Investor Education

• 130. A Trader's Introduction to the Australian Dollar-

  A look at what forex traders need to know about the currency of Australia, the Australian Dollar.

• 129. A Trader's Introduction to the Canadian Dollar-

  http://www.informedtrades.com/ An introduction to the Canadian dollar, the factors that impact its value, and what forex traders should bear in mind.

• Short Selling Rule Change-

  WSJ News item: SEC to stop “naked” short selling of financial stocks:

  Under current rules, a short seller must first locate shares to borrow, but does not have to enter into a contract with the share lender. Often, more than one trader is able to borrow the same shares, creating a multiplier effect in the size of the total short position.

  Under the emergency order, a short seller would be required to have an actual agreement to borrow the shares. The new move would effectively take shares out of the market for borrowing, which could reduce the amount of stock available for selling short.

• SI TV #15: Can newsletters help you beat the market?-

  Want to beat the stock market? It's harder than it looks, according to a well-known tracker of investment newsletter advice.

• Relating Company Fundamentals To The Dividend Discount Model-
  (I originally posted the following article on The DIV-Net on July 6, 2008.)
  
  Before I describe how to apply the Dividend Discount Model (DDM) to other fundamental company factors like, price to earnings, price to book and return on equity, following is a brief overview of the DDM.
  
  The usefulness of valuing a stock using the Dividend Discount Model is the fact the formula provides an investor a price he/she can expect to receive from the specific stock investment. The investor receives all dividends on an ongoing basis plus the value of the stock when it is sold. In order to value the shares using the DDM, an investor calculates the present value of all the future cash flows. The constant DDM formula is:
• The Meaning of Volatility-

  In preview, vol is up, which is to say that it's no longer down, as it was for several years previous. The bear market in volatility ended in late 2006/early 2007, as our chart below reminds. As it happened, the windup in vol's decline preceded the start of the bear market in equities. If you're thinking that volatility's nadir was a clue of things to come, you're right. In fact, we considered no less in the recent past, including this post from January 2007, when we advised, after a long spell of falling standard deviations: "Higher volatility is probably coming, one day, and history reminds that sometimes higher volatility is forged by falling prices."

  

• Importance of Diversification-

  Diversification isn't everything, but it's a lot. And sometimes, it's everything.

  It doesn't take much analysis to recognize that asset allocation's value has risen sharply this year. More precisely, the right asset allocation has generally made the difference between losing a lot of money and either losing a little or even turning a profit this year. Even a passive asset allocation across the major asset classes has generated potent benefits. Indeed, the year-to-date performance numbers for the major asset classes midway in 2008 are wide ranging, as we noted last week.

  That's in sharp contrast to the horse race as it looked mid-year in 2007, when almost everything was running higher. No wonder that halfway through 2007 there was chatter that asset allocation was washed up as a strategic tool. Who needs to own everything when robust returns are falling out of trees?

• What if what they taught you is wrong?- In this Financial Times commentary, Wolfgang Münchau comes ever so close to asking what must be one of the most difficult of all questions for any practicing economist to ask, "What if what they taught you is wrong?"
  
  [Note: This is similar to what some U.S.-based financial advisers might be asking themselves today, eight years into a secular bear market in stocks where "stocks for the long run" may not make a whole lot of sense for someone whose "long run" is only 15 years or so and happened to begin around 2000.]
  
  In a story appearing elsewhere at the Financial Times under the much more direct title of "The villains are not the bankers, but the economists", Mr. Munchau questions the very foundation of accepted economic theory and modern central banking.
• Sound Investing TV #14: Should you be investing globally?-

  With the US market gyrating wildly, investors are looking to international opportunities for stability and enhanced returns.

• How To Short A Morning Spike-

  Each of the past two mornings, I’ve shorted Uranium Resources, Inc. (URRE)—mainly cuz it’s up so much and its horrendous long-term chart and level 2 price action tells me there’s a ton of bitter shareholders looking to sell on these bounces. This 100% stock price spike naturally has brought in the short sellers, many of whom are complete morons, thinking it’s gonna collapse at any moment and I gotta thank God for their existence cuz their premature entry and inevitable squeezing is what causes these morning spikes.

• Mexicans and Machines: Drew Carey on Nafta
• SITV #13: Do you need a guru?-

  Everyone's an expert these days, but do you really need a financial guru to build a successful retirement?

• Elliott Wave on Crude and the USD- USD & Crude Short Term Forecast Update
  
  USD
  
  The USD has completed a leading diagonal and is currently in a wave (2) correction. The current wave up is close to completion and we should see one more wave down to complete wave (2) down. Once this wave down completes, we should see a strong rally in wave (3) up.
  
  Crude
  
  Crude is currently in a wave (2) correction in wave [5] up. We should see minor downside to the 130 area before a strong rally in wave (3) up. Once wave [5] up completes we should see a sharp decline in Crude and a strong rally for the USD. We are expecting a big reversal day to signal the top of the rally for Crude in our target area of 150-155.
  
  The metals are also aligning for a sharp decline after the USD completes wave (2) down.
  
  USD Chart
  
• Is There Any Value In Stella Jones?-

  Value Investing

  A few months ago, I discussed my encounter with Warren Buffett, and promised that I would eventually analyze a stock using the value investing (VI) approach.

• VIX Put to Call Ratios and Call Option Volume-

  I have not yet posted much about VIX call options volume on the blog, but the subject of VIX option volume and put to call ratios is an interesting one that I will return to periodically.

  First, I should set some context by pointing out that two years ago, it was rare for VIX options volume to hit one million contracts in a single month. Following the record 64% one day spike in the VIX on February 27, 2007, VIX options suddenly surged in popularity, with their monthly volume rising steadily and peaking in August 2007 at 7.15 million. Interestingly, since last August, VIX options volume has been fairly steady month to month and has been averaging about 4 million contracts per month.

• A Trader's Introduction to the Swiss Franc-

  http://www.informedtrades.com A look at the Swiss Franc, its historical use as a safe haven currency, its correlation to gold and the Euro, and other information that currency traders should know.

• 127. A Trader's Introduction to the British Pound-

  http://www.informedtrades.com The first video in our series on the British pound, its history, and what traders should know about it before trading the GBP.

• Probability of a String of Profits or Losses-

  How does flipping a coin relate to trading probabilities? Simple, we can look at different probabilities of trading outcomes based on the distribution that results from a pure 50/50 chance outcome.

  What do I mean?

  Although the odds of a successful trade are rarely exactly 50/50, let’s assume that - for the moment - they are. Let’s say you take ten trades in a row. What can you expect to happen?

  You can expect that 5 out of the 10 trades (or coin tosses) will ‘win’ (or, come up heads). What is the actual distribution like, though?

  Did you know that the odds of having exactly 5 of the 10 trades (or coin flips) win is only 24.61%? That means that roughly 75% of the time, you’ll have a different result than what you expect!

  To be fair, the probability of having 4, 5, or 6 winning trades (plus or minus 1 from the expected value) is 65%, which is in line with the standard “bell curve.”

  What is the probability of having a run of 10 out of 10 trades be winners (or losers)? It’s only 0.10%. Rare, but it can happen.

• Buybacks And Dividends On The Decline In First Quarter 2008-
  Today, Standard & Poor's reported dividend and buyback activity for the first quarter of 2008 for the S&P 500 Index. Although buybacks continue at a rate exceeding $100 billion and dividends exceed $60 billion, the buyback and dividend trend is not positive.
  
  One critical aspect of a dividend growth investment discipline is to look at the change in the dividend growth rate of a particular company. For those knowledgeable in calculus, it is the second derivative that is important. Although the growth rate may be positive, the rate may be lower than the prior period. This means the rate of change (second derivative) is negative. If the dividend growth rate is slowing, is this a precursor to slowing earnings growth? A number of factors other than the dividend growth rate are important criteria to review, e.g., payout ratio, dividend yield, etc, but the slowing rate of dividend growth is certainly a yellow flag.
  
• 126: A Trader's Introduction to the Japanese Yen, Part III-

  http://www.informedtrades.com The third and final video in our series on the Japanese yen. This video discusses imports, exports, interventions by the Bank of Japan, and more.

• A Trader's Introduction to the Yen, Part II-

  http://www.informedtrades.com The second in our three part series on the Japanese yen, and what traders need to know about the Japanese economy before trading it.

• A Trader's Introduction to the Yen-

  http://www.informedtrades.com A look at the Japanese Yen, and what traders should know about its history and the Japanese economy before trading it.

• SITV #12: When should you be an index fund investor?-

  Vanguard is struggling to find its soul, and if a new interview with the legendary index leaders is any indication, the devil may win.

• A Trader's Introduction to the Euro, Part III-

  http://www.informedtrades.com The third and final part of our series on the Euro, and what currency traders should know about it.

• A Trader's Introduction to the Euro, Part II-

  http://www.informedtrades.com Part II of our look at the Euro,the European Monetary Union, and what traders should bear in mind when speculating on the Euro.

• Will the US Dollar Remain King?-

  A lesson covering the factors which will determine if the US Dollar remains king of the currency world.

• Strongest Trend Forex Trading System-

  This video will show you how our Currency Scanner finds statistically strongest currencies to buy, weakest currencies to sell and we discuss specific entry and exit methods.

• A Trader's Introduction to the Euro-

  http://www.informedtrades.com A look at the history of the Euro and the European Monetary Union, and what currency traders need to know about this when trading the Euro.

• Sound Investing TV #11: Will Payout Funds Pay Off?-

  Everyone wants to manage your money in retirement, but a simple solution is not always the best one.

• 120. Economic Releases that Move the US Dollar-

  http://www.informedtrades.com A look at economic numbers that impact the value of the US dollar, and how traders can use them accordingly.

• Sound Investing TV #9: Steer clear of Magellan-

  Why Fidelity's flagship fund may not float your boat

• Sound Investing TV #10 Motown blues for private investors-

  Private equity investments are supposed to supply big returns in a short time, but it's not always easy money...

• Sound Investing TV #7: Should you follow the gurus?-

  A track record is important, but is that all that matters?

• Sound Investing TV #8: Brokerage CEOs doing just fine!-

  Whether or not the market treated you well this past year, one thing's for sure: the CEOs of the big brokerage firms managed to scrape together a few bucks.

• SITV #5 Is Vanguard's new fund for you?-

  Should you run out and buy Vanguard's new Global Index Fund? Probably not.

• Sound Investing TV #6: Are bond funds a safe haven?-

  Everyone is looking for a port in the storm. Have you found yours? Some suggestions that may help....

• Sound Investing TV #1: Trouble in Hedge Fund Land-

  Sound Investing TV #1: Trouble in Hedge Fund Land

• Sound Investing TV #2: Finding Your "Number"-

  Is finding your retirement "number" as easy as using a Web-based calculator? We don't think so...

• Sound Investing TV #3: Where to invest now?-

  With market turbulence keeping investors pacing the sidelines, when (and where) should you get in? The answer shouldn't surprise a savvy investor...

• Sound Investing TV #4: Selling Yourself Short-

  A brief look back at the nerve-wracking first quarter of 2008.

• Determining the Fate of the US Dollar, Part III-

  http://www.informedtrades.com A look at the US dollar and the primary factors that traders need to consider when evaluating its long term value. The final video in our three part series on this subject.

• Currency Pegs and the Value of the US Dollar-

  http://www.informedtrades.com A look at currency pegs, what they are, and how they affect the value of the US dollar.

• 115. Forex Trading Fundamentals Quiz - Test Your Knowledge-

  http://www.informedtrades.com/ Lesson Link: http://www.informedtrades.com/26444-forex-trading-quiz-test-your-basic-forex-fundamentals-knowledge.html A 10 question quiz on the basics of the fundamentals of forex which everyone will need to understand to go through the rest of our free forex trading course.

• Trading Dictionary: Market Maker-

  http://www.informedtrades.com The term "market maker" defined for traders/investors.

• 116. Why the US Dollar is Still King-

  http://www.informedtrades.com/ A lesson covering why the US Dollar is still king of the currency world at least as of this lesson. This also begins our discussion on the fundamentals of the main currency pairs.

• Trading Dictionary: Electronic Communications Network-

  http://www.informedtrades.com A short video explaining the term "electronic communications network."

• InformedTrades.com Homepage Introduction Video-

  http://www.informedtrades.com/ A video introducing the site which is meant for the homepage of InformedTrades.com

• 111. How To Trade the Carry Trade Strategy Part 2-

  http://www.informedtrades.com/ The second lesson in a series on the carry trade for active traders and investors in the stock, futures, and forex markets.

• 112. How To Trade the Carry Trade Strategy Part 3-

  http://www.informedtrades.com/ The third lesson in a series on the carry trade for active traders and investors in the stock, futures, and forex markets.

• Small Cap Stock-

  http://www.informedtrades.com A quick video definition of the term "small cap stock."

• 114. Fundamental Analysis Vs. Technical Analysis in Forex-

  http://www.informedtrades.com/ A lesson on the different methods that traders use to analyze the markets and which is best technical or fundamental analysis.

• 108. How Interest Rates Move the Forex Market Part 1-

  http://www.informedtrades.com/ A lesson on how interest rates move the forex market for active traders and investors in the stock, futures, and forex markets.

• 109. How Interest Rates Move the Forex Market Part 2-

  http://www.informedtrades.com/ A lesson on how interest rates move the forex market for active traders and investors in the stock, futures, and forex markets.

• Trading Dictionary: Industry Sector-

  http://www.informedtrades.com This video defines the term "industry sector" as it relates to financial trading.

• 110. How To Trade the Carry Trade Strategy Part 1-

  http://www.informedtrades.com/ A lesson the carry trade for active traders and investors in the stock, futures, and forex markets.

• Trading Dictionary: Market Capitalization-

  http://www.informedtrades.com Watch this short video to learn the meaning of the term "market capitalization."

• Trading Dictionary: Volume-

  http://www.informedtrades.com Watch this short video to learn the meaning of the term "volume" as it applies to investing/trading.

• 107. Fundamentals that Move Currencies - Balance of Payments-

  http://www.informedtrades.com/ A lesson on how trade flows and capital flows interact through something known as the balance of payments for active traders and investors in the forex market.

• 106. Fundamentals that Move Currencies - The Capital Account-

  http://www.informedtrades.com/ A lesson on how capital flows are measured by the capital account for active traders and investors in the forex market.

• Trading Dictionary: NASDAQ Composite-

  http://www.informedtrades.com Learn the definition of "NASDAQ Composite" by watching this quick video.

• Trading Dictionary: New York Stock Exchange (NYSE)-

  http://www.informedtrades.com Watch this short video to learn what the New York Stock Exchange is (NYSE).

• Can the Tiger Claw Back?-

  The Celtic Tiger is one of the most remarkable economic stories of the past twenty years. In 1987, its GDP per capita was 30% below the EU average. Now, it boasts one of the highest in the world at $44,000, 20% higher than the European average. Factors like wise fiscal and monetary policy planning are responsible for Ireland’s transformation from a third-world country to one of the richest in the world.

• How can I win the stock-picking contest at my school?- Reader's Question: I am taking a finance course in college. Our teacher has set up a competition on Virtual Stock Exchange, where students build their own portfolios and the student who has the highest return at the end of the trimester wins. I'm new at this. Which stocks should I buy?
  
  As you set out to pick your stocks for the contest, I suggest keeping in mind two "facts" about the short-run performance of individual stocks:
  
  1) It is almost impossible to predict with any certainty today which particular stocks will rise and which will fall tomorrow, and
  
  2) Stocks that are volatile today tend to remain volatile tomorrow.
  
  Putting these two principles together, I'll show you how to win the stock-picking contest--at least with greater odds than you might otherwise expect.
  
  A Stock-Picking Analogy: Numbers in a Hat
  
• Should we remain renters or buy a house?- Reader's Question: My husband and I are 40 years old, live in Australia, and have no kids. We own a small business and have annual income between $80k and $100k. We live within our means, have no debt, and save about $30k to $50k per year. We do not contribute to superannuation (tax-advantaged retirement plan) because we prefer to manage our investments on our own. Our savings and investments (mostly common stock) are currently worth about $400k. Instead of buying a house, we have chosen to rent, since local real estate prices are very inflated, making renting much cheaper than buying. However, I am wondering if we should invest in real estate so as to diversify and have some place to live further down the line. How do you see renting vs. buying? Do you think we are on the right track to a comfortable retirement in about 15-20 years?
  
  Rent vs. Buy Analysis
  
• Why Successful Traders Are So Secretive- I set out to explain why successful traders are so secretive, by stepping through a logical argument of how a trader, if he publicizes his trading decisions, will almost certainly sooner rather than later undermine his own success. For many reading this, secrecy among successful traders may be a truism not requiring elaboration. However, for anyone wishing to hear the story, here it is:
  
  Let's call our (hypothetical) young trader Mr. Bright. Assume that Mr. Bright either has an innate and remarkable ability to discern patterns in stock price movement or, alternatively, has developed a sophisticated computer program that can correctly forecast price action. Using his uncanny ability or his financial technology, Mr. Bright buys and sells stocks, typically taking positions for only a few hours, and achieves a highly favorable track record, soon vaulting him to multi-millionaire status.
  
• The Academic Stereotype-

  The study of behavioral finance has exposed many of the heuristics and biases of investors.  While financial pundits are aware of this literature, they are just as susceptible as the average investor.

  We believe that opportunity knocks when too many rush to over-simplify.

  Pundits and the  Academic Stereotype

  Here is a test that readers can try at home.  When some financial writer or trader dismisses someone as an academic, take an extra look at the argument offered.  Our experience is that those using such stereotypes do so to mask hasty arguments.

  These writers reveal their own naivete' , since any sophisticated person knows better than to reason from stereotypes.

  Inhabitants of the Ivory Tower

• The Psychology of Risk-

  Each year millions of sports fans enter bracket pools for March Madness, the NCAA basketball championship.  Participants buy an entry or two for modest amounts like ten or twenty dollars.  Most who join in rarely, if ever, make even small wagers on specific sporting events.  March Madness  and the Super Bowl are different.

  With tonight's championship game we have an opportunity to use the bracket pool to gain a little insight on risk and how it affects behavior.  The situation described nearly always arises when the championship game is to be played.

  A Typical Case

  Let us suppose that a player enters a large bracket pool for $25.  Through a combination of a few astute guesses and a lot of luck, our hero is in line for a useful prize.  If Kansas wins, he will win about $1500.  If Memphis wins, he will win about $1200.  A celebration will be in order either way.

• The Stochastic Oscillator- The Stochastic Oscillator is a momentum indicator showing the current close in relation to the high/low range over a set number of periods. Closes at or near the top of the range represent accumulation days, while closes at or near the bottom of the range represent distribution.
  
  How is it calculated?
  %K = 100[(C - L14)/(H14 - L14)] C = the most recent closing price
  L14 = the low of the 14 previous trading sessions
  H14 = the highest price traded during the same 14-day period.
  %D = 3-period moving average of %K
  
• Should we sell the farm and pay the tax?- Reader's Question: Next year we will sell our family farm and expect to net in excess of $200,000. Our tax preparer says to pay the tax and invest the rest. Is this correct? If so, where should we invest? My husband and I are both in our 60s and would certainly like more income to help us enjoy this stage of our life.
  
  Since you are selling real estate, you should first determine whether or not your farm qualifies as your principal residence; in accordance with IRS rules, if your farm property is your home, you and your husband might qualify for exclusion of up to $500,000 in profits from your capital gains tax calculation. Here's a Bankrate.com article covering this home-sale tax exemption.
  
• The perils of taking stock when you sell-

  Every entrepreneur, private equity and venture capital firm hopes that the “happy outcome” of any start-up, investment or venture will be an ultimate sale or initial public offering of the business in question. All too often, however, investors are asked to take stock as part or all of the consideration. Folks often wonder why professional investors balk at the concept, and here’s why.

  For the entrepreneur who will stay with “NewCo”, taking back stock in a sale transaction isn’t generally a bad idea. He/she will remain in a position of influence and will be able to monitor the stake as the business grows. For the VCs, Angels and PE firms who were also given paper as part of their sale proceeds, it’s a much more complicated concept.

  There are many reasons for this, but the primary concerns investors have are as follows:

  1. As part of their original investment agreement, VC-types generally have Board level access, observer rights or, at a minimum, some degree of influence. More often than not, they actually sit on the Board and enjoy all of the appropriate tools to monitor their multi-million dollar investment.

• 4 Simple Tips to Find Bottoms in Stocks-

  1.  A stocks needs to lose most if not all of its sponsorship to form a true bottom
  -when everyone has downgraded a stock and it still has a decent balance sheet, your downsize is limited

  2.  Bad news hits and the stock cease to go down
  -bottoms get formed only when all of the sellers have finished, so there is no one left who cares about the new negatives to want to dump the stocks

  3.  Large insider buying
  -management buy shares for one reason: to make money
  -make sure it is large insider buying, small amounts of buying from management could be used as a tool to deceive investors to make it look like the company is attractive

  4.  A stock is rumored upon negatively and nothing happens
  -negative rumors usually start with large hedge funds which are trying to cover their shorts; this is used in desperation because they know that the stock is more than likely going to go up unless they can do something about it

• World Series: Alpha Versus Beta-

  I can’t believe it’s already a year since I was in Miami and soon thereafter writing my synopsis of the event, one of the first ETF conferences I attended in the US. At this year’s event, the 8th Annual U.S. World Series of Exchange Traded Funds East, being held this coming Wednesday and Thursday in Miami, I’m participating in two panel discussions and you’ll notice the common theme in both as found on the online itinerary:

• Forex Pivot Point Trading-

  Learn how to make money trading the foreign currencies using Pivot Points

• Forex Trend Snapback Trading System-

  Learn how our Trend Snapback Trading System makes 300 to 500 pips per month per currency. Trend Following System

• Forex HeatMap & FX Multimap Trading System-

  This video will show you the best Forex Trading indicator ever invented. While it does 50+ million calculations, its so simple to use and make money with. Signup at our website for 5 Day Free Training class to see how this and a dozen+ other trading systems work.

• Forex Trading : Putting it all Together Part 1-

  This video will show you how to use our Trend Channels, Statistical Levels, Trend Reversal, Trend Snapback, Forex Heat Map and FX Multimap to make money trading Currencies.

• 4 Hour Statistical Forex Trading System-

  This video will show you how to make money using our 4 Hour Statistical Forex Trading System. Also includes info on FX Multimap, Trend Reversal and other tools

• Forex Position Sizing : Determining how many lots to trade-

  This video will answer the age old question, how many lots can I trade while maintaining a small risk per trade - KEY to making money in the Forex markets

• FOREX: Trend Explosion FOREX Trading System-

  This 100% Trend Following Forex Trading system uses our exclusive Multimap technology to watch 40 currencies to help predict the ones you are trading. Very high win rate, small losses and bigger avg wins make this one of the best forex trading systems we've created.

• Fibonacci Forex Trading-

  How to make money in Foreign Currencies using Fibonacci Retracements and Fibonacci Profit Targets. Brought to you by www.LeverageFX.com

• Understanding LIBOR-

  In the last week there has been a rather big flap about LIBOR rates.  It is a very serious matter.  The Wall Street Journal pointed out a week ago that these rates might be misleading.  There have been various stories following up on this and noting the defects in the method of calculation and the implications for US markets.

  We believe that the stories capture neither the significance of the implications, nor all of the possible reasons for the problem.

  Four months ago we worked on this issue.  While we urge readers to revisit the entire article, here were some of the key points:

  Readers need to know the following:

• Should I buy-and-hold or trade?- Reader's Question: How does a buy-and-hold strategy compare to a trading strategy for ETFs [and stocks in general]?
  
  Your question pertains specifically to exchange-traded funds (ETFs); however, because the buy-and-hold versus trade decision is basically the same for individual stocks, I will answer within the general context of equity-style investing.
  
  Investing vs. Trading
  
• Do’s and Don’ts of raising capital-

  Being that it is the New Year and all, I’m going to try to spend a bit of time this week sharing some insights into the world of VCs and capital providers.

  During a meeting of the Globe and Mail’s Small Business Advisory Panel last week, it dawned on me that many entrepreneurs may not know the basic do’s and don’ts of raising capital. Here are a few highlights from the perspective of people who cut cheques:

  Do’s:

  1. When you ask to meet with an prospective investor, have a defined amount or money in mind, or at least a range, and know what the use of proceeds will be.

  2. Prepare an overview, and there’s nothing wrong with PowerPoint. The pitch can be 15-25 slides long. No one needs a 50 page deck for the first meeting; there’s no way you’ll get through it all during the first session in any event (see below).

  3. Ask for 60 minutes, and no more. That should be all that you need for the 1st meeting.

  4. Show up on time.

• Common Stock Investing Mistakes- As we go into 2008, let’s recap some of the common mistakes we all make and strive to avoid making them in 2008.
• Five Ways to Find the Best Stock Picks- There is no doubt that penny stocks are a risky and thinly traded breed of stocks issued by relatively tiny companies. Also, the SEC does not require penny stocks to follow their reporting rules. This combined with unclear or unverifiable financials can make this stock seem like something to avoid altogether. Penny stocks can be dangerous for investors of all experience levels but especially for amateurs just getting their feet wet. 1. Profit
• Real Estate and Leverage: How much is best?- Reader's Question: I'm 28 years old. My wife and I both work as electrical engineers in jobs that pay well. Using our savings we have been buying income-producing real estate to replace our employment income and now own 11 units. Is real estate the best vehicle for achieving our goal of becoming financially independent to free up time for activities we consider more meaningful?
• Shorting Explained: To Go North, Head South- An excerpt from Dave Fry's new book “Create Your Own ETF Hedge Fund: A DIY ETF Strategy for Private Wealth Management” - reprinted with permission of the author and publisher: ***
• New Year's Resolution #3: Do Not Let an Investment turn into a Trade-

  There is an old rule -- and a good one -- for traders:  Do not let a trade turn into an investment.

  For individual investors we submit the alternative:  Do not let an investment turn into a trade!

• Three Common Mistakes in Interpreting the Employment Report-

  There are three things that nearly everyone does wrong in the monthly discussion of the employment report.  The first two are comments I made earlier today on RealMoney.

• Who Can Investors Trust Now?-

  Financial media outlets of all types hunger for content.  They are driven to find an audience, since their business models depend upon it.  Any financial program needs guests.  Prominent journalists need to write stories that will attract readers.  Bloggers who depend upon advertising or promotion need to find and satisfy an audience.  What effect does this have?

  Quantity versus Quality

• Distinguishing Opinion from Analysis-

  At "A Dash" we have been exploring the question of how an intelligent individual investor might gain useful information from the media -- both print and broadcast -- and from the rich offerings of the Internet.

  A main theme of our planned book is that a little knowledge can be a dangerous thing.  The average person, a consumer of this information, needs to understand the qualifications of the source.  The consumer must have enough knowledge and technical skill to decide how to interpret the commentary.

  An important theme is that the democracy of the Internet and the hunger for content has diminished quality.

  Background

• The Winning Trade is the Tough Trade-

  One of our favorite daily reads is The Kirk Report.  Charles Kirk shares his success, listens to his readers, and provides long lists of links that find articles often missed by others.  For the full benefit, readers should make the requested donation and become members.  You'll probably recover your cost on the first trade.

  In an article today Charles provides a lot of great advice from legendary trader William Eckhardt.  We recommend reading all of the great quotes, but wish to highlight two particularly relevant insights (emphasis added):

• Wall Street Research and Your Money: What is the Answer?-

  In our office we have wide-ranging lunchtime discussions about things affecting the market.  A recent topic was the impact of the analyst recommendation.

  The question before us was the following:

  Suppose that you had a feeling that an analyst from a big-name firm was going to downgrade a stock.  Further suppose it was someone you had been following, and you saw some signs.  What would be your reaction?

  There was general agreement in our office discussion that we would sell in front of the announcement, assuming under the rules of the question, that we had no "inside" information.  (We don't cheat.)  Why?  A downgrade by the analyst at a big firm has a big effect.

  The Effect of Analyst Recommendations

• Daytrading Using the MACD- The MACD measures the intensity and direction of a trend. It is calculated using three exponential moving averages (EMA); the 12, 25, and 9. The MACD is the difference between the 12 and 25 EMA, while the signal line is the 9 period EMA. Many traders believe that when the MACD is above the centerline they should be buying. Similarly, they believe they should be selling when the MACD is below the centerline. When I am trading I pay attention to the centerline in order to determine the trend, but I do not however use it as a system for trading. I myself look for the MACD to cross above or below the centerline because they represent potential trades. For example, if I am looking at shares of a stock in which the MACD has been trading below the centerline we would say this stock has negative momentum. Now suppose the MACD crosses above the centerline. This signals positive momentum and I may consider entering into a long position if other indicators are telling me the same story.
• Insider Trading-

  When you hear the words "insider trading" do you immediately think of Ivan Boesky or Michael Milken? Maybe Martha Stewart? Insider trading is a phrase that has gotten a bad rap when all it needs is a bit of clarification in its application. The Securities and Exchange Commission(SEC) has made it clear that there is legal insider trading and illegal insider trading. The legal kind is the sort I want to examine today, particularly insider buys. During a weak market, heavy insider buying can pinpoint a particularly undervalued stock.
  
  Perhaps you can decide if a sell is for reasons of diversification, to pay taxes, to pay the kids' college bills, but I can't. You can contact investor relations for some insight, but you might not always get the truth(see Enron). However, people only buy stocks because their trying to make money, but they sell for a variety of reasons.
  
  Here are some basic definitions that will enrich our discussion.
  

• Playing Chess with the S&P500 Part II: Market Pushes Lower- In part two of our series, we’re going to look at how we can adjust our original strategy (the Put Diagonal) to take advantage of a fairly large push lower by the SPY’s.
  
  We started our strategy on Friday, March 14 with a Put Diagonal (see original article) and by Monday morning, things were looking pretty ugly for the markets as emergency moves had to be taken over the weekend by the Federal Reserve to deal with Bear Sterns. As a result, the Asian markets had sold off quite hard on Sunday and by Monday morning the index futures in the U.S. were pointing to a big down day initially.
  
• Identifying A Short Squeeze- Short selling is a strategy that attempts to make profits from a decline in share value by selling stock at a high level and repurchasing these shares at a lower price. Once a trader enters into a short position they represent future demand because they must cover their trade and repurchase the shares in order to make a profit, or if the trade goes sour, repurchase in order to avoid a huge loss. This is what really gets a short squeeze going. When you sell a stock short the potential loss in theory is unlimited. It is this fear that will cause traders to cover their short positions when a stock’s value starts to rise rapidly. A “short squeeze” occurs when stocks with a large short interest rise rapidly because traders who are short start buying shares in order to cover their position. Short interest is the number of shares that have been sold short but have not yet been covered. The short interest ratio is short interest divided by average daily volume. It represents how long it would take sellers to cover their short position. If the short interest ratio were 5 it means it would take shorts 5 days to cover their positions.
• Day Trading - Stick to Your Rules- Yesterday I was stopped out of my position in the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP).
  
  I managed to obtain an 18% gain on the trade in FXP but this is actually a pretty lousy result because there were other opportunities to sell at a much better price. Why didn't I? Because I ignored my rules for trading.
  
  Trading is not like buying and holding for the long term. Nevertheless, both types of investing should be pursued with a set of rules, a discipline if you will, that guides your decisions. The rules may be different in these two cases but you should define your rules and stick with them. Unless, of course, they seem to get you into trouble on a regular basis in which case perhaps they should be revised.
  
  First, let's talk a little about the rules I try to follow. They're pretty simple and not particularly original but they are what I use. Here they are:
  
• IPO Alternatives: London Stock Exchange AIM-

  Listing on AIM

  The biggest difference between a US listed company and an AIM listed company; NO Sarbanes-Oxley compliance. Listing on AIM eliminates the SEC governmental review process of the prospectus, the multitude of periodic regulatory filings and mandatory financial reporting requirements.

• What are Hedge Funds?