Monday, March 21, 2011

We Love Silver But We Respect The Trends - Be Careful

NASDAQ versus Silver Monthly
The above chart helps illustrate the power of identifying a long term trend when it comes to building wealth. However, the following arguments could be made in regards to the above chart.
  1. The chart does not consider taxes paid or other investing fees.
  2. Hindsight is 20/20. We can't expect to pick the perfect day to trade.
  3. We don't all have 30 years to invest.
Let us address these comments individually:
  1. The chart does not consider taxes paid or other investing fees. The simple illustration above does not consider some costs such as taxes paid or trading costs, but it also does not consider the benefits of dividends from stocks or mining equities within a mutual fund. To clearly illustrate our point we wanted to keep the math very simple and easy to understand so we left out external considerations that both increase and decrease the end number.
  2. Hindsight is 20/20. We can't expect to pick the perfect day to trade. The above chart uses monthly price data and the profit would be larger if we had picked the perfect intra-month day to trade. Additionally we recognize that we cannot pick the ideal day, week or month to trade all of our capital from one investment to another. However, it may be reasonable to attempt to "dollar-cost-average" into positions over time near a perceived bottom, and "dollar-cost-average" out of a position near a perceived top. We do not expect perfect results but instead we try to locate multi decade bull markets and avoid multi decade bear markets.
  3. We don't all have 30 years to invest. This is a valid statement as many individuals may not live long enough to invest for 30 years. However, the above chart was meant to illustrate the power of the mega trends so we only used a modest initial investment of $10,000. Over a lifetime, investors will most likely invest more capital than $10,000, and that would increase their profit potential within a shorter period of time. Additionally, we try to identify intermediate term moves within the long term trends to help us identify lower risk entry and exit points within the mega trend. Our goal here is to maximize our profit potential from the major trend.
Basically, in the above chart we are trying to illustrate the power of identifying long term trends, investing in the bull markets, and avoiding the bear markets. In our opinion short term trading is a very difficult and time consuming skill to master. At the same time the indefinite "buy and hold" strategy concerns us as investors ride multi decade long term bear markets.
Instead of trying to guess what will happen day to day and moment to moment, we want to identify the major bull market trend in the markets. When we backup and look at the large macro moves, the smaller fluctuations seem rather trivial. Imagine if you could build significant wealth and spend more time focusing on your career, relaxing and enjoying your family. Imagine if you simplified your investment decisions instead of spending many hours of your day in front of a computer screen making various short term decisions.
So how about now? Commodities are doing great! Silver is up to about $36 from a low of around $4 in the early 2000's. You can't lose by putting your money in commodities right? Wrong. Although we think precious metals are eventually going much higher we are careful not to forget about the intermediate down turns that all markets go through.
We get nervous when investing in one asset class or another gets "too easy." Silver, gold and commodities in general have been "spiking" in price. Most people would agree that government money printing can only cause precious metals to rise further. In our opinion, this seems too obvious to be right from an intermediate term perspective. Additionally, the media has been focusing ever more attention on precious metals as they climb to new highs. In recent months we have seen three different instances of characters on reality TV shows "hunting for precious metals". We are aware of at least one reality TV show solely based on gold mining. Where was the media attention on precious metals in the 90's or early 2000's, when they were hitting lows? In our opinion, the time to buy any investment is when it is out of the spotlight and on "sale".
We suggest that when the market appears to be too obvious and too easy to predict because it continues to advance in one direction, it often means that a turn in the opposite direction is nearing.
Are we long term bullish on precious metals and commodities? You bet. In fact, we are probably more bullish than most. However, in the excitement of the current bull market move we are preparing for the new trend that will arrive sooner or later.

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