A Strategy For Profitable Investing, by JEH, CPA

I am writing this letter in response to the question posed in “Letter Re: Surviving Financial SHTF and Becoming Debt Free, by K.D”. I am a CPA who thought about investing the day I got my first job. I am not a licensed investment representative, so as a result I will not tell you what to specifically invest in. However, I want to teach you how to look at the market.

The first tax season I worked, I noticed that people poured money into what was “hot” at the time, and they took a loss when the market went south. As a result, I talked with people who were successful at investing. One family took me under their wing and taught me about their strategy. They had a family trust routinely making 40% to 50% per year. I was flabbergasted.

I started off with $500 in 1991, investing in what was not hot at the time. The bubble has just busted on this investment about six months earlier. I placed my money in a mutual fund, via an IRA, through an online brokerage service. I made money. When this investment made 25%, I took the profit and invested in the thing people were just beginning to talk about– technology. I made easy, quick money. Back then people were talking about technology like it might never end. I got out. When TV people talk about something, get in when it is in its infancy; get out when everyone owns it.

I have never gotten close to an investment. An investment is like a car to a car dealer; you just use it to make a buck and then sell it for more than it cost.

In 2006 people started talking about gold. Mr. Rawles had several articles discussing gold and silver. I had grown skeptical with the stock market and the many bubbles. I took the money from the stock market and placed it in gold and silver. My investment doubled. The talking heads were saying gold would go blah, balah, blah, and silver had no end in sight. I decided it was time to sell in early 2009. I tripled and quadrupled my investment. Wow! Thanks, Mr. Rawles.

I left money on the table but not that much, as compared to the profits I made all tax free in my Roth IRA. WooHoo!

So to sum up my strategy, listen to the talking heads. If it is hot now, do not buy! If you can get in on the beginning, do it. Do not be greedy! Take a decent profit, and be happy. It will multiply. One of my mentors told me to sell stocks that lose 5% and sell stocks that make 30%; you will always, on average, realize a 25% profit. It worked for me until I went into the precious metal market. I thank my wife for keeping me grounded. She is not the financial information decipher, but she understands human reaction. She well understands my theory and is watching to see the next bubble.

I am not a fan of profiteering from tragedy. However, when something bad happens in America, such as 9/11, stocks tumble. The talking heads said they did not know if the airline industry could sustain such a hit. There were investing opportunities when the market opened again. If everyone is leaving an industry, pick the best of the industry and enjoy a quick gain.

I had made some money in the banking industry from 1998 to 2003. I got out because it had been too good for too long. My grandfather, before he passed away, once told me that things in our country have been too good for too long. I have taken his philosophy and applied it to the stock market. When a sector has been too good for too long, get out; you are in a bubble.

My daughter used to love to blow bubbles. She asked me one day, “Why do some bubbles continue to rise and then pop, while others sink and pop, and other bubbles stay afloat and then go away?” I had the opportunity to talk about density to her and high pressure and low pressure. It became important to me, because I could now explain how the market works.

Bubbles That Rise and Then Pop

The bubbles that rise and then pop represent the people pouring money into the market and it is rising, rising, rising. Eventually, what everyone has money in will pop as it is too high! The atmosphere (this is metaphysical, as this is the political atmosphere and the perceived atmosphere) causes the physical bubble to pop. When money stops pouring in, it cause the financial bubble to pop.

Bubbles That Sink

Bubbles that sink are too heavy to float. In investments, this can easily represent a market that is overheated and heavy. The bubbles are crashing. The bubbles also could represent companies too heavy in debt to float. They, too, go away. Just look at the number of closed banks.

Bubbles That Float a While Then Go Away

This represents industry darlings that have a significant amount of money poured into them. The money then becomes stagnant as the amounts of generated profits are not enough to make people happy. People then take some money out, but the investment continues to float. It can float forever. It could quickly pop one day out of the blue. When an industry is flat for a while, cut your losses or take your profits.

The Atmosphere – High and Low Pressure Systems

This represents the climate, not just the climate outside that causes my daughters bubbles to go up and down but the financial climate that causes stocks to go up or down. In today’s climate, we are in a high pressure system. Stocks are climbing and climbing. Bond returns are low and precious metals are lower than they have been for a while.

Therefore, a high pressure system causes stocks to rise. Eventually, the atmosphere becomes too light and the bubble pops. DO NOT be in the market when this happens. People commit suicide over this, as their paper profits are not recognized (more on this later).

In a low pressure system, interest rates are high enough to sustain an equal amount of people in the market for bonds and stocks. Alan Greenspan was a genius at this. Stocks and bonds have low pressure from bubbles during this type of financial atmosphere.

Realized and Recognized

We, accountants, use funny terms to talk about profits on your tax return. For example, you can realize a gain on the sale of business property, but through like-kind exchanges, we can help you not recognize the gain on your tax return.

I will use the following example to demonstrate realize and recognized:

  1. You buy one ounce of gold for $1,000 on January 1, 2014.
  2. On November 1, 2014, the spot price for gold is $1,200 per ounce.
  3. On November 17, 2014, you sell the gold for $1,100 per ounce.

From January 1, 2014 to November 1, 2014, you realized a profit of $200 ($1,200 – $1,000). However, because you did not sell your ounce of gold, you do not recognize the profit. You rock on until November 17, 2014 and then decide to sell the investment. You realized two things– first is a profit from January 1, 2014 to November 17, 2014 of $100 ($1,100 – $1,000) and a loss from November 1, 2014 to November 17, 2014 of $100 ($1,200 – $1,100).

If you have to report your investments on your tax return, you will recognize a gain of $100 (January 17, 2014 price of $1,100, less the original cost of $1,000).

My goal is to realize gains and recognize them in my ROTH IRA. “Realize” means it is a paper profit or loss. “Recognize” means you have completed the process.

Overcoming Being Human

Human rationale is to follow the crowd and think you are a winner. I am an avid college football fan. The teams in the top 10 have more money poured into their team wear (jerseys, sweatshirts, memorabilia, etc.) than other teams. So if you follow a winning team, and you decide to go out buy a t-shirt with your favorite team’s logo on it. Only, next year, that team is not the darling of the top 10. Their sales goes down, the bubble popped. You might not even wear the t-shirt you bought.

Then you have teams like The University of Alabama and Florida State University, which are good year after year. People everywhere, unless you are an Alabama or Florida State Fan, hate Alabama and Florida State. We like to root for the underdog.

Try not to follow the crowd. This creates bubbles, and you lose the chance to get in in on the ground floor of the next bubble. Root for the underdog with your investments. See what is not hot at this moment but shows promise. My best example of this would be The University of Arkansas. They have been beat up for years. They barely lost to Alabama, and they finally beat LSU– a monster of the SEC West. I was happy for Arkansas. I like it when an investment pays off when I rooted for the underdog.

Where to Invest Now

Gold and silver prices are down. It looks like people have left the precious metal market. Right the opposite, our currency is being propped up and makes it a buying opportunity for precious metals once again. The stock market is in a high pressure system with a rising bubble, which is not a good place to be. As for telling you where to place your money, I am not a licensed investment representative. I cannot tell you where to place your money, but I can tell you philosophies and strategies.

I hope this helps to explain my philosophy and strategy, which is to place money where other people are not. When people realize I am making a profit, I recognize my actual profits and look for other places. I try to do the opposite of what human rationale tells people to do. You can be a winner if you are the leader.

Finally, I collect old accounting text books. One old book, from the 1950’s, I bought had a hand written note in it: “Do not put all of your eggs in one basket, the bottom could fall out.” They understood bubbles back then; they just did not call it a bubble.

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