Book Review: The WallStrip Edge

I have long said that the underlying theme to all the greatest investment ideas is simplicity. Railroads connect geographic locations to facilitate commerce and travel. Cars get us from one place to another. Energy powers everything we need. Microsoft Windows makes computers functional for the masses. Google is our guide to searching the Internet.

In Howard Lindzon’s The Wallstrip Edge: Using Trends to Make Money–Find Them, Ride Them, and Get Off, Howard adds practical investing strategies to this core investment philosophy extolled by other world-class investors including Warren Buffett, George Soros, Peter Lynch, and Carl Icahn. The book is easy to read, full of fun stories, and Howard has an entrepreneurial spirit which will leave you excited and inspired to apply his advice.

If I was forced to summarize Howard’s book, I would say:

Ignore distracting opinions in the financial media so you can better see true trends as opposed to hyped noise. Once you spot genuine trends, follow up with due diligence on the company and stock. When the stock exhibits certain characteristics (you must buy the book for Howard’s secret recipe — see below), jump aboard and ride the train while using professional risk management techniques to take profits and cut losses.

The last part of the book is like bonus material. Howard offers his seasoned view on which trends he thinks are timeless, and others that seem to be on the cutting edge. This section gives readers a feel for Howard’s trend-spotting framework and sets the stage to find your next great investment candidates.

Most investment books claim to be for investors of all skill levels, but they are truly more suited for either beginners or pros. On the contrary, Howard’s book is actually a gem for beginners and pros alike. I would be equally comfortable recommending this book to my teenage cousin or a hedge fund manager. Both will walk away with value.

Lastly, Howard has his hands and cash in many interesting companies. I sat down with him (in the virtual world) to learn more about his ventures, how he got started, and some bright new prospects he has uncovered since publishing his book. You can read our exclusive interview in next month’s addition of my popular newsletter Wall St. Cheat Sheet. (Follow me on Twitter).

To purchase Howard’s must-read book, click the first link below ($16.49 new). To purchase the electronic edition for your Kindle, click on the second link below ($9.99):

Retailers on Viagra and Amazon’s Blindside Threat

The following article is a reprint from this month’s issue of SmartGuyDH’s popular newsletter Wall St. Cheat Sheet:

Retailers are performing better than Wall St.’s most pessimistic predictions. So, the stocks have helped fuel the recent rally. Regardless, this is truly a matter of “very shitty” outperforming “shittiest.” Thus, don’t get caught sprinting into the headwinds of continuing unemployment and increasing savings rates. Walmart (WMT) continues to be the only low-risk play in the sector.

The internet version of Walmart, Amazon (AMZN), has been a Wall St. darling lately. The killer app Kindle evolved to 2.0 and consumers are on a waiting list to sip a fine Pinot while caressing Oprah’s favorite new gadget. But, I think valuations (e.g., PE ~50) for the stock are now in the emotionally euphoric zone. Uber-cool Apple (AAPL) has announced a new tablet device launch sometime later this year, and those with a fetish for AMZN don’t seem to understand the implications. Read my lips: if AAPL releases a device with book reading capabilities like the Kindle, and they use content leviathan iTunes to sell digital books, AMZN shares will fall faster than Bernie Madoff’s reputation. Thus, AMZN may be a great day trading vehicle, but the risk-reward is not great for holding overnight.

The Retail Holders ETF (RTH) really transformed from limp to stiff this month. However, unlike my wife, they are not pregnant with anything special.

Viagra-style Move:

Earnings season should be a roller coaster ride for retailers. There will be real winners and losers. However, before making any long term investments, make sure your picks have strong business activity. Most people are piling into the sector simply because companies may start beating heavily reduced expectations. In other words, analysts have assumed something near a nuclear holocaust, so anything like a depression will “beat the Street.” Caveat emptor! It is better to be out of the market wishing you were in, than in the market wishing you were out. If you are not a short term trader, your time will come.

To subscribe to Wall St. Cheat Sheet and read the entire April issue, please visit wallstcheatsheet.com.

Book Review: Technical Analysis Using Multiple Timeframes

If you follow my trades and comments, you know I am more of a trader than investor. Given the recent per se deceit flowing from the mouths of government officials and CEOs, I have been spending increasingly more time honing my trading skills because investors (and the public at large) are apparently nothing but suckers.

I have learned this lesson perpetually since graduating during the dotcom bubble, experiencing the bubble’s implosion, watching Fortune 500 companies lie and steal (e.g., Tyco, Worldcom, Enron, etc.), realizing the Federal Reserve purposefully caused new bubbles in the housing and credit markets, and now witnessing the new wave of legal con artists at Bear Sterns, Merrill Lynch (MER), Lehman (LEH), Fannie Mae (FNM), Freddie Mac (FRE), et al. Rather than get angry and fill my days discussing moral hazards, I’ve decided to accept reality and enjoy myself while reading Brian Shannon’s Technical Analysis Using Multiple Timeframes.

First, let me preface my first book review by noting that I am extremely skeptical of marketing experts who sell trading systems and technical analysis products. However, I believe the Internet will allow a handful of successful investors and traders to build a loyal following if and only if said followers can make money. Brian is going to be one of those success stories.

When I first received Brian’s book, my wife joked, “How’s your textbook?” However, I think she was spot-on with her accidental compliment. Like a short textbook, Technical Analysis Using Multiple Timeframes is laid out in a very logical fashion and offers loads of practical knowledge. I would classify the book as intermediate level material, although it’s an excellent resource for technical analysis newbies.

For purposes of this review, the book has four sections. In the first section Brian introduces technical analysis, explains the four stages of a market cycle (accumulation, markup, distribution, and decline), and details the major variables in his methodology (price, support and resistance, trends, volume, moving averages, and time). In the second section he shares his secrets about how and when to buy long and sell short.

In the third section Brian addresses news and fundamentals concerning companies and their stocks, then he has a very nice intermediate/advanced analysis of short squeezes (and how to profit from them). In the fourth section he offers invaluable wisdom on risk management and exit strategies, his personal rules and insights, and an excellent conclusion entitled “Putting It All Together.”

It’s hard for me to go into too much detail because I don’t want to explain Brian’s system and defeat the purpose of reading the book. So, here are some core characteristics to consider:

• Brian is a pure trend trader. If there’s no trend, he ain’t trading.
• Brian possesses professional insights into market structure and the psychology of supply and demand.
• Brian is religious about risk management.

If you are serious about becoming a better trader or learning how to improve your buy and sell decisions, Brian’s book will pay for itself the next time you make a transaction. Unlike countless “classics” that spend 200 pages preying on our get-rich-quick tendencies, Brian skips the infomercial and delivers a practical framework we can use to make money or preserve capital.

If you are interested in purchasing his book or learning more, please visit:

Lehman Buyout Rumors Don’t Pass the Laugh Test

In the legal world, an incredibly illogical argument is said to “not pass the laugh test.” Last week an anonymous source told Reuters that the Korean Development Bank had Lehman (LEH) on their watchlist. LEH and shares of other financials rallied nicely on the news. However, no one stopped to question the absurdity of a savvy prospective buyer literally showing its cards to the entire world.

For those who did not take Econ 101 or Negotiations 101, here’s a quick primer:

If you are going to bid on an asset, do not tell anyone because then those people will buy in anticipation of the bid. As a result, the price will increase proportionally with increased demand, and you will be forced to pay a higher price for the same asset.

In this case, we are supposed to believe that a major financial institution would rather have everyone and their grandparents bidding up shares of LEH so Korean Development Bank could pay a higher price than they otherwise would have if they simply kept their mouth shut. For example, if the bank was planning to offer a 15% premium for LEH, they can either offer that premium on $12 or less, or they could offer that premium on $14 or more after alerting the entire world of their plans.

I honestly feel sorry for the average person who is investing their savings in the stock market on the bare trust that the financial media and SEC are actually doing their jobs. I’m glad longtime readers of SmartGuyStocks never buy on absurd rumors, but I can’t imagine how many hard working middle class folks bought LEH last week and are sad to see the results today. When Wall Street PR spin doesn’t pass the laugh test, those who are laughing hardest are those laughing their way to the bank as they pass the bag.

The Price is Light: Market Weighing a Skinnier Load

There is a famous American game show, The Price is Right, during which contestants attempt to guess the correct price of a certain item. The winning contestant guesses closest to the true price. A somewhat similar game is occurring with the stock market’s financial companies. However, rather than observing a familiar item and guessing the price based on a few simple known variables, many complicated and obscured variables affect the true value of financial companies.

Let’s attempt to play a simulated version of this game with the headlining stock Lehman Brothers Holdings Inc. (LEH). A little over a year ago, LEH was trading near $80 a share. The company was coming off a multiyear bull run and was profiting from investments related to the strong real estate market, the roaring global boom, and tons of private equity deals and IPOs. The market looked at LEH’s financials and imagined every investment providing superior returns, the global boom spiking without fail, and the deal flow continuing ad infinitum. Although none of those projections were connected to reality, they were included in the stock price nonetheless.

So, in our simulation we are now staring at a share of LEH trading at $80 in 2007. We are bright-eyed and having idealistic fantasies like parents do while staring at their newborn babe. LEH is our little darling. LEH can do no wrong. LEH is genius! We are guessing that the price of LEH is “right” at $80 - for sure.

While we are staring at our simulated computer screen enjoying the beautiful ascension of our darling, simulated LEH employees are making trades, signing contracts and checks for more projects, and marketing their services to prospective clients. As all the aforementioned booms started losing momentum, the quality of the then current deals began to erode. Long trades in real estate related securities started to sour. Deal flow came to a screeching halt. But all the while, LEH bulls kept demanding shares because they were living in a deluded intellectual world where LEH was invincible.

Last summer a handful of people snapped out of their daydream. So, LEH shares started to slide. Despite the mounting evidence that the boom had peaked, LEH management and their well-paid PR machine told the public, “Although you can’t see behind our veil, trust us that things are just fine.” And since most analysts, fund managers, and individual investors are too far removed from the company’s reality, they drank the Kool-Aid and guessed that the price for LEH was “cheap.”

This is the point when most people are simply investing based on the inertia of the market (e.g., “buy the dips”). Although any reasonably discerning person could find plenty of data to support that major problems were manifesting in the economy (if you are lazy read Barry Ritholtz’s brilliant blog The Big Picture), the inertia bots piled back into shares and kept them stable until February of this year. At that point, reality was harder to conceal and the protectors of the veil (e.g., CEO, PR team, Federal Reserve, National Association of Realtors, etc.) were forced to concede a host of problems. Thus, the next wave of sellers dumped their LEH shares.

Despite the concessions and selling, the protectors of the veil followed all their negative revelations with positive rhetoric and spin. They are, after all, trying to prevent us from accurately repricing the market all at once - because that’s what we call a “crash.” So, once again plenty of inertia bots started buying shares. As a result, we had a little rally from the middle of March until the middle of May. At that point, more of reality was revealed, and the next wave of selling began.

At this point, we are in the present moment: Monday, July 14, 2008. LEH has taken a hard beating down to $12.40. The mainstream media is finally reporting that LEH owns ghost towns and has an enormous amount of possibly valueless illiquid assets on their books. However, despite all the negative data about LEH’s reality, there are still people who continue to buy. And, despite those who continue to buy, the reality behind LEH’s veil has still not been fully disclosed - not to mention the economy is getting worse.

This same issue is true for the market as a whole. Although companies have revealed some things about the cancers growing on balance sheets, they haven’t revealed everything. And we definitely don’t know how much worse that cancer will be as the economy continues to slow. But, like contestants who know results of a reality show that was filmed but not yet aired, those who can see behind the veil are very well aware that share prices are not yet based on reality.

Legendary investor Benjamin Graham said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.” So, we will continue this classic Bear Market game where insiders are forced to give us nuggets of reality and prices reduce another leg based on weight. Then protectors of the veil will find a statistic or two and claim things are bottoming, and we will have another bounce based on votes. Maybe LEH execs will even consider going public to end the slaughter? But until we know everything and get to stare at the naked skinny horror behind the veil, LEH and the market will continue to be inaccurately priced as a heftier load. Therefore, I recommend staying out of this volatile market unless you are an incredibly skilled trader. As the maxim goes, “When in doubt, stay out.”

Stay tuned for SmartGuyDH’s upcoming article about how to play this market …

SGS Five Investing Pitfalls: #3 The One-Dimensional Thesis

Savvy investing is tough. Success requires solid due diligence and constant observation of the economy. However, many investors like to oversimplify a thesis and then buy-and-hold with total confidence.

Since last fall I have received many emails from readers who challenged my assertion that the bull market was finished. On December 31, 2007, I wrote an article Banking Crisis: No End in Sight. Some Seeking Alpha readers passionately argued that banks were in as little trouble as their CEO’s alleged - despite the troubling mortgage and commercial loan data I provided.

The constant theme I noticed was that some people bought into stocks like Wachovia Bank (WB) on the general thesis that finance is the engine of capitalism and therefore will be fine in the “long term.” This is the same bullish rhetoric I quoted in my article as stated by Rich Pzena of Pzena Investment Management (PZN): “Citigroup is everywhere. It is a massive global franchise that will grow in line with global financial growth …” Try to explain that to the poor investors and employees who have seen WB and C shares erase all gains from the past 16 and 10 years, respectively. That, my friends, is as “long term” as long term gets.

The lesson here proves that developing a general thesis is not enough. In fact, a general thesis is merely a starting point for the savvy investor. The next action step is due diligence, and the following step is constant monitoring of the situation. When investors execute step one and ignore steps two and three, multiyear gains can evaporate quicker than Lake Lanier during a drought.

I can tell investors are ignoring steps two and three when they tell me broad-based statements like, “WB is a steal at 40 because it’s already down over 20% from its highs,” or, “With WB’s dividend, you can just load up the truck and get paid to wait.” Wait for what? The stock to go to 15 and the dividend to get slashed or suspended? If you find yourself ignoring important reports displaying a company’s exposure to a major problem (e.g., WB’s exposure to toxic debt), you are deluding yourself into the land of hope and dreams. And once you start using hope as support for your thesis, your investing days are limited.

Another perfect example of the one-dimensional thesis is Whole Foods Market (WFMI). A very oversimplified thesis states that organics are a growing trend. True. WFMI was the first-mover in the space and delivered an excellent retail experience. WFMI also had nearly zero competition. With those supporting data points plus the awesome financial metrics, WFMI was a screaming buy.

However, over the past several years many world-class companies have entered the still growing market for organic products. Traditional grocers such as Kroger (KR), Walmart (WMT), and Target (TGT) created isles dedicated to organic foods, while other organic retailers such as Wild Oats and Trader Joe’s simply attacked the niche - and companies such as Safeway (SWY) and Publix (PUSH) did both. Thus, WFMI lost its first-mover advantage as well as its pseudo-monopoly (i.e., pricing power). Once you add food inflation, rising shipping costs, merger costs (Wild Oats), and decreasing consumer spending, WFMI looks like a very ripe target for multiple contraction and decreasing earnings. But the one-dimensional thesis (i.e., increasing demand for organics) is still intact. If you relied on this sound thesis without due diligence and constant observation, you probably watched 6 years of gains disappear like organic double-chocolate brownie samples on the bakery counter.

So, next time you find yourself conceding to cognitive dissonance and ignoring new data points, take a step back and make sure you’re not succumbing to the pitfalls of the one-dimensional thesis. If you are the preventative type (which I highly recommend), then apply your trusty three-dimensional framework - sound thesis, due diligence, and constant observation - during all your prospective and current investments and trades. The added dimensions will blow your mind when you preserve and grow your hard-earned cash.

Is the Fed Pandering or Too Late?

In case you were brilliant and went on vacation last week after raising 100% cash before Christmas, you may have missed the emergency Fed rate cut and the Britney Spears like attention on a rogue trader who nearly crashed the global markets. An interesting debate has emerged as to whether the Fed pandered to the equities markets and cut to stop the bleeding caused by the rogue trader, or whether the Fed applied “too little, too late” after the US equities markets already lost all gains made in 2007 and housing persists in free fall.

A few respected market commentators opined the following:

John Mauldin: Fed had to cut pre-meeting to break up the abnormally large reduction in rates.

Barry Ritholtz: Fed pandered to the markets.

Joseph Stiglitz: Too little, way too late.

I tend to believe that all three perspectives played a role. Nothing is black and white, and managing global market action is one of the more complicated pseudo-sciences in existence. I say the Fed offered too little too late because they should have used legislation and regulation to stop the mortgage market from expanding into an unsustainable ether (i.e., issuing debt to those who could not service it). I say the Fed pandered to the markets because they may have stopped what could have been a major market crash. I say the Fed broke up their cuts because one huge cut is too extreme for our analytical brains to digest (and, therefore, subject to harsh reactions).

I also add that Monday morning quarterbacking of the Fed is near worthless banter. First, the Fed can do no right because the media needs to dramatize everything. Thus, if the Fed did not cut, the market may have crashed and the Fed would have been blamed (note today’s WSJ front page article about Bank of England Chief King and the criticism he faces for letting markets unwind freely).

Second, what the Fed should and should not do is a philosophical issue (and largely depends on your personal asset allocation, job, etc.). The more valuable approach is to accept that the Fed exists, the Fed affects the markets, and we must determine how to plan our investment action steps as the Fed alters the landscape.

In the coming weeks SmartGuyStocks will discuss how the Fed action and other events signal what we can expect for markets in the midterm. But for now, we are still recommending bearish trades, raising cash into rallies, and nibbling at rare exceptions such as Pet Med Express (PETS).

Until then, we also recommend entertaining yourself with a fun Hollywood version of this week’s rogue trader debacle. The movie, Rogue Trader, stars Ewan McGregor (Trainspotting, Moulin Rouge) and is based on a similar true story from the late 90’s. (I guess that means rogue traders no longer qualify for the trendy label “black swan.”) Enjoy!

SGS Five Investing Pitfalls: #1 Going Long-Only

In Ben Stiller’s parody of the fashion industry, Zoolander, the protagonist possesses a critical flaw preventing him from regaining kingship of the runway world: Zoolander does not turn left. As an avid reader of the mainstream financial media, I have noticed a similar critical flaw: many of my peers do not sell short or buy puts. If the market can go up and down, we need to learn how to invest for up and down. Otherwise, we are like Zoolander or a car driver who turns only right: we lose ground when we need to go left. Thus, investors are not whole without shorts and puts.

I agree that shorting and buying puts has risks. However, I have read numerous recommendations in the financial media to buy homebuilders and banks while these industries are experiencing a crisis, and such buying has proven extremely risky (if not detrimental). On the other hand, short sellers and those buying puts of homebuilders and banks have crushed the markets with superior gains. SGS has achieved gains of 21.6%, 36%, and 65% selling short Build-A-Bear Workshop (BBW) and buying puts of Blockbuster Inc. (BBI) and Martha Stewart Living Omnimedia (MSO), respectively. Consequently, investors who only buy are stubbornly losing hard earned capital and opportunities to profit in down markets.

If you are not interested in selling short or buying puts, sit tight and relax in cash while waiting for the next bull run. You can do a lot of research on potential buys while the markets are down-trending - but you must also resist the temptation to go bottom-fishing. Bottom-fishing in a down-trending market is like shorting stocks in a high flying market: you can never predict how long the irrational trend will sustain from inertia (and it’s usually much longer than your stomach or investment account can handle).

I agree that cash is a poor investment for the long run. Money market returns are not strong in the face of core inflation at 3% and healthcare-energy-food-education inflation much higher. However, a 4% money market return may be stellar if the markets go negative. Many people forgot this golden rule of capital preservation when the dotcom bubble burst. I, for one, wish I had held more cash at the time.

In addition, if you are sitting in cash watching the market whip-saw, keep in mind you need only a handful of strategic investments to score superior returns. You do not need to continue investing every time you have spare cash. If you trade too often (from impatience or a tendency to enjoy the rush), you risk making many mistakes. If you trade too rarely (from paralysis by over-analysis or fear), you risk missing opportunities. The key is to be savvy and strategic rather than fall victim to these extremes.

For example, even if you sit out of the market for the next six months, if you grab shares of KBW Bank ETF (KBE) and end up doubling your money in 3-5 years, it will have been worth the wait. A wise ancestor of ours once noted that patience is a virtue.

At SmartGuyStocks we aim to maximize our return on investment (ROI). We are not interested in how many transactions you make (c.f., brokerage houses), we are not here to cheerlead the market and economy (c.f., mainstream financial media, government, Federal Reserve), we do not pretend to know the future (see above), and we do not stubbornly offer you one way (e.g., buy and hold) to play a multidimensional investment market.

We believe you are smart enough to follow what the market and economy tells you. We believe you can make money no matter which way the markets trend. We believe you have the discipline to step aside if things are too chaotic. And we believe you can have fun while beating the market and avoiding the herds.

If you have not already learned about selling short or buying puts, spend time surfing the web or reading some good books. If you don’t like what you read, no worries - cash is king when the market and economy starts to recover and excellent stocks are on sale. However, if you are interested in selling short or buying puts, stay abreast of what we are writing and put your toe in the waters with some small investments. As Zoolander would say, “you too can turn left!”

At SmartGuyStocks we hate leaving money on the table. Too often, popular beliefs about investing lead to that result. We have identified five common mistakes that investors make. Stay tuned for the next four installments of “SGS Five Investment Pitfalls.”

KudSiegStein: The Bagholder Bulls

Investors want to maximize profits and minimize losses. However, a three-headed monster has been created to use spin and logic tricks to keep the masses buying and holding while smart money sells or goes short. This monster is none other than the financial “buy, buy, buy” bobble-head known as KudSiegStein (AKA: Larry Kudlow, Jeremy Siegel, and Ben Stein).

KudSiegStein acts in three separate parts, yet mumbles in a singular voice. No matter the details of any individual article, interview, or show episode, the main message is “buy and hold for the long run.” The science and charts behind this message are simple: over the long term, stocks rise; therefore, keep buying no matter what, and time will smooth out everything in your favor. The more rigorous web surfer can find an amazon forest’s worth of literature proving why this investing philosophy does not maximize profits, but I simply want to point out some major reasons why you should ignore these ignoramuses.

First, KudSiegStein is never accountable for anything because its time horizon is forever. If you lose money in the market, you simply didn’t live long enough to see your stocks come back. If you are a real person living in the real world, this reasoning has no practical value.

For example, let’s look at the Nasdaq 100 index ETF (QQQQ). According to KudSiegStein’s strategy you should have bought the QQQQ like clockwork every month, quarter, or year when you took your paycheck surplus and invested. Let’s say you graduated college in 1999 and bought $10,000 at the beginning of every year starting in 2000 at 90. Then you invested $10,000 in 2001 at 60, $10,000 in 2002 at 40, $10,000 in 2003 at 25, $10,000 in 2004 at 38, $10,000 in 2005 at 40, $10,000 in 2006 at 40, $10,000 in 2007 at 42, and $10,000 in 2008 at 50. Today you would have a cost basis of 47.2 and the QQQQ closed yesterday at 48.18. That’s a 2% gain over seven years!! Other indexes may have fared better, but return on investment (ROI) depends on when and in what you invest, not on a one-size-fits-all buy and hold approach.

Second, KudSiegStein prides itself on being a red-blooded, patriotic free market capitalist, yet hypocritically begs for Federal Reserve and government stimulus. If someone has a major inconsistency in his or her guiding framework, find a new mentor. The internet has birthed an indie movement in finance for realists, so do not feel forced to swallow KudSiegStein’s manure in the mainstream media.

Third, KudSiegStein helps its elitist finance friends sell their bags to the masses when the business cycle slows or contracts. If KudSiegStein told you to sell when the smart money sold, then the market would fall much faster and KudSiegStein’s friends would lose more money than if you bought their bags on the way down. Moreover, retail brokers and finance media such as Charles Schwab (SCHW) and CNBC (GE) do much better in bull markets, so they want finance journalists pushing stocks as much as possible. Also, like all media, the finance media is tainted by press releases and publicists. Thus, KudSiegStein & Co. are not the objective market scientists they hold themselves out to be.

Fourth, KudSiegStein is comprised of a journalist (Kudlow), an academic (Siegel), and a game show host (Stein)! Kudlow is bullish because being bearish doesn’t get ratings, Siegel is pushing his ETF (Wisdom Tree Investments) and books, and Stein is making money in books and journalism too. Consequently, KudSiegStein has the tendency to get lost in theory, err in application, and be heavily biased on the bullish side. And as for the game show host, isn’t he inclined to treat your investments like a big game?

Lastly, but possibly most important, KudSiegStein has denied the housing crisis the entire way down. Only as of very recently has the permabull monster admitted issues with housing. I am not sure when interest-only “no doc” loans seemed sustainable to KudSiegStein, but such hogwash thinking discounts anything further it says about the economy or any asset market. In short, KudSiegStein’s lack of common sense has lost a lot of people a lot of money.

KudSiegStein is not completely flawed. Sometimes it has a few reasonable things to say. But don’t let its moments of reason fool you into blindly following this new age mass media monster. Otherwise you too will be a victim of the Bagholder Bulls.

SmartGuyStocks.com is holding a contest for the World’s Best KudSiegStein graphic art. Please email submissions to smartguystocks@gmail.com.

Caveat Emptor: Crystal Balls & Unicorns are Bad for your Health

Over the past two weeks, my favorite financial media sources have been vomiting 2008 prediction after 2008 prediction. So, I think this is a good time to address a few of the major flaws with annual predictions that encourage us to buy and hold investments for the entire new year.

1)     Economies and economic transactions do not know when one year ends and another begins.

Technically speaking, time is a convention used to measure relative changes in matter and energy. Where we draw our lines in the sand are completely arbitrary from a cosmic perspective. So, why all the fuss about reallocating assets and rebalancing portfolios for the new year?

This approach has no rationale. In fact, I think annual stock advice causes more harm than good because less savvy investors make broad stroke investments, hold through the inevitable unforeseen events, and open their eyes when it’s time to worry about taxes and holiday gifts.

Further, moving from May to June is just as meaningful as moving from December to January. For example, agribusiness (MOO) has not changed one bit because Santa Clause left the North Pole. The only businesses affected by a change in the month are seasonally dependent businesses. And we definitely cannot maximize seasonal trades if we only buy or sell in January.

2)     Global events can change drastically from week to week.

In 2007, Iran came into focus as a potential war combatant, and later fell out of the proverbial cross hairs. Putin in Russia (RSX) still had many fooled at the end of 2006, but is now openly viewed as ruling with an iron fist. In November, Africa (GAF) was one of the hottest new places to invest, yet by January they proved true change remains far off.

I raise these issues because many people will buy oil (USO) on the supply and demand thesis, but 2008 may bring news of a new major oil discovery at the hands of Chinese exploration companies. Or, a black swan such as An Inconvenient Truth will surface and raise immeasurable awareness of something on the periphery like renewable energy (PBW). A terrorist attack may occur at the Olympics, or a Republican may make the majority of US voters feel safe and fuzzy (something that apparently wins Presidential elections in the US). The point is: there are very few foregone conclusions in this grand global social experiment - and even fewer the longer the duration our predictions hope to span.

3)     Effects of major annual events are usually impossible to figure in January.

As noted above, the US Presidential election may be a closer race than currently portrayed. In 2003, the media was saturated with anti-Bush rhetoric and “We must change now” anthems. Nine to twelve months later President Bush surprised many. And look how Obama has charged ahead in a matter of weeks.

Will the world continue its affair with Chinese stocks (FXI) after the Olympics? Or will visitors realize the Great Dragon is actually version 1.0 rather than the 3.0 stocks and government controlled PR would have us believe? Will Monsanto (MON) continue to genetically modify the world’s food supply, or will an Indian or Chinese activist bring the biotech company to a halt?

I do not know the answer to these questions or anyone who does. I suggest the savvier investor cares not what the answers are so long as they are ready to react like a Zen Samurai master. Yet year after year I meet countless ‘annual prediction’ buy-and-holders who end up bag holders 12 months later.

4)     No one has repeatedly predicted in detail what will happen in the world or markets in an upcoming year.

Last but not least, the scientific method indicates that annual predictions are luck. Unlike contests based on skill, every annual stock market prediction contest has different winners and top finalists each year. I don’t know any psychics who have won the lottery multiple times or gamed the stock market every year - and if they exist, they surely don’t work in financial journalism or get much coverage. This fact alone should make you very skeptical of chasing “hot” fund managers or investing hard earned money in an annual pick from some guy in a $3,000 suit on the cover of Forbes or Barron’s (and the following year will bring new hot funds, faces, and suits).

Rather than leave you with an annual prediction I leave you with experiential wisdom: stay current while observing the world and you will better react as an investor. When trends arise, note their beginning and keep a close watch as they unfold. Do not assume that great ideas in January (e.g., buying puts of retailers) will remain intact later in the year. Do not assume that what worked during the previous 12 months (e.g., industrials) will work during the next 12. Change is a universal constant, and the best traders use this law to make superior profits.

Not many people can tell you what will happen next week let alone the entire year. So-called prophets of every generation have predicted the end of days during their life, yet to date all have been wrong. And how many people do you know with a working crystal ball or unicorn in their backyard? But who am I to say we won’t find some in 2008 …