The Yajnik Letter

If you’re a trader, you’re most likely a loser. That’s what a Journal of Finance study found. As the two Journal of Finance researchers said in their article, “Trading is hazardous to your wealth.” They studied over 66,465 online trading accounts for a period of six years, from 1991 through 1996. They found that the average trader’s returns were about 6.5% less than the overall market. That’s even worse than most mutual fund managers, who routinely do about 4.8% worse than the market.

Generally speaking, the more active the average trader is, the more he/she loses. For one thing, there’s too much competition. As a trader, you must compete against gigantic firms, like Goldman Sachs, that have billions of dollars of trading capital and armies of people sifting through mountains of information – information they often get before anyone else. Also, they are market makers and have the ability to place multiple trades before you even get one trade closed. Their executives are in touch with the highest levels of government around the world. No wonder traders do so poorly on average. Another thing is, most traders have no idea that they should use small position sizes and strict stop losses. They take huge risks against the Goldman Sachs of the world. So one bad trade can blow them out of the water.

There’s a much better alternative to getting involved in all this action. Building enormous wealth in the stock market is possible and chances are it’s not by following the herd or the likes of Wall Street, CNBC, and a zillion newspapers and magazines would have you believe. If you want to make money through investing, you should listen to and read about people who have actually done it. A few people that come to mind are George Soros, Jim Rogers, and Warren Buffet. Rogers wrote Investment Biker about how he drove around the world on a motorcycle looking for new investment ideas. He’s not sitting in front of a computer trading his online brokerage account all day.

Here’s what Rogers says you should do. “Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to. Then something will come along where you know it’s right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is. You’ll know when to sell again, because you’ll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you’ll make a whole lot of money.”

Billionaire investor Warren Buffett doesn’t day trade either. Like Rogers, he’s an investor. A few years ago, in Omaha, Buffet was interviewed about managing money. As usual, he gave simple, easy-to-follow advice that made sense. “Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.”

That just means you should keep your money in cash and wait for an investment to come along which you understand well, is safe, and looks like a winner. Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash and equivalents of more than $46 billion, equal to about 27% of the entire company’s current market value. That’s a boatload of cash. He’s been very active the past year or so, but he still keeps plenty of cash on hand. You should do that, too.

There’s just one problem with this simple strategy of sitting in cash and investing only when circumstances are ideal: human nature. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results in that Journal of Finance study, they really just want to buy and sell quickly, whether they make a fortune or not.

So, how does this apply to what I have been saying? I feel that our economy may have stabilized for now but there is still plenty to be worried about such as impending inflation due to our monetary policies, a mountain of commercial debt maturing over the next few years, and global economic uncertainty surrounding the major currencies (Euro, Pound, and US dollar) to name a few. All of this means that precious metals, class A real estate, and large globally dominant companies should prosper in years to come. This is why I have been recommending gold and silver since I started this website service over a year ago. With regards to keeping money in short term investments, I recommend straight up cash or large globally dominant companies with a strong dividend and a track record of increasing dividends. As for a play on the bashing that certain companies have taken over the past year or so, I have been recommending Citigroup but have advised, via my twitter account and the twitter feed on the right side of my homepage, to take some of the profits off the table and have a stop loss in place.

-Samir