Jake Bernstein no bull investing_5

THE GENERAL INVESTMENT MODEL 83 time maximizing your profits. Perhaps I am overstating my case, but I will remind you that unless you learn the GIM and the tim-ing method presented in Chapter 7, you will likely fail in your efforts to become financially independent. The GIM is divided into five parts: 1. Historical pattern 2. Expectation 3. Confirmation 4. Action 5. Management While this model may not sound exciting to you at first, I think you’ll change your mind when you see the flowchart of the GIM in Figure 6.1 and a few examples. Each step in the GIM is dependent on the successful com-pletion of the previous step. If any step in the model is skipped or incorrect, the entire model will fail and you will lose money. If you correctly follow each step, you may still lose money, but your odds of making money are considerably higher than if you FIGURE 6.1 How the General Investment Method Flows Historical Pattern HISTORY Leads to an Expectation EXPECTATION That Must Be Confirmed CONFIRMATION After Which Action Is Taken ACTION and Risks Are Managed MANAGEMENT 84 NO BULL INVESTING do not follow the model at all. Each step in the model is fully ex-plained below. Now let’s take a look at the aspects of the GIM. Remember to keep an open mind and focus on the logic of what I’m saying— not on the ultimate application. And while you are doing this, I suggest that you clear your mind of what you may have learned elsewhere, because it will only confuse you. Historical Pattern What do I mean when I talk about a historical pattern? The simple answer is that every investment, every stock, every mar-ket, real estate, and relationships all have patterns. What is a pat-tern? There are literally hundreds of patterns in our daily lives and in the financial markets. Such patterns consist of repetitive price cycles, seasonality, day-of-week relationships, and market indicators. As an investor, you will want to follow the most basic patterns; however, as a preliminary example, consider the cycli-cal pattern in the stock market as shown in Figure 6.2. The chart shows the four-year cycle pattern in the U.S. stock market. As you can see, this pattern has run about four years in length from one price low to another. While the stock market does not follow the pattern perfectly, it does track quite closely. The idea of using a pattern is to help you get close to a turning point in the market. Patterns help you develop an expectation. It is en-tirely possible that your expectation will change as time passes. Remember that expectations are not realities and need to be con-firmed. Don’t take any action until an expectation is confirmed. As long as you know what to do with the expectation, you will fare well; however, if you allow the expectation to overcome your good judgment, then you will lose money in your investments. This is a very important point! Please remember it in all you do. THE GENERAL INVESTMENT MODEL 85 FIGURE6.2 The Four-Year Cycle in S&P Futures. This cycle chart shows my evaluation of the ideal approximate lows and highs of this pattern. As you can see, a cycle low was projected for late 2002 if the pattern is on time. An expectation is NOT a reality. It merely points you in a direc-tion, telling you what MIGHT happen. Never let your expec-tation of what MIGHT happen become transformed into the belief that it WILL happen. The outcome of an investment is never a certainty, and as long as you remember this, you will do well. This brings me to the next major topic—expectation. Expectation As I told you earlier, if you allow your expectation to influ-ence you to the point of believing that it MUST become a real-ity, then you are surely headed for trouble. Here is an example 86 NO BULL INVESTING of what I mean. Many investors believe that gold is a good thing to own in the event that there is political or economic instabil-ity, either at home or anywhere in the world. The idea that gold might be a good protective investment in such cases is a good one. Yet, the facts indicate that for many years gold has not been a good investment. Some people believe that whenever an inter-national situation threatens to escalate or encourage instability, their best defense is to buy gold mining stocks or gold in the form of coins. Their expectation, based on history, may be a good one. Their reasoning is sound, but it is based on the belief that international conflict or domestic problems always (or most often) cause the price of gold to go up. In actuality, this is not the case, because the situation is not that simple. The relation-ship between conflict, economic instability, inflation, or defla-tion and the price of gold is not 100 percent predictable. When investors buy gold in anticipation of a crisis escalating, and the price of gold fails to go up when the crisis actually devel-ops, then the only reasonable action is to get out of gold because the expectation, based on a historical belief, failed to material-ize. Yet, investors—especially in gold—often refuse to get out when their expectation fails to develop into a reality. They keep their gold as it declines for many days, months, and even years. They tie up their capital in a nonproductive investment, because they are convinced that their expectations will become a reality. And when the expectation fails to materialize, they refuse to abandon their ideas, failing to take their loss or break even. This is only one very small example of what happens when you allow an expectation to negatively affect your thinking and your actions. Perhaps the most glaring example of such a situa-tion was the recent Y2K bug and the “end of the world” hysteria that surrounded the coming of the 21st century. If you think back to that situation, you will recall that supposedly knowledge-able individuals in the government, scientists, economists, finan- THE GENERAL INVESTMENT MODEL 87 cial advisors, and the clergy all warned us of what might happen. While many individuals in positions of authority were moderate and acted sensibly so as not to alarm the public, others went on highly visible campaigns that literally scared the stuffing out of investors. These individuals advocated selling all stocks and the stockpiling of food, medical supplies, energy sources, and weap-ons. The predictions seem laughable, now that we look back on them. Still, there are those who made major preparations, who sold their homes, stocked up on supplies, changed their invest-ments, and closed their bank accounts. And when 2000 came and went with virtually no problems at all, they stubbornly re-mained with their losing positions, because they allowed their expectations to rule their sensibilities and failed to admit to their folly. Confirmation This brings us to the cure for expectation—confirmation. Yes, once we have developed an expectation based on historically valid patterns, we must have a method by which we confirm that the given expectations will become a reality. We need a method by which to improve the odds of our expectation actually devel-oping into the situation we had anticipated. There are a number of ways in which this can be achieved, ranging from the very sim-ple to the highly technical. I will discuss confirmation methods in detail in Chapter 7. Action Taking action is the next step in the sequence. Without action, nothing will happen. Yes, it’s true that you can’t lose money if ... - tailieumienphi.vn