Category Archives: Investment

Passive Investing Destroys “Price Discovery”


Courtesy Google Images


ZERO HEDGE published an article entitled, “Hedge Fund CIO: “Expect Enormous Losses In The Next Correction As There Is No Price Discovery In Index Investing”. According to that article,

The CIO [Chief Investment Officer] of One River Asset Management spoke on the one topic that is first and foremost on the minds of the active investing community: the unprecedented shift from active to passive management, and what it means for not only the industry, but for markets during the next “normal correction.”

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Posted by on April 21, 2017 in Economy, Investment, Market Panics, Uncategorized


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Wall Street Speculation [courtesy Google Images]

Wall Street Speculation
[courtesy Google Images]

One way to understand the difference between “speculators” and “investors” in the markets is to consider a Las Vegas casino. In the casino, there are basically two kinds of people: the gamblers and the casino owners.

The gamblers are constantly betting on the next throw of the dice, the next turn of the cards, the next spin of the roulette wheel. Their focus is on right now and the immediate present.

The casino owners aren’t generally concerned with the next throw of the dice. They’re concerned with “fundamental” truth that, statistically, the casino has a 1.4% statistical advantage in the game of craps. That means that, in the long run, out of every 100,000 throws of the dice, the casino will win 51,400 throws and the gamblers will win 48,600 throws.

Yes, there’ll be the occasional sailor who makes seven consecutive passes and wins a small fortune—but, long-term, the casino’s seemingly small 1.4% advantage is enough to guarantee that, long-term, the casino owners will become fabulously wealthy and—if the gamblers play long enough, they’ll lose every cent they’ve got.

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Posted by on May 1, 2016 in Investment, Speculation


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Goin’ Against the Flow

Contrarian [courtesy Google Images]

[courtesy Google Images]

This article expresses some of my notions on investing–especially in relation to the “buy low, sell high” mantra. reported in “Opinion: Almost no one believes the stock market will fall” that,


Everyone believes the U.S. stock market has reached a permanently high plateau. . . . A recent Investors Intelligence survey showed bearish sentiment is at its lowest since 1987 (13.3%). . . . short-sellers have nearly disappeared along with the few remaining bears. . . . the VIX (“fear index”) is at historic lows (near 12), which reflects investor complacency.

“Put another way, almost no one believes this market will go down.”


As I’ve repeatedly observed, the fundamental strategy for profiting from any investment is “buy low and sell high”. You buy an investment for $100 (when its price is low); you later sell it for $200 (when its price is high); you make a $100 profit.

Conversely, if you buy an investment for $100 (when you mistakenly believe its price is low) and later sell it for $50 (when the price is even lower), you’ll lose $50.

The theory behind the “buy low and sell high” investment strategy is obvious and simple.

In practice, however, “buy low and sell high” is complicated and hard to apply because it compels investors to:


1) it diligently and independently research the current and historical price of whatever stock they’re attracted to; and

2) act contrary to the “conventional wisdom” of mass of investors precisely whenever that “wisdom” seems strongest.

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Posted by on September 30, 2014 in Economy, Investment, stocks, Values


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Fact or Fantasy?

[courtesy Google Images]

[courtesy Google Images]

Yahoo! Finance reported in “The $1 trillion reason why Bernanke’s critics were wrong,” that:


“Last week, NYT columnist Paul Krugman penned an ode to his former Princeton colleague. ‘And there but for the grace of Bernanke go we,’ Krugman wrote, reflecting on Europe’s economic morass.

“On Monday, Bloomberg wrote that Bernanke’s critics missed out on $1 trillion in potential gains in Treasuries since 2008. ‘The resilience of Treasuries represents a rebuke to the chorus of skeptics . . . who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market’.”


But how “resilient” are US Treasuries if nearly 90% of those sold since A.D. 2012 have been purchased at full face value by the Federal Reserve?

What would the price of US Treasuries be if those Treasuries were only sold on the free market and not on a market dominated and manipulated by the Fed?

The reason the Fed bought those bonds is because the free market would only agree to pay a fraction of the bonds’ face value. Rather than let the free market “discover” the true value of US bonds, the Fed intervened to overpay and thereby support the illusion of US Treasury value.

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Two Competing Investment Strategies based on Two Opposing Premises

Savings [courtesy Google Images]

[courtesy Google Images]

A recent article in Mish Shedlock’s Global Economic Analysis declared in part,


“With central bankers globally suppressing interest rates, the [creditors’] search for yield elsewhere is on. One of the places investors have turned is speculative junk bond offerings.”


Here’s where I differ from such investors.  Those willing to invest in junk bonds believe it’s possible to reliably invest their wealth (fiat dollars) into some form of paper debt instruments (stocks, bonds, junks bonds, etc.) and recover an acceptable “yield” on their wealth.  Because the world’s central banks have reduced interest rates on what would ordinarily provide a positive yield (in bonds, for example), some investors seek “junk bonds” because they pay higher rates of interest.

From such investors’ perspective, they need only search though the various paper investments options until they find one that pays a positive rate of return.   If the option that pays the highest reasonable rate of returns is junk bonds, then they’ll invest in junk bonds.  If the option that pays the highest rate of return is stocks, they’ll invest in stocks.

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Posted by on May 6, 2014 in Gold & Silver Coin, Investment, Values


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