Thursday, August 23, 2012

Inside The Mind Of A Tuna: How I Invest & Why

Let me first begin by saying that I am a terrible trader. I don't purchase an investment in the morning hoping to sell at a profit later that afternoon (or even the next few days). If someone listens to what I am saying or happens to do something I am doing it is very likely that they will lose money in the short term.

My goal in making investments is to purchase assets that I believe are in long term secular bull markets when they sell off in price and when sentiment becomes very pessimistic toward those assets. I put short positions in place on asset classes I believe are in long term secular bear markets when prices rise significantly and sentiment becomes very optimistic in that asset class. For a simple discussion on why sentiment is important when making investment decisions see 2012 Real Estate Outlook: The Fall (2006 - 2011).

Here is a sampling list of some specific investments I believe are in long term secular bull markets:

Gold, Silver
Precious Metals Mining Shares
Oil, Agriculture, Water, Rare Earths
Specific Stocks Purchased Through These Currencies
Australian Dollar, Canadian Dollar, New Zealand Dollar
Brazilian Real, Asian Currencies

Here is a sampling list of some specific investments I believe are in long term secular bear markets:

Long term bonds
Most Stocks
US Dollar
Most Real Estate

I track the price of these items on a daily basis and then I read a tremendous amount of information to get a gauge on the sentiment level in each asset class.

That being said, let me walk you a simple step by step on how this year has played out looking through each one of my outlooks during the year. During each outlook I went through a long process of discussing my thoughts on the world and then provided a brief segment at the end of each talking about how I was personally investing.

January 3, 2012 - 2012 Outlook: How To Invest

On the sidelines raising safe cash

March 18, 2012 - Global Market Forecast: Conclusion

-Raising safe cash
-Began accumulating short position in market

June 2, 2012 - Second Half Outlook: Policy Response & How To Invest

-Closed short position on stocks
-Began purchasing silver and specific gold mining shares
-Raising safe cash

August 10, 2012 - Second Half Outlook Update

- Steadily accumulating precious metals, mining shares, rare earth stocks
- Preparing to begin accumulating short position on stocks if market continued to rise
- (Market continued to rise and short position was put on shortly after)

You can see, based on what I just discussed above, why I was making the decision on each of these investments. If stocks go up in price and everyone gets excited, not only do I run the other way but I put on a short position. If precious metals fall and everyone gets very pessimistic on the sector then I accumulate as much as possible (I was close to adding positions in agriculture and energy in June but prices and sentiment did not fall enough to trigger a purchase).

I don't look at technical patterns on charts. I have nowhere near a large enough ego to think I can beat a high frequency trading operation day trading in the market. If fact, I am positive that no human investor on earth can beat the machines on a minute to minute basis. This is why you do not hear about the long term success of the individual trader any more. They have a far, far, better chance making money out in Vegas.

I began purchasing precious metals again in June (after taking almost 2 full years off buying other than a very brief period in December of last year). During the last few months precious metals continued to fall, meaning my investments almost always lost money that day, the next day, and the next week. The prices kept falling, sentiment continued to worsen, the "bubble" calls were back in every segment of the mainstream media, and I kept buying. As I said, I am a terrible short term trader.

As I layered in my short positions into the stock market back in late March (and recently during the early part of August), the stock market continued to rise. My investment was down the next, day, the next week, and so on. I continued to purchase additional shorts.

Now the market has reversed. Stocks have fallen throughout the week and precious metals have rocket launched. Silver is up close to 10% on the week and the gold mining index, the GDX, is up close to 20% since mid July.

This does not mean that I get excited about purchasing more. I have stopped buying. Now that the stock market has fallen I have stopped purchasing additional shorts.

Can you understand how the psychology of that decision making is put into effect? As I stated, and I will state again, I am a terrible trader. However, looking at my portfolio over the course of the year it looks fantastic.

Does this mean it will look this way next week? Who knows. Precious metals may resume their downtrend, pessimism may enter back into the market, and stocks may begin their climb higher. What will I do? Buy more precious metals and continue to accumulate a short position on stocks.

The psychology is the exact opposite of the natural human instinct when making an investment decision. This is why most investors always buy high and sell low. Someone I have been helping with their portfolio over the last few years, after years of arguments and struggling with this concept, called me a few weeks ago and said he thought it may be a good time to short the market because of all the reasons I just described. I couldn't have been more excited. It finally "clicked."

Purchasing an investment should feel like the worst possible thing you should be doing when you make the purchase because of the psychological reinforcements you subconsciously receive on a daily basis through the media, friends, family, and the world around you. 

So what am I purchasing today?

Actually, just one thing. The Brazilian Real. One of the most hated currencies on the planet right now. It is down very close to the lows put in during the financial crisis of 2008. Where will its price be tomorrow or next week? Probably lower.

And I will buy more.

I am not a financial advisor. Please speak with one before making any investment decisions.

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