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Wealth Building Strategies

Richard Russell: Acting

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Posted by Richard Russell - Dow Theory Letters

on Wednesday, 09 March 2016 13:28

UnknownACTING: A few days ago a young subscriber asked me, "Russell, you've been dealing with the markets since the late-1940s. This is a strange question, but what is the most important lesson you've learned in all that time?"

I didn't have to think too long. I told him, "The most important lesson I've learned comes from something Freud said. He said, 'Thinking is rehearsing.' What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action."

This brings up another story which illustrates that same theme. J.P. Morgan was "Master of the Universe" back in the 1920's. Morgan belonged to many exclusive and expensive clubs. One day a young man came up to Morgan and said, "Mr. Morgan, I'm sorry to bother you, but I own some stocks that have been acting poorly, and I'm very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It's a terrible dilemma. What do you think I should do, sir?"



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Wealth Building Strategies

7 Keys to Building a Culture of Innovation to Foster Sustainability

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Posted by Eamonn Percy - The Percy Group

on Tuesday, 08 March 2016 11:02

c2794b04-7787-4f0d-a027-f25ce7d5ce49“Live in the sunshine.  Swim in the sea.  Drink the wild air.” – Ralph Waldo Emerson 

You want your organization to thrive because it innovates, not innovate to survive.  By building a culture of innovation into the DNA of both your leadership and organization, you become more competitively positioned and create greater long-term value.  Leadership must be persistent, aggressive and focused while transforming the organization, so innovation becomes the way you are, not something you do.  

The 7 keys to building a culture of innovation to foster innovation are:



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Wealth Building Strategies

The Art of Being a Contrarian Investor

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Posted by Tyler Bollhorn

on Saturday, 05 March 2016 10:36

Being a contrarian investor makes sense to many market participants.

Buying stocks when they are weak and selling them when they are strong takes a good deal of intestinal fortitude but can pay good returns if done properly. What separates many from success is not having a good understanding of what it takes to be a profitable contrarian. Here are my thoughts.

Simply buying an asset because it has dropped in price is a losing game. There are usually very good reasons for why a stock falls in price and not understanding the cause and its effect on price can leave the bargain hunter penniless. I expect that self proclaimed contrarians have lost their shirt buying bargains in the Energy sector over the past two years. Buying a stock that is at 50% of its high price is not a bargain if it is destined to trade at 10% - or even zero.

In that is the first lesson of contrarian investing. You can not justify a purchase by saying that the company used to trade at a higher price and therefore must go back up there again. The high price may have been irrational or the current business may not be strong enough to justify that higher price again in the future. Ignore anyone who says “You should buy XYZ Energy, it used to trade at $100 and now it is only $50!”.

Many investors have an emotional attachment to the companies they buy. Perhaps they made money on them in the past, maybe they have spent countless hours studying the company’s business, for some it is the company they work for and rely on. So often, these investors’ judgment of the future is based on an emotionally clouded vision of the past.

This leads to my next rule for contrarian investing. Never use old information to make investment decisions. This is actually a great rule for all investing – information that is out in the public realm has already been priced in to the market and therefore has no value to your decision making process. The only information that has value are facts that are not widely known and therefore not yet priced in to the market. If you are going to use information, you must have an edge that the general investing public does not have.

Since most investors don’t have access to better information than the public, the opportunity that comes with being a contrarian has to be based on something other than information. This leads me to the factor which provides the greatest opportunity in the market – emotion.

We have all heard how the market moves on fear and greed but I think few people know how to take advantage of it. First, we must define in market terms what fear and greed are.

Fear is what causes people to accept an irrationally low price for a stock. It is mostly the fear that the stock is going to go lower than it already has, bringing the panicked share owner to their knees and dumping in desperation.

Greed is what causes investors to chase a stock higher, up to prices that have no basis in the fundamental value of the company. In many ways, greed is just another form of fear – the fear of missing out. As stocks move higher, investors think about what could have been if only they had bought in the past and what could be if the stock continues on its upward trajectory. Greed causes bubbles.

Fear and greed are easy to spot if you are looking at a chart of the price history of a stock or market (or anything that can have its price history charted). They are both characterized by parabolic trends. Draw a straight line across the bottoms of a price chart in an upward trend and a straight line across the tops for a price chart in a downward trend. The parabolic trends occur when price runs away from the trend line, either far above the upward trend line or far below the downward trend line.

This leads to the first opportunity for the contrarian investor. Buy stocks that have fallen down and away from their downward trend line because it is likely that they will come back up to the trend line as panic selling wears off. Sell stocks that run up and away from the upward trend line because it is likely that price will come back down to the upward trend line when emotional buying wears off.

Here is a 3 year weekly chart of the Canadian Energy Sector ETF which shows four time when emotion took prices away from the linear trend line:

tyler contra

At Point #1, price went parabolic to the upside providing for a good time to sell when most investors were overly optimistic about Energy stocks. Points #2, #3 and #4 came when the price trend went parabolic to the downside before a quick snap back up to the downward trend line.

Trading these emotional extremes can give the contrarian good trading opportunities. You will see these on long term charts like the one I show above but also on very short term charts that more active traders can take advantage over as little as hours or a few days.

While emotion can give you quick profits as the market works its way back to rationality, the greatest opportunity comes when the trend changes. It is usually the most well informed investors who recognize the shift in fundamentals first and they leave a trail for us to follow.

As I have written many times before, there is a simple pattern for most trend line breaks. For down trend reversals, you must have a break of a downward trend from rising bottom. For up trend reversals, you need to see a break of the upward trend from a falling top.

Go back to the chart of Canadian Energy above and you will see the formation of the falling top at the start of September 2014 and a break of the upward trend line later that month. The sentiment in the Canadian market for Energy stocks was still positive but the chart was telling us that there were problems coming. A good contrarian timed the market with a sell on the group then.

“When will it be time to buy Canadian Energy again?” is one of the most common questions I get these days. You now have the simple tools to be a contrarian buyer of these stocks just by looking at the chart of T.XEG or which ever Energy stock you are interested in. Right now, price is below the trend line so it is not time to buy. That could change as soon as next week, or it might take much longer. All you have to do to answer the question yourself is watch for a break of the red line in the chart above and make sure the break comes after the formation of a rising bottom.

There are two ways to be a successful contrarian. First, take advantage of emotion by taking trades that go against the trend when price runs away from the trend line. That means buying when price falls rapidly away from a downward trend line and then starts to move up. On the sell side, take the trade when price runs in a parabolic curve up and away from the trend line.

The second way to be a contrarian is to take trades when trends reverse with the simple break of trend from a rising bottom (buy) or falling top (sell).

Neither of these methods work every time so you must always practice good risk management. If the market gives you a signal that turns out to be wrong, take the small loss and wait for the next signal. Trading as a contrarian is like every other kind of trading – it just a numbers game where you aim to make more when you are right than what you lose when you are wrong.



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Wealth Building Strategies

This Is the PERFECT Time to Generate Big Income

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Posted by Steve Sjuggerud - Daily Wealth

on Friday, 26 February 2016 06:42

We get it... you're worried. 

The bad news is easy to repeat: The market celebrated the New Year by stumbling down 9% right out of the gate... the worst start to a year ever. And it's still down 5% year-to-date... 

It's naturally concerning to get up every morning to see more red (negative) numbers on Yahoo Finance. 

But if you only take away one message from today's essay, we want you to understand... Nothing unusual is happening in the market

Declines of this magnitude don't signal the end of prosperity. They are normal market movements. If you hold high-quality, long-term investments in your retirement accounts... don't worry. Building wealth comes from holding for the long term – including through market dips. 

But what about options trading? What does the recent market volatility mean for the kind of short-term trades we open in my newsletter, Retirement Trader

The good news: Right now is an ideal time to trade options the way we do... With this correction, we have a greater opportunity to profit

Below, I'll show you exactly what I'm talking about. We'll take a close look at how the market really works. You'll see that even though the news makes it sound like the world is ending, the market is behaving normally...

By our count, from 1950 to 2015, the market experienced 47 pullbacks of 5% or more, 40 "corrections" of 10% or more, and 11 "bear markets" of a 20% drawdown. (In the unofficial vocabulary of Wall Street, a "correction" is a 10% fall and a "bear market" is a 20% fall.) 

The following chart tells the story:

sN-94418926-1

This tells us a few things. First, the correction that we're experiencing right now is normal. It happens about every 1.6 years (though not on a set schedule, of course). 

Second, it's extraordinarily difficult to "trade around" these normal market movements. 



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Wealth Building Strategies

Richard Russell: The Perfect Business

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Posted by Richard Russell - Dow Theory Letters

on Thursday, 25 February 2016 12:57

AH PERFECTION: Strange, but the most popular, the most widely-requested, and the most widely quoted piece I've ever written was not about the stock market -- it was about business, and specifically about what I call the theoretical "ideal business." I first published this piece in the early-1970s. I repeated it in Letter 881 and then again in Letter 982. I've added a few thoughts in each successive edition. But seldom does a month go by when I don't get requests from subscribers or from some publication or corporation to republish "the ideal business." So here it is again -- with a few added comments.

I once asked a friend, a prominent New York corporate lawyer, "Dave, in all your years of experience, what was the single best business you've ever come across?" Without hesitation, Dave answered, "I have a client whose sole business is manufacturing a chemical that is critical in making synthetic rubber. This chemical is used in very small quantities in rubber manufacturing, but it is absolutely essential and can be used in only super-refined form. 

"My client is the only one who manufactures this chemical. He therefore owns a virtual monopoly since this chemical is extremely difficult to manufacture and not enough of it is used to warrant another company competing with him. Furthermore, since the rubber companies need only small quantities of this chemical, they don't particularly care what they pay for it -- as long as it meets their very demanding specifications. My client is a millionaire many times over, and his business is the best I've ever come across." I was fascinated by the lawyer's story, and I never forgot it.

When I was a young man and just out of college my father gave me a few words of advice. Dad had loads of experience; he had been in the paper manufacturing business; he had been assistant to Mr. Sam Bloomingdale (of Bloomingdale's Department store); he had been in construction (he was a civil engineer); and he was also an expert in real estate management. 

Here's what my dad told me: "Richard, stay out of the retail business. The hours are too long, and you're dealing with every darn variable under the sun. Stay out of real estate; when hard times arrive real estate comes to a dead stop and then it collapses. Furthermore, real estate is illiquid. When the collapse comes, you can't unload. Get into manufacturing; make something people can use. And make something that you can sell to the world. But Richard, my boy, if you're really serious about making money, get into the money business. It's clean, you can use your brains, you can get rid of your inventory and your mistakes in 30 seconds, and your product, money, never goes out of fashion." 

So much for my father's wisdom (which was obviously tainted by the Great Depression). But Dad was a very wise man. For my own part, I've been in a number of businesses -- from textile designing to advertising to book publishing to owning a night club to the investment advisory business.

It's said that every business needs (1) a dreamer, (2) a businessman, and (3) a S.O.B. Well, I don't know about number 3, but most successful businesses do have a number 3 or all too often they seem to have a combined number 2 and number 3. 

Bill Gates is known as "America's richest man." Bully for Billy. But do you know what Gates' biggest coup was? When Gates was dealing with IBM, Big Blue needed an operating system for their computer. Gates didn't have one, but he knew where to find one. A little outfit in Seattle had one. Gates bought the system for a mere $50,000 and presented it to IBM. That was the beginning of Microsoft's rise to power. Lesson: It's not enough to have the product, you have to know and understand your market. Gates didn't have the product, but he knew the market -- and he knew where to acquire the product. 

Apple had by far the best product in the Mac. But Apple made a monumental mistake. They refused to license ALL PC manufacturers to use the Mac operating system. If they had, Apple today could beMicrosoft, and Gates would still be trying to come out with something useful (the fact is Microsoft has been a follower and a great marketer, not an innovator). "Find a need and fill it," runs the old adage. Maybe today they should change that to, "Dream up a need and fill it." That's what has happened in the world of computers. And it will happen again and again.

All right, let's return to that wonderful world of perfection. I spent a lot of time and thought in working up the criteria for what I've termed the IDEAL BUSINESS. Now obviously, the ideal business doesn't exist and probably never will. But if you're about to start a business or join someone else's business or if you want to buy a business, the following list may help you. The more of these criteria that you can apply to your new business or new job, the better off you'll be.

(1) The ideal business sells the world, rather than a single neighborhood or even a single city or state. In other words, it has an unlimited global market (and today this is more important than ever, since world markets have now opened up to an extent unparalleled in my lifetime). By the way, how many times have you seen a retail store that has been doing well for years -- then another bigger and better retail store moves nearby, and it's kaput for the first store. 



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