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Contents
1. Quotation of the Month
2. Main Article: Flying the Friendly Skies
3. Top Ten Investment Scams
4. The New Face of Retirement
5. Interesting Links
6. Recommended Reading: A Random Walk Down Wallstreet
7. Automatic Investor Question of the Month
8. Legal Notices: Keeps the Lawyers happy
Quotation of the Month
"If you cannot make money on one dollar, if you do not coax one dollar to
work hard for you, you won't know how to make money out of one hundred
thousand dollars."
E. S. Kinnear
Have a favorite quote? Tell us about it by sending it to
eletter@automaticinvestor.com
Main Article: Flying the Friendly Skies
With the proliferation of discount brokers, a prolonged bull market, and
stories of untold riches, it's no wonder that individuals have been
entering the stock market in ever increasing numbers. Unfortunately all is
not well in investor-land.
The vast majority of investors are new to the game and have never been
through a bear market. That's why the recent turn of events are beginning
to take their toll. It used to be so easy. Pick a stock (the exact one
really didn't matter, just as long as it had "high-tech" attached to it -
or better yet, "Internet"), invest everything you could come up with and
wait a few weeks - a month at most. Then sell and pocket a tidy profit.
Recently, however, we've seen these same can't-miss stocks plummet to
52-week lows and beyond. Margin calls have increased dramatically and many
investors have lost 50% or more this year.
It's no secret that in a rapidly rising market everyone looks like a
genius. The trick is how you do over the long term. Investing by the seat
of your pants, relying on emotions, and planning for a short-term killing
is akin to playing the lottery, and equally as futile. Study after study
has shown that in the long run, emotional investing, which leads to
thoughts of "getting rich quick," rarely works. In fact those same studies
have shown this kind of investing technique is an almost sure way to lose
money. Add to that the usual response of selling when the market dives and
most people would be better off putting their money in guaranteed bonds
and certificates. The sad part is that people don't like guaranteed
instruments because they aren't exciting. There's no thrill. Personally, I
think if you want thrills, go climb Mount Everest. If you want to invest,
then do it properly.
This of course begs the question of how to go about it properly. The
Internet is a great starting point and has opened the door to the
investment realm for millions of people. But in doing so it has created a
new set of problems. With so much information available, it becomes
increasingly difficult to filter the good from the bad. But there's an
even subtler trap. The Internet has given the average person the tools to
invest, but not the knowledge or the discipline to do it wisely.
To truly grasp the absurdity of this, let's look at an example. I have a
friend who's a pilot for a major U.S. Airline. He has flown thousands upon
thousands of hours and constantly attends training to keep his skills up
to date. Even so he's limited to flying one type of aircraft at a time.
Now let's suppose the government suddenly decided to open the friendly
skies and let everyone who was interested take an airplane out for a spin.
No training, no minimum level of competence, and no pilot's license
required. If you think you can fly, take a plane up. My feeling is that
most people would think this was insane - especially those who lived near
airports. There would also be a marked increase in plane crashes. Nobody
in his or her right mind would support this.
But that's exactly what the investment industry has done with the
Internet. Anyone can open a brokerage account and start trading. No
training, no minimum level of competence, and no license required. Yet
most people think this is a good idea. Nobody calls it absurd. And best of
all, you don't hear about the crashes. Rest assured, however, they're out
there.
Investment principles haven't changed in the past 100 years. Investment
methods have changed, but the underlying, fundamental principles remain
the same. Principles such as investing in high-quality companies,
diversifying over different asset classes, performing your own fundamental
analysis and due diligence, buying low and selling high, taking some money
off the table when things are going well, and the list goes on and on.
The methods we now have available to implement these principles are vastly
different than what we had even 10 years ago. But some people believe that
because the methods have changed, the basic principles have too. The bad
news is that the market will punish anyone who chooses to believe this
fairy tale. Contrary to popular belief, a company has to have good
earnings potential and make a profit - whether they're an Internet company
or not and whether they were founded 100 years ago or two months ago.
The number one problem with investors today is their lack of knowledge.
Right there in second place, however, is their lack of discipline. Even
investors who have the knowledge constantly succumb to the temptation of
their emotions. When markets are rapidly rising, greed fuels the belief
that the trend will go on forever. People who make 40% in one week tend to
extrapolate this over many years - basking in the glory of how much their
portfolio will be worth five or ten years hence. In fact they borrow
money, usually by way of margin, to increase their potential returns.
Consequently when the markets turn, they're the first to sell. Either
because of margin calls or, more commonly, fear. So they buy high and sell
low. Common sense will tell you that's not the way to make money.
Unfortunately this phenomenon isn't new. It's always been possible to lose
vast sums of money in the stock market, but the Internet now allows those
vast sums to be lost faster than ever before.
Many baby boomers are thinking of retirement for the first time in their
lives and can't see how their current savings will meet their retirement
needs. They know they need to be in the stock market, but they don't know
how to go about it. So they jump into the market and make mistake after
mistake. Sadly, most don't have the time to recover from even one major
error.
Deciding what to do can be a time consuming task. However it's time well
spent. Some people will put more effort into choosing a medium priced car
than in thinking about their investments - investments that are supposed
to take them comfortably through the rest of their lives. That's not much
different than taking off in a 747 when you don't know what you're doing.
Hopefully that's not you.
Did you know?
Every day more money is printed for Monopoly than for the US
Treasury.
Top Ten Investment Scams
The California Department of Corporations has listed the top 10 scams
currently in vogue. Each one is a tried-and-true method specifically
designed to part unwary investors from their money.
1. Promissory notes -- The states are working together and coordinating
with the Securities Exchange Commission (SEC) on a nationwide project
relating to the illegal and fraudulent sale of promissory notes and
unlicensed broker-dealer activity by the sales agents marketing them. Many
of the notes are being marketed as 9-month promissory notes in an attempt
to rely on narrow exemptions from federal and state securities laws, but
these exemptions do not apply.
Investors should beware of cross-marketing of investment and financial
products by insurance, banking and securities firms; and by insurance
agents and financial planners who are often selling products they don't
understand. Many don't bother to do proper due diligence checks to
determine whether the investments are legitimate.
2. Internet fraud -- California was one of the first states to introduce
an Internet Surveillance Program. Now, half the states have programs to
identify illegal and fraudulent investment offerings, market manipulation,
insider trading and unlicensed broker-dealer, as well as agent and
investment adviser activity on the Internet. Working groups have been
formed to improve referrals and coordination among the states and with the
SEC. States are receiving training in computer crime investigative
procedures from the National Cybercrime Training Partnership.
On-line trading has become a major issue in terms of trade execution,
capacity, disclosure, margin and suitability. State regulators have
brought actions against a number of day trading firms for unlicensed
investment adviser activity, unlicensed broker-dealer activity, and fraud
in connection with guaranteed results and promises of success.
3. Telemarketing fraud -- New boiler rooms, or high pressure telephone
sales operations, are opening all the time selling illegal and fraudulent
investment products and many of them are making as much as $1 million a
month. Sales representatives will say anything to convince the investor to
part with his or her money because they don't have any intention of
delivering on their promises.
California received one of five grants from the U.S. Department of Justice
to attack telemarketing fraud, establishing a major telemarketing project
in Southern California. The program is a partnership between local, state
and federal law enforcement and regulatory agencies working together to
prevent and prosecute telemarketing fraud and to create innovative
enforcement techniques that will serve as a model for the nation.
4. Investment seminars and financial planner activity -- The states now
have greater responsibilities for the regulation of investment adviser
activity and are concerned about the proliferation of investment seminars
and financial planners offering investment advice that may require a
license. State regulators are also concerned there may be a lack of
disclosure of conflicts of interest and hidden fees and commissions.
The proliferation of "tout sheets" and other financial advice on the
Internet has created new legal questions about what constitutes investment
advice that requires a license, what is opinion and what is a bona fide
publication. Many Internet advice forums claim not to receive fees or
commissions for their recommendations but may be engaging in trading
patterns that constitute market manipulation.
5. Affinity group fraud -- The states continue to bring enforcement
actions involving breach of trust and fraud on religious, ethnic and
professional groups by members of these groups or persons claiming to
provide assistance to these groups. Advertising in the media that serves
specific ethnic groups is used to identify potential victims, often with
offers of employment, training or financial advice.
Ethnic communities particularly have recently been targets of bogus
investments in precious metals and foreign currencies allegedly being
traded on the Hong Kong and other foreign exchanges. Unscrupulous
promoters rely on perceived opportunities in international investments to
entice investors to speculate in questionable foreign currency
investments, usually on unregulated or non-existent foreign exchanges.
Typically, the promoter just steals all the money and no investments are
actually made.
6. Abusive sales practices by licensed broker-dealers and agents -- In the
regulated industry, sales of securities to unsuitable investors, failure
to disclose critical information, fraudulent offerings of securities and
market manipulation are of great concern to the state regulators. A number
of enforcement actions have been brought against brokers who specialize in
the manipulation of low-priced microcap offerings, including revocations,
bars, suspensions, injunctive actions and criminal prosecutions.
Increasingly, states are utilizing actions by other states as the basis
for enforcement actions. As a result, many of the worst microcap dealers
have been put out of business. Investor vigilance is still required,
however.
On-line trading has become a major concern to state regulators in terms of
trade execution, capacity, disclosure, margin and suitability. State
regulators are playing an active role in the dialogue with the regulated
industry on how to accommodate new technologies with the need for investor
protection and vigorous regulatory oversight.
7. Viatical investment scams -- Viatical investments are still one of the
hottest investment products in the marketplace, and also one of the
riskiest. Viatical investment companies solicit investors to buy interests
in the death benefits provided for in life insurance policies of
terminally ill patients, including AIDS and cancer patients. The insured
receives a discounted percentage of the death benefits in cash to
allegedly improve the quality of their lives in the final days. Investors
get their share of the death benefit when the insured dies, less a
brokerage fee for the viatical investment broker.
Because of the uncertainties involved in predicting when a person is going
to die, even a person with a disease considered terminal, these
investments must be considered extremely speculative and are only
appropriate for persons willing to risk losing all their investment. On
the investment side, these investments are being heavily marketed as
humanitarian and profitable investment opportunities to elderly investors
and investors with IRA accounts for whom they are entirely unsuitable.
8. High tech products and services -- The states have participated in a
number of multi-state and state-federal task force actions against illegal
offerings of high tech investments. Such illegal offerings target
unsophisticated investors with promises of high profits with no risk by
getting in on the ground floor by investing in the latest high tech
products and services such as 900 number investments, Internet service
providers and high tech virtual reality shopping malls.
9. Entertainment -- Many scams offer opportunities for investments in
movie deals and other entertainment products with promises of guaranteed
profits and pitches that emphasize the potential profitability of many
popular entertainment vehicles without disclosing the risk.
10. Ponzi/pyramid schemes/bunco -- Ponzi and pyramid schemes continue to
be popular. Ponzi schemes are swindles in which tremendous rates of return
are paid to initial investors out of funds from later investors, who end
up losing all of their money when the house of cards falls down. A pyramid
scheme involves the collection of money from individuals at the bottom
(new investors) to pay the initial investors at the top, with all the
emphasis on bringing in new members/investors and not on selling the
product or service. Recently, there have been a large number of schemes
offering investments in alleged "prime bank interests" of world banking
entities. In fact, there is no such thing as a prime bank interest, and
the offerings are just scams.
Did you know? Charles Ponzi claimed he was giving investors just a portion
of the 400 percent profit he was earning through trade in postal reply
coupons. As Ponzi paid the matured notes held by early investors, word of
enormous profits spread through the community, whipping greedy and
credulous investors into a frenzy. Investigation later revealed that there
were no coupons or profits--earlier notes were paid at maturity from the
proceeds of later ones. The simplicity and grand scale of his scheme
linked Ponzi's name with this particular form of fraud. A swindle of this
nature, once called a "bubble," is now referred to as a "Ponzi scheme."
The New Face of Retirement
Saving for retirement used to be very simple - at least if you listened to
the mutual fund companies. Just save as much as you possibly could and buy
their funds. When you're ready to retire (somewhere between 55 and 65),
use your nest egg to fund your cushy life of unlimited travel, golf and
exotic cruises. In other words, you and your spouse are in for one big
party.
My how things have changed in the past 50 years. The current view is that
if you're more than 15 years away from retirement, you probably won't
retire - in the traditional sense. Rather you'll work until your
mid-to-late 50s, be "downsized" and either start your own business or take
a part-time job. Hopefully your debts will be fully paid and you'll have
enough to live a comfortable, but not extravagant, life. Of course some
people in this category stand to inherit a substantial sum from their
parents, so perhaps some will live a little more comfortably in their
later years.
On the other hand, if you're more than 25 years away from retirement
things start to get very fuzzy. Retirement, as we know it, may not exist.
You'll most likely continue to work at one thing or another until you're
physically or mentally unable to - or you die. Your income will be
volatile, but your work will be "knowledge work" and very satisfying. You
won't have to cut trees or dig ditches when you're 75. In fact your work
may become a large part of the things you do for fun in your "retirement."
Did you know?
The number "172" can be found on the back of the U.S. $5
dollar bill in the bushes at the base of the Lincoln Memorial.
Interesting Links
Brought to you by
the Market News Network.
Title: Tech Value Bin May Not Be a Great Place to Shop
Source: TheStreet
"It might be tempting to buy fallen tech angels but the problem is they
just keep falling."
(this link is not available from the archived version of the eGazette.)
Title: The cost of divorce
Source: Cnnfn
"Let's face it, next to death, the topic we least like to think about is
divorce."
(this link is not available from the archived version of the eGazette.)
Title: Rebuilding Your Tech Portfolio
Source: Worldlyinvestor
"It is time for tech investors to start rebuilding the wealth eroded
during the past nine months."
(this link is not available from the archived version of the eGazette.)
Title: How to Make Easy Money on a Bear Market Bounce
Source: TheStreet
(this link is not available from the archived version of the eGazette.)
Did you know? Hong Kong has the most Rolls Royce's per capita.
Recommended Reading
"A Random Walk Down Wallstreet," by Burton Gordon Malkiel.
An interesting book that covers a variety of Investment methods including
technical analysis and modern portfolio theory. Malkiel then goes on to
shoot down most of these methods and comes to the conclusion that future
prices cannot be determined from past prices. In fact he goes further and
suggests that a blindfolded monkey throwing darts at the financial pages
could select a portfolio that would perform as well as one selected by
professional stock pickers.
You may not agree with everything in this book, but you will definitely
learn a number of valuable lessons. Highly recommended.
You can purchase this book at
Amazon.com.
Automatic Investor Question of the Month
QUESTION:
How would I convert an existing portfolio containing 100% equities for use
with Automatic Investor?
ANSWER:
Since you have an existing portfolio, you'll have to sell some securities
or add additional cash in order to use Automatic Investor (AI). AI balances
cash and equity positions in order to minimize risk. When your equities are
selling at high prices (relative to where you purchased them), AI will
recommend you sell a portion in order to lock in some profits. Conversely
when prices are relatively low, AI will recommend you purchase additional
securities in order to add cheaper shares to your portfolio. To do this
however, you'll need to start with the right mix of cash and equity.
For example, if you have $10,000 in equities and no cash, you can set up an
AI portfolio as follows (assuming you use the default AI configuration):
1. Create a new AI portfolio (see "Setting up a Portfolio" under the "Quick
Start" section of the AI Help) and enter $10,000 (i.e. the value of your
equities) as the initial cash deposit.
2. AI will prompt you for your security information. Enter the ticker
symbol, a description and the price per share. Then click OK.
3. AI will then ask you how many shares you'd like to purchase. It will
recommend a certain number. You can decrease this number if you'd like, but
you should not increase it. For example, if you entered a share price of
$40, AI will recommend you purchase 167 shares (i.e. $6680 worth).
4. Now since you already have $10,000 worth of equity (i.e. 250 shares),
you will have to sell approximately $3300 worth (or 83 shares @ $40 per
share) so you'll end up with the 167 shares AI is recommending. Execute
this trade with your broker.
5. You will now have $6680 worth of equity (i.e. 167 shares) and $3320
in cash (minus any transaction costs). Your portfolio is now ready to be
managed by AI.
6. From this point on, simply update your security's price whenever you
choose (i.e. daily, weekly, monthly, etc.) and follow AI's recommendations.
Conversely you can add cash to your existing account in order to come up
with the correct mix of cash and equities. So, in the above example, you
could simply add approximately $4930 in cash. This would give you the 33%
cash and 67% equity mix that allows AI to work correctly.
Legal Notices
The Automatic Investor eGazette does not rent out its subscription list.
This newsletter is Copyright (c) 2000 by Aptus Communications Inc., Maple
Ridge, British Columbia. All rights are reserved, except that it may be
freely redistributed provided that it is redistributed in its entirety,
and that absolutely no changes are made in any way, including the removal
of these legal notices.
Automatic Investor is a trademark (tm) of Aptus Communications Inc., Maple
Ridge, British Columbia. All other trademarks are owned by their
respective companies.
THE MATERIALS CONTAINED IN THIS NEWSLETTER ARE PROVIDED "AS IS," AND APTUS
COMMUNICATIONS INC. EXPRESSLY DISCLAIMS ANY IMPLIED OR EXPRESS WARRANTIES
OR CONDITIONS OF ANY KIND, INCLUDING WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF INTELLECTUAL
PROPERTY RELATING TO SUCH MATERIAL. IN NO EVENT SHALL APTUS BE LIABLE FOR
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CONSEQUENTIAL OR INCIDENTAL DAMAGES, INCLUDING, WITHOUT LIMITATION,
DAMAGES RESULTING FROM USE OF OR RELIANCE ON THE INFORMATION OR SOFTWARE
PRESENTED, LOSS OF PROFITS OR REVENUES OR COSTS OF REPLACEMENT GOODS OR
LOSS OF GOODWILL.
All statements and expressions are the sole opinions of the authors and
are subject to change without notice. This information is neither an offer
nor solicitation to buy or sell any securities mentioned. While we believe
all sources of information to be factual and reliable, in no way do we
represent or guarantee the accuracy thereof, nor the statements made
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YOU SHOULD VERIFY ALL CLAIMS AND DO YOUR OWN DUE DILIGENCE BEFORE
INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS
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