Category Archives: book

Crypto Myth and Market Reality

The Myth

The prevailing theory is that the cause of the decline in cryptocurrencies lately is that the “banks” and Wall Street want to undermine the market for decentralized currencies to either steal the technology like the record industry and Apple (AAPL) did with Napster, or to eliminate a viable competitor to the Wall Street and banking industry cabal.

The Reality

The reality is that, like the introduction of every new technology that turned out to be revolutionary and widely dispersed to the point that it became second nature in its use and profound in it’s application, the price/value of such technologies is only relevant to the use.

In the formative stages (right now), blockchain technology is trying to find its footing in the world.  Make no mistake that blockchain is here to stay and it will likely permeate everyone’s lives, like it or not.  However, as with the canal, railroad, airplane, automobile, computer, biotechnology, and internet bubbles before, there will be thousands of contenders but only a dozen survivors (at most).  The risk of loss is significant when there are more than a thousand different cryptos out there and we all know there should be two dozen, at best.

The Market Reality

Everyone loves a great conspiracy theory.  However,  The last week of market volatility is proof that when everyone wants to sell, it doesn’t matter what they are holding.  Take for example the Dow Jones Industrial Average (DJIA) and Bitcoin (BTC).  The chart below shows the hourly percentage change in BTC  (cryptocurrency) versus the DJIA (Wall Street/bankers) from January 30, 2018 to February 5, 2018.

image

In the last week, it should be more difficult for someone to make the claim that Wall Street is pushing down cryptocurrencies while at the same time, Wall Street is falling as well. 

Our take on the matter is actually quite the opposite of the conspiracy theory, if Wall Street can continue to rise, there will be more money and enthusiasm to fund hair-brained ideas within the crypto space.  However, when the money drains out of Wall Street, it will also drain out of all the cool ventures that support and ensure the organic growth of the crypto environment and at a ridiculous rate.

The question might come up as to why BTC is crashing more than the DJIA if everyone is selling in all markets.  In a nutshell, familiarity.  The DJIA has been around for more than 120 years.  BTC has been around for less than 10 years.  Anyone unfamiliar with the risks of a new venture is naturally going to be more skittish when the old line investment (DJIA) is crashing, on a relative basis, and therefore would put into question the more dubious blockchain ventures, this in spite of blockchain technology possibly becoming bigger than the concept of money as we know it.

In Closing

As indicated above, cryptocurrency investors should embrace the idea that a rising stock market allows more money to go into more wasteful, and potentially lucrative, ventures in the blockchain universe than a falling stock market.  Just for the sake of better understanding the point we’re trying to make, get a copy of the book F’d Companies: Spectacular Dot-com Flameouts by Philip J. Kaplan.  You’d be surprised to know that even though there are some ridiculous concepts for dot-com companies, there are still many that would be incredibly lucrative today if the stock market didn’t crash like it did from 2000-2003.

Giving Away $32K, Was Never So Difficult

In what we hoped would be an annual tradition for our site, we gave away books that we thought were  valuable to the understanding of the stock market and investing.  Little did we know that one book would become an instant “classic” with a price that now seems staggering.

On July 16, 2010 (found here), we announced that we were going to give away a single copy of Dow Theory Unplugged: Charles Dow’s Original Editorials & Their Relevance Today. Because we had 5 copies of the book, we later decided to give away two copies instead.  However, after contacting the first two winners and getting no response, we settled with giving away only one copy of the book as announced on August 29, 2010 (found here). 

Fast forward to the present and we find that the books we were having such a hard time giving away has skyrocketed in price since August 2010 (found here).  It appears that the lowest priced copy of the book is priced at $889.99 while the highest price rings in at $16,026.74.  Our suspicion is that these prices, the minimum and maximum, will nudge much higher in spite of what already seems like an outrageous amount.  Who is going to pay these prices, we can’t imagine.

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Suffice to say, after the 2nd annual giveaway, we decided to give up on purging our book collection.  However, we strongly encourage reviewing and reading the books found on the book list that we’ve compiled based on the references and recommendations of the great Dow Theorist Richard Russell over the last 55 years (found here).

There is no such thing as a Sophisticated Investor

We listen to Bob Brinker every weekend and his manner of steam rolling the listeners gets annoying at times.  However, Diana Henriques is one of the few guest authors who (1) gets challenged directly by Bob Brinker and (2) solidly holds her ground with a lucid explanation on how Bernie Madoff and mutual funds have more in common than most people are willing to admit.
The following is a transcript, in part, of a recent interview that Bob Brinker had with Diana Henriques about her book Wizard of Lies: Bernie Madoff and the Death of Trust.  Diana is clear on one thing that all investors should understand, even a well known and well established mutual fund company should be questioned on it's integrity.  The clarity in Diana Henriques' responses while getting grilled by Bob Brinker requires that we recommend reading this book.
Diana Henriques:

 

…there on your statement, it looked like you owned a widely diversified portfolio of blue chips, everything from J&J to Wal-Mart, and so you had this sense, ‘well I am kinda diversified,’ there was this illusion of  a diverse portfolio and you move into cash safely and into treasury bonds and back into these blue chips, so not to defend people who were willing to trust every penny they had to Bernie Madoff, they may have been deluded by the notion that they did have a balanced and very highly diverse portfolio almost like a mutual fund, of course it was nothing like a mutual fund, in fact, and the notion that you would give all your money to Bernie Madoff, in hindsight, of course looked dreadful, but how many of your listeners actually invest all of their money with Vanguard or different mutual funds but they will invest it all with a fund family because of the convenience that comes with it."
Bob Brinker:

 

(interrupting Diana) "That’s a good point, that’s a good point, but I’m willing to propose to you that a listener that invests with the Vanguard, a listener that invests with a Fidelity, a listener that invests with a T. Rowe Price, can simply not be compared to somebody giving their money to Bernie Madoff.  He is not Vanguard, he is not Fidelity, he is not T. Rowe Price."
  
Diana Henriques:

 

"Yeah, but neither is he Joe’s Plumbing and Ponzi Scheme operation down on the corner.  He was a very respectable."
Bob Brinker:

 

(interrupting Diana) "No but actually he was that Diana, he had a po-dunk auditing system set up in a storefront in NY, I mean, he was Joe’s Plumbing and Heating."
Diana Henriques:

 

"I’ve got to disagree with you there because I knew Bernie Madoff back when he was in the wild before he was in captivity, and I knew his firm very well.  As a reporter at Barron’s it was one of the first places you’d call if were trying to find out what news, what impact, breaking news would had had on specific stocks or segments of stocks.  For example, the night the first gulf war broke out, it hit us in NY at a very tough time right against our deadline for the next day’s business section.  We took the whole section apart and put it back together again.   Well, what would the out break of war going to mean to the oil stocks?  How do you find out? The NYSE had been closed for hours.  You called Bernie Madoff, because he pioneered after hours trading.  There was a period in time when Madoff’s trading firm handled up to 10% of the daily volume of the NYSE stocks;  in what is called the third market.  We didn’t know him as retail investors, I knew him as a business reporter, but he had no retail customers, so far as we knew.  He was a wholesale trading house but he was very well known on the street as a whole sale trading house one of the biggest, one the fastest, one of the most technologically advanced and a firm that had always set the standard for the speed of processing orders, so I have to disagree with you, people who knew wall street and who did a little 'due diligence' on Bernie Madoff would have learned that he was a very well respected wholesale trader."

 

Bob Brinker:

 

"All of which led them to the false conclusion that he was someone that you could do business with."

 

Diana Brinker:

 

"Yes…and he was someone that they could trust."

 

Bob Brinker:

 

(interrupts Diana while she is talking) (incredulously says...) "TRUST!…are you serious Diana?…you could trust!…what do you mean you could trust?"

 

Diana Henriques:

 

"He was someone certainly that they thought they could trust clearly they would not have given their money to him otherwise.  On the surface, you know Bill, a shifty eyed guy with a cheap suit and scoffed shoes may commit a lot of crimes but a ponzi scheme is never going to be one of them.  Ponzi schemers are by definition done by people who seem trustworthy, if they’re not they can’t even start.  The can’t pull it off.  So, people who think they would instantly recognize a crook like Bernie Madoff, are deluding themselves.  That’s one of the dangerous lies we tell ourselves.  They’re going to look like responsible respectable people."

 

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Dow Theory: Cyclical Bull Market Confirmed

On April 4, 2011, we were provided with a Dow Theory confirmation of the cyclical bull market, within a secular bear market, when the Dow Jones Industrial Average exceeded the prior peak of 12,391.25 set on February 18, 2011.
As has been the case throughout this bull market run, the Transportation Average has taken the lead on the way up. This most recent move by the Industrial Average only confirms what the Dow Jones Transportation Average managed to accomplish on March 31, 2011 by closing at 5,299.89. At least for the next month and a half, the economy is expected to continue to grow. What we see from the Transports on the way up we may also see on the way down.

What do the new short-term highs mean for the market overall? It appears to indicate that the Dow Industrials will continue to stagger towards the old high that was established October 9, 2007 at 14,164. For us, a possible leading indicator for the market (even before the Transports) is the price of gold and silver. If precious metals can continue to rise then the Dow has a more favorable chance of rising. However, if precious metals are falling then, in this stage of the interest rate cycle, the general market will have little chance of going up.

According to Dow Theory, all technical indications in the stock market should translate into the economy. Dow Theory was never intended to predict the stock market. Instead, Dow Theory was intended to determine if the prospects for the economy were favorable or not, using the stock market as a leading indicator. The best example of this is in Robert Rhea’s easy to read book, The Dow Theory Applied to Business and Banking.

 
Please revisit New Low Observer for edits and revisions to this post. Email us.

Seeking Ten Percent

A reader asks:
“I see that your Watch List performance for the past 12 months is no better than the Dow's. How is that possible when you focus on the Dividend Achievers that are close to their 52-wk lows and do so much in-depth research and analysis?
“Am I missing something? If not, then how do you argue against just investing in something like a Vanguard index fund? Or, better still, there are value-oriented funds like those run by Tweedy Browne, et al, that have substantial outperformance to the market.
“Should your approach be modified to take into account the macro view first and then selecting the right sectors (from among the S&P 500's ten sectors) based on where the economy is in its growth/decline cycle? Thus, should the cycle analysis be used along with your present criteria to achieve outperformance?”
Our response:
These are all great questions. First, we’ll address the question of why bother doing all the work of researching these company if the final result is simply to underperform the Dow Jones Industrial Average. As indicated in the book Investing: The Last Liberal Art there is an element of joy in learning new things. We love the process of understanding the research into cell apoptosis that a drug company is doing. We love finding a book like Taking Chances: The Psychology of Losing and how to Profit from it which helps us to understand more fully the benefits of failing. We love stumbling upon mathematical "quirks" like Benford’s Law whereby it can be proven that the order and frequency of the first digit in a set of numbers can reveal that there is accounting fraud. Simply put, our research of stocks fulfills our desire to understand the world around us while we attempt to pursue the profit motive.
In pursuit of the profit motive, the goal of the New Low Observer is to obtain mediocre gains of 9%-12% in each investment that we make. This means that when a stock rises to the level that we’re comfortable with, within the designated range, we find the next best alternative that is on any one of our new low lists.
As mentioned before, we consider selling a stock when it reaches a gain of 10% within a year. All of the stocks on our September 25, 2009 watch list accomplished our goal of 10% well before the end of the one-year period. The table below is the best demonstration of our approach in action.
Symbol
days to 10%
Annualized gain
WMT
54
67.59%
CAH
44
82.95%
WEYS
208
17.55%
ABT
44
82.95%
NWN
162
22.53%
BCR
182
20.05%
LLY
52
70.19%
BDX
68
53.68%
PNY
84
43.45%
*based on September 25, 2009 Dividend Watch List
As you can see from the stocks above, in some cases, accomplishing 10% occurred much earlier than we would have expected. We like to think of returns of 10% in less than a year as a form of accumulated time. This means that if we gain 10% in 5 months, we have at least 7 months to sit back and study the markets. This is seven months where we can detach ourselves from the noise and chaos that normally distorts rational thinking. Obviously, this is an option that we exercise from time to time when we’re not sure of the market prospects.
The example that we provided in our performance review of Dividend Achievers from September 25, 2009 was actually the worst case scenario if you decided, for some reason or another, to buy and hold all of the stocks that were on the list at the time (not recommended.) As far as we’re concerned, we were out of those stocks long before one year as has been demonstrated with the Sell Recommendation section of this site. Again, we seek mediocrity in our investment strategy knowing that if 10% can be accomplished within a year then we have been exceptionally fortunate. As mentioned in previous articles, we only expect 1/3 of the stocks to achieve 10% in one year during a bull market. However, if a stock that you purchase is on our Dividend Watch List, you can be assured that you can hold the stock for the “long term” if you choose to do so.
Finally, we are constantly trying to keep abreast of the macro view of the markets and the economy. However, our best experience has been with the use of Dow Theory. Although not infallible, Dow Theory is intended to be an all encompassing guide to not only what is going on right now but also what to expect in the future up to three to nine months ahead. We’re cognizant of the fact that Dow Theory is only a tool and not THE answer to what the future holds. Therefore, we only apply Dow Theory as a tool for determining asset allocation. Charles Dow himself has been specific on the point that investors can still have their money at work in a bear market (during a recession or depression). The only change that needs to take place during such hard economic times is the expectation of returns. As we at the New Low Observer seem insistent on getting 10% during the good times, we must be willing to accept 5% during the bad times.