Throw Out The Calendar, Invest By The Rules

Individual investors can find many ways to lose money in the stock market, but the most frequent is their tendency to buy-high and sell-low. It’s human nature. We get more confident when things are going well, and we become cautious and fearful when they’re not. So we load up on stocks when the CNBC talking heads are cheerleading the latest highs in the market, and we sell when their tone leaves little doubt that Armageddon is just moments away. Sadly, this natural tendency is exacerbated by the stock market’s unfailing ability to rocket too high and plummet too low. With all due respect to the oft-repeated fallacy regarding the market’s efficiency, there’s always a bubble somewhere and the popping is getting louder and far more frequent.

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"Accidental" Gold Discovery Is 24-Carat Scam

You can imagine my excitement when I received the envelope with 24-point type telling me that an "Accidental Gold Discovery in Arizona Baffles Top Geologists." But even better, the stock being promoted — Gunpowder Gold — was anticipated to surge 369% in the next 3 weeks, "with potential gains as high as 1,333% to follow." I was a little taken aback that Tim Cole, the editor of Secret Gold Stocks, had made the rookie mistake of naming the stock on the outside of the envelope so anyone could share in this unprecedented opportunity. But, hey, the guy is an investment genius not a marketing genius.


Inside, the 16-page newsletter was jam-packed with tidbits that would help me "lock in massive potential profits" with "one of the most spectacular American gold plays that ANYONE has seen in more than 14 years" and I was urged to avoid "one of the biggest mistakes inexperienced investors make [by] acting too late."

I was so excited about the opportunity that my fingers were too nervous and jittery to even place the online trade order — at which point I feared that Mr. Cole was correct. I had delayed too long and lost my chance to party like a gazillionaire. But I still had an opportunity to subscribe to Mr. Cole's newsletter for only $949 per year. That was about $949 more than I felt it was worth, so I passed on that as well.

Fast forward to today, three months later. Gunpowder Gold, which had been trading at $1.05 when the envelope arrived, is now at 0.48. The good news is that now I can buy twice as much for the same price. The bad news for Mr. Cole is that I read the fine print. I learned that parties affiliated with Gunpowder Gold paid Mr. Cole $600,000 to tout the stock. Mr. Cole stresses that "this inherently makes the report biased" and his publication "is not, and should not be construed to be, an offer to sell or a solicitation of an offer to buy any security."

Inside, the 16-page newsletter was jam-packed with tidbits that would help me "lock in massive potential profits" with "one of the most spectacular American gold plays that ANYONE has seen in more than 14 years" and I was urged to avoid "one of the biggest mistakes inexperienced investors make [by] acting too late."

I was so excited about the opportunity that my fingers were too nervous and jittery to even place the online trade order — at which point I feared that Mr. Cole was correct. I had delayed too long and lost my chance to party like a gazillionaire. But I still had an opportunity to subscribe to Mr. Cole's newsletter for only $949 per year. That was about $949 more than I felt it was worth, so I passed on that as well.

Fast forward to today, three months later. Gunpowder Gold, which had been trading at $1.05 when the envelope arrived, is now at 0.48. The good news is that now I can buy twice as much for the same price. The bad news for Mr. Cole is that I read the fine print. I learned that parties affiliated with Gunpowder Gold paid Mr. Cole $600,000 to tout the stock. Mr. Cole stresses that "this inherently makes the report biased" and his publication "is not, and should not be construed to be, an offer to sell or a solicitation of an offer to buy any security."

Article first published as "Accidental" Gold Discovery Is 24-Carat Scam on Technorati.

Will The Real Ford Earnings Stand Up

Ford released its Q4 and full-year 2010 earnings this morning, and it serves as a poster child for the media's determination to turn everything into a good-news/bad-news, black-or-white headline. The New York Times article proclaims that "Ford Reports Largest Profit in 11 Years." Wow, that's pretty darn good. But then why does the WSJ report that "Ford's 4th-Quarter Profit Falls 79%"? How is such a dichotomy possible in an age where everyone has instant access to every conceivable data point? Well, as gravelly voiced Tom Waits tells us, "the large print giveth and the small print taketh away." So the small-print story of Ford's quarter is that the company took a one-time charge related to the conversion of debt. If you choose to focus on that event, which served to reduce debt and cut annual expenses, then the quarter was bad. If you exclude the one-time charge, Ford had a blow-out quarter. In either case, the moral is to not buy or sell Ford based on a single quarter: but especially don't buy or sell based on headlines.

Article first published as Will The Real Ford Earnings Stand Up on Technorati.

Don’t Buy into the GM IPO Even If You Can

There’s been a lot of angst and gnashing of teeth in recent days about the likelihood that average investors will be shut out of GM’s forthcoming IPO. The very fact that this is newsworthy shows how little understanding there is in the media and among individual investors about how the IPO process works.

IPOs are universally viewed as the sexiest way to play the stock market. They’re also the riskiest, least understood and most fraught with hyperbole. Nonetheless, most individual investors would do pretty much anything to get a piece of the action -- even for a suspect post-bankruptcy company like GM -- and that’s a serious mistake.

An IPO refers to the process of a private company converting to a publicly traded company by selling stock to individual and institutional investors. IPO companies are usually younger and smaller companies in need of additional capital to expand. The less politically correct reason for an IPO is to pay back the venture capital firms and angel investors who supported the firm during its early years. Similarly, an IPO allows the companies’ founders to monetize their ownership stake. These are the folks who become instant millionaires on IPO day. The people who buy stock in the IPO are rarely as lucky.

Notwithstanding the speculative nature and relatively poor performance of IPO companies, investors excitedly line up to buy shares. Fortunately for them, most investors are excluded from the process. As explained on the Securities and Exchange web site (www.sec.gov), brokerage firms usually “sell the IPO only to selected clients. For example, before you can purchase an IPO, some firms require that you have a minimum cash balance in your account, are an active trader with the firm, or subscribe to one of their more expensive or ‘premium’ services.” This is a key point because it highlights the unwavering truth about IPOs: If the average investor is offered an opportunity to buy an IPO, it means that the smart money has declined -- and you should do the same.

That’s why most individual investors can’t participate in the GM IPO. It’s not part of a government conspiracy, and no valid argument can be made that this IPO should be different simply because the U.S. taxpayer bailed out GM. In truth, most retail investors would have no idea what exactly they’d be investing in other than the GM brand name (which has lost most of its former luster). I’d bet your right arm that the average investor who desperately wants a piece of the GM IPO wouldn’t be able to answer basic risk-management questions like what are GM’s normalized earnings, what is the firm’s global strategy, how will long-term pension funding requirements affect earnings, etc.

Anyone who’s still interested in buying the GM IPO is advised to remember this sage advice from Groucho Marx: “I don’t care to belong to any club that will have me as a member."

So if you can buy the GM IPO, don’t. If you can’t buy it, follow the stock in the weeks and months after the IPO, wait for the price to settle at fair value, and make a decision to buy or not based on logic and intellect rather than emotion and an artificial sense of urgency.

Article first published as Dont Buy into the GM IPO Even If You Can on Technorati.

Apple's Apt App Language & Why It's the Apple of Our Eyes

Apple recently released a revised set of guidelines for apps sold in its App Store for use on iPhones, the iPod Touch, and iPads. As opposed to the mind-numbing legalese that would likely have been used by the Intels and Microsofts of the world, Apple's approach was entertaining and engaging.

For example, Apple writes that “We have over 250,000 apps in the App Store. We don’t need any more Fart apps. If your app doesn’t do something useful or provide some form of lasting entertainment, it may not be accepted.”

How many S&P 500 companies have ever used the word "fart" in any public document?

The Apple guidelines go on to state that “We will reject apps for any content or behaviour that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, I’ll know it when I see it. And we think that you will also know it when you cross it."

Apple is winning because the company does indeed think different. Or perhaps it's simply that the company thinks.

Over-Reacting to Mosques, Children and Investing

I live in Wellesley, Mass. -- a suburban town best known as the home of Wellesley College and Babson College, as well as a pioneering recycling program. But now Wellesley has been thrown into the whole anti-Muslim, Mosque-paranoia debate. Why? Because a middle school class that was learning about world religions visited a local Islamic Community Center and -- drum roll please -- a few kids chose to kneel during a prayer session. The video shows up on YouTube and now Fox, CNN and the ultra right-wing "American Thinker" are having a field day denouncing the "indoctrination" of these innocent children. Interestingly, the visit occurred back in May. No one in Wellesley was at all concerned about it -- especially considering that similar visits were made to Christian, Jewish and Hindu places of worship. But in today's America where citizens routinely paint Hitler mustaches on our president and denounce socialism while gladly cashing their social security and unemployment insurance checks, hate-mongering rules the day and an innocent act can be twisted into a disingenuous battle cry for life, liberty and the American way. Very sad.

So what does any of this have to do with the HardWorkingMoney approach to investing? Simply that similar over-reactions to news and rumors occur every single day -- providing fodder for a parade of CNBC and FoxBiz talking heads. Mark Hurd gets fired by Hewlett Packard for cause, and the stock is down about 15%. Hurd was not a particularly good CEO -- certainly not in a league with Steve Jobs, Jamie Dimon or Alan Mullaly. But investors over-reacted. The Apple "antenna-gate" nonsense was another example, as were the recent huge drops in companies like Teva and Qualcomm based on "news" that was misinterpreted just to make news.

And that's the key point. Radio talk shows, newspapers, and cable TV have to fill their 24/7 formats with news. And sometimes -- or almost always -- there's not enough real news to suffice. So the solution is to make up news, bloat non-stories into propaganda-like horror stories, and focus more on talking rather than educating and informing. So be careful what you read and hear, be careful to interpret it correctly, and you can make a fortune in the stock market and be a better citizen of the world.

How Does Peter Schiff Live With Himself?

I'm sure he's nice to children and dogs, but Peter Schiff has to be the most self-serving economic analyst in the history of talking heads. First off, please note that the name of Schiff's company is "EuroPacific Capital." Then note this recent verbatim comment from Schiff: "It's patriotic for Americans to invest abroad." That would be like Tiger Woods saying that "I cheated on my wife because I loved her so much."

It's also interesting that he makes this ridiculous comment from a Connecticut mansion with a maid working in the background and a pool and tennis court in the backyard. Looks like America-bashing has been very profitable for this Tea Party favorite.

Schiff sees the day when tens of millions of Americans will want to flee the country but, oddly, he never mentions where they might go. I would love to know the country that would welcome an onslaught of Tea Party crazies who can find nothing but fault in the greatest country the world has ever known.

Schiff believes that things will get very bad in this country and people will want to leave but it will be illegal to leave with your money or gold. So guess what? Schiff offers clients the ability to buy gold and have it stored in an Australian firm he partners with. The man is brilliant -- a brilliant shill.