We live in interesting times. Since 2008, the world has been mired in a global sovereign debt crisis for which there have been few historical precedents. The excessive creation of financial derivatives — to the tune of 1 quadrillion USD — are at the root of the crisis, with by-products being an abundance of insolvent nation-states, insolvent mortgage holders, and rampant price inflation leading to unrest and regime changes in the Arab nations with possibly other parts of the world to follow. Because of the situation, markets are becoming more volatile and investors are panicking more frequently.
Of course, there’s no need to panic. Significant as the events in recent years undeniably are, they are not changing the immutable laws of how markets work and how prosperity is created. Stay focused on the immutable rules, and the likelihood of financial prosperity increases accordingly.
There are basically three immutable rules. They are as follows:
1. Wealth Goes to Those Who Produce More Than They Consume.
This is fairly obvious and intuitive. In market-based economies, one must serve others to gain income (produce), and delay purchases (consumption) in favor of savings. The more your production can exceed your consumption, the better off you’ll be. Incidentally, this principle can help us spot opportunities in the global economy as well; when an economy runs both budget and trade deficits, it is consuming more than it is producing. Conversely, economies boasting budget and trade surpluses are consuming more than they are producing. Understanding this principle can give us insight into investment opportunities likely to provide us with capital appreciation opportunities.
2. Follow the Ratios.
Prices are getting more volatile, which is making it tough for many to find real value opportunities. What value-seekers can do to counter the increase in volatility is to focus on long-term ratios. Understanding the relationship between the price of stocks, bonds, houses, commodities, and currencies can help us see when an asset is undervalued or overvalued on a long-term basis. Looking at where the current ratio of stocks to housing prices relative to where they’ve been over the past 150 years or more, for instance, can help us find high probability opportunities. The site multpl.com is one I’ve found particularly useful when conducting research regarding relative price ratios.
3. Be Right and Sit Tight.
Famed speculator Jesse Livermore, after spending years earning, losing, and re-earning untold fortunes, commented that the best way to make money was to “be right and sit tight.” Find an investment opportunity that is out of favor, likely to rise because demand is likely to outpace supply, and sit tight until it appears as though the top has been reached. Livermore advised focusing on getting the middle 60% of multi-year trends, recommending allowing others to focus on capturing the first 20% and allowing for a 20% pullback from a potential peak rather than trying to precisely time markets. This is similar to what professional trading educators like Peter Bain and David Waring recommend which is to find trends. It is finding and riding big trends that yields great opportunities for capital appreciation via the world’s financial markets.
About the Author
Simit Patel is a currency trader and investor with 10+ years experience in the financial markets. He is the operator of InformedTrades, a site featuring free trading courses from a wide variety of experts.
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