An Idiot's Limit Order

I have a mini-library.

Many of the books in that library deal with portfolio theory and economics etc.

One book, a relatively new one, is written by Charles D. Ellis. It's called Winning The Loser's Game.

One thing that Ellis argues is that the individual investor will always struggle for profit, because commissions alone, place them in a hole. In short, before one can realize a profit on a trade, they must make up the commission - the commission to get in and commission to get out of a position.

The thing that I encounter daily with meeting or talking to individual investors is not so much the refusal to learn about basic trading, but the lunacy involved in their reasoning behind their trades. I talked to one guy who put in a limit order to buy a stock ABOVE the current market price!!! Gee, I wonder if he thought he was a big time trader. Who wants to buy a stock ABOVE the current market price? An idiot, that's who.

But then I remember reading something Ellis wrote in his book. He suggested that well over half of the trading in the market is done by institutions, so the likelihood of the idiot buying or selling to a big institutional trader is very high. And guess what? If the idiot is loaded, then the big traders will be waiting. And that is one reason why WallStreet hands out generous bonuses every year.

I would recommend that the idiots merely save their trading, put it on pause for a few years and simply write a check to WallStreet at the end of the year; put it in a gift box with a nice red bow and send it off to New York!

One thing I do know; everyone did not get 16% on their money last year.

Moody Women & Yield Inversions

I am really looking forward to another (much needed) holiday, although I do not believe our country has fully arrived at a point where we can understand what MLK was trying to communicate. But then again, MLK was lightyears ahead of most people.

Today, the wife is cranky (non-PMS) and this may be a sign for me to get lost. I have plans to go to the gym and may head to the bookstore later. Yesterday she said that I always warn her about my mood changes etc. and that she appreciates it. Whatever.

Late last night I completed an investment article for an international publication on fatherhood. I was surprised that I was able to write it without many revisions. The wife helped edit the article which is always better than doing it yourself.

The 16% that the Dow gave last year is like what the casino gives. But you must remember that the house has the edge, and unless you know what you are doing, the house will take it all back. The bottomline is that investors should rebalance.

The bond market is telling us that things are going to be a little different in 2007. You can see this just by looking at the 2 year Treasury versus the 10 year and 30 year. The inversion has been around for several months and cannot be ignored. Yield inversions, if you recall, tend to precede recessions. And from what I have been reading the evidence pointing towards a downturn in mid to late 2007 is compelling.

Fools Chasing Returns

I wrote a comment in a financial forum the other day about the perils of chasing last year's returns (or top performing asset class). A few days later, I had a conversation with a gentleman about how well the equity markets performed in 2006 and his reply was, "I guess I better reallocate my portfolio to indexes...aye?"

Then, today there was an article in a local paper that pointed out how profitable New Jersey casinos were last year and I thought, gee, the transfer of wealth continues; if it aint happening in the stock market, then it sure will happen in the casino!