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How much insurance cover do you have?

I did a stocktake over the weekend. It turns out my loved ones has nine policies. You can include an extra couple if you consist of indirect cover.

Our insurance addresses everything from home to business…life to health. There’s something for everybody.

This level of cover doesn’t arrive cheap. The combined cost is thousands of dollars annually.

Some may state this is over the top. They could dispute the odds of the sky falling in are low. And they’d be right. The worst outcome rarely happens.

But sometimes the longshot gets up. This is where insurance pays its way.

You can insure just about anything these days. The key is deciding how far to go.

I have a strategy for making this decision. I call it the ‘what if’ test.

This is how it works. I ask myself what if the most detrimental was to happen. If I am prepared to live with the monetary outcome, I do nothing. But if not, then I insure. It’s as simple as that.

Let me provide you with an example.

Insuring a six figure bonus

Investment banks have a reputation for paying big bonuses. My former company — Bankers Trust — was no exclusion. Six figure bonuses were common. Some were higher still.

My most profitable year in the bank was 1998. A number trades had done very well. And I was on track for the greatest bonus of my career.

But there was a problem.

The markets had been on edge. An economic crisis was unfolding in Russia. Also it was sending shockwaves around the world. There was a real fear stock markets could fall hard.

Rumours had been circulating that my company was in financial trouble. A number of big bets on rising markets had gone south. There is a sense that the bank might not see out the year.

The collapse of a high profile hedge account didn’t help. This place extra pressure on a unstable situation. My concern had been the bank would go under when the markets sold off. That would be end of my bonus.

Insurance companies will give you cover for many things. Regrettably, bonus cover is not one of them. I had to tailor my own insurance package.

So I got creative. I purchased put options on high priced stocks. The logic was that if the markets crashed, my personal put options would rise in value — and cover the likely loss of my bonus.

It was an imperfect hedge. However it was better than nothing. For a few thousand dollars, I had a lot of safety if stocks took a dive.

Well, a crash didn’t eventuate. Bankers Trust made it through the 12 months. And I got my bonus.

The options were a write-off…they run out worthless. But that’s okay. It is a good year when you don’t need a payout on your insurance.

But my fears were real. My employer didn’t last considerably longer. Deutsche Bank took it over the following year.

Insurance is a key technique for managing risk. It’s your backstop for when things don’t go to plan.

Quant Trader offers two inbuilt insurance mechanisms. The first is the exit stop. Think of this as basic cover. It gets you out when a inventory falls. The money you shed is effectively your insurance coverage excess.

The next level of cover is more exotic…and it isn’t for everyone. This is short selling. The aim is to make money once the market falls. This should act as a buffer for losses on long trades.

The figures that count

Last week you saw the performance of long trades. Now I’ll consider the shorts. This will give you a obvious picture of how Quant Trader‘s insurance strategy is tracking.

But first, have a look at the next chart. It’s the All Ordinaries over the period Quant Trader has been giving live signals…

There are three distinct periods:

1. Stocks sell-off into mid December
2. There is a strong rally into the April high
3. A five month (and keeping track of) correction kicks in

Now check out the overall performance of Quant Trader‘s short trades.

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This exhibits the hypothetical performance associated with Quant Trader‘s short signals. It assumes $1,000 on every short signal. There is no allowance for costs.

Again, you can see the three periods. The insurance policies are working hard in periods 1 and 3. This requires the pressure off losses through long trades.

Period 2 shows a loss. This is when the market is actually rallying. Shorts will typically be considered a drag on performance during these occasions. That’s the price of insurance.

Let me say that Quant Trader is not a standalone technique for trading short. The system makes most of its profit via buying shares. So don’t be concerned if you’re not comfortable with shorts.

But shorting is a worthwhile strategy for some investors. It takes the edge off lower periods. This tends to smooth out performance over time.

Most people insure their own car and house. A sizable majority also have private health cover. But fewer people think about cover for their share portfolios.

Insurance isn’t a free ride. I’ve paid much more within premiums than I’ve collected over the years. And that’s a good thing. Insurance coverage is a plan for the worst. It’s something I hope not to call upon.

Until next week,

By Jason McIntosh

Editor, Quant Trader

Editor’s note: If you don’t understand which stocks to brief, then Quant Trader can help. The system’s algorithms are constantly scanning the marketplace for vulnerable stocks. It will then issue a sell sign, and calculate a unique stop-loss.

Just a few days ago, Quant Trader identified a high profile chance. This stock was a shining star of the bull marketplace. Its shares soared by over 300%. But now the trend is gloomier. This market heavyweight has potentially a long way to fall. There is still time to get short…but hurry.

You can learn more about Quant Trader here.

I’ve come up with a new way to buy stocks. You could almost contemplate it a game. I call it ‘Stock Showdown’.

The rules of the game are this particular:

I present you with two stocks. I’ll give you some information about these stocks. Once you’ve seen the information you have to choose which one you’d like to put your money in. Simple.

There’s 1 catch though. I won’t tell you who the companies are. You have to make your decision purely based on facts.

This way there’s no emotion attached to your choice. No bias, no preconceived ideas. You’re purely making a sound financial choice.

Sound like fun? Great. Let us play.

First off, both of these stocks are ecommerce companies. Both of them are involved in everything from online shopping in order to mobile services and impair computing. They’re almost identical.

There’s a good chance you might guess that these companies are. But let’s play anyway.

Stock Number One

The first stock has a market limit of US$155 billion. They trade at a P/E Ratio of 23.04.

In the company’s 2015 financial 12 months they had revenues of just over US$11.9 billion. Their price of revenue was around US$3.73 billion. That gives them yucky profits of US$8.2 million. Net profit is US$3.8 million.

And finally the company has US$19.Seventy four billion in cash as well as total shareholder equity of US$29.67 billion.

The current stock price is US$59.95

Stock Number Two

The second stock has a market cap associated with US$250.7 billion. There is no P/E ratio for this company and you’re going to see why.

This company’s most recent full financial year they had income of US$88.9 billion. Their cost of revenue was around US$62.7 billion. That gives them gross profits of US$26.Two billion. This company didn’t have a net profit. They had net loss of US$241 million.

Finally this company has US$17.4 million in cash and complete shareholder equity of US$10.74 billion.

The current share price is US$536.07.

Decision time

So, which stock can you buy?

If you had to choose can you buy the stock that’s making money or the stock that’s dropping it? With so much uncertainty in the markets right now exactly where would it make sense to invest?

Stock number 1?

There’s a pretty good chance based on those numbers you’d choose inventory number one.

But let’s look at the stock price of number one over the last year.

Source: Google Finance

And what about the price of stock number two?

Source: Google Finance

Hang on that can not be right? Can it?

The stock that’s performing better financially (stock one) is down over 36% within the last year. The stock that’s performing worse financially (inventory two) is up 61% over the last year?

I’ll tell you which two businesses these are and why they are important in a moment. But here’s what the Financial Times had to say about them:

‘[Stock #1] return on invested capital is 8 per cent; [stock #2] is actually minus 3 per cent. Actually at a slightly slower pace, [stock #1] revenue is growing at Forty per cent against [stock #2] 17 per cent. It is [stock #2], though, that right now commands a premium valuation: it’s enterprise value is Twenty times next year’s predict earnings before interest, tax, depreciation and amortisation compared with [stock #1] from 19 times.‘

None of it really makes sense. If you look at the details stock number one comes out on the top. But the market doesn’t seem sensible at the moment. And that’s a problem.

‘Stock Showdown’ would be to demonstrate that, in the market, sometimes the reality just aren’t good enough.

Kings of ecommerce, east versus west

The two companies are Alibaba Group Holdings [NYSE:BABA] and Amazon.com Inc. [NASDAQ:AMZN]. Alibaba is inventory one, Amazon is stock two.

Now if you had known the stocks at the beginning of my small game would your decision have been the same? Or would have chosen Amazon over Alibaba? If you do choose stock one, would you now choose stock two?

If so, why?

That’s a question you should always ask yourself when investing in any kind of inventory, why?

In this case, if you’re trading based on pure fundamentals then you’d go with Alibaba. The facts don’t lie. Alibaba is a better stock. They’re the actual kings of ecommerce in China. They are a large company. And their leader, Jack Ma, is a pioneer associated with technology and commerce.

But if you are investing in hope, potential as well as promise then you’d probably opt for Amazon. It might become lucrative. It might become the biggest company in the world, one day. Amazon may be the King of ecommerce in the US and Western countries. And their leader, Jeff Bezos, is also a pioneer of technology and business.

Of course when you look at both of these companies you’re also comparing the East versus the West. And the recent slowdown in China, has dragged on the price of Alibaba. But even with which in mind, the facts don’t lie. Alibaba is an excellent stock. But the market doesn’t seem to think so.

This is indicative of the markets right now. They don’t seem to make sense. They are driven more by sentiment than fact. That causes a problem as an investor because it makes the market unpredictable.

But unpredictability also means there’s room for chance. Right now Alibaba is 37% down from its opening price when it outlined late September last year (it comes down to 10% down from its IPO price).

However it’s a whopping 51.8% down from its peak of $120 through November last year when the organization carried the same excitement that Amazon has now.

That’s opportunity. And that’s the kind of thing you should be searching for in any market you choose to purchase. Look for companies that are strong. Companies that make money, have solid fundamentals but are out of favour for no legitimate reason. Those are the kinds of stocks you want in your portfolio in the long run.

So take ‘Stock Showdown’ as well as apply it to any stocks you want. It’s a fun game and it might also make for some fantastic investments.

Regards,

Sam

How often do you stop and take stock of your career, relationships, or life in general?

New Year’s Day time is a popular choice for self-reflection. It’s a opportunity to consider what went nicely…and not so well. Others make use of a traumatic event as the driver. Bad news is often a spark in order to re-assess our course.

I take stock regularly. It constantly jogs my memory to be grateful when occasions are good. This mental weigh-in also keeps me focussed when things turn south. We went through a particularly tough period in the late 1990s. The actual markets were volatile and fear was rife.

Two downturn had swept through the market. The first hit came from the Asian Financial Crisis. Hot on its heels was the Russian debt default. Many thought a big collapse was imminent.

Yes, the markets did fall — the Dow misplaced a quick fire 20%. But the negativity didn’t last. Stocks were back at all-time highs within a few months. This period is merely a footnote in history for most. Although for me personally, the impact was far reaching. It was a time I had to stop as well as take stock.

Let me explain what I mean.

Financial crises are nothing brand new. They are part of the economic period. And each time it’s the exact same story. A once high flying investment bank arrives crashing back to earth. The implosion of a financial juggernaut is a headline event. But this time I wasn’t reading about it…I was living it. The financial institution under siege — Bankers Trust — was my employer.

I began 1999 as a senior investor at a top firm. By mid-year, it was all over. I was from a job for the first time in my profession. Banks across the globe were tugging back risk. There was a glut of traders. Jobs were scarce. It was a time when many people left the industry.

Taking stock of the situation was important. It put things into perspective. Sure, I didn’t work. But I knew I had valuable skills. It was just a matter of getting a way to use them.

Looking past the instant gloom was the key. It provided the emotional boost in order to stride forward. Bankers Trust’s demise felt like the end around the globe. But it was actually a golden opportunity. This was the dawn of the highly creative period in my career. Redundancy was the nudge I needed to go out on my very own. I haven’t looked back since.

Challenging times… for some

The recent market sell-off is also an opportunity to take inventory. You’ve no doubt seen a number of trades go backwards. Several have probably hit their exit points. This can be emotionally screening.

I received an interesting email this week. It’s from a member who’s already taking stock of what the correction means for Quant Trader. Here’s what he says…

‘I have just finished my monthly review of the actual Quant portfolio. I joined from the get go and after 10 months I have to say I am impressed!

‘Some feedback on numbers…

‘As this was a bit of an experiment for me, I didn’t put all my cash into the project.?I have been trading primarily long signal 1s.?It required some time to set up a CFD account to start on the shorts, however i am now trading them also.

‘I have compared the various opportunities I have over the same some time and can report the following.

‘All Ordinaries down about 4.8%

‘Blue Chips down about 11.5%

‘Speculative Portfolio (used mainly from PPP recommendations after which own research) up 12.2% (at one point this was upward 46% but last month has hurt it!!)

‘Quant Trader (excluding trading costs and dividends)

• Up 11% (open wishes)
• Up 14.8% (open + closed wishes)
• Even (shorts)

‘Forex Trading – actually

‘So all up, I would say QT and PPP in general are doing pretty well given the market and unpredictability.

‘I have now gained enough confidence in the approach that I is going to be allocating another 5-10% to the project.’

Member, Dom

This correction is proving to be Dom’s ‘redundancy’ moment. He’s using a setback being an opportunity to access various methods. There’s nothing quite as revealing as a receding tide.

The outcome of this exercise speaks volumes. Dom is more confident. As a result, he is allocating more capital to the Quant Trader strategy. I believe this will result in a better return over time.

I’m likely to add to Dom’s analysis. This will give you a clear view of how Quant Trader is tracking.

Let me say this particular. The stats I’m going to show you are below their high point. And that’s fine. A method that needs ideal conditions to show its results is not worth trading.

Slicing and dicing the actual numbers

The following figures are for the period 17 November 2014 to 17 September 2015. That gives all of us 10 months of live signals to analyse.

The very first table shows the average revenue for long trades.

	Average Profit/Loss	Average Days within Trade
Open long trades	13.5%	159
Closed long trades	-3.7%	155
All Ordinaries	-4.8%	307

Now let me split this down further. This particular table separates open deals into profits and reduction. It does the same for closed trades.

	Average Profit/Loss	Average Days in Trade
Open profits	27.9%	171
Open losses	-6.9%	141
?
Closed profits	15.7%	196
Closed losses	-12.9%	136

The first thing you may notice is that profits are bigger than losses. Every trader wants this. But many lack a highly effective strategy to get it.

Quant Trader‘s approach is straightforward. It lets profits operate, and it cuts losses. This particular naturally leads to average earnings being higher. You won’t accomplish this by taking lots of small profits.

The other thing to note may be the average holding period. You can observe profitable trades have a greater average than losing types. And that makes sense. If a industry isn’t working, you get away.

Okay, let’s put all this into a chart. I much should you prefer a visual to a table.

>

This exhibits the hypothetical performance of Quant Trader‘s long signals. It presumes $1,000 on every long trade. There is no allowance with regard to costs or dividends.

Now let’s consider the All Ordinaries over the same period.

The two graphs tend to be broadly similar. That’s what I expect. The undercurrent of the Just about all Ordinaries will always be a key factor. However that doesn’t mean you can’t beat the market.

A strong strategy can make a big difference. This is when Quant Trader comes in. The aim is to hold strong stocks and cut weak ones. That is the foundation of outperformance.

Anyone can make money in perfect problems. But handling the tough occasions is the acid test. To date, I think it’s fair to state Quant Trader is holding its own.

Until in a few days,

By Jason McIntosh

Editor, Quant Trader

Editor’s note: Are any of your shares up 100% in the last 10 months? Chances are the answer is no. The All Ordinaries is lower, so normally many ASX stocks are lower as well. But that doesn’t mean there aren’t any opportunities — you just need to know where to look.

Quant Trader’s top five open trades are up between 303% as well as 109%. The system’s algorithms determine stocks on the move. It then allows its winners run. Click here to find out how you could buy stocks like these for your portfolio.

Development, development, development.

You can see it happening everywhere. All around the world, and right here in Australia too.

I understand there’s a lot to worry about. There usually is.

But just take a look at what’s happening in the property markets. You will see why the outlook we have at Cycles, Trends and Forecasts is so positive.

Make no mistake either — there’s big money included here.

You can see it in what’s begun in central Melbourne — not to mention what’s on the drawing board — to get an idea.

It’s almost unbelievable.

Source: The Age

Here’s a further flavor.

The ‘ultra wealthy‘ Deague family began construction on the $330 million apartment project within Box Hill, Melbourne a week ago. According to the Australian Financial Review it will have the tallest tower outside of the CBD on completion within 2017.

According to the paper,

‘Box Hill, the suburb 14 kilometres of eastern of the Melbourne CBD with a big Chinese population, has turned into a suburban high-rise hot spot with more than Twenty projects underway.’

A little further southeast of the city, Amstel Golf Club within Cranbourne is selling its land to a property developer and moving elsewhere.

The Age believes that it is a $40 million deal. The current course will make way for housing estates.

And it’s not just Victoria…

Up in New South Wales, two airports were put up for sale within Bankstown and Camden in May. The vendor received bids rumoured in order to well exceed the $200 million figure. The initial expectation had been for about $195 million.

The Australian Financial Review reports that Bankstown is the fifth most popular airport in Australia. There was ‘huge interest’ in the offer, according to the paper.

Here’s the actual probable reason:

‘Bankstown is going to be one of the big winners of big ticket spending on major road and rail projects by the?NSW government. It is also adjacent to a development proposed by Bob Ell’utes Leda Group which could open up more opportunities for Altis should it buy [the] airport.’

See what I mean here? There are so many opportunities in property as well as stocks that spring from all this.

Do yourself a favour and check out what they are here.

The boom no one’s watching

I wrote an article last week on the boom I don’t think many people are following. It’s on the Oriental, especially Chinese, travel growth. You can check the article out on the actual Money Morning website.

But for a quick overview, you can get an idea from the projected demand for pilots. That’s because of this graph from the Wall Street Journal….

An estimate for the quantity of tourists to come out of China is 200 million within 5 years.

I mention this now since i received the following feedback from Cycles, Trends and Forecasts editor Phil Anderson,

‘I got back to the UK tonight. I spent one and a half hours in the passport queue and was thinking about this very thing. I have absolutely no idea how airports and security are going to deal with this. There is not an airport terminal in the world that has planned for it.‘

And this, from Revolutionary Tech Investor‘sSam Volkering working in london,

‘Mate of mine flies with regard to EasyJet over here, he’s about a 12 months off becoming a Captain. He or she was telling me that the Oriental (Chinese) airlines are poaching ‘Western’ Captains much in the same way the Middle-East air carriers were over the last couple of years.

‘He reckons the money being thrown around is insane as in approaching a mil a year. And one of the main reasons they’re recruiting Western Captains is to reduce their insurance premiums.

‘Also because the regular of training in Asia is pretty poor compared to the West they convey these experienced captains onboard to help train up their own First Officers and trainees. Then they can also claim to possess Western pilots, when in all reality the bulk of them are not.‘

And here’s this from senior British pilot whose title I’m not at liberty to say…

‘I know a lot of Far Eastern airlines cannot get enough aircraft pilots to operate all the routes they want to expand onto. Certainly the actual south-east Asian area is growing like crazy.’

Like I said prior to, there is so much to be positive about. Start here to capitalise on these opportunities.

The myth of America’s decline

If you’re interested in what’s happening in China, I urge you to listen to the interview I did with Shaun Rein. It is free on The Daily Reckoning Podcast. Shaun is based in China, as well as runs a successful research home.

You can check it out here on iTunes or Android right here.

Shaun Rein is Episode Twenty one.

The latest is with a man called Josef Joffe. He wrote a book by what he calls the ‘myth’ of America’s decline.

I called him or her up to chat more about that idea. What he says is quite true. Ever since the 1950s America has been written off. There’s always already been a contender that’s considered on the threshold of dethroning the united states from its perch.

In the 1950s it had been the Soviet Union. In the Sixties it was Europe. Later it became Japan. Today, states Joffe, it’s China.

That’s not to say China is about to collapse. But the All of us still has a lot going for it. Its economy is still about double China’s in term of GDP.

In fact, one of the points we make in the latest issue of Cycles, Trends and Forecasts is that a slowing The far east will have little effect on the US.

He had a lot more to say around the current balance of power in the world.

As above, check it out right here on iTunes or Android here.

Cheers,

Callum

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdie’s new book is known as The End of Australia: The Real Story Behind Australia’s Economic Collapse and What You Can do to Survive It. We are mailing free copies of this guide to anyone who requests one online. It does not make for pleasant reading. But the idea is the fact that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s happening…what happens next…and what you should be doing about it now… (much more)

Never before have grades been so important. They are the yardstick by which we measure ability. It seems you can’t get anywhere nowadays without good grades.

I was speaking with a friend the other day. She works at a big multinational in Sydney. It turns out, a university degree is the bare minimum to get a job interview — although a Masters would be better.

Now that’s a tall order. It automatically culls a big chunk of the populace.

So are grades really the be-all and end-all?

Well, Google says no. Laszlo Bock is Google’s Senior Vice President of people operations. He says that grades on your own are not a good predictor associated with career success.

Google instead hones within on something called understanding agility. This is essentially an individual’s ability to adapt. These flexible thinkers can move outside their own comfort zone and learn from mistakes.

And you know what. A 2011 study ranks learning agility as the best indicator of achievement — outscoring both IQ and education. So maybe the highest score isn’t the best guide after all.

I lately read a fascinating study. It centred on cadets at the West Stage Military Academy. And again, grades are in the heavy of it.

You see, entry levels are a key input in judging who’ll make it through. But it turns out there is a better predictor — the ‘Grit Test’. It essentially measures persistence and resilience.

The findings were amazing. Cadets with high Grit scores were most likely to complete the gruelling program. It was regardless of their academic levels.

And it makes sense. You don’t have to be the school dux to excel. But you will not make it big by quitting after an early setback.

So once again, high grades aren’t the best indicator of success. There are more factors to consider. Only then can you make a precise assessment.

The idea that high levels predict success has importance to trading. You see, many people believe good traders have high win rates. These people view the strike rate as a key measure of success.

Let me personally give you an example. It’s from a conversation I had a few years back at a wedding.

I got talking to a guest about buying and selling. He was working at a telco. But his goal was to be a trader. I was working at Bankers Trust at that time, and my new buddy wanted to know all about this.

One question sticks in my mind. He or she asked me what my hit rate was. In other words, he was asking what rates of my trades made money.

My answer was about 35% to 40%.

I remember his response vividly. He said ‘Oh, that’s honest‘

I paused as it were. Then it struck me. He or she though a low strike rate was bad. In his mind, I was confessing that my trading career was in tatters. We had a serious disconnect.

I then added some key information. This made all the difference. I explained my average winning industry was more than three times my personal average loss. This intended I was actually a very profitable trader.

But I can understand the misunderstandings. The internet is full of ads for every type of trading services. Many claim to have exceptional strike rates. This plays on the thinking that ‘high grades’ equal success.

Have a look at the following table.

	Trader A	Trader B	Trader C	Trader D
Strike rate	86.9%	67.1%	62.3%	60.4%

Suppose you want to hire a trader. Whose CV can you look at first?

Most people might go with trader A. Again, it’s that natural tendency to link a high quality with success. But that’s only part of the story. Let me add some more information.

	Trader A	Trader B	Trader C	Trader D
Strike rate	86.9%	67.1%	62.3%	60.4%
Profit	$62,182	$80,267	$104,587	$126,369

Trader A is no longer the surface of the class. It’s trader Deb making the most money.

These aren’t the random set of numbers. They are actually from some back-testing I did last week. My aim was to test two exit methods — taking profits and allowing winners runs.

All I did had been modify Quant Trader‘s exit algorithms. There were no changes to the admittance or risk management methods. The test period is between 1 January 2009 and 10 July 2015. Each industry is for $1,000. And there is no allocation for costs or dividends.

Here’s the final table. It shows the results from four situations.

	5% take profit	20% take profit	100% take profit	Let profits run
Strike rate	86.9%	67.1%	62.3%	60.4%
Profit	$62,182	$80,267	$104,587	$126,369
Number of trades	2577	1007	605	551
Ave profit per trade	$24	$79	$173	$229

The first two strategies are similar to how many individuals trade. Locking in an earlier profit typically leads to plenty of small wins. The problem with this is that it caps profits.

The third strategy gives profits scope to run. It then takes revenue if a stock rises through 100%. The final example is Quant Trader. Earnings are let run until the inventory hits its trailing quit.

Now, you may be thinking the 5% take profit strategy isn’t that bad. It appears to make good money. And you get plenty of winners to boot.

But there’s a catch

Look at the number of trades whenever you take 5% profits. Now consider the average profit per industry. This strategy may well lose money following brokerage.

And don’t forget, these tests use Quant Trader‘s entry and danger management strategies. Many investors don’t have a robust method for either.

The 20% take profit strategy is a little better…although it’s no stand apart.

It’s only when we let the those who win run that things get interesting. The number of trades drop, and profitability rises. The longer holding periods are also more prone to result in dividends.

I have one last thing to show you. The following chart brings all the numbers to life. This graphs the hypothetical performance of the four strategies.

There is no doubt about it. Letting those who win run makes a huge difference. Certain, you’ll have a lower strike price. But that’s okay. A high hit rate is not a good predictor of success.

Trading isn’t about becoming right more often…it’s about earning money.

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: Are any of your stocks up 89% in the last nine months? Chances are the answer is no. The All Ordinaries is lower, so normally many ASX stocks are down as well. But that doesn’t mean there aren’t any opportunities — you just need to know where to look.

Quant Trader has just locked in a good 89% gain on a stock known as Pro Medicus [ASX:PME]. And there are open positions along with even bigger gains. Click here to find out how you can buy stocks such as PME for your portfolio.

All investors say they want to make money.

But the truth is, most of them don’t.

They’re not interested for making money.

They’re only interested in being right.

Trouble is, in their mission to be right, they often end up being wrong.

That can cost them cash. Sometimes, a lot of money…

We’ve been favorable on this market for years.

When other people said it was too risky, we told you to buy. When others said you should sell, we told you to hang inside.

Those were the right decisions.

Now we’re issuing a this caution. You should prepare for a market accident. You’d think that after phoning this market right for most of the past seven years, investors could be glad for the warning.

But they are not. They hate it…as well as we’ve got the hate postal mail to prove it.

This isn’t a ‘fake’ crisis, it’s a real crisis

Take this particular email from subscriber, Chris, as an example:

‘Two years of buy purchase buy and now you are saying sell sell sell and all I am getting is loss after reduction.

‘You have now successfully stopped me personally investing in any shares a person recommend.‘

That’s just one example.

It’s obvious that some folks would prefer it if we didn’t warn them about a coming market accident.

They would prefer it if we kept on saying buy, buy, purchase, even though we believe the market is actually heading for a major fall.

And we aren’t just talking about one of those half-baked corrections the mainstream has cooked up over the past few years.

If we thought it would be one of those, we would tell you not to worry. But this is potentially more serious than that.

And although it’s still early days for this crash, so far we’ve got it spot on.

Check out this chart from the S&P/ASX 200 index. We’ve circled the date where we informed Tactical Wealth subscribers to buy two specific stocks which would profit from a falling market:

Source: Bloomberg

We’ll ask you: If a person gave you that advice, would you be grateful for the guidance, or would you reject it?

Implementing a ‘crash protection’ strategy

It’s logical to want to market at the top and buy at the bottom.

Every buyer knows that’s what you should do.

But, when it comes down to putting the theory in to practice, many investors prefer to stick to their guns.

They prefer to hold on to prove that they’re right instead of doing what’s right — in cases like this it means taking out ‘insurance’ to protect your wealth in the event of a market accident.

We’ll be clear on this. We aren’t saying that you should sell every stock you own. You should continue to hold stocks, especially if they’re having to pay you a nice dividend.

You should continue to speculate too. We’ve seen over the past few weeks that many small-cap as well as microcap stocks are holding up nicely, despite the recent fall.

But that shouldn’t stop you from taking measures to protect your portfolio.

That’s the reason why we recommended two specific ‘crash protection’ stocks in this month’s Tactical Wealth. One of those shares has gained 16%, and the other has gained 6.4%. Within the same timeframe, the S&P/ASX Two hundred index has dropped Six.9%.

We don’t know about you, but to all of us that seems like a pretty good method to achieve some peace of mind whenever stocks are going through a volatile period.

It’s OK to be wrong

But here is the bottom line. We don’t know for sure in the event that we’ll be right about the Sept or October crash.

And simply because we don’t know, that’s why we are taking precautions with our personal wealth, and why we recommend you take precautions with your wealth too.

Oddly enough, we hope we are wrong about a crashing market. We hope that the crash indicators that we’re seeing are just a fake alarm.

If they are, great. You will still own stocks in your profile, and you can easily get out of the actual ‘crash protection’ stocks we’ve recommended in order to Tactical Wealth subscribers.

Discover what they are here.

Like just about all insurance policies, it doesn’t come without some cost. By securing even part of your profile, you’ll forgo some increases if the market doesn’t accident.

But again, that’s just part of the deal with insurance policies. You take them out on the off-chance that you’ll need to make a claim…but in truth, you hope you’ll never have to.

The brief message here is, don’t worry about being right. Pay more attention to building and protecting your prosperity. And if sometimes that means changing your investment approach, then so be it.

It’s better to be incorrect about something and keep your wealth, rather than becoming wrong and it costing you a fortune.

Cheers,

Kris

The letters ‘GFC’ have global acknowledgement. And rightly so. It was one of the biggest financial meltdowns of all time.

Some resources say that 45% of global wealth had been lost by March 2009. Trillions of dollars increased in smoke. Many people lost everything.

The social cost had been overwhelming. Global job deficits were close to 27 zillion. Around 250,000 of those were Australian jobs. It had been a time of hardship and low self-esteem for many.

You can be sure of this: the actual GFC is a crash people will talk about for years to come.

But not today. I will tell you a story from an additional crash. It was only 7 years earlier. Yet it already draws a blank with regard to younger traders.

What I’m talking about is the Dotcom era. This is one of the great boom/busts of our time. And it drew in retail traders for the first time.

I remember watching a current affairs program of the day. It was profiling a brand new age trader — an everyday mum. Her classic line was ‘I can make $10,000 while making the kids’ lunch‘.

Then there was the actual host of a popular early morning breakfast show. When the accident finally came, he had to take the day off to ‘attend to his portfolio’. It was speculation gone wild.

Many were hailing it a new era. They said it was different to other booms. The thinking was: technology would forever boost growth. Old school stock analysis was supposedly obsolete.

But you know what. It had not been different — it never is actually.

You see, markets move in large recurring cycles (my friend, Phil Anderson, has an excellent service about cycles). The problem is that most people just focus on the immediate past. They just don’t see the overall patterns.

Let me personally tell you a story about one of these simple people. His name is actually Tony. He was a stockbroking customer of a colleague.

Tony was typical of many part-time speculators. He would take large positions in a few companies. The strategy was then to hold upon and hope they increased.

Now Tony had been my colleague’s client for a couple of years. He had a few decent wins. But some large losses were adding up. Their account was slowly heading south.

It was now late 1998. And the internet trend was about to hit top equipment.

Tony called my colleague. He said ‘buy me 20,000 shares in Sausage Software‘. Sausage was an emerging IT company. It’s shares were worth about $1.

Sausage shot to $2 a reveal within a couple of months. Just 3 months more and it was closing within on $10. Tony’s stake was quickly nearing $200,000.

Have a look at the next chart. This is what an 8-fold gain looks like.

My colleague advised Tony a2z to sell half. But he or she wouldn’t hear of it. The media was in a frenzy over Sausage. And so was Tony.

Sausage was your classic trend following stock. This ran, and ran, as well as ran.

The shares hit an optimum of $41 in March Two thousand. They had gone up 40-fold in just Fifteen months. It was what we call a 40 bagger.

Tony had run a $20,Thousand stake into a profit of around $800,000. He had also opposed all his broker’s calls to sell. Tony did exceptionally well to get this far.

There only agreed to be one more test — his leave strategy.

Think about this for a moment. How would you react?

It’s not as simple as stating sell. No one knew $41 had been the peak. And anyone prone to take profit had most likely sold out long ago.

Let me tell you what Tony did. He held on.

Sausage shares were back at $26 within just fourteen days. Tony’s $800,000 paper profit had been now worth $500,000. He saw $300,000 evaporate before his eyes.

My colleague was still being pressing Tony to sell. But there was a problem. Tony was now focusing on the $300,000 he had ‘lost’ — not the $500,Thousand he still had.

Many investors make this mistake. They location more value on what they’ve lost than what they still have. The need to get back to even overrides the necessity to get out.

Tony held, and held, and held. The shares were below $20 in times. Within two months they were below $10. And by 2003 they were buying and selling for less than $1.

Have a look at this chart — it’s a wipeout.

Source: BigCharts

It all comes down to this. A good entry strategy only gets you so far. You also need a plan to sell. This is what separates the plodders from the entertainers.

Let me show you what could have been. This is what happens when we apply Quant Trader‘s exit strategy to Tony’s trade.

Look at the difference a robust selling technique makes. It captures all but the final manic stages of a huge bubble.

An excellent real-time example is the Chinese market crash. Viewpoint is split on whether this is a short-term correction or a long-term bust line. The fact is, no one knows. This is exactly why you need an exit technique.

Quant Trader had exposure to the growth through the AMP Capital China Development Fund [ASX:AGF]. The system rode the trend up. But it won’t ride the popularity all the way back down.

Have a look at this chart.

Do you see the red dotted line below the stock price? That’s the trailing stop — it’s the point where we exit a trade. It ensures you don’t end up like Tony.

A looking stop won’t exit at the very top — that’s for the crystal golf ball gazers. But it does the next best thing. This gets the big middle area of the trend. That’s where you make the money.

Successful trading requires multiple strategies. You not only have to get to the big moves…you eventually have to get out. The trailing quit is the best way I know to get this done.

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: The basis of excellent trading is to stay with shares that are rising. But that’s insufficient. You also need to kill off the trades that are eroding your capital. Fortune favours the actual trader who masters this straightforward concept.

Quant Trader does this by utilizes algorithms — a collection of mathematical formula. These allow for consistent as well as unemotional trading. You can read more about Quant Trader’s algorithmic methods here.

The culmination of the last 9 months is almost here. In only 24 hours not only will you learn how you can USE the ‘fusion method’ investing strategy to much better time your stock investments…you will find three cheap companies currently bucking the broader market’s downwards trend.

Fundamentally, all three are appealing. But, importantly, the market is telling you they have turned a corner. They’re moving up. In other words, they’ve hit ‘lift-off point’. You’ll see what I mean the next day.

For now, here’s the final hit of my Facebook video chats with Kris Sayce. Today we talk about gold and maybe it’s a good time to buy. You can check it here.

Ahhh, gold. Why hath thou forsaken me?

I’ve been a long-term bull upon gold. I still am. But I’ve been terribly incorrect. The market’s verdict is, after all, final.

Who would’ve thought though? I mean, cast the mind back to 2012. The ECB has just said it would do whatever it takes to rescue the system. The Bank of Japan had just promised to go ‘Weimar’ on everybody. And the Fed was producing $85 billion per month in quantitative reducing.

Why wouldn’t you want to own precious metal? While I didn’t buy the argument that these actions would create high inflation or hyperinflation, I did think it would cause enough concerns for capital to seek the safety of gold.

What’s that thing they say about views? Something about everyone getting one…

Well, my opinion on precious metal was wrong. Horribly wrong. Yet I couldn’t see it at the time. My judgement was too clouded by my lengthy held biases about what gold ‘should’ do.

Like I said, I’m still bullish on gold. Just I’m cautious for the short term. I’m waiting for the market to warm back to the story prior to getting too enthusiastic.

If you had used the time to hear the market out…to listen to what it was trying to tell you back in 2012 as well as 2013, it would’ve already been a different story.

By the way, I’m telling you this because it’s something that you can learn to do too. That is, curb your excitement. Listen in to what the market says. Let me show you what I mean…

The graph below shows the US dollar gold price. After peaking in 2011, gold went into a remedial period, with support at the US$1,550 level.

Source: StockCharts

Then, on the back of all the central bank activity I pointed out above, gold broke greater and went back into an uptrend. (Note the short term shifting average, the blue line, crossing above the long term moving typical, the red line.)

But it was a confusing and fake move. The gold price quickly turned back down. The moving averages crossed again a few months later, in early 2013. This was a warning sign for anybody willing to listen.

The market had been telling you something wasn’t right. Despite all the bullish basic principles in the world, gold couldn’t create a new high. In fact, it was going back into a downtrend.

The rest is history. Except for parts of 2014, precious metal has been in a well defined downtrend ever since. While I think the long term fundamentals for gold remain outstanding, the market says I’m incorrect.

And I’m not about to argue. I will happily wait for the trend to show around before I start getting too excited about gold once again.

As I’ve pointed out before although, gold in Aussie dollars is a different story. It really bottomed back in 2013. But with the current big pullback in US dollar gold, even Aussie buck gold isn’t looking just like it did a month or so ago.

Despite the recent bounce, you’re ready to be cautious.

Among other things, it was this experience with the gold market that made me reassess and tweak my investment philosophy. As I’ve mentioned this week, I came up with the ‘fusion method’ to identify stocks that are both fundamentally sound AND are in established or emerging uptrends.

The beauty of this methodology is that you can use it in a fluff OR bear market. Because of the weakness the Aussie marketplace has experienced lately, this flexibility comes in handy.

For example, I have analysed the top 50 stocks on the ASX over the past few months in my subscribers. An increasing number of them are in downward trends. That’s telling you to stay away.

Even the stronger shares are under selling pressure. Yesterday, Telstra announced a decent result, but the market reacted negatively anyway. Telstra’s still in an uptrend, incidentally, but it’s not looking as strong as it was.

If this market does morph into a unpleasant bear, you’ll save yourself a lot of cash and angst by staying away from companies whose share costs are in a downtrend. It doesn’t matter if they’re essentially sound or good value. The actual downtrend warns that a change in investors’ emotional state is brewing. Just like it did with precious metal.

This reminds me of something I read in the classic book, The Money Game. So I went and caught it out to look up the passing I had in mind. The following is an estimate from a ‘Mister Johnson’, a revered you’ll need Wall Street in the 1960s.

‘You can have no preconceived suggestions. There are fundamentals in the marketplace, however the unexplored area is the psychological area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describer an emotional state.’

That’s what the fusion method attempts to do…it fuses the fundamentals using the charts. The charting evaluation is an attempt to describe the actual market’s ’emotional state’.

So if you’re willing to ‘have absolutely no preconceived ideas‘ there’s a whole new trading world that awaits a person. Given that many are now questioning the longevity of this bull market and are nervous about a new bear unfolding, it’s time you considered looking at things differently. The next day I’ll show you how. Keep an eye out on your inbox around 2pm.

Regards,

Greg

Yesterday I said I’d demonstrate how to ‘fuse’ two very different expense approaches to gain an trading advantage. I’ll get to which in a moment with an actual instance.

I’ve been using this new ‘fusion method’ since late last year. Despite the current correction, the results have been good and it’s outperforming the market comfortably.

I spoken with Kris Sayce about it today, as part of the number of Facebook chats we’ve been doing this week. You can check it out through clicking the screenshot below…and, of course, don’t forget to ‘like’ the page.

Before I show you how this fusion method functions, I want to touch on the topic de jour. That is, China’s currency devaluation.

Don’t you believe it’s funny how everyone is now an expert on it? The other day it was not even on the mainstream media’s horizon. Not that I saw anyway. But now it’s leaking off the business pages.

It wouldn’t have come as a surprise to you though, dear reader. In the 3 August edition associated with The Daily Reckoning I wrote the following:

‘The additional very big issue here is China’s currency peg to the dollar. As the All of us dollar strengthens and the US loses competitiveness, so does China. A break of the dollar-yuan peg is coming.

‘And that will send another deflationary impulse through the global economy.‘

Global miners BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] felt those chill deflationary winds the other day, dropping 4.3% and Five.4% respectively. And this morning, the actual Financial Review reports just how this deflationary behavioral instinct flows through the global economy:

‘Chinese steel producers have already cut export prices in response to a lower yuan, industry sources stated, providing some of the first proof of how Beijing’s devaluation can help companies in the world’s second-biggest economy boost sales.

‘China’s steel industry is the world’s biggest, but shrinking demand in your own home has forced many generators to ship record amounts abroad, with some said to be selling at a loss.

‘A weaker yuan will make Chinese steel products even less expensive overseas as Beijing’s surprise move to devalue its forex gives the country’s exporters leeway to chop prices.

‘Some small Chinese generators had already lowered export prices of steel products like rebar for construction use, through $US5-$US10 a tonne, sources familiar with the problem said.‘

But in all the pages discussed China’s ‘one-off’ currency devaluation (which to date stands at two adjustments totalling around 3.5%) no one has mentioned the architectural problems behind it.

I don’t know, maybe it’s implied in the entire currency war argument. Jim Rickards, editor of Strategic Intelligence, must be using a good old laugh at how the media are now flogging a term he or she reinvigorated and popularised years ago.

Yes, it is all about the ‘currency wars’. But what are the forex wars really about?

The way I view it, it’s a consequence of a horribly flawed global economic ‘structure’. I go on about ‘economic structure’ all the time. I think it’s a very important way to view the global economy.

In the context of China and the currency wars, here’s the problem. China has a huge trade surplus. It’s constructed its whole modern economic expansion around exports…which creates this trade surplus.

By all accounts, China remains really competitive on a global size. In July, it generated a trade surplus of US$43 billion. Yet it’s devaluing in order to retain export competitiveness?!

It’s doing so because it has an inflexible economy. It cannot handle change. The whole framework of its economy is geared towards satisfying the needs of western customers. Especially US consumers.

Even a little change in that dynamic periods trouble for China. Think about it. China wants to create a more balanced economy. One that sees it’s consumers driving growth.

Don’t you think a strong currency would make feeling in this case? It would make imports less expensive. It would increase the purchasing power of Chinese households. The problem is: the production structure of the global economy is not designed to provide for the Chinese consumer. It will take years of switch to get there.

But politicians are not thinking about structural change. They are only interested in maintaining the status quo…their own grip on power. Which is why the focus is always on monetary policy. Unfortunately, this only reinforces the structural impediments weighing the economy down.

We are truly stupid. The global economic climate is like the Titanic. It is headed for crisis, but everyone is blissfully unaware.

For me, the only question is how the coming crisis plays out. Do asset prices collapse as the buying power of cash increases? Or even does the opposite happen? Perform central banks double down on their historic post-2008 blunder?

I’m prepared for anything. It’s why I’ve embraced the ‘fusion method’ of investing. That is, focus on the company’s fundamentals and value, but also ‘listen’ to what the market informs about it. The market is far smarter than you. Ignore it at your peril.

Let me give you an example…

In February last year, JB Hi Fi’s share price fell sharply, putting the actual stock into a downtrend. (Remember earlier this week I said a downtrend occurred when the short term shifting average (yellow line) entered below the longer term MA (nowhere line.) You can see the cross over on the chart below.

The stock was good value, but ‘the market’ (reflected in the downtrend) told you to stay away.

Source: BigCharts

And the market was correct. In August 2014, JB’s stock price plunged on its results release. Though it was still good fundamental value, it was a bad buy at this time because it was in a downtrend.

Buying right into a downtrend is a higher risk strategy. It might work out, but you just have no idea how far the trend will take you. In addition, it’s higher stress.

For instance, you may have bought at around $17.Fifty after the initial decline. However it then fell some more, rebounded a little, and then plunged to $14.50. Perhaps you thought you got it wrong, and decided to get out…at exactly the wrong period.

The ‘fusion method’ of investing prevents you against getting into these situations. This tells you to wait for the downtrend to play out and for a new upward trend to emerge before buying.

That’s what we did here. As JB Hi Fi made a new multi-month high in February this year, and the shifting averages crossed over to confirm an emerging uptrend was going ahead, I sent out a buy recommendation to subscribers. All of us didn’t pick the bottom, but that’s ok. No one will ever get it done consistently so it’s no something should even try to perform.

The fusion method is a lower stress strategy. It’s about finding essentially mis-priced companies and waiting for a good uptrend to unfold before buying into them.

It’s simple and efficient. And built to withstand the actual uncertainties of the modern trading world. It’s working pretty much too. Recently I’ve been planning a video report to show you the best way to begin taking advantage of it. It’s almost ready for release. Stay tuned.

Regards,

Greg