the predator and trader alike, itâ€™s a near-meaningless distinction: Every
market has wheels within wheels, upstrokes and downstrokes that offer profit opportunities to the quick and the strong of heartâ€”and to
the strong of stomach. This is the principal insight of our Dynamic
After all, who needs a bull market anyway when thereâ€™s plenty of
opportunity to make money all over the world?
Just a few days prior to the terrorist attacks of September 11, the Dow
Jones Industrial Average dropped 200-plus stomach-churning points
in only three hours. The Nasdaq, long off its 2000 bubble-market
highs, was heading into numbers woefully reminiscent of the early
settlement dates of the American continent. Sitting at my desk and
following the market carnage on my computer monitor, I leaned
back and thought of golden jonquils.
In the Ozarks, hopeful homesteaders used to plant golden jonquil
bulbs by their front doors.A century or more after they were planted,
some of these flowers still keep appearing each spring. Often, they
rise around bare foundation stones deep in a deserted stretch of skyhigh oak woodsâ€”symbols of peace and hoped-for prosperity that
â€œbloom sunshine yellow against a sea of green.â€
In Country Living Is Risky Business, author, fencing master, and
gentleman farmer Nick Evangelista muses about the shattered dreams
Markets Rise, Markets Fallâ€”It Matters Not
and ambitions that are evidenced by these empty, deserted farmsteads
deep in the Ozark Mountains:
Where did these people go? Where did their dreams disappear to?
What sent them spiraling down to disaster and abandonment? When
does a shout of assurance become a hollow cry of enough is enough?1
I looked at the Nasdaq back then and I felt an inkling of that pain.
Even today, as most U.S. equity indexes are trading well above their
postâ€“September 11, 2001, lows, or are even approaching their bubble
boom highs, the memory of financial hardships is still evident.
More than four years have passed since the sociopathic attacks on
New York City and Washington, D.C., but the economic fallout is still
as real as falling concrete, less damaging to human life but just as
lethal to perceptions of value.
But mark my words: Even back in 2001, you didnâ€™t have to lose
money. You didnâ€™t even have to give up on high returns. All you
needed to know is what to buy, what to sell, and when to take profits.
In September of 2001, the market was providing amazing ultrashort-term profit opportunities. (No one can tell me that you canâ€™t
make money on 3 percent drops and 2 percent recoveries, even if the
indexes end down overall.) With the emphasis shifted to ultra-shortterm, this market was a day traderâ€™s nirvana. One buying opportunity
chased the next. It was as if a scatterbrained store clerk had inadvertently put up the discount sale signs for the dollar store instead of
those meant for Bloomingdaleâ€™s.
But unless you were ready and able to rapidly jump on buyingâ€”
and profit-takingâ€”opportunities, you might have been better served
by watching from the sidelines.
So why do some win where most others lose?
Because those who lose in the market have no idea how the investment world really works. Theyâ€™re still trapped in the nice, cozy
idea that markets are about logic, rationality, and analysis.
But think about what the market is telling us right now. The investment world doesnâ€™t follow formulas.And it is not for amateurs. In
fact, if investing were easy, it wouldnâ€™t be fun. There would be no
challenge. No excitement.
DYNAMIC MARKET THEORY
And no big profits.
The fact is that real investmentâ€”the kind that yields profits
worth mentioningâ€”can be as unpredictable as a day on the battlefield.The way General George Patton saw it, â€œWar is won by blood
and guts alone.â€
I think Patton would have made a shrewd investor, because playing to win is all about guts. Competitiveness.The timing and nerve to
go for the jugular. Itâ€™s also about hunger . . . the hunger to be rich
and beat all the other bastards out thereâ€”because if you donâ€™t, theyâ€™ll
beat you first!
Let me be blunt: Those who are made nervous by crisis and upheaval shouldnâ€™t be in the market. Successful investing isnâ€™t always
pretty. If you win and you make money, itâ€™s because the other guy
lost.And if he wins, you lose.The rules change fast. But the plunderâ€”
the spoils of the investing warâ€”can be huge.
Many American investors have turned their backs on the equity
markets, liquidating their portfolios and reinvesting in real estate.
(Germany, which had seen the number of households owning stock
more than double from 8 percent to almost 19 percent between 1995
and 2001, saw almost all those new investors being shaken out of the
market by the end of 2001.) The great majority of U.S. investors still
remembers all of the money theyâ€™ve lost, wondering how long itâ€™s going to take to make it all back.Thatâ€™s a tall order. Consider that a 25
percent loser requires a 33 percent gainer just to get back to even.
And a 50 percent loss demands you double your remaining money to
break even. But you can make gains like this with relative ease by
putting your money into the right kind of stocks at the right time.
It takes a sturdy disposition not to panic in the face of such
prospects. And you may thinkâ€”rightfully soâ€”that these are the days
for dynamic optimism in the face of adversity and a sense of gloom in
THE TRUTH . . . VERSUS SMILING LIP SERVICE
To succeed in the fast-moving market, you need to have truth on
your side. This is not a mere platitude. My associates and I call ourselves Taipan for a good reason. We donâ€™t believe in telling investors
Markets Rise, Markets Fallâ€”It Matters Not
what they want to hear, or playing into the way they think things
should be. We tell it like it is. That may get a few people hot under
those crisp white collars. But letâ€™s be serious: a lot of investors lose out
because they canâ€™t see past the way they want things to be.They need
to findâ€”and useâ€”the truth.
Things are rarely what youâ€™re told. Weâ€™re not ashamed to admit
that weâ€™ve always ranked high in insubordination. Thatâ€™s the way
things have to be. Realistically, though, you know that all the pessimism and prissy judgments in the world wonâ€™t help you invest
wisely and well.
Weâ€™ve always encouraged our editors and analysts to develop their
own ideas rather than slavishly adhere to the curriculum that forms
todayâ€™s bedrock of mainstream analysis. We admit that our approach
makes no claim on being complete or generally accepted. Author
James Surowiecki wrote:
Human beings donâ€™t have complete information.They have private,
limited information. It may be valuable information and it may be
accurate (or it may be useless and false), but it is always partial. Human beings arenâ€™t perfectly rational, either.2
Markets arenâ€™t rational, because people arenâ€™t rational. Accordingly, much of the information the markets generate is at its core the
result of compound irrationalities. An extreme example, the â€œTulipomaniaâ€ that gripped Holland in the seventeenth century, makes this
point. Tulip bulbs, the story goes, became the mania among not just
speculators, but average men and women as well:
The rage for possessing them soon caught the middle classes of society, and merchants and shopkeepers, even of moderate means, began
to vie with each other in the rarity of these flowers and the preposterous prices they paid for them.3
Indeed, by 1635 people paid as much as 100,000 florins for a tulip
bulb. (To put this in perspective, the value of a suit of clothes was
about 80 florins.) When the market for tulip bulbs crashed, no one
would buy at any price. In hindsight, the irrationality of Tulipomania
was apparentâ€”especially to those who had lost money in that market
DYNAMIC MARKET THEORY
by sheer greed, and to those who had not participated in the bubble
out of a sense of morally righteous indignation or inactivity. Both
groups were losers: those who had held on to their bulbs as prices
crashed, and those who had stood aside as prices were rising. Even so,
many investors today make decisions on the same irrational level, and
that itself defines the market for what it is, and for how it operates.
The key to overcoming this â€œmarket insanityâ€ is to take a step
back with rationality and reassess all information you can possibly lay
your hands on. Find fresh angles to old solutions. Reevaluate signals
and ratios as to their usefulness as indicators. Identify market myths
and avoid falling into those thinking patterns. And finally, cautiously
begin to test your own market perceptions by paper trading.
MEN (AND WOMEN) OF ACTION
While the Taipan Group was deeply affected by the human tragedies
in Manhattan and Washington back in 2001, we remained pragmatic.
In his Nicomachean Ethics, the Greek philosopher Aristotle defines the
moral man as the man of action. (And while Aristotle himself might
be inclined to argue, we extend that definition to women as well.)
Taking action in the case of the 2001 attacks meant doing what
was best for our way of life. Paralysis, grief, and mourning were appropriate and understandable responses. So was compassion. But these
sentiments typically enforce passivity where the markets are concerned. Not so here at Taipan.The Taipan Groupâ€™s editors decided to
make â€œOpen for Businessâ€ the motto of the hour. But letâ€™s get this
straight:This was not about making a buck off other peopleâ€™s misery.
It was about getting back to the basics of a free market society.Within
a day after the collapse of the World Trade Center towers, we had organized our â€œOpen for Businessâ€ fund drive for the American Red
Cross.Within a month,Taipan members all over the world had contributed $40,000 to this effort.
This â€œOpen for Businessâ€ philosophy also translates into investment action. In the days that followed the horrid massacre of September 11, 2001, I asked my editors to come up with some plays that you
can use to show the world an indomitable free market spirit, something the terrorists donâ€™t understand.
Markets Rise, Markets Fallâ€”It Matters Not
It worked. We closed the year 2001 with an average gain of over
26 percentâ€”and a large percentage of these gains was taken straight
from our recommendations to investors: to use the epic Dynamic
Market opportunity created by September 11.
Successful investing invariably depends
Sign up for Taipanâ€™s daily
on adjusting your short-term strategy
free e-mail service, the
and taking advantage of the fastest
Dynamic Market Alert. This
means of delivery to find critical inforprovides you valuable
mation in as timely a manner as possible.
leads, not just once a
In the immediate aftermath of the
month, but each and
2001 attacks, we identified what we
considered to be valid buying ranges
for a bunch of great investments. Because, terror or not, weâ€™re not opposed to buying cheap. Our mission
is to enable you to prosper now and in your future.
You see, despite the incredible short-term market fluctuations we
have experienced in the past few years, the people making a living
commenting on whatâ€™s going on havenâ€™t changed one bit. And while
the bulls are still holding back, licking the wounds they sustained back
in 2000 and 2001, the bears appear to be on a roll.
Half of the bulletins and editorials I read these days bemoan
Americaâ€™s rising levels of personal debt. Others never tire of invoking
the Bush administrationâ€™s â€œtwin deficits.â€ Editors, commentators, and
pundits build intricate causal strings based on these economic indexes, foreboding strings that inevitably involve bank runs, the collapse of the dollar, and crashing mutual fund and real estate
industriesâ€”all, of course, to occur within the next few weeks.
I have to confess, sometimes theyâ€™re very convincing. In fact, Iâ€™d be
a believer by now if it were not for one simple fact: Iâ€™ve read the same
dire predictions from the same editors since at least 1989, then again
in 1992, 1995, 1997, and 2000. And Iâ€™m still waiting for the other
shoe to drop. I am sure I will be waiting for a while.
Why? Personal and public debt levels really have little to do with
how the markets work. If the personal savings of an individual in any
DYNAMIC MARKET THEORY
given industrial nation were an indicator of that marketâ€™s profit potential, weâ€™d all be lining up outside the Frankfurt, Zurich, and Tokyo
Oddly enough, these markets move with the same seeming randomness as the U.S. markets, no matter how solid the personal savings
rates or local currencies of the respective countries may seem. In fact,
many global markets still take their clues from whatâ€™s happening on
the American exchanges, notwithstanding the twin deficits!
BOOM, DOOM,AND GLOOM
The professional doomsday prophets are getting one thing right.
In a market whose mood swings make postpartum depression seem
like an evening of Scrabble with your accountantâ€”when even the Dow
can gain and lose more than 200 points within a six-hour spellâ€”investors must come to terms with one simple fact: if you want to come
out ahead in this market, you need to be mobile, motivated, and disciplined. Maintain a healthy emotional detachment from the stocks you
buy and be ready and willing to get rid of them at the drop of a hat.
After all, every 200-point rise and fall spells a double 200-point
profit opportunity for those who know where to lookâ€”and who
have the guts to take profits whenever they can make them.
The message of this book is quite simple:
There is always an opportunity to make exceptional stock market
profits independent of where the domestic indexes are headedâ€”as long
as you know how to read the signs.
The key to locating these opportunities is to keep your eye on the
money. The opportunity to create wealth does not evaporate. It migratesâ€”from the Nasdaqâ€™s Internet bubble into real estate, foreign
bonds, or emerging markets and back into U.S. stocks.
You have to be selective in your choices and stay out of the way of
the lemmings. Most important of all, you have to find a way to hitch
your portfolio to some of the most powerful profit engines around.
Over the past two decades, Iâ€™ve sent out millions of annual investment forecast reports that contain a lot of the advice youâ€™ll be reading
Markets Rise, Markets Fallâ€”It Matters Not
about in this book. And based on those forecasts, Iâ€™ve watched some
subscribers to our various Dynamic Market Theory trading services
pile up triple-digit profits, and even quadruple-digit profits in some
instancesâ€”often in a very short time.
The pages that follow give you a blueprint for making money in
the market today. I show you step-by-step how to read signals and interpret eventsâ€”and how to transform these events into consistent investment returns. Much of what youâ€™re about to read here may sound
familiar to you, simplistic even. But this is exactly what makes our approach so powerful: Dynamic Market Theory is a rags-to-riches investment philosophy that opens up doors of opportunity to investors
of all experience and skill levels. Among our existing members and
subscribers, professional traders rub shoulders with novice investors,
seasoned money managers, amateur day traders, and Iâ€™m sure even a
few punters who, according to mainstream investment opinion, have
absolutely no business being in the stock market.
Each chapter of this book can be read in less than 15 minutes.You
might find some of the catalysts and concepts we will be introducing
easy, perhaps too easy. Thatâ€™s because they are built around information you yourself can extract from common information sources on
the Internet. But to absorb the principles and put them to work will
probably require a few weeks of study, thought, and practice. Of
course, you can go faster if you wish, or take the program at a more
leisurely pace.The only deadlines are the ones you set for yourself.
By the time you have finished this book, youâ€™ll know how to
make yourself very, very rich. Whatâ€™s more, youâ€™ll have discovered a
secret for making money that you can apply to any market: up, down,
or sideways. In fact, youâ€™ll see it can be as easy as reading a road map.
All you need to know is how to anticipate the unexpected turns. Iâ€™ll
give you all the tools you need, everything that you must know to
make money in the market: how to look at fundamentals, company
symbols, insider background, price-earnings (P/E) reports and statistics, trends, principles, and insights.
Itâ€™s all here.And itâ€™s all yours.
Thatâ€™s one of my motives for putting together this bookâ€”to get
you to understand the half dozen or so trading techniques and styles
we use, collectively, to make fabulous profits for our readers.Your motive is to make more money investing.
DYNAMIC MARKET THEORY
CAST YOUR NET WIDE (AND PROFIT FROM BOTH
UPWARD AND DOWNWARD MOVEMENTS)
It has been said that â€œall economic movements, by their very nature,
are motivated by crowd psychology.â€4
A couple of months ago at the fencing club, my eyes fell on a book
held by one of the fathers watching the exploits of their offspring.The
book was Bill Bonnerâ€™s â€œbible of the bears,â€ Financial Reckoning Day
(Wiley, 2003).What are the chances, I thought, a tingle of â€œsoft depressionâ€ blending in with the sense of dÃ©jÃ vu. Have bearish market views
really become so mainstream that you now encounter them at your
local gym, just like you encountered overexcited bullishness among
busboys and sales clerks during the Internet stock mania? Or is it just
that fencing attracts people who like the challenge of being a step
ahead of their opponent?
Over the years, I have found that fencing has a lot in common
with trading. Both depend on timing and positioning, on reading the
action accurately, on picking up on clues that seem meaningless to
the untrained eye but contain the blueprint of the movement to
come. Both require discipline and strategic thinkingâ€”but first and
foremost the ability to adapt to and then exploit new conditions as
The favorite saying of my Chinese-born fencing coach Bin Lu is:
â€œYou can take a chance, or you can make a chance. If you can make
the chances, you will be a great fencer.â€This holds true for the equity
markets as well.
Foresight and planning certainly are laudable qualities in and of
themselves. But they can become quite dangerous if based mainly on
assumptions on how markets and opponents should react.
Typically, the execution of elaborate plans based on wrong assumptions is terminated quickly and resoundingly by an unforeseen
(and seemingly irrational) counteraction.Thatâ€™s why fencers who expect too much of their opponent typically end up leaving competitive fencing before theyâ€™ve truly started.
Many years ago, I briefly served as the editorial director for the
Colby Report, the private, small-circulation newsletter of Bill Colby,
who served as director of the Central Intelligence Agency (CIA) under Presidents Richard Nixon and Gerald Ford. Up until his myste-
Markets Rise, Markets Fallâ€”It Matters Not
rious drowning death in the spring of 1996, Mr. Colby was a very
proper and distinguished gentleman. And yet, he did not leave much
of a lasting impression on me. I guess that was part of his strategy.
Unfortunately, I found his letter equally unremarkable: I never really
had the feeling that the content of his briefings exceeded the
amount of intelligence you could gather from a middle school geography atlas.
But maybe that was part of the strategy as well. It always made me
itch for more. I was looking for a catalyst, something that turned the
academic insights and seductive opinions into something actionable:
What does this information mean to me? What practical conclusions
can I drawâ€”and implementâ€”from the historical facts, assumptions,
and opinions expressed?
It is this same feeling that I have when reading Financial Reckoning
Day: Is â€œbuy goldâ€ really the only answer to burgeoning American
household debt, a declining U.S. dollar, or the rise and fall of equity
valuations? If gold is really your best strategic defense against excessive market fluctuations and the decline of Western civilization, how
come it is still priced at levels reflecting just one-third of its bubble
valuations in the 1970s and 1980s? And how come you still can lose
20 bucks within a week or two on an ounce of gold, much like you
can on the most flimsy technology stock?
(Iâ€™m not even going to touch on the fact that in the case of rare
coins, you typically buy at retail and sell at wholesale.Add in sales tax,
and youâ€™re down 20 percent in real terms before you cut the first
check to pay for your safe-deposit box.)
Now donâ€™t get me wrong here: We at the Taipan Group actually
like gold. We think it is part of a prudent diversification of assets to
keep maybe 5 percent of your portfolio in bullion. We also have
likedâ€”and profited fromâ€”positions in select mining stocks, especially when entered and exited at the proper time.We love exchangetraded gold and precious metals indexes that enable you to profit
from upward and downward movements of the gold price.
But gold is just an asset, one out of many that can be harnessed
to build wealth in the Dynamic Market environment. And the
more asset groups you include in your view of the markets, the
better your chances to have one (or several) working for you at any
DYNAMIC MARKET THEORY
This is the principal insight of Dynamic Market Theory:
Cast your nets wide enough, and you will be able to profit handsomely from the major and minor fluctuationsâ€”upward and downwardâ€”of equity markets, international indexes, currencies, hard
assets, real estate, and technologies.
Supplement short- and medium-term profits with long-term protective strategies, such as calls or puts on individual indexes.And most
importantly, donâ€™t get overly enamored with any particular investing
philosophy.As long as you pay as much attention to financial planning
as you would to the maintenance of your car, chances are youâ€™ll come
out ahead of the gameâ€”because the only credible advice a bear
could give you is: stay out of the markets.
And where would be the fun in that?
History is a rhetorical weapon in influencing modern policy outcomes. In particular, the invocation of bubbles is one such use
â€”Peter M. Garber, Famous First Bubbles: The Fundamentals
of Early Manias (2001)
One chilly Saturday morning in April 2005, I was roused from my
beauty sleep a half hour earlier than I had planned. Now, I can sleep
through the demanding yowls of our cats and the whimpering of the
dog. I donâ€™t even mind the sharp elbows and knees that my early-rising
children like to apply to the paternal sides and back. What woke me
up was a New York Times columnist on National Public Radio commenting on the most recent 200-point drop in the Dow Jones Industrial Average. Get used to it, his rather smug message was. Stocks are
simply overvalued. Tech stocks in particular were trading at a priceto-earnings (P/E) ratio of over 40â€”and the historical average was 20.
And stocks just shouldnâ€™t trade at a higher P/E ratio than that.
Annoyed, I turned off the radio. But our friend from the New York
Times was just repeating what a generation of pundits and economics
professors has said before him. Judging by their commentary, the
stock marketâ€™s final purpose is to move toward and establish a stable
(if static) and ideally air-conditioned level from which it will progress
DYNAMIC MARKET THEORY
at an orderly, measured, and above all reasonable pace that is determined by the real value of its underlying equity.1
But if real value is what investing is all about, it begs the question:
what then is value?
Over the years in financial publishing, Iâ€™ve found a surprising variety in the personal definitions of value, which may be indicative of
â€œthe slipperiness of that classic economic concept.â€2 Indeed, there are
plenty of value indicators that financial analysts apply. First, there are a
companyâ€™s business fundamentals: the cash value of a companyâ€™s assets,
as well as its break-up value and cash flow value.There is the cost of
production versus the cost of the product.Then there is the marketâ€™s
current appetite for a specific sector, technology, or industry that must
go into the definition of value.
These days, when asked what is value, Iâ€™m tempted to reply: when
the bearish view of the world starts cutting into your profits. This is
true in the negative sense of the word. Just as we can measure happiness, love, wealth, or other positive things by the degree to which we
have lost them, value works in the same fashion. For all intents and
purposes, value in the stock market is the device by which we judge
our relative successes and failures, moods and attitudes, and the effectiveness of our own judgment and timing.
Classic value gauges, such as the historic P/E ratios of a sector,
certainly have their place in analyzing the relative qualities of a
company, especially when youâ€™re about to buy or sell a business. But
like all evaluative shortcuts, they contain enough arbitrary elements
to make me question their unqualified applicability.3 In his book
The (Mis)Behavior of Markets, Benoit Mandelbrot muses on the
wildly fluctuating P/E ratios of Cisco Systems between 1999 and
If [the marketâ€™s appetite for technology companies . . . is as much
a part of the measure of intrinsic value as balance sheet or cash
flow] . . . then surely the â€œrealâ€ value of Cisco changes every
month, every week, every dayâ€”even tick-by-tick on the stock
exchange. And if that value changes constantly, then of what practical use is it to any investor or financial analyst weighing whether
to buy or sell? What use is a valuation model with new parameters
for every calculation?4
What Exactly Is Value?
In our view, stocks are about more than intrinsic value. Theyâ€™re
about human behavior, human progress, and human ideals. In his
groundbreaking book The Wave Principle of Human Social Behavior,
Robert R. Prechter, Jr. wrote:
The stock market is far more significant to the human condition
than it appears to casual observers and even to those who make a
living by it. The level of aggregate stock prices is a direct and immediate measure of the popular valuation of manâ€™s total productive
If aggregate stock prices, conveniently packaged within market
indexes, are compound reflections of the moods and attitudes toward
mankindâ€™s immediate future, what does that tell us about the concept
Letâ€™s take another step back: Valueâ€”what a thing is worth, and
whyâ€”is the heart of Dynamic Market Theory. Once you understand
the way value really works in the stock market, you can avoid the
misconceptions that cost investors trillions in the crash of 2000, and
begin to see your portfolioâ€™s worth climb steadily upward.
To begin with, the traditional measures of value for investors all
have to do with the actual or potential earnings of a company:What
is it producing? What are its costs of production? What is its position
in the marketplace? What is its competition? What is its future potential for earnings? How much merchandise can it possibly sell, and at
what profit margin? Is its market growing or shrinking?
REMEMBER, ONLY THE NARCISSIST CAN FIND
How can we judge the true value of something, whether emotional
or logical? How can we know what is true? We must have some
means for making consistent and informed value judgments. Typical
value investors, for example, look at the ability of a company to produce and sell products of value to consumers at a profit.They assume
that a company with a good, healthy, and competitive business is a
valuable company to own. Or at least they base their decision about
DYNAMIC MARKET THEORY
whether the stock is a good buy at the current market price on the
value of the business as measured by its earnings or potential earnings,
because as investors, they have just one thing on their minds: arbitraging the difference between the current asset price and a future asset
price into a profit, plain and simple.
Oddly enough, few investors these days seem to care about traditional value anymore.They sure didnâ€™t back in 1999, either, when all
they wanted was an Internet-related business plan scribbled on a
cocktail napkin. And unless theyâ€™re seeing sales and earnings increase
in U.S. companies where we canâ€™t find them, they still donâ€™t care now.
This culture that preferred to shun profits was expressed by Amazon.com chairman Jeff Bezos in 2002, when he told a reporter that
he did not believe in setting profit goals, explaining â€œIt would be impossible for us to do so.â€6
That is one CEOâ€™s opinion. But how are investors to react to such
a statement? Then again, maybe you donâ€™t have to care about value to
make money. Maybe Bezos was onto something.
In fact, based on our research into Dynamic Market Theory, the
traditional views on value are all wrong.
Most market theories deal with the intrinsic value of stocks or
other commoditiesâ€”in other words, the notion that the value comes
from within the thing, and that it has value in and of itself, regardless
of any associations with other things. But we believe that, for investors, the only value of any importance is the value that someone else places
on a stock, commodity, or investment at any given point in time.
For instance, in early 2005, gold had a value around $435 an
ounce. But is that value intrinsic in a bar of gold metal? What good is
it? What can you do with it, other than use it as an expensive paperweight? And what makes an ounce of gold on February 8, 2005, $21
less valuable than on December 28, 2004, when it set a 161/2-year
high at $456? This is what we mean by observing that value is defined
by what someone else is willing to pay, or by what someone else
wants to receive at any particular moment.
Ground beef sells for about 20 cents an ounce, a tiny fraction of 1
percent of the price of gold.Yet the hamburger meat has greater practical value than gold: if you are hungry, you can cook it and eat it.
The value of a gold bar is based on the value other investors place
on it at a given point in time.When others want your gold, they are
What Exactly Is Value?
willing to pay more for it, and the price of gold goes up. But one
ounce of gold at $435 has no more practical value than the same
ounce you bought two years earlier at $280, or the ounce that your
father bought at $800 back in 1980. Sure, its price can go up considerablyâ€”but not because its practical value increased but because
more people believe that they can arbitrage the differential between
goldâ€™s current price and a future price level into profits.And there are
plenty of value factors that you can use to convince yourself that
goldâ€™s future upside is virtually limitless. It just depends on how you
look at it. For example, you can meld gold with your philosophy on
how currencies ought to work. Referring to the fact that back in
1980 one ounce of gold cost around $800, Laurence Kotlikoff and
Scott Burns argue:
Divide the amount of U.S. currency in circulation in 1980 by U.S.
gold reserves, and you find that a gold-backed dollar would require
gold to be priced at $800 an ounce. Do the same math today, and
U.S. gold reserves would have to be worth $4,600 an ounce for us to
have a gold-backed currency.Thatâ€™s nearly twelve times the current
market price of gold.7
Make sense? Sure. If the current dollar is overvalued by a factor of
12, and gold has been moving in sync with the other anti-dollar, the
euro, you might even use your calculation to define value for the dollareuro exchange rate. As I am writing this in July 2005, thatâ€™s at $1.18
per euro. Furnishing our arithmetical house of cards, we could arrive
at the razor-sharp conclusion that a euro really should be worth
$15.60. Bad news for central banks around the world! Japan, with its
$800 billion in dollar reserves, already sees the relative value of its
holdings melt like frozen tofu on a hot summer day, by $8 billion
every time the dollar sheds a cent.
When it comes to the markets, we have come to consider that a
dogmatic view really is not all itâ€™s cracked up to be. I wager that during
the five-year upsurge of the last big bull market from 1995 to 2000,
more money was lost by those embracing fundamentally bearish attitudesâ€”with ill-timed fundamentalist short sales, misplaced investments
in precious metals and mining stocks, and plain missed opportunitiesâ€”
than was lost by all those chipper, bright-eyed irrational but exuberant
DYNAMIC MARKET THEORY
market devotees combined. Once a bubble pops, you may have the satisfaction of being able to say â€œI told you soâ€â€”and maybe even write a
book about it. But chances are that you, too, may have gum all over
your face at that point.
Let me give you an example:
In early 2003, a radio talk show host asked me if I could comment
on what he called the U.S. real estate bubble. My reply was cautious,
Clintonian even:â€œDepends on what your definition of â€˜bubbleâ€™ is.â€
Look around yourself, read the daily papers, surf the Web, and all
youâ€™ll find is prudent warnings on this, that, and the other thing.
Show me a market or asset that gains 10 percent in a year, and Iâ€™ll
show you a choir of pundits singing â€œbubbleâ€ at the top of their
voices to the tune of Richard Wagnerâ€™s â€œRide of the Valkyrieâ€: everything, from China to tech stocks to the equity in your suburban fourbedroom colonial, everything that rises these days apparently qualifies
as a bubble or at least a bubble in the making.
If you follow our dyspeptic friends from the perma-bear encampment, only rising gold prices and the sky-high exchange rate
of the euro against the dollar appear to be nonbubbles. In this mindset, the all-time highs of the gold and gold coin markets that were
set in the 1970s and late 1980s represent these assetsâ€™ fair valuationâ€”even though price charts documenting their price development over three decades or more bear a closer resemblance to that
of the Nikkei 225 from 1985 onward. (See Figure 2.1.) But more
on that later.
We at the Taipan Group have never cared much about market
bubbles, because in the nearly two decades we have been monitoring
and uncovering profit opportunities in the worldâ€™s equity, bond, and
real-estate markets, we have made one quintessential discovery: you
can make a lot of money on irrational exuberance, and you can make
lots of money in markets that move sideways or even down.
Two of my colleagues examined the hubris and market frenzy surrounding the scandalous market debacle of Global Crossing
(GX:Nasdaq).They arrived at the same seemingly obvious conclusion
every other commentator has in the past half-decade:
â€œIf you bought Global Crossing in 1998,â€ a cynic might have retorted,â€œyou would have lost 98% of your money.â€8
What Exactly Is Value?
Figure 2.1 Japan Nikkei 225 Index as of April 27, 2005
This is one way of looking at things. Surely, many investors did
lose money, and plenty of it. But even Global Crossing is not a clearcut example of a bubble stock, given that its demise was the result of
blatant large-scale fraud rather than the collapse of the Internet bubble. ( Just think about it: Enron collapsed for the same reason, and not
because there was anything wrong with the energy market.)
A graph from my colleaguesâ€™ book appears in Figure 2.2, with my
annotations. Here it is in a nutshell:Yes, if you bought GX in August
of 1998 or at either of its $60-plus highs, put them into Al Goreâ€™s
proverbial lockbox, and sat on your hands as you watched your position lose almost all of its value in the maelstrom of bad press before
selling in the aftermath of September 11, you could have lost 98 percent of your investment.
But had you applied a simple risk-management strategyâ€”such as
the 20 percent or 30 percent trailing stop we at Taipan recommend
that you observe on your more volatile positionsâ€”you would have
had not one but two opportunities to walk away with triple-digit
profits intact.9 It took well into 2001 for the stock to reach its 1998
breakeven point. Those who still held on when it was delisted were
either in a Rip Van Winkle-like trance or were day traders or hedge
fund jockeys looking to squeeze double-digit profits from even the
most minute price fluctuations.
DYNAMIC MARKET THEORY
Figure 2.2 Global Crossing, 1998â€“2001
Source: William R. Bonner and Addison Wiggin, Financial Reckoning Day: Surviving
the Soft Depression of the 21st Century, Hoboken, NJ: Wiley, 2003. Annotations
Or how about this other poster boy for big, bad bubble stocks, Intel (INTL:Nasdaq)?
Here, too, in Figure 2.3, weâ€™re supposed to see a bubble
followed by a cataclysmic collapse in the stock price. A valid if
academic argument can (and should) be made that investors who
bought INTL at its peak of $45 lost $35 a share when the
stock plummeted into the single digits in the aftermath of September 11, 2001.
Even so, the Financial Reckoning Day view holds up only in the
case of those who bought at the absolute top and bailed out at the ultimate bottom. A basic stop-loss provision would have locked in a
majority of the gains and limited the losses of even the tardiest Internet Johnnies-come-lately to $9 and change per share. With a few
well-placed puts as strategic insurance, this loss could have been
turned into a profit, while the dynamic ups and downs of the stock
price provided ample opportunity to make short and long gains on
What Exactly Is Value?
Figure 2.3 Intel Weekly
Heck, even those investors who
bought at the top and then dollar-cost
averaged over the next couple of years
Check the Chicago Board
could have doubled and tripled their
Options Exchange (CBOE)
money on the portion invested after
web site at www.cboe
.com not only for free
Most of this, as you will rightfully
20-minute delayed quotes
interject at this point, is a result of peron stocks and all listed
fect 20/20 hindsight. But so, my friend,
options, but also for
are bubbles, if you consider it carefully.
If anything, Intelâ€™s chart bears a striking
concerning using puts for
resemblance to that of the CU 3000
insurance. This is a conserindex of rare US gold coins. (See Figvative strategy when
If Intel stock were a quintessential
bubble asset based merely on its price
curve, weâ€™d have to argue that at one point gold coins were, too.This
only goes to prove one thing: there is no such thing as a safe investment. Every asset class carries risk and opportunity, downside as well
as upside potential, both of which can be leveraged to your benefit by
adopting the sweeping perspective of Dynamic Market Theory.
DYNAMIC MARKET THEORY
Figure 2.4 CU 3000 Coin Performance Index
In the Conclusion to his book Famous First Bubbles, Peter M. Garber wrote:
Before we relegate a speculative event to the fundamentally inexplicable or bubble category driven by crowd psychology . . . we
should exhaust the reasonable economic explanations. . . . Bubble
explanations are often clutched as a first and not a last resort. Indeed,â€œbubbleâ€ characterizations should be a last resort because they
are non-explanations of events, merely a name that we attach to a
financial phenomenon that we have not investigated sufficiently in
Following the notion of value we proposed earlier, we accept as
our working hypothesis that there is no such thing as a bubble. If the
price of a commodity like real estate, tulip bulbs, or Internet stocks
rises to hyper-value based on demand, then that is not a false reading.
It is the commodityâ€™s true value at that moment in timeâ€”not, however, for its intrinsic or absolute value at that time, but for its perceived
value as a tool to be leveraged into future profits.
You see, at its core, a bubble is an argument about valueâ€”mostly
What Exactly Is Value?
made in retrospect, after a particular investment fad has gone bust.
(Investment fads that donâ€™t go bust, conversely, are called strokes of
genius, even if the underlying speculative analysis and risks are the
same for both.)
For example, at the market peak in early 2000, it was said that the
stock market had a valuation of $17 trillion.That amount had dipped
to $8.5 trillion by October 2000. By the first quarter of 2005, the valuation of the stock market was about $10 trillion.
Butâ€”and hereâ€™s what most investors donâ€™t seem to realizeâ€”all
these figures are assignments of value based only on what a small percentage of shares trades for. Only a tiny fraction of a given companyâ€™s
shares are in play at a given time.Take Microsoft, for example.There
are almost 11 billion shares of Microsoft outstanding, but on any one
day only 25 to 30 million might change hands.
If you dumped all 11 billion shares on the market at one time, the
price would plummet because of the monstrous excess in supplyâ€”no
matter what was going on at the company, with the software, or in
the stock market. So the valuation commonly given to any or all
stocks is more or less arbitrary, not real, even if it is based on the latest
sale of a few shares of the stock.
Those who hold a bearish view of the market like to say that
around $8.5 trillion of equity valuation was destroyed in the bear
market from early 2000 to October of that year. But since valuations
are assigned arbitrarily anyway, they canâ€™t be destroyed. They change
up; they change down. But they never go away. Conversely, that $8.5
trillion wasnâ€™t created, but was generated by the reallocation of savings and spending money put into stocks, which pushed share prices
up overall, causing the higher valuation.
THE GLITTER OF GOLD
In early 2005, for example, gold was increasing in value. It sold for
$435 an ounce, and an article in Barronâ€™s predicted that gold would hit
$800 an ounce, based, I guess, on its 1980 valuation. Another expert
source even predicted $1,000 gold. And one of my favorite gold bugs
was quoted as saying that he â€œsees no reason why gold shouldnâ€™t be
priced at $1,200 an ounce.â€ Kotlikoff and Burns, as mentioned earlier,
DYNAMIC MARKET THEORY
even make what could be considered a valid case for a $4,600-anounce price.
Why? Economic uncertainty and market volatility make investors
less confident in currency, stocks, and other financial instruments.
These investors are worried about the value of their holdings. So they
start to shift assets away from paper instruments and toward hard assetsâ€”investments they can see, feel, and hold, like gold coins, bullion,
or gems. Demand for goldâ€”the â€œcurrency without a governmentâ€
(Kotlikoff and Burns)â€”increases, and prices rise.
Plus, there is a political streak to the speculation as well, which has
crystallized both the euro and gold as anti-dollarsâ€”presumably because economic conditions in the United States are deemed unsustainable. Given the economic and democratic carnage we expect the
economies of Europe, and especially Germany and France, to undergo in the next couple of yearsâ€”more about this in Chapters 5 and
6 of this bookâ€”this is by far the thinnest and flimsiest rationalization
of blatant speculation we have seen in recent history.
And hereâ€™s another interesting fact: In 1982, at the beginning of
the most recent bull market, there were only about 1,500 companies
listed on the New York Stock Exchange, with roughly 40 billion
shares.The market valuation was around $1.3 trillion.
But by the year 2000 and the end of the bull market, there were
more than 3,000 companies listed on the New York Stock Exchange
with over 349 billion shares available. Granted, some of these were
start-ups, but itâ€™s obvious that a lot of the wealth that was â€œcreatedâ€
actually came from existing private companies going public, taking
advantage of a rising market, and putting shares of their company up
for sale to the general public.
These companies were already in existence, with dynamic value.
Itâ€™s just that their value was now counted as part of the stock market.
It shifted from the private owners to the shareholders who purchased
the stock on the open market. In these cases, wealth wasnâ€™t created; it
merely changed hands, from a few private owners to millions of stock
investors. Realistically, since stock market valuations came down, the
amount of money invested in stocks also came down. Much of that
money was simply reallocated to other assets, like real estate, bonds,
gold, energy, and other commodities.
Stocks are valuable to investors because their prices change, both