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To: grey_whiskers
People who borrow what they cannot afford see their standard of living fall by a law of nature, not financial developments or government policy anything.

Americans as a whole have reduced their net savings rate to zero, and the trade deficit moved to negative 5% of GDP to replace those missing savings with imported capital. That zero net savings rate is composed of a modest class of savers, maybe a quarter, and a larger class of borrowers, maybe half, with a quarter or so not in either group.

No policy conceivable could possibly have prevented the currency of a nation acting in that manner and on that scale for half a dozen years, from falling, against both other currencies and commodity prices. The boom allowed temporary trading gains to outweigh the debts being contracted for it, as long as prices were moving rapidly in one predictable direction. But that was temporary, and as soon as those price increases drove long interest rates high enough, had to reverse.

Present commodity prices are a bubble, just like real estate 4 years ago and stock 8 years ago. Money doesn't literally "pile in" to an asset class, however. The amount of money is unaffected by people's trading actions and asset preferences - there is a seller for every buyer - and the commodities in existence likewise. Higher prices do call forth additional supply, at the expense of less urgent branches of production. But that is precisely a restoring force (eventually any high enough demand will create new supply that swamps it) and not a continuation of the herding preference that causes the price spike.

By generational sale I mean yes, that your sons and daughters might again see US financials this cheap in their lifetimes, but you will not. As for the knife adage, it is simply momentum traders looking in the rear view mirror. No one can call the turns in prices for this or that asset. But you do not need to call bottoms to profit from wild price movements. Momentum players using borrowed money think they need to, that any movement against them ever is ruinous. That is why they are condemned by mathematical law to lose in the end, as a group.

The solution is to call levels and not turns. If you know prices are in the bottom half of their cyclical range, you needn't care when they turn or whether their present direction is down or up. You just invest gradually, not all at once, and thereby achieve an *average* price for all you buy.

In fact, by mathematical law, if you invest the same amount per unit time in an asset bouncing around in price, you are certain to achieve a better than average price, and a better one, the more violently it bounces around. You are buying fewer shares when the price is high and more when the price is low, if you invest the same amount continually. If in addition you only turn this "on" in the lower half of price oscillations, you are essentially guaranteed far better than average prices.

The only real requirement is that the asset continue to exist later, or have a positive long term expected return, and that you can hold it as long as necessary without ever being forced to sell against your will, but a margin call or whatever. If you can't be forced to sell and got a better than average price, what do you care if the price is better still the day after tomorrow? You just buy some more.

Calling levels is consistently more profitable than calling timing, and it is much easier to do, in the sense of the level of skill required. It takes discipline, and an apparently rare contrarian mindset, and a longer time horizon than frantic day traders (or year traders - the average, pro or amateur, only holds a stock for 1-2 years, and over those periods they might as well go to Vegas and bet on a wheel).

9 posted on 03/19/2008 6:05:12 PM PDT by JasonC
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To: JasonC
I remembered you wrote this "levels not turns" and wanted to ask you about the nationalization of GM, and the 100-for-1 reverse split.

Do *you* think it's worth a gander for a couple of hundred bucks? Book value of plants, brand name, etc has got to be more than 1 cent per share...?


10 posted on 05/06/2009 5:09:30 AM PDT by grey_whiskers (The opinions are solely those of the author and are subject to change without notice.)
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