Banks Cream Individual Investors – Again
April 17, 2013
It’s happened again: the individual investor got greedy and got creamed. And once more, financial institutions were the winners.
We don’t normally talk about precious metals here and we usually don’t speculate on price movements. They are too prone to manipulation and politics, and not simply economic cycles. But a 13% drop in the price of gold in two days and media comments demand that we do both on this occasion.
I have was warning friends who own the metal 18 months ago of the dangers they faced. When on news channels I see dealer advertisements every few minutes designed to encourage buying, that raises red flags. Gold had risen more than 500% in a dozen years while stocks made no headway. Retail investors flocked to gold ETFs and futures and the price rose above $1,900 an ounce.
Outright manipulation
What is absolutely clear is that recent events in the gold futures market were the outright result of manipulation by the banks, and the majority of trading was computer generated. An estimated 400 tonnes of gold futures – 15% of annual gold mine production – were dumped on the market. The fact that the authorities did not step in and cancel the trades is unconscionable. Such behavior is another nail in the coffin of private investing upon which economies rely.
Many gold investors left mutual funds that were underperforming for the greater apparent profits of precious metals. Their objective was to make up for lost ground in their retirement savings. Now, they have been slammed again while the banks greed has been satisfied – for now. You might be forgiven for wondering what purpose – or for whom – the Commodity Futures Trading Commission exists. The little guy got hosed and no one did a thing about it.
What next for battered families?
Families have been turned off real estate, stocks and now precious metals. What are they supposed to turn to next?
We are big on systems and systematic investing for profit and protection. But there was no protection against what happened between April 12 and 15. The activity happened during the night when most folks on North American were asleep. Even if they had stop losses, the declines were so large that stops were of limited help.
There was also another factor at play: the attraction of the shiny new object. It happens every time the price of something roars ahead. It happened with real estate, with stocks, and more recently with gold and silver. The private investor want to feel he is on a sure thing. When that feeling exists, it’s too late for him to buy whatever it is he is sure about – but he does so anyway.
Why the little guy misses out
Take stocks. At the time when they hit their absolute low of a bear market, the media is reporting absolute doom and gloom and rightly so. Unemployment is rising rapidly. Businesses are going under. No one is spending more than they must. Personal bankruptcy rates are high. All is misery. Yet the stock market takes off. Why? This is what the individual investor does not understand and why he buys only after much of the profit has already been had by the institutions and professionals.
What most private investors fail to realize is that professional traders look ahead nine months; they pay little attention to today’s news today. Today is old stuff. They see expansion on the horizon and start to position themselves for it. Meanwhile, the media has the private investor so riled up with negative news he wants out at any cost. And the institutions are there to pick up the pieces at rock bottom prices.
Late again at tops
The opposite is true at tops. The retail investor gets used to price declines every few days and the fact that his stock then goes to new highs. So what in hindsight turns out to be the market top is just another little dip to him. In reality, the institutions have been getting rid of their earlier bargains for top dollar. No worries, Mr. Retail Buyer thinks; a few days later and there will be a new high. When it dawns on him this is something worse, he has already lost much of what he once had so the next thought might be: Maybe if I hold on there will be a bounce of a couple of bucks; I’ll sell then. If the bounce comes, he convinces himself the corner has been turned and his stock will go to new highs (or at least higher).
When the bottom falls out of the market, he either sells in a panic to rescue 50 cents on the dollar or he sells years later at breakeven. Either way, he loses.
I have three words to drill home: systems, systems, systems. Investing is not a game of hunches like playing the horses. There were signals of trouble in the gold market months ago. Signals, if you know how to read them, are almost always there. And if you are to recover your eventual retirement hopes systems are essential to you.
Completed trades to Friday, April 12, 2013
Please forgive our late statistics. We are in the process of changing data suppliers due to technical incompatibility.
| Index | Completed Trades | Win % | Loss % | Annual ROI | Avg Years Trade | % Avg Winning Trade | % Avg Losing Trade |
|---|---|---|---|---|---|---|---|
| USA | 1667 | 83.68 | 16.32 | 25.73 | 5.6 | 31.63 | -4.5 |
| UK | 618 | 80.58 | 19.42 | 33.75 | 4.96 | 43.12 | -5.11 |
| Canada | 367 | 86.1 | 13.9 | 81.74 | 6.36 | 95.64 | -4.36 |
| Australia | 322 | 77.95 | 22.05 | 97.62 | 5.81 | 126.91 | -5.9 |
| Hong Kong | 325 | 76.31 | 23.69 | 90.93 | 5.88 | 120.87 | -5.53 |
How do we get such high returns, far beyond others?
Quite naturally, people often ask: “Just how can you get the numbers you do when no one else does?” At the back of their minds they may be wondering: What tricks are they playing? Are their calculations correct? In some cases, perhaps: You must be scamming people!
We expect no less because we initially had similar reservations within seconds of seeing such seemingly outlandish numbers in the early days of our research. We happily accept the questions because they confirm a level of interest that vindicates all our hard work in bringing the system to the world, addressing all the negatives individual investors have faced.
A change no sane person would make
The Wealthy Investor system started many years before the company was established. Sydney Tremayne, who has developed the system and is company president, admits it was late one night when, in frustration, he changed some parameters that no sane person would have attempted, breaking all standard rules of technical analysis. Today, he insists “I am not clever enough to have done this on my own”.
So, is that it? Just pure chance? The answer is a clear NO.
There is obviously some ‘secret sauce’ (internal coded rules and our intellectual property) associated with how exactly we achieve such outstanding results. You will have most of the answers before you have finished this article.
Trends repeat
Our research clearly shows that stock price trends do repeat themselves and have done so for all 45 years of data with which we have tested. The best returns appear to take from five to six years to achieve. (The length of investment varies by geography and market composition.) The system advises users to sit on the sidelines during bear markets that typically last a minimum of nine months.
Here are the reasons this approach is so successful:
- First, though not so much technical analysis, we entirely agree with senior fellow Paul Woolley and professor Dimitri Vayonas of the London School of Economics discussing long-term investing versus the latest trend in momentum trading (Financial Times, August 16 2012). They repeatedly state: “Long term investors must rediscover their patience” and, after describing ‘momentum trading’, related market volatility and puny returns: “The long run (always) adds up to more than a succession of intervening short runs” and, “adopting these (better, more fundamental stock selection and timing) strategies will gain a private advantage in the form of higher medium to long-term returns.”
Getting the timing right for a single investment for an entire bull market is a lot less fraught with mishaps than trying to catch every little twitch along the way. It is more profitable and less costly too.
- Second, we believe it is in the nature of humans to always recover from bad patches and to gradually pile into something good, transient or otherwise, taking it to excess before realizing the enthusiasm has been overdone. There are plenty of examples of repeating trends. Window dressing is one. Nine in ten times, stocks rise when Wall Street fund managers need to adjust the appearance of their performance at end of year.
- Third, people have short memories that cause the same mistakes to reoccur. Very few investment professionals take sufficient note of these phenomena, especially the broker-analysts and the forecasting communities that are driven by short-term prospects and gains.
Private investors misled by Wall Street
- Fourth, private investors perform most poorly. They are often misled by Wall Street’s bewildering and often contradictory headlines, like sheep to the slaughter. They repeatedly fail to understand Wall Street’s motives and the compensation mechanisms. This encourages overly short-term investing by the individual investor. Deliberately or otherwise, private investors are kept fully invested when they should not be. Instead of being warned not to follow crowds, less well-informed and more vulnerable private investors pile into stocks late in any upswing.
- Fifth among our answers: Without getting too technical, our system is based on massive focused research, testing and re-testing the returns that can be derived from adjusting our program’s range of trend-direction and measurement rules. The system uses what we describe as flexible trend lines. These automatically re-set when certain rules are influenced in specific ways by price movements. The rules give a buy or a sell signal only when an actual change in market direction is detected. Normal corrections are ignored.
- Sixth, it is impossible to reach perfection but our approach has brought us to the stage where the system’s monitoring and interpreting of price movements gives it the critical ability to ‘know’ when bull or bear markets have ended. No person or machine can forecast the future. The system merely sets limits that, when breached, show directional boundaries.
- Last, the system has required many years of painstaking effort to discover optimum solutions and consistently replicate results. To a certain extent, pioneer customers will need similar amounts of patience and discipline
While there may not be any such thing as a free lunch, we believe our long-term investor luncheon will definitely keep you well nourished!