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The Alchemist (01/12/2011)
By Al Thomas

INVESTING IN 2011

Everyone, just about everyone, is predicting 2011 is going to be

a good year. The economy is coming back. No one and I mean every one of those mavens thinks he knows for sure. Don’t believe it. What if they are wrong.

The mutual fund managers are loading up based on standard methods of analysis they have used in the past. Last year was a good year so why not do more of the same.

This is called a linear approach. A straight projection of past experience. It is an arithmetic approach to a possible logarithmic problem. Don’t stop reading yet.

Arithmetic or straight line thinking is like driving on a flat road in a straight line at 50 miles per hour with the driver always expecting the road to be flat with no hills or curves. If a hill, curve or valley suddenly appears the driver may crash. This is what happened to investors in 2000 and 2008. They could not adapt to the new conditions.

Our present money managers got their damaged vehicles back

on the road and now are steering with the idea the road ahead is again straight and flat and will remain so. In order to make up the time lost off the road the driver has increased the speed. The driver refuses to understand there might be another curve ahead.

Let’s see a quick look at the difference in the stock market of arithmetic and logarithmic results. Your stock went up 10 points.

Congratulations. If you bought it at $10 and it went to $20 you would have a 100% profit on an arithmetic scale. If you bought it for $100 the profit would be 10% on the logarithmic scale. Each had the same $10 gain, but the increase was huge for one and so-so for the other.

For a true return the investor should be using the logarithmic answer. When a portfolio has a 50% loss it requires a 100% profit to get back to “even”. Few portfolios from 2000 or 2007 are “even” today not counting additions.

In order to reach the destination the driver must realize the road

will not always be straight and flat. The driver must be ready for “S” curves and steep grades both up and down. He can slow down or speed up providing he has a strategy that is proven to work.

The most important part of any investment for the stock market is an exit strategy. Without it no investor will ever make money. The secret of the market is not buying; it is knowing when to sell. Each year his portfolio should have a percentage increase not counting any additional funds.

Your broker might say your account went up $5,000, but what you want to hear is what percent did it increase.

The smart investor will do research at the library or on the Internet to select an exit strategy that will fit his personality. Don’t rely on any broker or fund manager. It is your money, not theirs. Unless the investor learns to protect his money he will not see his funds grow.

Al Thomas’ new book, “If It Doesn’t Go Up, Don’t Buy It!”, 3rd edition, has helped thousands of people make money and keep their profits with his simple 2-step method. The method made 10% during 2008. Read the first chapter at www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2011 Williamsburg Investment Co. All rights reserved.

 

 

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