This article is a reprint from November 20th, 2010
It is essential that you understand market movement from an investors standpoint first, and that you differenciate fact based analysis from opinions. There is an old industry joke which goes: “How do you make a small fortune trading currencies?” The punch line: “Start with a big one”. My guess is many traders don’t think like investors because they don’t have a lot of money left after trying to learn to trade. I’m thinking this must also be the case in financial blogdom based on all the negative press out there trying to tell us that the U.S. government’s attempts to secure it’s economy and stock market is somehow a terrible thing and will lead to near certain destruction down the road. Meantime the stock-market, still the best leading economic indicator I know of, just put in a 2-year high settlement earlier in the month – see Figure 1 – while long-term interest rates, and the economy, are steadily upticking. The S&P 500 is just below the 66% retracement level of the ‘07 – ‘08 Panic, a level which if eclipsed, would give us a definitive end to the bear market. It’s fact based occurrences such as 2-year high settlements, and upticks in long-term interest rates, and 60%+ retracements that investors take patient stock in, while so many bloggers and pundits still prefer guess work with a negative bias.
Ask yourself why Warren Buffett decided to loan Goldman Sacks $5 billion in late ‘08 during the height of the financial panic, and then invest $44 Billion in Burlington Northern in late 2009 in what he called “an all in bet on America”. We can’t speak for him but the answer has much to do with Buffett being an investor, not a trader, and, in the case of his railroad investment, having first-hand experience in seeing the benefits of the Economic Stimulus Act of 2009. Did Buffett somehow have inside information that the stimulus act would work as well as it did? And how can we know such things? Regardless of what Buffett believed we can have a pretty good idea that a plan is working by simply looking at the closing price of a market or security on a weekly and then a monthly basis. We don’t guess what it will be and then bet on it; we wait and see how in fact a market closes on a higher time frame, and then position ourselves in that same direction. We think and act like an investor.
Something else I keep hearing from short-sighted speculators is the inevitable graying of America and how we have so many Baby Boomers about to retire and how the whole system will be broke and America is trapped in a Keynsian whirlpool. I don’t doubt the certainty of death and taxes. And I don’t doubt that those U.S. workers in their peak earning years, 45 to 55 years old — which happens to be the largest segment of the U.S. population — are going to be paying a bit higher taxes over the next decade than they have over the previous two