So how do you stay calm about your investments when the markets seem to be going crazy?

By going back to the basics and sticking to simple stock trading rules!!!

With a nervous market and economy, it’s a good time for a refresher in one of the most basic but helpful practices an investor can do for themselves.

Before buying an investment, think of all the reasons for buying it . Even pull out a sheet of paper and write down all of the factors that were important in your decision.

Effectively, you are articulating everything you like, as well as what you expect the investment to deliver in terms of performance and volatility.

So if you are looking at a mutual fund, you will have a variety of characteristics to write down. It might get good ratings from Morningstar, past performance over short- and long-term periods, a minimum initial investment you can afford, etc.

In stocks, it’s all of the basic characteristics you’re looking for. It might be a solid balance sheet, no debt, earnings stability, a leading position in its sector and industry. It might also be the bullish recommendation of an expert or analyst or the diversification that the investment adds to your portfolio.

Want to do it like the pros?

Most pros look at 8 fundamental factors:

- Positive earnings

- Positive earnings surprises

- Increasing sales growth

- Expanding operating margins

- Strong cash flow

- Earnings growth

- Positive earnings momentum

- High return on equity

For a stock to be worth buying, five of those eight characteristics need to be present; when a stock changes over time and it falls below that minimum threshold, it gets sold.

For options, the above is not that crucial because you can also profit from a down market. Here it is important to look at the overall trend of the broad market and the underlying stock for a specific option before you decide what options to buy, either calls or puts.

Whereas stocks and mutual funds have an unlimited lifetime, unless of course the company goes broke, options do have a limited life because they expire after some time. So that’s why, if you buy options, never go against the trend because “the trend is your friend”! With stocks and mutual funds you can always sit out a crash or a bear market. But with options it becomes more and more difficult the longer the market trend goes in the opposite direction of your trade.

Laying out the selection criteria lets you know specifically what’s in place, and what’s not.

At the end of the day, writing down your reasons for making an investment also cements your feelings about the money you are putting into it. If you start the process and then feel like the reasons are stupid then perhaps it’s time to change your investment strategy or selection criteria.

If, on the other hand, what you wrote down on your sheet is a good representation of your thinking and demonstrates that you have reasonable expectations and reinforces your belief that your methodology will stand up over time, then you can go ahead and make the purchase.

But what do we do if we’re still nervous? Try to recall your thinking at the time of purchase, and come up with conditions that would have you buying the investment again today. If you can’t convince yourself that you would buy it again, you have a clear sign that you shouldn’t be quite so calm about your investments, because something is not quite right and it’s time to make a change.

Another thing one should always do. And I mean ALWAYS (!!!) especially if you are an options and short-term trader! Always set a trailing stop!

A trailing stop is a stop order than can be placed with % or $ limits. The limit slides up with the stock. So if you set a $1 trail when you buy a stock at $50 the exit takes place automatically at $49. If the stock moves up to $55 then the exit would automatically be at $54 protecting a $4 profit that you’ve made should the market consolidate or even crash.

The other way around would be if you bought a stock just before the market goes down which is always annoying! Then, taking the above example, your stock would get sold at $49 making you only a loss of $1 per stock instead of a lot more.

So in other words, if the price gets to the trigger (trail price), it activates the trade and then gets you out at the then market price.  A trailing stop is a disaster averter and protects against major losses. A trailing stop also does not limit upside profits, because it follows the price of the option premium.

At the latest, as your trade makes profits, use a trailing stop. By doing so, you should look at an approximate 20-25% trailing stop.

And if all else fails and you’re still not sure whether to trade or not, then don’t! Don’t make the same mistakes hundreds and thousands of traders and investors do every day falling into the same pitfalls as many before them.

Just sit back and relax because market storms provide many new opportunities after the dust has settled. They are also a good time to pull in the sails and make for port.

In volatile markets I always back off to see if the waves of panic will settle down before making new trading commitments whether short on long.

So again: remember! When it comes to the crunch, go back to the basics and revert to proven stock trading rules !

The financial collapse resulted in a political crisis as Yeltsin, with his domestic support evaporating, had to contend with an emboldened opposition in the parliament. A week later, on August 23, Yeltsin fired Kiriyenko and declared his intention of returning Chernomyrdin to office as the country slipped deeper into economic turmoil. Powerful business interests, fearing another round of reforms that might cause leading concerns to fail, welcomed Kiriyenko’s fall, as did the Communists.

Yeltsin, who began to lose his hold on power as his health deteriorated, wanted Chernomyrdin back; In a televised address to the nation, Yeltsin said that “heavyweights” such as Chernomyrdin, who was ousted as prime minister in March 1998 for failing to vigorously promote economic reforms, were needed to stem the nation’s financial collapse. Yeltsin also suggested that Chernomyrdin would be named his successor as president when Yeltsin’s term expires in 2000. But the legislature refused to give its approval. After the Duma rejected Chernomyrdin’s candidacy twice, Yeltsin, his power clearly on the wane, backed down. Instead, he nominated Foreign Minister Yevgeny Primakov, who on September 11 was overwhelmingly approved by the Duma.

Primakov’s appointment restored political stability, because he was seen as a compromise candidate able to heal the rifts between Russia’s quarreling interest groups. There was popular enthusiasm for Primakov as well. Primakov promised to make the payment of wage and pension arrears his government’s first priority, and invited members of the leading parliamentary factions into his Cabinet. Communists and the Federation of Independent Trade Unions of Russia staged a nationwide strike on October 7 and called on President Yeltsin to resign. On October 9, Russia, which was also suffering from a bad harvest, appealed for international humanitarian aid, including food.

Recovery

Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices rapidly rose during 1999–2000 (just as falling energy prices on the world market helped to deepen Russia’s financial troubles), so that Russia ran a large trade surplus in 1999 and 2000. Another reason is that domestic industries, such as food processing, had benefited from the devaluation, which caused a steep increase in the prices of imported goods.

Also, since Russia’s economy was operating to such a large extent on *barter and other non-monetary instruments of exchange, the financial collapse had far less of an impact on many producers than it would had the economy been dependent on a banking system. Finally, the economy has been helped by an infusion of cash; as enterprises were able to pay off arrears in back wages and taxes, it in turn allowed consumer demand for the goods and services of Russian industry to rise. For the first time in many years, unemployment in 2000 fell as enterprises added workers. Since the 1998 crisis, the Russian government has managed to keep social and political pressures under control, and this has played a vital role in bringing about the current recovery.

Effects on other Countries

Baltic States

The Russian crisis affected Baltic countries more than was expected. Estonia, Latvia and Lithuania sank into recession. The figures for 1999 showed a heavy decline in Baltic’s exports to Russia and a significant decline in the growth rates of these economies. Food and beverage as well as processing industries as a whole have suffered the most.

Belarus

Overall, economic activity slowed down substantially in the immediate aftermath of the Russian crisis, with output growth falling from about 8.5 percent in 1998 to 3.4 percent in 1999. Both exports and imports contracted substantially, resulting in a drop in the current account deficit from 6.1 percent of GDP in 1998 to 2.2 percent of GDP in 1999. Externally, exports to Russia, which accounted for more than 60 percent of total exports, fell during the second half of 1998 by 10 percent. Demand for Belarusian products was weak through 1999, showing signs of recovery only during the final quarter, with the revival of economic activity in Russia. Also, in the first quarter of 1999 as compared with 1998, except for investments, all the budget expenditures were smaller (see, Table 3). The biggest cuts were done in national security (1.9 percent of GDP compared with 2.5 percent of GDP in the first quarter of 1998) and social policy (1.5 and 2.4 percent of GDP, respectively) where the expenditures were lowered almost by one third.

Kazakhstan

The Russian crisis was a hard hitting blow to the Kazakh economy. Kazakhstan lost its price competitiveness and its exports were in shambles. On the other hand, cheap Russian goods were flowing into the economy that was killing the domestic industries. There was huge downward pressure on the tenge and their balance of payments had worsened. However the National Bank of Kazakhstan was still holding on to the tenge. In fact, they had spent close to a billion dollars to maintain the level of tenge. Their foreign exchange reserves halved.

Moldova

Moldova received an IMF special mission advising the government on how to cope with the effects of the Russian crisis. Russia bought at that time 85% of Moldova’s wine and brandy and most of its canned goods and tobacco. After the rouble crashed, most Russian importers put deals with Moldova on hold. The Moldovan president Petru Luchinski was quoted as saying that the Russian crisis had cost Moldova as much as five per cent of its GDP. The country’s parliament was discussing a programme aimed at reducing imports and searching for new markets outside Russia.

Ukraine

The crisis cost a lot for Ukraine. It’s national currency, the Hryvnia, devaluated by 60%, domestic prices increased by 20%, the National Bank of Ukraine lost 40% of its gross reserves.

Uzbekistan

In the central Asian state, the government has banned the free unlicensed sales of food, most of which is imported from Russia, as a preventative measure against price rises and panic.

Inkombank was one of the most high-profile casualties of the events of August 1998. Once one of Russia’s largest banks, whose billboards proudly announced its motto “We are for real, we are here to stay”, it closed its doors almost overnight. Their Nizhny Novgorod building, which was one of the city’s symbols of the new Russian capitalism, looks rather shabby in the above picture, taken 2006. But above the name of its current owner, one can still see a not-quite-erased Inkombank logo.

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*Barter is a type of trade that doesn’t use any medium of exchange, in which goods or services are exchanged for other goods and/or services. It can be bilateral or multilateral as trade.

On August 17, 1998, Russia was forced by an escalating payments crisis to devalue the Ruble dramatically, declared its intention to restructure all official domestic currency debt obligations by the end of 1999 and imposed a 90 day moratorium on the repayment of private external debt, to aid its commercial banks suffering from the ongoing investors frenzy.

On September 2, the central bank of the Russian Federation decided to float the bubble. By September 21, the exchange rate had reached 21 Rubles to the US Dollar. On September 28, Boris Fyodorov was fired from the position of the Head of the State Tax Service.

Russian inflation in 1998 reached 84% and welfare costs grew considerably. Many banks, including Inkombank, Oneximbank and Tokobank were closed down as a result of the crisis. The salaries of miners alone were to consume $919 million, more than 1% of the federal budget. By August of that year, the government had paid $4 billion to settle miners’ strikes. Prices for almost all Russian food items have gone up by almost 100% while imports have quadrupled in price. Many citizens were stocking up for bad times and throughout the country shop shelver were being emptied, leaving a shortage of even the most basic items such as vegetable oil, sugar or washing powder.

The crisis had reduced the demand for food and lowered food consumption because substantial depreciation of the Ruble significantly raised domestic prices for food stuffs. The crisis also increased social tension. The middle class that was already forming by that time and that had some hope for stability, ceased to exist as millions of people lost their bank savings.

On October 7 that year, demonstrations were held in many cities. Around 100000 took to the streets in Moscow, in Vladivostok 4000, in Krasnoyarsk 3000 and in Yekateringburg 6000. Defence minister Igor Sergeyev cancelled his scheduled visit to Greece in the first week of October, in order to be at hand should matters get out of control. Similarly select military were placed in a state of readiness. On October 20, President Boris Yeltsin signed a presidential decree barring mass protests in Moscow between the hours of 10p.m. and 7a.m. and limiting them to a maximum of 5 days.

As the crisis deepened, regional governors had been introducing emergency measures: In Krasnoyarsk Krai in Siberia, governor Aleksandr Lebed, had signed a resolution to hold down prices “using administrative methods”, a television report said. The authorities in the far eastern city of Vladivostok had banned deliveries of food to areas beyond the port city, and there had been talks of introducing rationing there. In Russia’s Kaliningrad enclave on the Baltic, the governor announced a suspension of tax payments to the federal authorities.

The regional budgets also suffered from the 1998 crisis. The spending of the regions declined from 18.2% of the GDP in 1997 to 14.8% of the GDP. Spending on the economy (by 1.5% of the GDP) and social expenditures (by 1.6% of the GDP) were especially heavily reduced. The expenditures continued to decline in the following period. They dropped another 1% of the GDP in 1999 to 13.8% of the GDP, and to 10.8% of the GDP in the first quarter of 2000. One of the main factors in the reduction was the decline in subsidies for housing and municipal services, from 3.5% to 2.7% of the GDP.

Click HERE for Part 3.

When stock markets drop, especially significantly, it is obviously not very thrilling for an investor unless he invested in a down market.

But a dropping market might not necessarily be such a bad thing after all. Down markets - more often than not - can present perfect buying opportunities.

Turning Bad News Into a Lucrative Opportunity for Your Portfolio

Even the best companies, industries, and sectors fall out of favour from time to time. A well-informed investor, with some cash and a firm understanding of the situation, can calmly get into a turbulent market and buy up shares of these underdogs at a fraction of their value. Or, you can buy put options and profit from a market that’s in a downtrend.

But how do you know which companies are permanent losers and which are undervalued gems? Consider the following to determine if you should invest your money or keep it stashed in cash:

Is the problem temporary or long-term?

You must be careful not to simply invest in a company because everyone else is running from it; sometimes there is reason to run! Even after the share prices of companies such as Lucent and United Airlines had been cut by 75%, they still did not constitute a good investment. There are many companies that aren’t worth buying at any price. Trash is trash, regardless of how much you pay for it.

In some cases, problems arise that are the result of one-time mistakes on the part of management. During the Savings and Loan crisis, for example, bank stocks were beaten down to almost comical levels. An investor who mentioned he was purchasing shares of these institutions was immediately scorned, mocked, and considered crazy by even close friends.

At the same time, firmly entrenched companies such as Wells Fargo (which boasted a solid balance sheet, established reputation, top-notch management, and steady customer base), were hit just as hard as banks of lesser quality. At some point though, those that had exercised courage and relied on their analytical judgment by purchasing shares in such banks found their portfolios much fatter. Remember the words of a very wise man; “you are neither right nor wrong because the crowd agrees with you; you are right because your analysis says so.”

Is the business an excellent business with a suitable market capitalization?

In your attempt to look for under valuated companies you should focus your interested more on large market leading companies instead of smaller ones.

Companies with high returns on equity, little or no debt, that aren’t affected too much by economic trade cycles and that operate in areas where competition is less brutal. Especially in the long-term. Because in the event of a recovery, for example, Wal-Mart is more likely to recover sooner than a small specialty retailer. The owner of smaller companies may find himself waiting considerably longer for his shares to realize their full value in the market.

Does management have an excellent track record?

The best indicator of future performance is past results. Great management tends to produce great results for everyone involved, including the shareholders.

If a company has encountered significant problems for consecutive years while the industry in which it operates prospers, it is likely that management has been unwisely retained. In such cases, you and your pocketbook would be better off ignoring the empty promises of executives who are only interested in keeping their jobs.

The quality of management question is perhaps one of the most important an investor must pose to himself. Coca-Cola is an excellent example of how good management can make a great company even better.

When Roberto Goizueta became CEO the business became a truly global powerhouse, throwing off cash to its stockholders faster than they could gulp it down.

Are you patient enough able to wait out the storm?

After you’ve determined that the problem a company has is temporary, management has an excellent track record, and the business possesses excellent economics, there is still one question remaining before you should purchase a seemingly undervalued stock.

Are you patient enough to wait out the company’s troubles? Do you have the luxury of waiting for the company’s value to be reflected in the share price?

Bear in mind what I always preach. “Trading is a business and should be treated like one!” It’s not a lottery game.

As investors, we know that a good company will eventually be recognized by the market; we just don’t know when.

In the short run, anything can happen. There is nothing to stop an undervalued stock from falling significantly further in price.

You must have the time to wait for the inevitable result of wise investing, regardless of whether it takes a week, month, or several years. In the end, your sound analytical judgment and unshakable patience should be rewarded.

Course of Events

Prior to the culmination of the economic crisis, the GKO bonds ( GKO = Gosudarstvennoe Kratkosrochnoe Obyazatelstvo which are Federal Loan Bonds ) issuance policy was described as similar to a pyramid scheme or Ponzi scheme (Hyman Minsky 1992), with the interest on matured obligations being paid off using the proceeds of newly issued obligations. Note however this scheme is used in the issuance of currency through a Central bank but is limited by *Fractional-reserve banking practices.

Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to the meltdown. The economic cost of the first war in Chechnya that is estimated at $5.5 billion (not including the rebuilding of the ruined Chechen economy) was also a cause of the crisis. In the first half of 1997, economy showed some signs of improvement.

However, soon after this, the problems began to gradually intensify. Two external shocks, the Asian Financial Crisis that had begun in 1997 and the following declines in demand for (and thus price of) crude oil and nonferrous metals, also impacted Russian foreign exchange reserves. A political crisis came to a head in March when Russian president Boris Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet on March 23. Yeltsin named Energy Minister Sergei Kiriyenko, aged 35, as acting prime minister.

On May 29, Yeltsin appointed Boris Fyodorov Head of the State Tax Service. The growth of internal loans could only be provided at the expense of the inflow of foreign speculative capital, which was attracted by very high interest rates: In an effort to prop up the currency and stem the flight of capital, in June Kiriyenko hiked GKO interest rates to 150%. The situation was worsened by irregular internal debt payments. Despite government efforts, the debts on wages continued to grow, especially in the remote regions. By the end of December 1996, the total debts on wages reached more than 47.1 trillion Rubles. By the end of 1997, the situation with the tax receipts was very tense, and it had a negative effect on the financing of the major budget items (pensions, communal utilities, transportation etc).

A $22.6 billion International Monetary Fund and World Bank financial package was approved on July 13 to support reforms and stabilize the Russian market by swapping out an enormous volume of the quickly maturing GKO short-term bills into long-term *Eurobonds. This had started to be implemented with some success by July 24, yet the Russian government decided to keep the exchange rate of the Ruble within a narrow band, although many economists, including Andrei Illarionov and George Soros, urged the government to abandon its support of the Ruble. On May 12, 1998 coal miners went on strike over unpaid wages, blocking the Trans-Siberian Railway. By August 1, 1998 there were approximately $12.5 billion in unpaid wages owed to Russian workers.

On August 14 the exchange rate of the Russian Ruble to the US dollar was still 6.29. Despite the bailout, July monthly interest payments on Russia’s debt rose to a figure 40 percent greater than its monthly tax collections. Additionally, on July 15 the *State Duma dominated by left-wing parties refused to adopt most of government anti-crisis plan so that the government was forced to rely on presidential decrees. On July 29 Yeltsin interrupted his vacation in Valdai Lake region and flew to Moscow, prompting fears of a Cabinet reshuffle, but he only replaced Federal Security Service Chief Nikolai Kovalyov with Vladimir Putin.

Realizing that this situation was unsustainable, investors continued to flee Russia despite the IMF bailout. Weeks later the financial crisis resumed as the real value of the Ruble resumed its decline. Russians sought frantically to buy Dollars, but these had become scarce. Foreign investment rushed out of the country, and the ensuing financial crisis triggered an unprecedented flight of capital from Russia.

It was later revealed that about $5 billion of the international loans provided by the *World Bank and *International Monetary Fund (IMF) were stolen upon the funds’ arrival in Russia on the eve of the meltdown.

On August 13, 1998, the Russian stock, bond, and currency markets collapsed as a result of investor fears that the government would devalue the Ruble, default on domestic debt, or both. annual yields on Ruble denominated bonds were more than 200 percent. The stock market had to be closed for 35 minutes as prices plummeted. When the market closed, it was down 65 percent with a small number of shares actually traded. From January to August the stock market had lost more than 75 percent of its value, 39 percent in the month of May alone.

Click HERE for Part 2.

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* Fractional-Reserve Banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments.

*A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for example in Singapore or Tokyo.

Eurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese Yen and American Dollars respectively.

*The State Duma in the Russian Federation is the lower house of the Federal Assembly of Russia (legislature), the upper house being the Federation Council of Russia. The Duma is headquartered in downtown Moscow, a few steps from Manege Square. Its members are referred to as deputies. The State Duma replaced the Supreme Soviet as a result of the new constitution introduced by Boris Yeltsin in the aftermath of the Russian constitutional crisis of 1993, and approved by the Russian public in a referendum.

*The World Bank ( formally established on December 27, 1945 ) is an internationally supported bank that provides loans to developing countries for development programs with the stated goal of reducing poverty.

*The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance. Its headquarters are located in Washington, D.C., USA.

The International Monetary Fund (IMF) was conceived in 1944, with a goal to stabilize exchange rates and supervise the reconstruction of the world’s international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances.

Reasons for the crisis

The crisis started in Thailand with the financial collapse of the Thai Baht caused by the decision of the Thai government to float the Baht, cutting its peg to the U.S. Dollar, after exhaustive efforts to support it in the face of a severe financial over extension that was in part real estate driven.

At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. The drastically reduced import earnings that resulted from the forced devaluation then made a quick or even medium-term recovery impossible without necessary international intervention. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and asset prices, and a precipitous rise in private debt.

Though there has been general agreement on the existence of a crisis and its consequences, what is less clear were the causes of the crisis, as well as its scope and resolution. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also fairly hurt by the slump. Mainland China, India, Taiwan, Singapore and Vietnam were relatively unaffected. Japan was not much affected by the crisis but was going through its own long-term economic difficulties. However, all of these Asian countries saw their currencies fall significantly relative to the United States dollar, though the harder hit nations saw extended currency losses.

Although most of the governments of Asia had no national debt and seemingly sound fiscal policies, the International Monetary Fund (IMF) was forced to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, whose economies were hit particularly hard by the crisis.

In Japan, which had already been in a state of profound recession due to a highly inefficient banking system laboring under mountains of bad debt (much of which up to that point had been relatively invisible because of the established Japanese banking practice of hiding the losses of major customers), the United States intervened to stop a precipitous slide in the value of the Yen by agreeing to buy some $2 billion worth of the Japanese currency. In doing so, the United States hoped to increase the value of the Yen, which had fallen to its lowest point in some eight years.

The efforts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After 30 years in power, President Suharto was forced to step down in May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the Rupiah. The effects of the crisis lingered through 1998. In the Philippines growth dropped to virtually zero in 1998. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs that the economies of Asia were beginning to recover.

In Vahan Janjigian and Steve Forbes book “Even Buffett Isn’t Perfect” they conclude that Warren Buffet is one of the greatest investors - if not the greatest - of all times. But they identify one recurring problem with Buffett’s style of investing. He holds on to stocks too long regardless of price.

Buffett once said , “we have no interest at all in selling any good business that Berkshire (Buffett’s conglomerate holding company) owns and we’re very reluctant to sell businesses if they were at least producing some cash and had decent labour relations.”

For Buffett, his investments are almost like a marriage. Meanwhile, Vahan Janjigian and Steve Forbes prompts him with an old adage, “never marry a stock.” These attitudes can be reconciled because Buffett sees all investment decisions as though he is buying a business, rather than simply buying a stock, and takes very large stakes. Once invested, he is married to the business, not merely the stock.

For most it’s probably not so! If a very good business has become overpriced, most people consider selling it. The emerging discipline of behavioral finance - which uses experimantal psychology to explore investment decisions - suggests that far more mistakes are made in deciding when to sell a stock than in the much more widely discussed arena of deciding when to buy.

One of Buffett’s great stock picks was Coca-Cola, which he rode all the way up to it’s brief stint as the world’s largest company by market value, a distinction it reached a little more than a decade ago. But he still holds it, even though Coke has been outperformed by many rivals since then.

For Buffett, this might make sense. But the rest of us should develop a selling discipline. When a stock has become overpriced, we should sell.

As for Soro’s mistakes, he’s been honest enough to tell us about them. His book “The New Paradigm for Financial Markets”, on the causes of the credit crisis includes an investment diary that started at the beginning of 2008. Soros gave his prognosis for 2008 and explained his investment strategy to capitalize on it.

He then updated it every 2 weeks. The timing was fortunate: Soro’s diary took him through until the Bear Stearns sell-off in March 2008. Soros was the first great “global macro” fund manager making big asset allocation bets. Most famously he wagered that the sterling would have to devalue in September 1992, forcing the UK government to leave the exchange rate mechanism.

Macro funds - which is a hedge fund that specializes in strategies designed to profit from expected macroeconomic events (Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy) - did well in the first quarter of 2008, making an average of about 10% while many other investors lost serious money.

But Soros reveals in his diary that he was only flat for the period. He failed to make money even though he was exactly correct in the way he assessed the global markets. In January  2008, he predicted that the credit crisis was sever but that the acute phase would be contained because central banks would provide temporary liquidity. And that’s exactly what happened.

He also saw a bubble in China. So he started the year betting on the dollar and US and European stocks to fall. All correct calls! So how did he fail to make money? Timing was part of it. He was heavily invested in India and China on the theory that the bubble was in its early stages. But Indian stocks fell 20% in a few weeks during January 2008, while the Shanghai Composite was at half from its peak of  October 2007.

Then there was Bear Stearns. His overall prediction on US financial services was uncannily correct. But on Friday, March 14. 2008, he bought Bear Stearns stock which closed the day at $54. The Federal Reserve had announced emergency funding and he assumed that Bear Stearns would be auctioned off to the highest bidder over the weekend.

Instead, Bear was forced into the arms of JP Morgan for $2 a share. And Soros could have feared very much worse. His Bear shares were very well hedged in the credit market. But by March 20, his fund was “under water for the year”, albeit to a much lesser degree than many others.

There is a belief that times of turbulence are times of opportunity for those that see the big picture. And that perfectly describes George Soros. But if even he can fail to make money owing to slight errors in timing and slight misreadings of individual situations, the lessons for the rest of us is sobering!

Turbulence creates risks as well as opportunities. Those of us not called Soros or Buffett should probably leave well alone.

Ricky Schmidt

Looking at the declining stock markets and the impending recessional effects on global economy, these end-of-the-world headlines fall on fertile ground. The ground of a very normal human emotion. FEAR! And because the media likes to pour more and more fuel into the fire, the fear of investors increases and stock prices drop even more.

But is a recession really that bad like many people are made to believe?  How long is the recession going to last? What industries profit during a recession and how can the government prevent another recession?

It’s economic basics that a decline is followed by an upswing or even a boom like in the ’90s, and then there’s a high possibility of a recession. It is impossible for any economy to just grow continuously. And in times of globalisation where so many corporations and sectors are cross-linked and intertwined, when one big economy struggles, others can suffer too.

What the media is trying to make out as a huge threat to mankind is nothing but a totally normal phase of the economy. Just the reasons often differ.

This phase is without a doubt very unpleasant! The economy declines, consumer spending declines which causes earnings of companies to decline, unemployment increases, stock prices go down and a look at your portfolio resembles a nightmare! This also answers the question, “how will the recession affect the average consumer?”, that a lot of people are asking themselves in such times. But as a general rule it is also a relatively short phase in comparison to the upswings that have always followed after a downswing.

After all, a recession isn’t only a nasty decline of the economy. It is also a correction that does away with a lot of exaggerated nonsense and speculative prices that are fundamentally unjustified like the automobile company Volkswagen (VW) when it shot through the roof on account of speculations at the end of October 2008. On Oct. 27 VW gained some 200% intraday and on Oct. 28 another 81.73% peaking at €1005 when Porsche announced that it wants to increase its share in VW to 74%. For a short while, VW became the most expensive corporation in the world.

But then, on Oct. 29 Porsche announced that it was going to sell some of it’s VW stocks again thus, VW dropped some 45.29% that day. And guess what? Porsche gained 30.48% because selling VW stocks at prices up to 1000 euros meant a huge chunk of money into Porsches pockets. And all this has absolutely nothing to do with the fundamental value of a company. That’s pure speculation, gambling and even stock manipulation.

But most importantly, a recession is also an economic phase that marks the beginning of the next upswing and paves the way for a lot of great investing opportunities.

How Much Longer Is The Recession Going To Last?

In a recession there’s no telling when it is going to end and when prices will go up again. A recession length can take several months to several years depending on how strong the recession is and what caused it and why. But sooner or later the markets will rebound again. And then things can go very fast!

And because I know that the situation will eventually turn to the upside again I’m going to look back and take a glance at what happened in the past.

One of many questions are how fast and by how much can stocks rise again after a rebound?

Let’s take a quick walk down history road!

On October 9, 2007 the Dow Jones marked it’s all-time high of  14,164.53 points. After that it dropped by around 40% due to the credit crunch, housing crisis and the recession that followed. Let’s compare this with the last 2 severe bear markets.

From October 14 to October 19, 1987, the major indices of the United States (Dow Jones, Nasdaq, S&P 500) dropped between 30 and 40%. This crash marked the end of a 5 year Bull Market that saw the Dow Jones rise from 776.92 points in August 1982 to a high of 2722.42 points in August 1987.

On October 20, these indices recovered a part of their losses. However, for the next 4 months, they were often subject to fairly large daily variations. But it only took 1 year and 10 months - until 1989 - for the markets to reach a new high with a gain of 37%. 5 years later they almost doubled with a new all-time high.

From March 20, 2000 until October 2002 the Dow Jones also lost 40% due to the burst of the internet bubble - 40% by the way, is also the average drop in the Dow during a recession in the past. The turnaround came in March 2003 and within the year that followed the most important index in the world gained 30%. After 5 years the Dow almost doubled reaching its all-time high of 14,164.53 points. And other bear markets before (1982 - high inflation) and in between (1990 - Gulf War) had  similar recoveries.

Of course one can’t compare those crises with the present one. But no crisis is like another. They all differ because they all had different reasons! Back in 2000 it was the internet and technology sector that got the markets into trouble and marked the beginning of  a recession. And now it’s the financial sector that brought about the present recession.

Back in 2000, the German stock index DAX was even worse off than the Dow Jones. It lost 3 quarters of its value. It collapsed from  its all-time high of 8136 points down to 2200. The rebound came slightly later than that of the Dow, but it definitely came, and pretty violently too! A year after its 2200 point low the DAX was up 70% already! And 5 years later it reached its high from the year 2000 again.

One remarkable rebound was seen after the crash of 1982, which was probably the worst recession after the great depression of 1929. The US economy dropped by 2,2% due to the Federal Reserve strongly reducing the supply of money on account of the high inflation back then. But the recovery came much stronger. After 5 years the Dow more than tripled!

What Industries Profit During A Recession ?

Even in negative situations like a crisis or recession there is someone that profits. Like I said in my free report on my website already, would you stop buying groceries just because the economy and stock market is down? I doubt it ‘cos we all need to eat, right! So what are the chances of Wall-Mart going out of business. Very little don’t you think. Their earnings might be less due to an overall bad market situation. But they will still exist and make money.

Wouldn’t people still go to Walgreens or other pharmacies to get their prescriptions and medicine they’re in need of? I think they would! Just as much as they would most probably postpone that brand new car they were ogling with because in turbulent times, that’s something one doesn’t necessarily need immediately and which can be put off for a few months.

That’s why the automobile industry is so volatile and always will be. It depends too much on the economy. But companies of industrial sectors that are more independent from the economy and that supply people with their everyday needs are the industries that profit directly during a recession. Especially if those companies are also discounters.

How Can The Government Prevent Another Recession?

It can’t! Period. Otherwise we wouldn’t have had one single recession anymore after the one in 1929 that turned into a depression. As I said. A recession is part of the game and a totally normal phase of the economy.

Governments can implement tools and measures to reduce the risk of a recession or minimise its depth should it occur. They can also learn from the past and create an environment so that a recession won’t be caused twice in the same way. But no one can avoid a recession entirely!

The economy - especially due to globalisation - has become too complex with all kinds of industries being intertwined which makes it virtually impossible to avoid an impending downturn, also because a recession has to do with another elementary component of economics: Supply and demand. If the demand has been met, no matter how much supply there still is, no one’s gonna buy anymore until there’s a demand again. Although it’s not quite that simple, but that’s what it basically boils down to.

There Definitely Is Hope!

And as I’m writing all these positive and motivating words, I know that the present recession is painful! Let’s face it! And the end of the road has not been reached yet! It’s probably going to take a few years again before we see the light at the end of the tunnel. But this doesn’t mean that everything is going to collapse and break down forever and that all big corporations are going to be wiped off the face of the earth and rendered worthless.

I know that in the past weeks we have been hearing all kinds of statements that suggest that the economy will not come back; that folks should accept the idea that widespread prosperity as we’ve known it is over; that retirement accounts will not recover.

All this is utter crap! The game is not over!  In mechanics, mathematics, physics, electronics, food production, transportation, biomed, engineering, energy production, increased physical capabilities of the human body and a host of other endeavors that will elevate mankind have not been abandoned. The work, the dreams, the imagination, and the motivation goes on in spite of what a pack of blood scented reporters and analysts are convinced of.

Take the Asian financial crisis in 1997 for example. The world survived that as well! And wow, Sony survived, Toyota survived, Samsung survived…I wonder why if a recession is the end of the world like many so-called experts always proclaim. Bollocks! It isn’t! A year later (in 1998) we had the Russian financial crisis. And funny enough, we survived that too!!!

Sooner or later the financial sector will stabilize and normalize again and so will the economy like it always has. So panic is the wrong advice someone could take right now. Just be patient! A recession is just a normal cycle in an free market economy. The next upswing will come!

What To Do With Cash In A Recession?

That’s another thing I wrote about in my free report. So if you don’t know what to do in a recession, then here are a few possibilities:

You can sell all your assets with the risk of taking a loss and stash everything away under your pillow and wait for better times. Or you can keep investing like I do and average your costs.

Because it is virtually impossible in any phase of the economy to sell at its exact peak and buy at its absolute low, I prefer to stay in. Not even the professionals and big investment gurus can pinpoint these spots.

If you don’t sell in a recession and keep investing, you are buying much cheaper than you did when equities were still high. So when the markets turn around again, you’ll be back in the green much faster because your average entry or purchasing costs have been lowered.

Yet again, if you’ve already made a gain of 20, 30 % or more, then it’s totally ok if you sell and get out quickly hopefully taking at least a bit of your profits. You can always get back in again at a later stage once the markets have calmed down.

Coping With The Recession

I guess for an individual one of the worst things that can happen in a recession is unemployment, because getting a new job that pays at least your last salary is more difficult than in good times which of course also depends on your qualifications. But generally, that’s the way things are im bad times.

And in most cases, with unemployment comes less money and, as if things aren’t bad enough already, you probably won’t be able to pay the rates for your house anymore so you end up losing that as well. Now that’ll be the worst case scenario.

But if things have gotten that bad for someone then there’s always professional help that one can seek like debt counselling etc., because what one can do individually depends on each individual situation. So getting into that would go beyond the scope of things here because it involves a lot more than just saying that one must tighten the belt and spend less money because that definitely goes without saying and is no help for anyone that’s in financial troubles!

So yes, unemployment will rise, some companies will reduce productions or even close down and a lot of things will not be nice. Ok, Fair enough! We know that! But the chances are extremely high that General Electric will survive, that BASF will survive, that Apple will survive and most other companies too, hence, most people will still keep their jobs earning the same salary as before! So what big deal is going to change for them and why?

During the last recession between 2000 and 2003 and after 9/11 I still kept my job without any salary cuts. So why should I change my standard of living, the way I live or my spending habits? I still kept on investing, I still kept on going out for dinner, movies etc. and I still kept on donating every month. I had no reasons to panic and change anything! Nada!

The things I hear on TV today makes me want to throw up! There’s talk about consumers holding back with spending and buying less things for festive seasons like Christmas that’s just around the corner. I just watch this sensless crap with disbelief!

As I just said, if you lost your job and couldn’t find another or if you had a salary cut then all this is understandable. But otherwise it’s not and doesn’t make any sense because this will deepen a recession even more because what keeps an economy going? The flow of money!

And if everyone is now keeping a tight grip around their wallets, it is then no wonder why companies are making less profits and can’t grow anymore. It’s no wonder why some companies - especially smaller ones without a big financial cushion like GE or Microsoft - run into trouble having to close down even!

This consumer conduct is definitely the wrong way to cope and deal with a recession because it will not alleviate it, but make it worse. Fear is the wrong answer! Panic is not how you get out of a recession!

Now I’m not saying that you must throw your money out the window. It is important and good money management to build a financial cushion for yourself by keeping some cash stashed away safely for bad times. I do that as well.

But those kind of precautions and provisions should already be made long before a recession so when trouble does lurk around the corner, you’re prepared and all set. More often than not it’s too late to start putting on your safety rope when the bomb has already been dropped.

And, a recession also has its benefits. Also for our wallets! One more reason why refraining from spending is the wrong strategy!

One benefit of an economic recession is that a lot of things are getting cheaper! Just look at petrol prices! In the last 2 years I haven’t paid so little for petrol like today.

In many countries, in order to keep customers, all kinds of discounts are springing up like mushrooms which leaves us with more cash in our pockets. And that’s how many of us can even profit in a recession. So why stop spending and stop living???

Why 1929 Won’t Repeat Itself!

Ok, for some this might be a pretty daring statement. But:

With hindsight we know now that governments and other responsible people and organisations reacted totally wrong!

While companies went broke by the hundreds, banks collapsed, the unemployment exploded, many countries reacted by reducing their expenses and raising taxes. Both of course couldn’t help. It only aided in heating up the recession even more turning it into a deep depression.

The governments were also not prepared to help banks with bail-outs like the 700bln bail-out
package of the U.S., and so the financial dilemma started to drag many companies into bankruptcy.

Today, governments and federal reserves are way more aware of the risks and perils. And of course there’s never a guarantee that the bail-outs and other measures taken are going to be successful. But today problems are approached more valiantly and openly, more prudent and sensibly.

Interest rates were cut and will probably be cut even more. Banks are being supported by bail-outs and there’s no talk of governments cutting expenses.

There was a headline in the “Die Zeit” newspaper here in Germany that said “Will The Misery Of 1929 Repeat Itself?” But that was back in 1973 already. And did the miser repeat itself? No! What I want to say with this is that emotions and recessions are just as old as the economy itself. And it will always be a part of it just like the recovery that will follow. Period!

Yours In Successful Trading,

Ricky Schmidt.

]]> http://stockbreakthroughs.com/2008/11/23/a-recession-is-part-of-the-game-and-how-to-survive-in-a-recession/feed/ http://stockbreakthroughs.com/2008/09/04/where-can-i-trade-stocks-for-cheap-and-why-it-might-not-be-such-a-good-idea-to-do-so/ http://stockbreakthroughs.com/2008/09/04/where-can-i-trade-stocks-for-cheap-and-why-it-might-not-be-such-a-good-idea-to-do-so/#comments Thu, 04 Sep 2008 15:26:13 +0000 stock http://stockbreakthroughs.com/?p=34 Especially when the stock markets have consolidated and broken down significantly, thousands of bargain hunters are on their way trying to find and buy dirt cheap stocks in the hope of cashing in large profits with these cheap trading stocks once the markets go up again!

And even beyond this scenario investors, a lot of times beginners, are in quest of buying cheap stocks whether they are penny stocks, undervalued stocks or any other alleged “great” cheap stock.

But when exactly is a stock cheap?

For many investors a stock is only cheap when it trades within the $10 to $20 range or even way lower than that, trading within a few dollars or even cents, which is why these stocks are also called penny stocks or also over the counter (OTC) stocks. But the peril is, especially with penny and otc stocks, that there’s a reason why these stocks are trading at these give-away-prices.

More often than not there’s some bad news surrounding these companies whether it has to do with fundamentals, management, earnings or other factors. Or - which most often is the case with otc’s - they just haven’t met the stringent requirements to be listed in one of the major stock exchanges like the Dow Jones. So something is just not kosher with these cheap trading stocks. And it would have to be scrutinized very carefully if you contemplate investing in these kind of dirt cheap stocks.

In my early rookie days of trading I fell for 2 dirt cheap stocks myself. I bought Bank Internasional Indonesia (the 6st largest bank in Indonesia) for 3 cents and KrungThai Bank (being the 2nd largest bank in Thailand) for 64 cents thinking that a bank stock must go up at some time. They can’t stay so dirt cheap forever. But they did. Worse even: Shortly after I bought this “hot” cheap stock of Bank Internasional Indonesia it dropped down to 2 cents. Cheap penny stock Krung Thai dropped by 50%. And why did these stocks like lots of other financial stocks in the far east drop to penny stocks? Because of the asian financial crisis 2 years before. Not having recovered yet I, like lots of other investors too,  thought that a recovery is not far away. Wrong!!! These 2 banks are still extremely dirt cheap penny stocks!

But especially when advertising campaigns for cheap trading stocks are spreading through the internet with slogans like “hot cheap stocks”,  “best penny stocks”, “dirt cheap stocks with growth potential” or “cheap stocks to buy now” your alarm bells should start ringing! If these stocks are that brilliant, why is it then necessary to advertise for them in such a way? And at the latest here is where your stock research starts. Before even dreaming of investing in these kind of stocks, research them very very carefully. There’s a very high risk involved! Remember, you’re not buying General Electric, Microsoft, Wall Mart or Apple.

I wrote an article on these kind of stocks called “OTC Penny Stocks And OTC Bulletin Board Stocks - Never Fall For This Nonsense!!!” where some people tried to get me into buying utter junk. You should go ahead and read this article too. You’ll find it on this website. Within 2 years now, not one of these stocks  that were offered to me has moved up by even a cent. Not one! They all went down even further.

They all would’ve been good for a short trade!  But there was nothing mentioning that! It was proclaimed that these super-duper dirt cheap stocks would go through the roof making you a killing of a profit. So don’t fall for this nonsense! Rather read my article! These kind of “where can I trade stocks for cheap” scams are nothing but junk trading tips without any quality.

The only ones getting filthy rich are the people behind these scams that try to show you how to invest in cheap trading stocks and tell you all about hot penny stocks, cheap stock of the week, penny stock secrets and that you can retire from you day job within a year if you follow these penny stock recommendations.

Another one of these scams I got via email was “five dirtcheap stocks for getting filthy rich video”. The only one that got rich was the person or organisation that sold these videos. So in your own interest, exercise extreme caution when someone comes with investing in Dirt cheap stocks!

Now don’t get me wrong. I’m definitely not saying that it is entirely impossible to make money with penny stocks or stocks that are cheap. All I want to point out to you is the extreme risks these stocks bear and that a lot of these stocks are not only dirt cheap, but also dirt cheap scams! So just be very careful!

For others a stock is only cheap when the price-earnings ratio (P/E ratio) is low. So the lower the price-earnings ratio the better it is for them on speculations that it will go to where it was before the stock dropped, if it goes up again.

To recap. A price-earnings ratio is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share  It is determined by dividing current stock price by current earnings per share (adjusted for stock splits). A higher multiple means investors have higher expectations for future growth.

The thing about P/E ratios is that conservative investors should avoid stocks with a high P/E ratio because if these corporations disappoint with their earnings and don’t meet market expectations, the stock will drop dramatically like Whole Foods did dropping more than $20 at the beginning of November 2006.

If a stock has a low P/E ratio, where expectations aren’t that high, the reaction is far less dramatic if earnings and performance expectations aren’t met.

If trading and investing in the stock market was that easy, everybody would just buy these so-called good cheap stock, best penny stocks or stocks with a low P/E ratio. To bad so sad that no one would have then had Starbucks in their portfoilo. A stock that shot up sky high in the past. A low P/E ratio didn’t exist in Starbucks vocabulary back then in the good days of Starbucks!

If you disregard individual stocks that have dropped sharply and take a look at the broad market, you’ll surprisingly notice that a P/E ratio tells you absolutely nothing about whether a stock is going to go up or down in the future! Not only stocks with a high P/E ratio can drop, but also stocks with a lower one can.

A good example of the above is the following:

Within the last 4 years the Dutch financial company ING, having a low P/E ratio, climbed to the skies from $10 to over $40. That’s over 300% profits, whereas AIG (American International Group), also having a low P/E ratio, was virtually dead in comparison.

On the other hand, Starbucks and the German cosmetic company Beiersdorf kept on going up although both companies had a high  P/E ratio whereas Whole Foods, also having a high P/E ratio, dropped from $80 all the way down to $40 in 2006, and EMC² is still hovering around $15 and hasn’t recovered yet since 2000 where the stock was trading at just over $100.

So as you can see, there are no rules whether a stock with a high or low P/E ratio is good or bad!

Why doesn’t the P/E ratio strategy work?

The problems already start at the very beginning. Which earnings should one take into account? The reported earnings from the previous year; the expected ones for the current year or even the forecasted earnings for the next year?

Because the stock market mainly looks at future performance and earnings, the future P/E ratio plays a more important role. But even the expected earnings of the current year can only be estimated let alone the one for next year. It all boils down to estimation and speculation which is quite common in the stock market. But if these estimates are wrong and market expectations aren’t met, investors are then commonly very disappointed and the stock or even the whole market goes down. And this happens every year somewhere along the line.

And this is not the only reason why a P/E ratio is not a good formula for success. The furure performance of a corporation depends on so many factors. A future stock price doesn’t only depend on earnings from the current year or the next. It also depends largely on fundamentals like, how well the management does it’s job, whether the company has a strong product line or which possible problems the company may face.

An example of this is Apple (AAPL). When CEO Steve Jobs introduced the iPhone in Jan. 07, AAPL shot up by over $10 in two days. But then Cisco Systems (CSCO) claimed that they had the rights to the name iPhone and were contemplating to sue AAPL if they were to continue using the name iPhone. Well. Guess what happened? AAPL went down the following days losing it’s entire $10 gain.

So once again you can see that a P/E ratio, whether high or low, says way too little to base an investment decision on because the question you should ask yourself is not, how to buy cheap stocks and where to get them, because they are all over the show, but you’ve got to ask yourself, does it make sense to buy the one or other cheap stock and where can I make money with it without taking too much of a risk?

Conclusion:

At the end of the day, a P/E ratio, or any other ratio, or whether a stock is cheap or not is absolutely irrelevant. What matters most importantly in the long run are earnings and the overall performance and future outlook of a company! Short-term factors like oil prices, political turmoil etc. can influence the markets and they will, more often than not! But in the end these factors are secondary and negledgible for long-term investments.

Successful Trading!

Ricky Schmidt

Over-The-Counter (OTC) trading is trading financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. There are no stock exchanges like NYSE, NASDAQ, etc. involved. That’s why this kind of trading is called over-the-counter because that’s what basically happens.

The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to exchange trading which occurs on futures or stock exchanges.

Now there are freaks and lunatics out there that spam people with emails with the intention of luring and enticing them into investing in disasterous equity that will, more often than not, diminish their investment to almost zero.

On June 5, 2006 I received the following email:

June 5, 2006

Trade Date: Tuesday, June 6th, 2006
Company: BioElectronics Corporation

Symbol: BIEL
Price: $0.25

IS MOMENTUM BUILDING FOR THIS STOCK? CAN YOU MAKE SOME FAST MONEY ON IT?
RADAR BIEL FOR TUESDAY’S OPEN RIGHT NOW!!

THE ALERT IS ON!!!

RECENT NEWS HEADLINE: (GO READ ALL THE NEWS ON BIEL RIGHT NOW!)

I want to spare you this because it’s just a waste of valuable and precious time. This is a typical OTC Stock and the chart, even as of today, August 21, 2008, says it all!

Ever since it was trading at $0.25 on June 5, 2006 it dropped and is trading today, August 21, 2008 at $0.015. That’s a ludicrous 1.5 cents. In 2 over years this stock never made it above 25 cents and this junk someone tries to palm off on you as a great investment.

The 5 year chart looks even worse. In all this time BIEL never made it above $1.50 and went downwards ever since never to see it’s all time high again.

No need to say that this stock would’ve make you a catastrophic loss!!!

On June 7, 2006 I got another email of this kind:

June 7, 2006

You may not be aware of A B S Y , but you should be, because this company
represents a terrific profit opportunity for early investors.
Can you make some fast money on this one? Put it on your radar now.
Breaking news alert issue - big news coming.

Trade Date : 7 Jun 2006
Name : ABSOLUTESKY INC
Ticker : A B S Y Profits of 200-400 % EXPECTED
Yes, it looks like the momentum has started up again.
Current Price : $0.95
SHORT TERM 2 DAY PROJECTION : $2
Market Performance : S T R O N G B U Y

A B S Y should be one of the most profitable stocks to trade.
It is only a matter of time before it is released out into the investment
community and they take it to the moon.
Whatever you do WATCH A B S Y …
When this Stock moves - WATCH OUT!

ABSY was still trading at $30 in March 2006. And now, as of August 21, 2008, it dropped all the way down to 3.3 cents. What makes one believe that this can possibly be a serious and solid investment?

This is again an OTC stock and just take a look at this (3 year) chart:

One can’t even make out a decent trading pattern on this chart! So here’s a 1 year chart so that you can at least see a bit of a chart pattern!

Now the short-term projection was that this, oh so wonderfull and profitable stock, would shoot up to $2 in two days.

What ludicrous nonsense! Not even 2 years let alone 2 days later it hasn’t traded anywhere near $2 yet.

Now trading at 3.3 cents, never mind 2 dollars, a 200 - 400 % profit looks different! Wouldn’t you agree?!?

Tuesday, July 11 was even better when I received the following Stock Alert:

AMERICA ASIA PETROLEUM
Symbol: AAPM
Price: $0.105
SALES AND EARNINGS!!!

OIL - IS THERE A HOTTER SECTOR TO TRADE?!

FIRST QUARTER REVENUE of $14,638,524!!! (Go Read The Full Story and All The News Now!)
CARSON CITY, Nev., July 7/PRNewswire-First Call/ - America Asia Petroleum (OTC Pink Sheets: AAPM), announced today results for the first quarter ending March 31, 2006 at $14,638,524, unaudited. For the three months ended March 31, 2006, earnings before interest, taxes, depreciation and amortization or EBITDA, totaled $447,247 with a basic and diluted earnings per share of $0,005.

How can anyone take such an investment offer serious? That’s not investing, that’s gambling!!! An EPS of $0,005 is ludicrous! So is the stock by the way. Not even 3 months later on October 5, 2006, this stock is trading at 0.0012 cents. It’s not even worth one single little cent anymore.

Since July 11, 2006 it hasn’t seen any new highs yet not even mentioning the $0.105 at which it was first suggested to me! And right now, on 21 August 2008, I can’t even find the chart anymore on Big Charts to see where it’s trading now.

Maybe it’s off the market already which is quite possible. This happens often with these otc penny stocks. They are nothing but junk! Period!!!

The scam behind this is manipulation! If enough unsuspecting investors are enticed to fall for this temptation then the speculation is that XYZ junk stock will rise. Once a certain price is reached the stock quickly gets sold by the manipulating organization and, before you catch wind of the scam, you sit on a total loss.

So be extremely careful if someone tries to persuade you to invest in stocks like these. I know that it is very tempting to buy OTC’s because they are so dirt cheap. And yes, if everything works out for you and your 20 cent penny stock shoots up to $2, then you will make a killing of a profit. But the question is IF(?) ! And this IF can wipe out your entire investment in no time. That’s how risky OTC and Penny Stock Trading can be.

And as you can see in the examples above, this talk about great cheap stocks, hot penny stocks, best otc stocks with extreme growth potential making you massive profits are nothing but empty promises. They are not even worth being touched with a barge-pole!

So the best advice I can give you from my own experience is to ignore the temptation if you come across headlines like “Where Can I Trade Stocks For Cheap”, “Dirt Cheap Stocks With Growth Potential” or other sorts of persuaders and tempting offers.

This is not the stuff decent and high quality investments are made of.

It’s gambling. Not investing!

Yours in Careful and Successful trading.

Ricky Schmidt