Rule of 72

I find the Rule of 72 useful when comparing expected returns between stocks and other investments.  The Rule of 72 says that in order to find out how many years it takes your money to double in a particular investment, choose a rate of return and divide it into 72. 

For example, if the long-run average annual return of stocks is 11%, the Rule of 72 means that, on average, stock returns double every 6.54 years (72 divided by 11).  If the long-run average return on bonds is 5% per year, then bonds double every 14.4 years (72 divided by 5). 

Let’s see what happens to a $10,000 investment, over 26 years, earning 11% per year.  That $10,000 will double nearly four times (26 divided by 6.54).  Thus, $10,000 becomes $20,000 becomes $40,000 becomes $80,000 becomes approximately $151,000.

Now, let’s look at bonds.  Since bonds return, on average, 5% per year, the value of the bond doubles nearly twice in 28 years.  That means $10,000 becomes $36,000 at the end of 26 years. 

Which would your rather own-stocks or bonds?  Of course, looking at the current economic conditions – don’t answer that yet, but the moral of this story:  Your money grows best by investing heavily in stocks!

Why You Should Avoid Speculating in Futures, Options, and Speculative Stocks

It’s happened to me.  It will happen to you.

Your investment program is going along quite nicely.  You’ve made some nice gains on stable blue chip company stocks.  But it has gotten boring and it feels like something is missing.  You hear about people making a killing on speculative stocks.  Maybe even heard it on CNBC or some other “trusted” financial channel how some trader managed to score big on some futures trade.  You don’t want to wait 25 years to get rich.  You want BIG profits now!  So you create room in your portfolio by venturing into the options and futures markets.  You buy gold because, hey why not?  Everyone is doing it and it can only go higher from here! 

In short, you stray from your investment approach, to roll dice. 

Big mistake. 

Making money consistently in the futures and options markets is difficult because you have to be right about the investment and the timing.  Buying stocks is an easier way to make a buck.  As long as you’re right on the stock, your timing need not be perfect.  You can wait until your reasons for buying the stock pan out.  When you buy options and futures contracts, the clock starts ticking immediately.  You can’t afford to be patient, hoping your investment thesis comes to fruition.  With options, you have at most nine months for your idea to develop.  That’s not a long time.  Most options expire worthless.  You shouldn’t think yours will be any different. 

Buying initial public offerings (IPOs) usually is another losing game for individual investors.  The problem with buying IPOs is that the best IPOs are not available to individual investors.  All those Internet IPOs you read about that went from $10 to $60 were never available at the $10 price for individual investors like you and me.  Only the best customers of the of the investment firms taking the company public get a piece of the best IPOs.  Oh sure, you can buy the stock after it goes public and has already jumped 300%.  That’s a bad idea, since many IPOs return to their initial offering price over time.  And if you are ever approached by a broker who wants to sell you shares in the next “hot” IPO, run for the hills.  Any IPO in which that’s offered to you and me is just junk that none of the big guys want.  We consider IPOs to be in the “Speculative Stocks” category since most of them have earnings that are hard, if not impossible, to determine.  

Should You Sell Your Gold?

With news of gold prices hitting $1,350 an ounce – buyers of all kids are eager to get their hands on all that glitters.  That includes the contents of your jewelry box.  Gold-party organizers, jewelers, mail-in companies and even kiosks at the mall want to pay for what you’ve got. 

While it’s easy to be dazzled by visions of quick cash, some (if not most) individuals and firms might take advantage of your enthusiasm.  So, here are a few tips to make sure you get the best deal when selling your metal.

1.  Know what its worth.  Buyers can offer widely different amounts for the same pile of earrings.  I found a simple formula for determining your gold’s worth:  Weight in Grams (use your kitchen scale) x Current Gold Market Price / Divide by one of these (10k = 74.8, 14k = 53.2, 18k = 41.5, 24k = 31.1).  Then multiply by 0.50 and 0.80 to get a fair price within that range. 

2.  Ignore the mail-in buyer ads that are blanketing the airwaves.  When you send off a piece of jewelry, you’re unlikely to go through the hassle of getting it back in order to compare prices.  As a result, these mail-in companies are able to low ball because they know they have a captive audience.  You might be better off shopping your gold around traditional jewelers, coin dealers, pawnshops, even gold parties.  Remember, just because you go into a store and ask what they’ll pay doesn’t mean you have to sell on the spot.  You should think about it first.  Also, there are some advantages to selling to jewelers as you may be able to get money for diamonds in the piece, generally if they’re at least 0.25 carat. 

3.  Consider a trade-in.  You might get a better deal if you’re willing to trade up your jewelry.  If you’re interested in a swap, visit at jeweler who sells pieces you’d like to wear.  And when someone admires your new ring, you can say, “Oh this old thing?”  (Literally).

The Basics of Technical Analysis

The primary strategy CAM Trading uses is Technical Analysis.  

What is Technical Analysis?  Essentially, it is chart reading.  Specifically, it is the science (or art, depending on your personal view) of recognizing chart patterns and interpreting them to make buying and selling timing decisions and implementing a trading plan.  Technical Analysis can help you not only make your decisions but make them more precisely, make them more disciplined, and can help you in managing your money more effectively.

Many Technical Analysis protagonists believe that everything you need to know about a security can be seen by looking at the charts.

Technical Analysis comes in two forms:

1. Price Patterns - these are simply visible patterns of what is happening to the price of the security.
2. Indicators - these are mathematical algorithms that take all aspect of the price movement, including volume, and are put together to form all kinds of ratios and analysis by which future price movements may be guesstimated.

The Problem with Relying Solely on Technical Analysis 

Fakes 


Be aware that Technical Analysis is not what you'd call an exact science.  In practice, this means don't get too hung up on precision.  As you gain more experience, you'll notice that no two historical price movement is ever exactly the same and believing so is an invitation for disaster.  


Behind the Scenes

What you see (real-time quotes) on your computer screen is only a half truth.  Fakes can occur where specialists and market makers identify extraordinary levels of interest around a support or resistance area and deliberately drive the price beyond that area to secure an advantageous position.  For example, a stock is falling down to a known support level where there are lots of sell stop orders.  Seeing this, the specialists work the price lower so that those stops are triggered.  In the mayhem of all this automated selling activity, the specialists are busy buying as much as they can, soon driving the stock price upward and securing a tidy profit for themselves. 

Eventually, the "specialists" and middle-men will go the way of the old phone and fax stock broker as financial systems and technology continue to evolve.