Doc Brown's Black-Board

January 2011 IU Call

2011-01-21T14:02:00.001-08:00

I was very glad after talking with you about using SPX and VIX as a guide to gage if the market is becoming toppy and one should be more cautious or stay on the sideline. I went back a few years and found SPX and VIX really helped to put caution sign up for market downturn. Thanks.

I looked, however, further using VIX and SPX to predict when the bottom of the market is turned, I was unable to do so. My first question is how can one tell when to start buying stocks again at or near the bottom?

My second question is what should a small investor do to protect his portfolio when the inevitable coming of the high inflation? Of course, many people said to buy gold or silver. But this is not the total portfolio (as all the planners suggest that one should only hold 5 to 10% of gold or silver) – What is?
Thank you!

p.s. You also mentioned, Dr. Brown, in your last call that we can get a DVD from Jack about the subject on VIX by Bob Waley (?) - how can we get a copy of it?

Here are some videos that will help you:

http://www.tradementors.com/chartbooks

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All my IRA is invested in the Gone Fishing Portfolio.
As i see our government printing money and spending with little thought of responsibility.
It appears we are heading for a ship wreck as soon as the bills all come due.
How is the best way to protect my investment?
I can see the market going to hell and inflation making nothing of any thats left.
When and if the price of oil is tied to another currency this can sink the ship. ******************************************
Dear IU Course Staff & Doc Brown,

I have only one question request this month and I have already mentioned
that one before, but since it didn't "stick" I will ask again... and again...

I would like to move to introduce a short analysis (max. 10min) and prognosis
of the EUR/USD at the beginning of each call as a regular part of your open
calls, since this is a topic which I trust you know by heart and I (we) am (are)
very much interested in this increasingly important topic. Maybe it is even be
possible to also add a few comments about other relevant or current
developments and news in other currencies or the currency market as awhole.
(e.g. "currency wars", ...)
If you are not sure if this topic is of general interest to your
callers (it should!),
you could ask them in the open call on Thursday. I would obviously like to see
it implemented in the call as a permanent enrichment to the course.

Well, I believe you will remember that request since I already sent it to you in
October and you explained the current situation in the next call, but
what I was propossing was to make that analysis a permanent part of your
conference calls (see above).
It would surely be very helpful if that could be arranged so I (we) could
compare my (our) own analysis and conclusions to those of a professional.
And again, if you don't think or are not sure that this proposal is of interest
to your students, just ask them. ;) That's what these calls are for, right?
Since I can't participate at this calls due to the time difference I hereby vote
with "YES".

Take a trial of the TnT Forex Platform:

http://www.tradementors.com/options

Tell Gecko you want to switch the package to Forex if you don't want to analyze through futures.

******************************************

After submitting my questions on capm (crapm) I ran across Fama: My life in Finance. A great read.

http://www.dimensional.com/famafrench/2010/03/my-life-in-finance.html

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In your book Worry Free Wealth Guide, on page 56 you seem to dismiss Markowitz’s theory of stock diversification by quoting Warren Buffett. “An excuse for not thinking.” Going on to argue that fewer well thought through investment have less risk that diversification.

Buffett also stated that “Diversification is protection against ignorance. It makes little sense for those who know what they are doing.”

Is you advise that we put 70% into diversified passive portfolio like the Gone Fishin suggesting that we will do better if we admit our ignorance? Louis Basenese suggests 80%. I have done very well with the majority of funds in the Oxford trading portfolios and Chairman Circle recommendations. I recognize my ignorance, but have tried to trade off the good ideas of others. I don’t want to take on stupid amounts of risk, but I also don’t want to use fear a an excuse for not thinking. Do you now love Markowitz and am I correct that in Worry Free Wealth you weren’t a big fan?

******************************************

Back in May I asked about your comments in the pre-session of the 2010 Investment U conference you praise the merits of the mean variance portfolio and trashed capital asset pricing model (CAPM) calling it CrapM. I am still interested in what parts of Modern Portfolio Theory are crap. Specifically I would like to understand is a mean variance portfolio and how it differs from CAPM. You also offered to go into explaining Sharpe Ratios.

I read a book recommended by Martin Hutchinson by the father of fractal geometry, Benoit Manelbrot called “The (Mis)Behavior of Markets”. He spends a great deal of time reviewing what he sees as Crap in CapM. As I understand it, Modern Portfolio Theory views market is considered in as efficient. Current price is an accurately value based on the sum of all known information. The risks are modeled bases of the random walk of a fair coin toss following a Gaussian distribution . And that there are no discontinuities in pricing.

Manelbrot argues that the market are not efficient. That that are discontinuities in pricing that cannot be model with a Gaussian distribution call the Noah effect, catastrophic events that have fat tails. The market is risker than believed. He states that the coin has memory title The Joseph effect, 7 fat years followed by 7 lean. Trends that work until the change. He also sees a wrapping of time. Pricing tends to slow down and speed up.

Have you read The (Mis)Behavior of Markets and are these the issues that cause you to call it CrapM? You mentioned that Fama-French 3 factor model was introduced to correct the errors in CapM. Could you talk more about how the Fama-French model works? Apparently Fama was a doctoral student of Manelbrot.

*************************
I'm interested in purchasing the stock of potential takeover targets and was wondering if there was a website or some place to find a listing of such companies.

January 2011 IU Call

2011-01-21T14:02:00.000-08:00

p.s. You also mentioned, Dr. Brown, in your last call that we can get a DVD from Jack about the subject on VIX by Bob Waley (?) - how can we get a copy of it? ******************************************
All my IRA is invested in the Gone Fishing Portfolio.
As i see our government printing money and spending with little thought of responsibility.
It appears we are heading for a ship wreck as soon as the bills all come due.
How is the best way to protect my investment?
I can see the market going to hell and inflation making nothing of any thats left.
When and if the price of oil is tied to another currency this can sink the ship. ******************************************
Dear IU Course Staff & Doc Brown,

I have only one question request this month and I have already mentioned
that one before, but since it didn't "stick" I will ask again... and again...

After submitting my questions on capm (crapm) I ran across Fama: My life in Finance. A great read.

http://www.dimensional.com/famafrench/2010/03/my-life-in-finance.html

Buffett also stated that “Diversification is protection against ignorance. It makes little sense for those who know what they are doing.”

******************************************

*************************
I'm interested in purchasing the stock of potential takeover targets and was wondering if there was a website or some place to find a listing of such companies.

Investment U Q&A Call April 22nd, 2010

2010-04-22T06:48:00.000-07:00

Investment U Q&A Call March 25th, 2010

2010-03-25T06:06:00.000-07:00

First off here's the link to the videos I promised...

http://www.tradementors.com/tntstocks

DR.SCOTT BROWN

I HAD TO STOP READING WHEN I GOT TO CHAPTER THREE.I WAS A FRIEND OF SAM WALTON WHEN I WORKED AT CITY PRODUCTS IN KANSAS CITY. I WAS AUDIT MANAGER AND I WENT TO AUDIT HIS STORE IN ARKANSAS HE WAS QUITE A GUY.I REALLY ENJOYED THE WRITE UP YOU HAD ON HIM.

What is your gut prediction of the direction of the market over these next 6-12month? I have been building cash recently and am more interested in not losing than trying to win big right now. How much precious metals do you hold in your personal portfolio(as a percentage of total)?

First off the VIX is at 17.5 which is low. Says stock market is not primed for a crash.

http://finance.yahoo.com/q?s=^vix

Second the S&P 500 is above the 12 month moving average.

Prognosis is continued rise.

The Gone Fishing Portfolio gives you an investment in metals.

That said the April Gold Futures contract is above the 12 month moving average.

Dr. Brown,

I have been following IPO offerings since January when I joined the course. So far, I found only one IPO that looked promising - and it withdrew before its expected offering date. I've also noticed that IPO pricing seems conservative for those that are going forward. Is this a rocky time for IPOs given the ping pong nature of the markets the last several months?

Also, one company, Broadsoft Inc gave as one use of its IPO money - redeeming preferred stock to cancel it all out. Is this a good sign?

The IPO market waxes and wanes according to market conditions. When markets crash and public sentiment is very negative it is hard for underwriters to get a high price for newly issued shares.

Just wait and as the market keeps rising you’ll see the IPO market come back. Alternatively you could enroll in Lou Basanese’s Hot IPO newsletter.

I've read many articles about Berkshire Hathaway B share stocks after it split. Most say it isn't a good buy at the current price. I'm also worried about when Warren Buffet is gone. What will happen to the shares of Berkshire Hathaway company.

Now that they have split BRKB the stock must be traded like any other stock. Don’t buy it in a downtrend. Buy in an uptrend. The stock is currently in an uptrend.

Is it a good idea to use margin account to buy stocks that pay dividends above what i pay for the margin interest?

No, if you buy stocks on margin you are trading. If you want to trade on margin go somewhere with a real bang for your buck like Forex or futures. Margin is very dangerous and requires great skill and training.

And I have to give this Disclaimer just for saying this… http://www.tradementors.com/disclaimer.htm

Surely you can do better than The Ivy Portfolio and Worrry Free Wealth for a Reading list. I am friends with Meb Faber and tried to get Julia to invite him to the Investment U conference with no luck.

I just finished the following books:

This Time is Different by Reinhart and Rogoff, Story how we make the same mistakes over and over, valuable, but boring.
History of Modern Economics by Skousen, very helpful understanding the issues of capitalism.
How Markets fail by Cassidy. Liberal, but well written.
The Greatest Trade Ever by Zuckerman, A real page turner on how John Paulson outsmarted Wall Street.

My question for you is what are your top five favorite investing books of all times?

The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett and Lawrence A. Cunningham
How to Be Rich, J. Paul Getty (read the section on stock investing).
Reminiscences of a Stock Operator, Edwin Le Fevre
The Elements of Investing, Burton Malkiel and Charles Ellis
The Gone Fishin’ Portfolio, Alex Greene
Richest Man In Babylon, George Clason

What are the best 5 books to read for this course?

There’s no really good books specific to what I teach in this course. It’s spread around the university system and Wall Street.

Name your favorite books on Forex, technical Analysis and options. Maybe include a book on technical trading.

Best Forex Book: The One Perfect Business, TheOnePerfectBusiness.com
Technical Analysis: GeckoSoftware.com training videos.
Technical Analysis: Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance) by John J. Murphy
Options: Commodity Options, Paul Britton
Options: Options as a Strategic Investment, McMillan
Options: Get Rich With Options, Lee Lowell

Backup Charts if those above don't open:

Back Up Charts

Investment U Course Open Q&A Call February 25

2010-02-24T05:29:00.000-08:00

First off I'll be talking about a few books on this call. All great investors are avid readers so I'll be recommending a book or two I know is excellent for your progress each month.

Book #1: Is my companion primer to the course that fills in gaps and is a very easy ready The Worry Free Wealth Guide to Stock Market Investing

Book #2: Is The Ivy Portfolio

Get them both at Amazon.com.

I finally have the advanced stock trading package organized for you with a full $500 off offer exclusive to Investment U course students.

Now the first answer I want to give you comes from last week concerning the Ivy Portfolio recommended by Steve Sjuggerud at http://www.dailywealth.com/archive/2009/oct/2009_oct_02.asp

I purchased the book and created a 15 minute video here to help you understand the very simple concept behind this return enhancing system:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

Dear Dr. Brown,

I live in the strongest economy in the Eurozone – Germany. A major portion of my portfolio is in Euros. The stronger and more responsible economies (not just Germany) want to get rid of the PIIGS, although I realize this may not be possible.

How can I best preserve and increase the value of my portfolio in the face of uncertain times, a weaker Euro and incompetent politicians who only tell half truths?

Please reconsider coming to Austria in November!

DOC BROWN ANSWER

You have to become very aware of the major trend on the EUR. Right now it is down! That makes the USD the safer currency as long as the trend remains down. You can only see the major trend on a long term monthly chart like this one…

This also means that as long as the USD is in a long term strengthening cycle a foreign investor could hold the Gone Fishing Portfolio in USD over the length of the cycle. Remember that currencies cycle for 5 to 7 years as you can see in the long term monthly chart above.

This also mitigates the stink of the PIGS. (PIGS = Portugal, Italy, Greece, and Spain).

Ps. You’ll have to campaign Oxford Club to get me over to Austria…I’m up for it but you’ll have to create the demand over there.

Pps. Back the PIGS isn’t it funny how the Romans used to be civilized and the Germans used to be barbarians. Now roles are reversed!

Ppps. I am teaching you to forecast currency rates since it impacts your stock investing. I am not implying in any way that you should trade Forex! Just make sure you understand how this analysis impacts stocks.

http://www.tradementors.com/disclaimer.htm

STUDENT QUESTION

Hi Dr. Brown:

I am relatively new to your program and I have two questions:

1.) Can you speak more in depth about scalability? You mention it in
passing in the course, but I couldn't
understand what it was or how to use it as an analysis tool.

2.) I came across a stock-ticker symbol CAST. The stock had some
clustered insider buying on Jan. 5th of
almost $5 million. It seems like a promising candidate for a buy. Would
you be willing to do an analysis for me based on the criteria in your
course so I have a better understand of how to go about the process?

DOC BROWN ANSWER

First of all congratulations on taking the initiative to find a stock with insider buying. You're showing the signs of becoming a great stock investor. I have answered your question about CAST in a video for you here since it is such a good question:

http://www.tradementors.com/tntstocks

I ALWAYS do an initial chart analysis on EVERY stock I consider buying. The videos should help you understand how I shift back and forth between monthly and daily charts.

Concerning scalability could you give me the course page number so I can read what I wrote. Scalability means a number of things and I need to see the passage. I simply don't have time to go back and re-read my entire course to find the passage. Give me the reference for the next call and I will give you the right answer! Thanks again for that great question on CAST!

STUDENT QUESTION

Page 206 in the course says that occasionally insiders can sell off optioned stock and use the cash to buy it right back and you said it is powerful....I didn't get that. Isn't owning optioned stock the same as owning the stock bought on the secondary market? How can it be 'powerful'?

DOC BROWN ANSWER

Holding the option is NOT the same as owning the stock. Employee Stock Option (ESO) Plans come with restrictions and limits on the length of time the executive is vested. That means that if the executive exercises the option to avoid expiration of the ESO and doesn’t sell the stock for cash that he or she very strongly believes in future appreciation of the stock. The idea here is that by watching the executive’s action you can get inside his or her head a little.

STUDENT QUESTION

Hey Scott,

Are the stock options (those given to insiders) the same ones as the options traded in the regular options market? Does the insider stock option itself have any value or gain value only after it is exercised? What are the characteristics of insider stock options?

DOC BROWN ANSWER

Another great question from another astute student!

No they are not. Employee Stock Options (ESOs) do not trade on the open market. They are options specific to a single employee that have to be exercised into actual shares. ESOs have value and can be priced (dirty inside executives tried to convince the SEC and FASB that they couldn’t be priced. This really raised Warren Buffet’s ire. Now the SEC requires that corporations price their ESOs. ESO plans are tailored by executive compensation committees and absurdly overpriced “consultants” to the final negotiation between the top executive and the board of directors. This is an enormously corrupt practice in general in corporate

America

today that siphons billions of dollars from shareholders to incompetent executives. Evidence of this is in the Banking packages post TARP funding.

STUDENT QUESTION

When the IPO lock up period ends, why do some IPO prices go up? Does it mean the insiders are let free to buy too? I got the point that insiders can't sell their shares till then but you said it could be a good IPO if it jumps after the end of lock up period. Do you mean to say that people wait to see if anyone is dumping shares and then buy?

DOC BROWN ANSWER

The lock up period also restricts the flow of information from the company to the market. If the price jumps it means that the insiders almost certainly decided to hold onto their shares instead of dumping. And if they know the stock is good you know that institutional have been tipped off as well. So it becomes a positive feedback cascade.

STUDENT QUESTION

Hi! Doc Brown:
I am interested in the hedge fund & its portfolio managing. On the last session you briefly mention about hedge fund trading.

I understand the hedge fund can be engaged in all type of trading like Forex/Currency, Futures, Stock, Bond, Index, Option, ETF, ETN, Treasury, Muni, etc.

Could you explain about hedge fund & its tax consequence or efficiency in more details?
Where can I register if it is required? and what requirement do I meet in order to start a hedge fund company and become a portfolio manager?

Thanks

DOC BROWN ANSWER

If you’re planning on creating a hedge fund I STRONGLY recommend that you attend the 2010 Investment U conference in San Diego. Try to talk with Robert Williams who has an enormous institutional trading background. It is imperative that you ferret out the best package of legal and financial services so that your hedge fund is properly structured from the start. Bob will know some good directions for you to take or who you might talk to who is good out there today. Don’t forget that the cost of the conference will be a tax deduction for your fund so don’t hesitate in attending.

STUDENT QUESTION

I've noticed that the question of where to start when investing from scratch comes up a lot, and The Gone Fishin' Portfolio is always Dr. Brown's response. Keep in mind that those of us small investors literally starting from scratch do not have the capital to start with the GFP, and perhaps not even the ETF version (which you can only find if you buy the book). However, I believe there's an alternative. The Permanent Portfolio Fund (PRPFX) could be considered the "poor man's Gone Fishin' Portfolio" --- it's intrinsically asset-allocated, tax-efficient, costs only $1000 to open, and you can avoid all the transaction fees if you buy it direct or through Scottrade. It has been recommended in the Investment U newsletter on a couple occasions as a great way to get started. (Look in Archives for "The Peace of Mind Fund" issue #773.) It gets top scores from Morningstar, Lipper Leaders, and MAXfunds.com, among others. After that's set up, perhaps dollar-cost-averaging in to IPOs or momentum stocks might be a way to get going when you have so little to start with. While the GFP is fantastic, it's simply out of reach for those of us who are truly starting from scratch. Hope this helps those in the same boat.

DOC BROWN ANSWER

Yes! PRPFX is an excellent alternative if you’re starting out on limited funds. This was such a good question I added the answer to the second video at:

http://www.tradementors.com/tntstocks

Also, here’s the article referred to in this question:

http://www.investmentu.com/IUEL/2008/March/permanent-portfolio-fund.html

STUDENT QUESTION

Dr. Brown,

I've been trying to methodically track the signals (your "prairie dog squeaks") for Momentum stocks and have a few questions.

1. In determining Market Share Leadership for a given stock, if I understand correctly, we're to write down the EnterpriseValue/Revenue figures for each competitor, add them all up (including for the stock we're analyzing?), then divide the EnterpriseValue/Revenue of our stock by the total. Is that correct? I can't seem to find an explanation of what this number we've calculated tells us. Please clarify.

DOC BROWN ANSWER

Depending on whether you pull the book or market value for Enterprise Value this gives you a ratio called book-to-sales or market-to-sales. The idea here is that the ratios controls for company size so that you can see who really dominates the product or service market the company serves. This is useful since large corporations often have many products in different markets and industries.

STUDENT QUESTION

2. For Double-Digit ROE, you say to use 5-year averages as compared to its rivals. How do we do this?

DOC BROWN ANSWER

In addition to Yahoo Finance I really like Market Watch for this kind of data. You pull each year’s fiqure for Total Net Income (which is after tax) off the income statement. Here’s an example with IBM showing data back to 2005:

http://www.marketwatch.com/investing/stock/ibm/financials

Then pull the figures for total equity (Shareholder’s equity) for each year off the balance sheet. Again for IBM:

http://www.marketwatch.com/investing/stock/ibm/financials/balance-sheet

STUDENT QUESTION

3. In filtering out stocks that don't meet the momentum criteria, it appears that only Earnings Acceleration, Institutional Ownership, Industry Leadership, and Technical Indicators need to be tracked over time, and that the stock can simply be given a "pass/fail grade" for each of the remaining signals. Is this correct?

DOC BROWN ANSWER

There is definitely a point where your research passes from quantitative to qualitative. So a pass/fail grade is definitely a good idea. Then track the stocks that pass for ones that are moving (1) in an up-trend or (2) have given a technical signal that the down-trend is turning up. I show you how to do this with a 12 month moving average crossover in the videos I created for you here:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

4. For the signals that need to be tracked, how often should this be done --- once a quarter?

DOC BROWN ANSWER

There are two facets to this question. For every stock that passes your screen you should create a tracking system like the TnT books in the videos here

http://www.tradementors.com/tntstocks

When you do get an entry signal with a good technical indicator like the 12 month moving average cross-over OR the TnT Bulls and Bears up arrow you can double check if the stock fails to move up in price accordingly. Otherwise you should re-check the fundamentals of your watch list quarterly and cull any of your stocks you downgrade from pass to fail.

STUDENT QUESTION

5. In order to be considered a Momentum Stock, how many of your "prairie dog squeak" signals must it pass: 80%, 90% 100%?

I may have more questions next time as I work through this, but this is enough for now. Thank you for your time and clarification.

DOC BROWN ANSWER

Remember that with momentum stocks the proof is ALL on the price chart. Momentum means that the stock is up-trending steadily. You will often get reactions (drawbacks) but the stock should shortly resume. Earnings growth and surprises are a key component that you should check first. The other factors are gravy. Then WATCH THE CHART LIKE A HAWK as I teach you in these videos:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

Dear Investment U Staff / Dr. Brown,

during the last month I sent you three mails with several (admittedly extensive) questions.
"Comments for Doc Brown concerning lesson 1-3"
I realistically didn't expect Dr. Brown to answer all of them (that would have taken up to
much time) but I would have thought that he would at least mention them and/or say that
he will address them at a later time. Or something like that. Instead he completely ignored
them. So, I have to ask now if/when he intends to answer/comment them.
I am aware that Dr. Brown has a very busy life, but as one of his "students" I am eager to
hear those answers, comments and opinions.
And by the way... Congratulations on the new book. I am looking forward to read it.
Also thanks for your efforts in regard of the TnT-BnB package. :)

DOC BROWN ANSWER

I think I know which questions you mean. I assure you I miss-read or missed the questions I did not answer. I will answer question even if I don’t know the answer to direct you to an expert or resource who does. Please do me a favor and resubmit the question summarizing in a short list at the top. I don’t mind long questions. It’s just that sometimes I get lost in the length! Thanks for the support on the book!

STUDENT QUESTION

In the last conference call Scott mentioned that there was a discount to the TNT software for iucourse students. Could you tell me how much it costs and how to order?

DOC BROWN ANSWER

You can order it here:

http://www.tradementors.com/tntstocks

I have arranged a $500 discount available ONLY to Investment U students. Also, when the new Autopilot Stock Trading feature comes out you will get that at no additional charge. The Autopilot will allow you to set up your watch list and have the program automatically buy and sell with presets even if you are asleep and the market is on the other side of the world!

STUDENT QUESTION

I have found that using drive time to listen to audio books and podcasts a great way to learn about investing. I call it the University of Prius. I purchased from Investment U. See second item: http://www.investmentu.com/new-book-store.html and it has been valuable resource. In it you gave a talk on “How To Supercharge your $1,000,000 Portfolio with Option’s!”. Could you post the power point presentation on this talk? Also you mentioned that Timothy Crack suggests selling options and using trading pairs with stock. The idea was to moving in and out of a long or short position as needed to hedge against price fluctuations since the commissions on stocks and the buy sell spread is so much lower. I bought Tim’s book Basic Black-Scholes: Option Pricing and Trading, but skimming the book found nothing on trading pairs. Can you tell me where to find more on this subject?

DOC BROWN ANSWER

Go Prius U (you should create a sports pennant)! I attend the University of Ford Ranger!

I was talking about Para-trading. Here’s a download link for the presentation entitled Understanding Stock Options:

http://stocks6969archive.s3.amazonaws.com/5881277685984969.ppt

Remind me for the next call and I’ll try to do a video on stock option paratrading and will post it at:

http://www.tradementors.com/tntstocks

But you have to remind me next month with a question.

STUDENT QUESTION

Is there a new SEC rule allowing brokerages to freeze money market mutual funds? Is it true that the rule does NOT apply to banks?

DOC BROWN ANSWER

The problem is with the institutionals not the small investor. So you shouldn’t have a problem with having your cash sweep trapped in the money market.

I couldn’t find anything on the new rule and don’t know if it applies to banks. But here’s the background argument that led to the new rule:

Note: See http://www.financial-planning.com/news/industry-sec-spar-money-funds-2662006-1.html

That’s it folks! Don’t forget to watch the videos on Technical Analsysis of Stocks here:

http://www.tradementors.com/tntstocks

Investment U Student Only Q&A Call January 28, 2010

2010-01-28T11:18:00.000-08:00

Welcome to the call. I am pleased to announce that my new book The Worry Free Wealth Guide to Stock Market Investing by Scott Brown, Ph.D. is finally up on Amazon.com for $10.77. I wrote it as a companion to the Investment U course...

[Click Here To Go To Amazon.com Page]

Here's what Alex Green has to say about it, "Dr. Scott Brown is one of the sharpest guys I know. And "The Worry Free Wealth Guide to Stock Market Investing is essential reading. Highly recommended."

--Alex Green, Oxford Club and Investment U Chairman

Hey Scott:

What is your long-term evaluation of the current market - Bullish or Bearish ?
Should we take this time as an opportunity buy Precious Metals or Gold Stocks and sell put options to the one we should acquire?
This is a very turbulent time, should we sell all equity position and hang on to the cash?
Alex Green is the only one I know who is positive on the dollar? I value his recommendations in that case should we be negative on Euros - any comment on EUR!

Q1. When watching the long term trend of the stock market first look at a weeklychart then drill down to a daily chart. I always watch the S&P 500 futures contract (CMEGROUP: SP). I look at…

1. The major trend itself on a weekly chart.

2. I watch for a down arrow on the Bulls n’ Bears technical indicator (the best technical indicator I have ever found). See http://www.trackntrade.com/

3. Then look at the daily chart. Here the BnB indicator gives you a feel for the direction of the minor trend.

4. finally, always check the VIX indicator. Right now it’s trading in a normal range of 23.14. See http://finance.yahoo.com/q?s=^vix

Q2. God no! The minor trend on Gold is bearish! Market is at extreme high and ALL news is bullish. See chart below…

When extreme markets break the major trend they often drop fast!

Q3. God no! The S&P futures market is still strongly bullish. Investors should be in for the long haul. If you are in single stock positions you should let your trailing stops take you out of the market.

Q4. Alex Green is not the only bull on the dollar. I recommended a selling the EUR/USD pair back on December 10 to my www.tradementors.com Forex students. A $100 margin on a mini Forex contract has yielded $719.00 thus far. Here there are various factors that led me to conclude that the cycle is over for a strengthening EUR versus a weakening USD. First burgers are too expensive in Europe according to the long term Big Mac Index. See http://www.futuresforexandoptions.com/ This weakens demand on the EUR according to Purchasing Power Parity from international monetary theory.

Second, the trend on the current account balance is strongly up. This means that the trade balance is reversing toward exports. This puts greater demand on the USD.

This means that the recent strengthening of the EUR was a reaction to the major down trend. When it comes to Forex remember that if the EUR/USD is $1.33971 that this means that one EUR can buy $1.33971. Hence if the exchange rate drops to say $1.25000 this means that one EUR buys less USD.

For that reason a downtrend on the EUR/USD actually means that the USD is strengthening. http://www.trackntrade.com/forex/live/

Is it recommended that our investment accounts be in the form of self-directed IRA's?...if not, how do we lessen the tax impact of any gains at the end of the year?

The trick to dealing with tax is to invest in very long term buy and hold strategies in your personal investing account where you would be due taxes for any equities sold. Then trade single stocks and stock option strategies in your standard or Roth IRA.

Account -------------------------	Strategy -------------------------
Personal Investing Account	Gone Fishin’ Portfolio, BRKB, BRKA
Standard or Roth IRA	Single Stocks, Stock Options, ETF Options

Dr.Scott Brown,
I am thinking about getting into the million dollar portfolio strategy program, just a question I have here, are you making the picks and leting us know what they are, or do we have to figure them out. We are retiring this coming May, and I wish I could say were are retiring well, but with the economy , it has eaten a good hole in my savings, so I can't really afford to just jump at every offer that comes my way. As an Oxford member I have been very happy, anything you might tell me would be greatly appreciated.

I NEVER give you stock recommendations. The whole point of my course is to teach you to think for yourself. I also recommend a 70/30 strategy where 70% of an investors portfolio is the Gone Fishin’ Portfolio or another solid set it and forget it strategy.

That said I am in the process of submitting an exciting study I performed with Prof. Eric Powers, Ph.D. and Prof. Jose Julian Cao, Ph.D. Professor Powers is a professor of finance at the University of South Carolina who holds a Ph.D. in finance from Massachusetts Institute of Technology. Professor Cao holds a Ph.D. in econometrics from Cornell.

We analyzed the returns to investors in Alex Green’s Insider Alert and found an astounding 28% return in the second year without filtering with trailing stops. This is a real testament to the incredible stock picking ability of Mr. Green.

The other Oxford Club staff member that has a very solid intuition is Lou Basanese but I have not tested his newsletter returns.

Hence if you are going to trade single stocks I strongly recommend looking at Alex Green’s and Lou’s newsletters as a first pass on your research. Then use what you’ve learned in my course to identify the best prospects.

Also, I am in the process of using the BnB indicator on the TNT High Finance platform to see if it will help filter better buying points once Alex and Lou have identified the stock. This is still a nascent idea. http://www.trackntrade.com/hf/stocks/

I have a question for Dr Scott Brown.
I understand that step 6 recommends the Oxford Club's Gone Fishin' Portfolio as a base. Vanguard requires $3000 minimum investment for each index fund. I do not have the $30,000 needed to start. What do you suggest?

Any online brokerage such as TD Ameritrade will allow you to purchase on a per share bases. http://www.tdameritrade.com/welcome1.html

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A few months back read a Daily Wealth article by Steve Sjuggerud http://www.dailywealth.com/archive/2009/oct/2009_oct_02.asp http://www.dailywealth.com/archive/2009/oct/2009_oct_02.asp> outling a passive portfolio of ETFs like Alex Greens Gone Fishin’ Portfolio that didn’t suffer from major drops by adding quantitative technical analysis to move into and out of asset classes. This is kind of a smart trailing stop system . So I got the book mentioned, Ivy Portfolio from the library and read it. I enjoyed it so much, I called the authors, Meb Faber and Eric Richardson. We hit it off and made an appointment for lunch. Meb claims that using moving averages as an indicator can keep you in the market for most of the upside while missing most of the down side. Do you think this approach as merit?

I have been following Mark Skousen’s debate with Alex Green where Mark infers that Alex is a closet market timer. Seems to me that even trailing stops is a form of market timing. Where so you stand on using quantitative indicators to move in an out of asset classes?

Yes I do… if the investor is adequately skilled in technical analysis. For instance Alex Green’s Insider Alert recommended on October 13^th of 2009 to “Buy Enterprise Products (NYSE: EPD) at $29.25 or better. And place a sell stop at $24 for protection . Speculators might want to take a look at the March $30 calls (EPD-CF). But don't pay more than $0.95.”

However there are much more powerful techniques than a simple moving average crossover. One is the MACD which means moving average convergence divergence. Notice how nicely the MACD picks out market tops on the way up.

But the MACD also gives a lot of false signals.

A much better indicator is the Gecko Software proprietary Bulls n’ Bears system. Notice how it gave only one false signal on November 2. You would have ignored it, however as your (1) trailing stop was in place and (2) the market was back up two days later. Here's another Insider Alert recommendation...

The BnB indicator gave a definitive sell signal today that would net the Oxford Club member a clean 10.57% raw return that converts to a 102.54% Annualized return.

http://www.trackntrade.com/hf/stocks/

Skousen is kinda-sorta right. The conventional market timer is a pure technical trader that endeavors to pick the exact low and exact high. This type of person is usually a braggart and quite arrogant.

Most importantly market timers tend display sever overconfidence.

Alex is extremely good at analyzing business in terms of factors that make them attractive to the stock market. He’s also in tune with factors that affect the general level of the stock market. He’s so good that his analysis often coincides with tops and bottoms.

He’s been around the markets so long that he has a solid intuitive feel for what’s going on beyond the common practitioner. Think of the expert fighter pilot who is simply the best in the air.

The reason that Alex is uncomfortable with promoting market timing is that it shifts you from working with the market to trying to dominate it. It also promotes cognitive errors such as over-confidence. That’s why you simply should not try to do it.

However, if Alex identifies a stock that has rock solid fundamentals then applying intelligent (and few people intelligently apply intelligent) technical analysis has great merit as I showed you in the chart above.

In evaluating newsletters it’s always hard to get performance numbers. When will you publish the results of your study on the performance of the Insider Alert. Have you considered having your students as a project to run performance numbers on Oxfords other VIP services, not to mention other newsletters. Thanks,

We are about to submit to the top academic journals of finance. If we circulate the article it would destroy chances of publication. As soon as we have acceptance I will make it available immediately to the Oxford Club membership services.

That said, if I get a sufficiently motivated Ph.D. student this year I will encourage a longitudinal study across the other services. Thanks for the research idea!

To whom it may concern:
I purchased the “How to Build a Million Dollar Portfolio” course last month.
Due to my reading and homework of the smaller book entitled “The 7 Golden Steps to Financial Freedom”, I have a couple of questions:

1. The 20% savings benchmark on the Financial Fitness Ratio- can Health Savings Account contributions, SEP IRA contributions, and 401K Contributions be considered for this category? We put roughly $4000 per year in a HSA for the tax deduction- our insurance premiums draft directly from this account- we also have debit-cards linked to this account for doctor’s bills.

2. The “write a thank-you check” to your bank to pay down your principal on the mortgage section- we refinanced two years ago to a 5.5% 20 year fixed mortgage. This eliminated $320,000 of interest payments over the life of the old 30 year loan while my payments stayed exactly the same due to the interest rate reduction. Should I still write a big thank you check once a year?

These are two very powerful question I will answer generally. However, I strongly recommend that you attend the 2010 Investment U conference since you may have specific individual factors that change the answer concerning your mortgage. I am always amazed at the knowledge of personal finance of our members and experts who attend each year so please do try to attend.

http://www.oxfonline.com/IU/IUConf0809.html

First, I generally recommend that investors pay off all of their debt. There are a few exceptions that are generally rare. The simple act of sending in the thank check is a form of forced savings.

Second, congrats on the smarts to run your HSA. I don’t want you to consider it part of the 20% though because the HAS secures your NEEDS expenses. I know that raises the bar on your savings but you’ll thank me later.

For students who don’t know what an HSA is here you go…

Some employers offer consumer-directed health plans that go one step beyond a flexible-benefit plan such as the HRA and HSA. These plans give you a high-deductible health insurance policy with a tax-free health reimbursement account (HRA). So, this is a plan funded by employers for each participating employee.

When the account is used up, you have to pay the remaining deductible of the health insurance policy before insurance begins to pay. If you don’t use the money by the end of the year, you can “roll over” the amount. After several years of rolling it over, you can build up a lot of cash to pay for medical expenses. But if you change jobs, the money stays with the employer.

The Internal Revenue Service considers employer contributions to HRA medical reimbursement accounts to be tax-free income!

The Health Savings Account

Something similar is the health savings account (HSA). The HSA is also a tax-free account, but the money is funded by employees, employers, or both for routine medical costs. An HSA is also combined with a high-deductible insurance policy to pay for catastrophic care in case of major accident or illness. It can be rolled over each year.

The monster advantage is that if you change jobs, the money in your HSA belongs only to you and is yours to keep!

first of I would like to say that I hope all of you had a merry Christmas and
a great start into 2010. Again, I wish all of you and every participant of your
course a great and successful 2010 and beyond. ... And I hope you will help
all of us get there. ;)

Second, I want to inform you that your course has finally turned up and I
already started to bury myself in your materials.
I sure am curious how this book is going to end. ;)

So, one last time I am going to bother you with my take on the USD/EUR
and your views on this topic. Views, I might add, which I now have mostly
adopted for myself.

When I sent you my last question about the USD/EUR and the monetary
base, etc. I already had a hunch that you would say what you did, but I
wanted to make sure. ;)

Especially the monetary base made me a bit uneasy, but in the end I agree.
The only thing that really matters is what really happens at the exchanges
and the charts and not what someone says SHOULD happen.

I guess that's the gist of it...

btw... Byron King and his OI service is a member of the Agora Financial
Group and said to be a specialist for precious metals, energy and such
(as is Jeff Clark, just not for Agora), but I guess he should stick to these
subjects and leave the currencies to you and other experts in this field. ;)
Oh, and I can assure you that I do not attend cocktail parties and even if I
would, I would definitely not listen to any financial advice I would get there
from some big headed guy/woman. ;)

But I would definitely like to hear more from you about the developments
in the US stock and commodities (gold) markets. I believe your expertise
would be very much appreciated by all off us if you e.g. happen see a special
development (up or down) somewhere in these big pictures.

Also, I am eager to hear if you (and the IU-staff) have already negotiated a
special deal with TnT for their services (including the BnB indicator!) or how
long you estimate this is going to take (...or if it is going to happen at all).
I really hope you will be able to pull this of.

Thank you very much for your help and insight so far.

Be assured that I will be in contact again and you will get my "European"
perspective on (many) occasion(s).

I hope one day to meet you as I really enjoy your questions! ;-)

I’ve analyzed all of this at the beginning of this talk so simply review. I will try to talk with Julia and Jenifer about a TNT package in March when we are all at San Diego. The package is done but Julia has to approve it for circulation to IU course students.

Send an email to Investment U as a course student asking for the package and that will put pressure on your side (which is most important).

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If you don't have more than 500.00 to invest, can you start there, and build it up quite a bit?
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Start…just start… just start! That’s always my advice even it you start with one penny! When you take action after studying this course you put into play the cosmic habit force of saving, investing, and stewarding your wealth.

So start today!

dr brown: i heard your answer to the 30K portfolio, but i have just a 10k " to play with" along with a small ira. which newsletters might be helpfull for ideas. i sometimes catch stocks moving due to news now and usually know when these are done rising and ready to fall which is how i have built up my small account. i don't expect to find a "tasr" in any of these. thanks ill catch you in january.

Alex Green’s and Lou Basenese’s newsletters are the cream of the crop when it comes to single stock investing.

Dear Dr. Brown,
The questions and topics covered during last night's seminar were great. The focus was largely on options and concerns related to timing the market. I rely on Alex Green's recommendations rather than time the market. My purchases are almost entirely from the Gone Fishing Portfolio and other Investment U portfolios. I follow the OS recommendations: my analysis is focused on maintaining a balanced portfolio based on OC recommendations for buying and selling. One exception is selling covered calls for income (<>

o When the market soars and the stock is expected to continue to soar with it, far greater than the strike price

o When the market tanks and my cost basis of the stock in the failing market is 20% less than when I purchased the stock. The market is expected to continue its freefall but the analyst's opinion is for the stock price to continue to grow rapidly

o When the market tanks and your cost basis of the stock in the failing market is 20% less than when you purchased the stock. There is no consensus on the market direction, and there is great volatility in the market. Over the next year or two, however, the stock price and market share is expected to continue to grow rapidly

o When the market tanks and your cost basis is less than half the price of the stock when you originally bought the covered call position. The stock price and market share are expected to soar over the new few years but many analysts predict prices for the commodity to tank at some point before soaring again in the long term.

Happy New Year!

I've seen a couple of approaches to trading stops. One says to monitor end of day trading and invoke a trading stop sell the day after the trading stop is hit at the end of the previous days trading. The other says to just enter an automatic trading stop, which would be hit when it is hit, and trigger a sell. What is your advice on this?

For students who don’t know a covered call is when you own the stock and sell a call against each share. You take in option premium on the call and hope it will expire worthless. An at the money option has a strike (the call buyers guaranteed price to buy) at the market price. Since the probability that the market will go up or down is 50:50 the delta is 50%. A call gives the investor the right to buy and can make money in a rising market. That means that if the stock price goes up a dollar the call will increase 50 cents in premium value.

An in the money call is where the strike price is below the stock price. An out of money call is where the strike price is above the stock price. A far out the money call is where the strike price is very far above the stock price.

If you sell a covered call for $2.00 premium and the stock goes up quickly you can find yourself in a situation where the call is priced at $3.50 and you face a potential $1.50 loss since you only took in $2.00. This is so because the option buyer could immediately resell the option for $3.50 that cost him $2.00.

Two key factors are the option’s delta and theta. Delta is the amount that each unit move in the stock translates into option price. Theta is time decay that erodes the value of the option as it gets nearer to expiration since less time means less probability the stock price will move as much.

As options get close to expirations delta drops so low and theta so high that the market can move a good deal and not affect the option price.

When you deal with written (sold, naked) options such as a covered call timing is everything. The ideal scenario is one where the stock price slowly rises offset by time decay of the option.

This means the call would expire worthless but the investor has a profit on the stock position. So if you have just put on a covered call and the stock shows signs of a potential fast rise then you should consider closing out the written call.

Technical analysis of the stock market is very useful in each of the four examples.

Close out the call>>> When the market soars and the stock is expected to continue to soar with it, far greater than the strike price.

Initiate Covered Call But Close Call Write On Sign of Technical Strength (See BnB indicator in chart below) >>> When the market tanks and my cost basis of the stock in the failing market is 20% less than when I purchased the stock. The market is expected to continue its freefall but the analyst's opinion is for the stock price to continue to grow rapidly

Initiate Covered Call But Close Call Write On Sign of Technical Strength (See BnB indicator in chart below) >>> When the market tanks and your cost basis of the stock in the failing market is 20% less than when you purchased the stock. There is no consensus on the market direction, and there is great volatility in the market. Over the next year or two, however, the stock price and market share is expected to continue to grow rapidly

Initiate Covered Call But Close Call Write On Sign of Technical Strength (See BnB indicator in chart below) >>> When the market tanks and your cost basis is less than half the price of the stock when you originally bought the covered call position. The stock price and market share are expected to soar over the new few years but many analysts predict prices for the commodity to tank at some point before soaring again in the long term.

As far as stops go you reall need to do a lot of Monte Carlo back testing which the TnT High Finance Stock Platform will allow you to do. There are a lot of stop strategies.

For instance the Track and Trade platform can also link technical indicators to a stop strategies instead of a 1:1 trail. Stops are tricky. Some of the best trades need room to breath. For that reason some traders move the stop to breakeven when there’s lots of profit and then shoot for getting out at a target profit or sign that the market is topping out.

Your first example is a mental stop the second is a true stop. I never recommend mental stops.

Talk again in February,

-Doc Brown