An investment framework and philosophy

Spirit Mind Body
Market sentiment (behavioral)           Technical analysis           Fundamental analysis
Which types of investments Inflation, stagflation or deflation
Manipulation, interventions, HFT, behind the scenes actions and activities
Investment entry and exit points Trends


OK, now that there's a bunch of words and arrows... what do they mean?

Simply, it's one complete way to look at the whole area of investing and help to remove some of the inevitable confusion from the area. It's just a framework. The investment words are all linked to definitions, so start there if you're at all uncertain of their meanings.

In investing, one buys & sells at certain prices and doesn't want to fight the trends - that's the lowest element or line of the framework above. The main trend and senior datum that controls which way prices go is the general rate of inflation, and that also controls what types of things in which to invest and that is the next line up in the above chart. Note that manipulation and "behind the scenes" actions or activities apply to all areas.

Fundamental analysis is used to determine both the expected rate of inflation or deflation, and whether the particular investment has good factual and positive data behind it. The combination of market sentiment and technical analysis (as an aside, market "manipulations" also belong in here) helps determine when to buy and sell. The analogy to spirit, mind and body on the top line helps to put it all in perspective.

Please note that the data here is extremely abbreviated and condensed. Many books have been written on each of the topics. It's only intended as a short but hopefully complete starting point. If you're new to investing, we recommend taking this page in small doses since it can be overwhelming. Also note that politics is included in both fundamentals and sentiment.

Our overall basis & approach

The basic theory behind our approach and thoughts is that at the highest level in investing is money itself, and both the supply of and demand for it. The central banks and regular banks of the world (like the U.S. Federal Reserve System) are the ones that create the money and are 'in charge' of it. They are also the primary cause of inflation or deflation. So we follow what they're doing, since the amount of current and expected inflation is, in our opinion, the most important factor in successful investing.

Reserves & funding

Step one on investing is to have some reserves for emergency purposes, like living expenses after unexpectedly losing a job or unexpected medical expenses or just plain unexpected life situations. Opinions vary but somewhere between three and six months basic living expenses is prudent in our opinion, and anything is better than nothing. Investing is much simpler and less stressful if one knows there's a stable base underneath.

If you do not have funds for investment, start putting aside a percentage of your income every pay period into an account. Opinions vary here too, but whatever works for you up to 10-15% is our guideline. If you can't set aside anything, stop right here and get that handled before hoping that investing is the answer to your problems.

Inflation, stagflation or deflation?

The first question to answer is which way is inflation going, since that controls which investments one should avoid and which ones are probably worthwhile. In general, for example, one should buy real estate during periods of significant inflation and one shouldn't get into debt during a depression.

We forecast what's coming up by using proprietary formulas. They're based on adding up all the money types that can be created by the banks, the Federal Reserve and other money creators. Then we subtract another set of figures representing all products and services, one figure of which is the US GDP. See our current general forecasts here, and our current inflation prediction here.

For shorter term investing and timing purposes, and after one is more comfortable with the area, other charts - such as those on our Key stats or Fed watch (warning, very advanced) pages as well as from other sites - may be helpful

The basic theory behind our approach and thoughts is that at the highest level in investing is money itself, and both the supply of and demand for it. The central banks of the world (like the U.S. Federal Reserve System) are the ones that create the money and control interest rates. That is way oversimplified but we have to start somewhere.

What types of investments during different 'flations, trends and trend changes?

Note that this is a conservative general guideline only, and dependent on the individual and the investment. Your opinions will likely be different.



           Expected inflation or deflation
Asset Type or Investment 10-15%+ & rising 5%+ & rising Stagflation 1-5%, stable or declining 0 to -2% -3% and under
Bonds, government            
Bonds, corporate            
Cash, Treasury Bills            
Charitable donations            
Collectables & antiques            
Credit debt            
Diamonds            
Education            
Farm, working            
Food, base living supplies            
Friends & family            
Gemstones, other            
Gold & silver            
Life insurance (whole)            
Money market fund            
Mutual Funds , general            
Mutual Funds , sectors            
Real estate, leveraged            
Real estate, fully paid            
Renewable energy            
Stocks            
Strategic metals            

Color Code      No    Questionable    Depends     OK    Should work     Yes  

After you've selected the type or types, what then?

  • Decide on the percentage of the available funds that will go into the different types. This is also called asset allocation.
  • If investing in stocks or mutual funds, choose the sector carefully. For example, in general do buy selected foreign stocks or funds if the U.S. dollar index is going down since you make extra profit due to the foreign currency being worth more (this assumes you're a U.S. resident).
  • There are many books available in the areas above, just visit a regular or internet book store and find one that fits your level of understanding, has a definite and understandable plan and whose author hopefully has a good track record of profits.
  • Study... study... study, and get as familiar as possible with your upcoming investment areas and specifics. With very few exceptions, a loser is what an investor is called who buys something without knowing a lot about it. One of the only things we like less than studying is investment losses...

  • Two exceptions

    1. There always has to be at least one and investing is no different. Although this one is very unusual, failure to see it coming if it happens will have very large negative effects. Its called a currency crisis.
    If we think there's a chance of it happening, to protect our hard earned assets we'd probably concentrate on having plenty of actual cash for day to day expenses, avoiding bonds or stocks of any kind and having as little debt as possible. We'd convert anything else to whatever we think would maintain its value and be exchangeable with as little loss of purchasing power as possible after the crisis was over, as well as things that would help the less fortunate survive the crisis with less troubles.

    2. The other exception that can throw one's plans for a loop is false statistics on inflation or deflation. If the government is stating that inflation is 4% and its actually 8% for example, analysis and selection of types of investments will be incorrect. See the The Consumer Price Index, a big lie page for more of our thoughts in this area.



    So now you've decided on specifically what to buy and why you're buying it, the next step is when.


    rule

    Buy low, sell high

    Or, how to use relationships and tools to help your trades have better entry and exit points. Yes, this is the technical analysis section and you'll need some definitions first:

    RSI MACD Stochastics Williams %R Market sentiment Trend line Fibonacci

    There are lots of other tools here if you're interested, and they can be quite useful. This page is not intended to be a full course in technical analysis, but will get you started with what we think are the best TA tools. We use those tools to determine at which price to buy and sell. Here's some examples of how to use them:

    RSI & MACD

    Just look at how highs and lows in the various indicators align well with actual highs and lows. Notice how RSI and MACD work well for these Dow Jones Industrial Average weekly closing prices. See the same chart with current data, free.


    Stochastics & Williams %R

    Just look at how highs and lows in the various indicators align well with actual highs and lows. Notice how Stochastics and Williams %R work well for these daily price charts. See the same chart with current data, free.


    Market sentiment

    Just look again at how the highs and lows align well with actual highs and lows. The basic idea here is that when there are too many investors thinking the same thing, the market frequently goes the other direction. See a similar chart with current data, free.


    Trend lines

    Now we'll switch to the gold market. The two blue trend lines show long term support under the price. If they're broken by more than 3% or so, its likely the prices will continue much lower and perhaps down to $350-370. The green one shows a likely longer term target of over $500.
    See the same chart with current data, free. You can draw your own trend lines on a current chart. Just click the "Add Annotations" button and you'll get a window similar to the one below. Draw away with the available tools and play with them. Hovering the mouse cursor over the tool will tell you what it is.

    One last switch, this time to the technology index, the NASDAQ. Note that trend lines also work on a very long term chart, and indeed this chart shows a classic pattern of three trends of increasingly steep trends lines. Trend lines work with log based charts too.



    Fibonacci ratios

    And now for something completely different, with apologies to Monty Python.
    So, if you just happen to be wondering if there are any "natural" points where prices tend to cluster during up or down trends, check the chart below which has been enhanced with the Fibonacci tool. We've found it to be another handy tool for helping to determine where prices tend to reverse trend.





    Volume

    (stub - more to come)
    Accumulation/distribution and on balance volume (OBV), as well as just raw volume data, are very useful in confirming and projecting price moves.


    Monitor your investments

  • Before we actually buy or sell, we establish a price target. This helps to remind us when to get out, since we sometimes find it tough to sell after a good profit... and then watch that profit evaporate.
  • We write down all the reasons for choosing an investment, so that when we get tempted to get out early for some reason we can return to those reasons and see if something has truly changed, or if its just unreasoned fear or some silly and temporary news item that the media is being somewhat over-the-top or rabid about.
  • We look at least monthly at what's happening with our inflation prediction here so we don't get caught in the wrong type when conditions change.
  • Watch the price charts frequently for trend changes and tips or hints on where to exit when our target is being approached or has been exceeded.



  • Other viewpoints from folk we respect

    A successful trading system
    Lessons for the Apprenticed Investor



    This guide may be quite useful for timing/switching across mutual funds or asset classes.

    Courtesy of BCA Research