Investing In The USA Today In Th… · investing for the long term, not the short term. While many...

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Investing In The USA Today

How To Lose Your Money Like A

Millionaire

A Grantian Network Inc. Publication

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Disclaimer: The Authors and Publishers make no claims in regard to the

contents of this document nor do they accept responsibility or admit liability for

any consequences that may result from the application of anything contained

in this document by any person. The material is offered for information

purposes only and is to be used at the discretion and complete risk of the

individual.

Published By: Grantian Network Inc.

427 N Tatnall St # 50492

Wilmington, DE 19801-2230

Ph. +1 (302) 858-0639

Copyright: Grantian Network Inc. 2011

ISBN: 978-1-61357-023-4

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Table Of Contents

The Stock Market – The Great American Game  ............................................  4  Some Background  ............................................................................................................................................  5  Investment Or Speculation?  ......................................................................................................................  10  The US Stock Market Today  .....................................................................................................................  11  Take My Money… Please  ................................................................................  17  Ponzi Schemes In A Nutshell  ...................................................................................................................  21  Pump And Dump  .............................................................................................................................................  24  Short And Distort  .............................................................................................................................................  26  Off Shore Investing  ........................................................................................................................................  27  Prime Bank  .........................................................................................................................................................  28  Bulletin Boards & Online Scams  .............................................................................................................  29  Crash And Burn Or Crash And Bubble?  ......................................................  32  The 5 F’s – Why We Invest  .......................................................................................................................  32  Wazza Bubble?  ................................................................................................................................................  34  The Tulip Bubble  .............................................................................................................................................  36  The South Sea Bubble  .................................................................................................................................  37  Florida Real Estate  ........................................................................................................................................  39  The Great Depression of 1929  ................................................................................................................  40  The Crash of 1987  .........................................................................................................................................  41  The 1997 Asian Crisis  ..................................................................................................................................  43  The Dot Com Crash of 2000 to 2002  ...................................................................................................  44  The Housing Bubble And Crash 2007 -2009  ...................................................................................  45  And The Winner Is…  ........................................................................................  47  The Bottom Line  ..............................................................................................................................................  49  About The Authors  .........................................................................................................................................  51  

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The Stock Market – The Great American Game

In 1688 a Spanish Jew by the name of Joseph de la Vega published a book in

Amsterdam all about the then still rather new and novel stock exchange. He

titled the book, ‘Confusion of Confusions’. Let’s pause here and savor the

irony of that. Do you understand the stock market? Do you know the

difference between the stock market and the stock exchange? Would you

know a ponzi scheme if Bernie Madoff’s ghost led you to one?

There is a lot of money to be made on the stock market and you don’t have to

go to the stock exchange to trade in this market (now are you getting the

difference?). Online trading has created new, even faster ways for people to

throw their money away or, make a lot of it. Very quickly and for very little

effort, at least compared to say working 9 to 5 for thirty years plus overtime

when you can get it.

This ‘fast money’ is the lure that has been a causative factor in the downfall of

many because the real strength in the stock market lies in the strategy of

investing for the long term, not the short term. While many do make a lot of

money getting out as quickly as they got in, that is a skillset all its own and not

something a software program can do for you, at least not every time.

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Some Background

If you don’t want to understand where this all came from and how it is

not necessarily a new problem, skip ahead to the next section.

Otherwise, read, enjoy and hopefully learn.

The first markets were probably held anywhere a couple of cavemen and their

clans bumped into each other and didn’t feel threatened enough to kill each

other or run away. They would exchange food, pelts, tools and maybe pretty

stones and sea shells. The people living near the coast having different items

to trade than those from the mountains.

As man moved on from hunter gathering to a more settled agriculturally based

existence, markets were more fixed in location and became regular events,

first at certain times of the year such as spring, mid-summer, autumn and

maybe even a mid-winter meet. Then monthly at the time of the new or full

moon, depending on the culture and lore of the people. All the time goods

were being exchanged via the barter system with traders having some shared

idea of value. Two sheep for one donkey or whatever it was.

It was like this for thousands of years until around 1700BCE, the Babylonians

got serious about making money. Hammurabi drew up a code of laws that

included paying interest on loans and a really good one about judges that

make mistakes paying twelve times the fine he set as compensation and

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losing his job as a judge. Other evidence from this time include clay tablets

from all over Mesopotamia recording interest bearing loans, perhaps the first

ever securities market in human history.

In Roman times they began to trade on less tangible items. The ‘Societates

Publicanorum’ were contractors who performed public service in the days of

the Roman Republic. They would do things like clean and maintain the

temples and feed the geese on Capitoline Hill that had warned the Romans of

attack and saved the city from Gallic invasion in 390BCE. These rather

lucrative public works contracts were divided in ‘partes’ or shares and were

bought and sold, or traded, sometimes at very high prices. The statesman and

orator Cicero records this in his writings and speeches, one which says

‘shares that had a very high price at the time…’ suggesting they no longer do

and surely a harbinger of the crashes and bubbles to come.

A millennia or so later, in 1171 CE, the government of Venice needed to pay

for their wars and so forced all citizens to loan the government money, paying

5% interest per year. This debt, called the ‘prestiti’ gradually became a

popular trading instrument as the government never missed an interest

payment until 1379 kicking off the first bond market in history. Around this

time the Black Death (plague) and the Hundred Years War between the Kings

of England and France played with investor confidence, especially as the

Kings reneged on their commitments to the Italian banks, much as some Latin

American countries and others have done to the IMF in recent times.

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All along there was evidence of limited share, or stock trading activity, from

Roman times to medieval Italy and into the Renaissance. Most of this trading

was between a handful of confidants and usually concerned with the shipment

of trade goods or another such single venture. Trading companies were

formed, firstly in Belgium with eh Hanseatic League and later in England and

other parts of Northern Europe. In the late 1500s there was a company

formed in England called the Muscovy Company which hoped to trade with

Russia and take some of the spoils from the Hanseatic League. Not far away

in Amsterdam in 1602, the Dutch formed the Dutch East Indies Company to

not only trade in the spices of the orient but eventually to run the colonies

there as some quasi government body with the power of life or death over the

native inhabitants.

In England, the Hudson Bay Company, the South Seas Company and the

East India Company were formed and after 1693 when the banking and stock

trading ideas of the Dutch came to England with William of Orange, thrived

even further. He set about fixing the English banking system, once again

ravaged by the costs of waging war. Given the trillions our government has

spent of our tax dollars in Mesopotamia today, sorry, I meant Iraq, it is ironic

how the circle of debt, stocks and trade seems to have gone all the way

around.

Which brings us roughly to that book, ‘Confusion of Confusions’ by de la

Vega, available in hardback at Amazon.com and elsewhere online for

somewhat less money. It takes the form of a conversation between a

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philosopher, a merchant and a shareholder. It exposes the many scams and

cons that were rife then, and are still pretty common today. Forbes magazine

said;

"You will see between its staid lines that, despite what the media says,

nothing really important has changed in the financial markets in

centuries."

De la Vega’s description of the four rules of the share market could just have

easily been written yesterday;

'The first rule in speculation is: Never advise anyone to buy or sell

shares. Where guessing correctly is a form of witchcraft, counsel

cannot put on airs.

The second rule: Accept both your profits and your regrets. It is best to

seize what comes to hand when it comes, and not expect that your

good fortune and the favorable circumstances will last.

The third rule: Profit on the share market is goblin treasure: at one

moment, it is carbuncles, the next it is coal; one moment diamonds,

and the next pebbles. Sometimes, they are the tears that Aurora leaves

on the sweet morning grass, at other times, they are just tears.

The fourth rule: He who wishes to become rich through this game must

have both money and patience.'

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Of those four rules, surely the last is just as relevant today as in 1688? It was

relevant when the English began trading in shares and other products out of

coffee houses in the late 1600s. By 1698 a broker called John Costaing

posted lists of stock and commodity prices outside Joanathon’s Coffee House

in London. Share traders had been barred from the old Royal Exchange and

set up shop in coffee houses in Exchange Alley because, apparently, they

had been too rowdy. Ever seen footage of the trading floor of the New York

Stock Exchange? Nothing’s changed.

De la Vega’s fourth rule was relevant when the first stock exchange in the

United States started trading just after the American Revolution in 1790. It

remained relevant through the ups and downs of the 19th century wars, gold

rushes and industrial revolution era events and into the 20th century and the

Great Crash of 1929. It remains relevant to this day.

The secret to success on the stock market, in fact any form of investing,

except for the lucky few and the even fewer gifted investors, is longevity.

History has shown there will always be booms and busts, bubbles and

crashes and you really only lose money if you can’t afford to leave your stock

where it is and wait for the market trend to turn upwards once again.

Providing, of course, you have your money in a legitimate investment in the

first place and we will take a peek at that in due course.

All over the world stock exchanges sprang up and traded stocks and

securities among the members of the exchange. They operated as mutual

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organizations. In recent times these exchanges have themselves become

listed companies in which shares are bought and sold, the first exchange to

do this being the Sydney stock exchange in the late 1990s. Others have since

bought controlling shares in other exchanges, such as the New York Stock

Exchange buying out the Euronext in 2002, they later demutualized in 2005,

three years after the NASDAQ.

Throughout history the one thing that has never changed has surely been the

excitement and thrill of the chance to make a fortune, counter balanced by the

very real risk of losing one even faster than it was made. The stock market is

a form of gambling for most, even if they aren’t aware of this. Perhaps some

of the reason for this naivety is the misunderstanding of the term ‘investment’

when really, a more apt word is required.

Investment Or Speculation?

Most people believe they are investing in the stock market when they buy a

portfolio of shares from a broker. No, they are speculating. When they invest

money in a new apartment complex that is still on the drawing board they are

actually not investing, they are speculating. In fact, any money poured into

any product or venture where the return is not certain and the safety of the

principle is not guaranteed is not, per se, investing. It is speculating.

The prototypical defensive investor is "...one interested chiefly in safety plus

freedom from bother." (Ben Graham, The Intelligent Investor 1949) Having

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said that some speculation might still occur as there are few things in life that

can be considered 100% iron clad safe and some risk must be assumed by

someone. Nevertheless, a defensive investor, while conservative, is not a

speculator as such.

Those people we call ‘Day Traders’ are perhaps the archetypal speculator as

they rely on the volatility of the market and their own diligence in deciding

when to buy and sell to make their money. There is no ‘investment’ made

except perhaps in time to learn the market and the role. There is no guarantee

they will make a profit let alone hold onto their principle and they rely on their

skill and expertise to predict what might or might not happen to a stock that

day.

Throughout history there have been speculators and investors and as we

examine some of the great scams and bubbles and bombs of the market over

the centuries we will see how even the most cautious of investors can lose

their shirts alongside the most speculative of speculators. For now, suffice

that we have planted the seed that there is a difference between investing and

speculating. We will revisit speculation later.

The US Stock Market Today

In the USA today there is one stock market but several stock exchanges. The

stock exchange is a place where stocks (also called shares) and other

tradable products (bonds, securities, annuities, trusts, derivatives,

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commodities, futures, pooled investment products etc) are traded, i.e.: bought

and sold. Each exchange has criteria that must be met before a company can

trade its stock on the market, at that exchange, in the form of shares. Often

these criteria include size of the company as far as assets, paid up capital and

income earning capability is concerned. Some exchanges require a company

to have a market capitalization of at least $1 million.

The New York Stock Exchange will not list a company that is worth less than

$100 million and they must have earned more than $10 million over the past

three years. Don’t make the numbers, you don’t make the board or if you were

there and your number slip, they can remove you from the board, or list of

companies.

You could go to another exchange where the requirements are not so large in

dollar terms. The London Stock Exchange only requires about $2 million in

market capitalization, three years of audited financial statements, a 25%

public float and sufficient working capital for the 12 months following your

listing. Apparently you can get on the Bombay Stock Exchange board for even

less.

If you don’t feel comfortable listing on a foreign board and your company

doesn’t make the numbers for the World’s Number One stock exchange, you

have a dozen more to choose from in the USA alone, with five in Canada not

far away. The list of US stock exchanges includes:

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• Arizona Stock Exchange (AZX)

• BATS Exchange

• Chicago Board Options Exchange (CBOE)

• Chicago Board of Trade (CBOT) - Owned and operated by CME

Group Inc.

• Chicago Mercantile Exchange (CME) - Owned and operated by

CME Group Inc.

• Chicago Stock Exchange (CHX)

• Direct Edge

• International Securities Exchange (ISE)

• ISE Options Exchange

• ISE Stock Exchange

• Miami Stock Exchange (MS4X)[5]

• NASDAQ Stock Market, The - Owned and operated by

NASDAQ OMX Group, Inc. (formerly The Nasdaq Stock Market,

Inc.)

• NASDAQ Market Tiers

o NASDAQ Global Select Market

o NASDAQ Global Market (formerly NASDAQ National

Market)

o NASDAQ Capital Market (formerly NASDAQ Small Cap

Market)

• NASDAQ Subsidiaries

o NASDAQ OMX PHLX - Formerly Philadelphia Stock

Exchange (PHLX)

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o NASDAQ OMX BX - Formerly Boston Stock Exchange

(BSE)

• National Stock Exchange (NSX)

• New York Stock Exchange (NYSE) - Owned and operated by

NYSE Euronext

• NYSE Alternext US - Organized as NYSE Alternext US LLC

(formerly American Stock Exchange (AMEX))

• NYSE Arca (formerly Pacific Exchange)

Some deal in stock form specific industry sectors and others are the board of

choice for start ups and smaller IPOs (Initial Public Offerings) so it pays to do

your homework and find an exchange that suits.

The oldest stock exchange in the USA is of course, the NYSE, or New York

Stock Exchange. On 17 May 1792, 24 stock brokers signed the ‘Buttonwood

Agreement’ under a buttonwood tree outside of 68 Wall Street, New York.

This agreement cut out any other parties such as auctioneers and restricted

the commissions the members could charge to 0.25%. The actual agreement

is short and sweet:

“We the Subscribers, Brokers for the Purchase and Sale of the Public

Stock, do hereby solemnly promise and pledge ourselves to each

other, that we will not buy or sell from this day for any person

whatsoever, any kind of Public Stock, at least than one quarter of one

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percent Commission on the Specie value and that we will give

preference to each other in our Negotiations. In Testimony whereof we

have set our hands this 17th day of May at New York, 1792.”

In 1817 this exchange drew a formal constitution and renamed themselves

the ‘New York Stock And Exchange Board’ until 1863 when they became the

more modern ‘New York Stock Exchange’. Membership on the board was

limited to just 1,366 seats and these were traded dearly. In 2006 the NYSE

went electronic and public and now membership can be obtained through the

purchase of shares like any other publicly traded company. One presumes the

NYSE met their own criteria for regulation at this time.

Meeting under the buttonwood tree might have been fine during summer,

however they soon relocated to a rented room, then the Tontine Coffee House

and eventually to their own building. The current NYSE building was opened

in 1902 having cost the then huge sum of $4 million. It was listed on the

National Register of Historic Places in 1978. All through its history the

members of the stock exchange have held an opinion of themselves and their

work that the more cynical members of the public might find hard to accept.

The sculpture on the face of the building is titled ‘Integrity Protecting The

Works Of Man’ and yet some of the goings on such as insider trading and

other such activities have hardly been of the highest integrity. Some members

of the public have voiced their opinion loudly, as in the case of the 1920 bomb

explosion on the street outside, killing 33 and wounding 400 people, the

bombers were never identified. In 1967 a peaceful but no less provocative

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protest took place when Abby Hoffman and his YIPPIE movement threw dollar

bills and fake money onto the trading floor from the gallery. Some traders

chased the money, others booed the interruption to business. Hoffman said

they were just doing the same thing to the traders that they were doing to the

people, making them chase false dreams of riches.

The stock market and the people that trade within it, the Wall Street types, are

a breed apart. Anyone that can handle the cut and thrust and mayhem of the

trading floor has to be cut from special cloth. The huge profits that can be

made by brokers creates considerable animosity, jealousy and cynicism

among the rest of the American public just from legitimate trading. When

those profits come from scams and cons and purpose designed products to

take money from the average investor, it is no wonder some rank stock

brokers on a social par with lawyers, politicians and child molesters.

Nonetheless, the reality of our economy is that we need Wall Street as much

as Wall Street needs us. If we don’t consume the things companies make and

sell, then they don’t make money. If they don’t make money then they can’t

repay their investors via dividends and so on. If the investors (or speculators

to be more accurate) aren’t going to make money they will find somewhere

else to risk their money. This means companies can’t raise the cash they

need to make the products we all get to buy. It’s a great, big circle and we are

as much a part of it whether we like it or not as the broker and the stock

holder. Everybody needs clothes, food, cars, houses and ‘stuff’. Few want to

live off the land in true caveman fashion so let’s not be hypocritical about

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where the money to pay for everything comes from, or at least part of that

money. This is the 21st century, this is the way it is, this is what we call

civilization and we are all a part of it. The trick is to use the ‘system’ to our

advantage and not be taken advantage of.

Take My Money… Please

-----Original Message-----

From: madlyn1538j78@mailcity.lycos.co.jp

Sent: Thursday, May 23, 2002 4:30 PM

To: Maire

Subject: Introducing the "Energy" Market

Get The Wealth You Deserve Unlock the Doors to STAGGERING

PROFITS! Take Advantage of Market Trends As They Happen! NOW

is the Time to Embrace The ENERGY Markets! Commodity Trading

Makes Millions Every Day! Powerful Profits Await YOU In The

ENERGY Markets!!! Fortunes will literally be made in the next few

months! Summer Driving Vacations alone will drive gas prices up very

soon! *We all NEED ENERGY...every day! *We all U.S.E

Energy...every day! *Your Life Resolves around ENERGY! *Every

Major Country in the world consumes ENERGY daily! Prices reach

extremes for reasons... Do you want to know the reasons WHY? Get

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Your FREE Energy Investment Information Packet at:

http://www.ynotuweb.com/energymarkets The Five Major Energy

Markets are:

*Unleaded Gasoline

*Electricity

*Natural Gas

*Heating Oil

*Crude Oil

OPEC announced 11/1/01 they would be cutting oil production

because prices were just too low. OPEC AGAIN announced on

12/28/01 to cut production another 6% starting 1/1/02! "The

Department of Energy says that the national average price of a gallon

of unleaded regular gasoline has soared 25 percent this year, and is

currently $1.37, up from $1.22 on March 11. That's a 12 percent

increase in three weeks. Prices are expected to rise even further when

the summer driving season gets underway." (ABCNews.Com) 4/03/02

Gasoline prices and crude oil prices are now rising again, and showing

up at your neighborhood gas station with higher prices. Let us show

you how to profit from these price movements! We can show you how

many of our clients have turned a small investment of only $10,000 into

$50,000 or MORE in a very short period of time! Isn't everyone looking

for YIELDS like that? ($5,000 Minimum Investment) HOW? Because

WE ARE "The Energy Experts" and we are truly Energy Market

Specialists. We KNOW the Energy Markets! We are an experienced,

professional firm with over 25 years of experience. Learn how our

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clients get the best results, and receive the most professional care in

the investment world today! Prices reach extremes for reasons... Do

you want to know the reasons WHY? Get Your FREE Energy

Investment Information Packet at:

http://www.ynotuweb.com/energymarkets

This is an oldie but a goodie, a genuine scam letter exhorting people to throw

away their money on the latest (for that time) next sure thing. The thing is, at

the time of writing the price of oil has dropped. The price of gold, on the other

hand, has shot through the roof yet other emails dropping into one’s inbox at

the moment are pushing silver as the next sure thing. So who is right and who

is wrong?

The answer is ‘both’. A long term study of the stock market will show an

upward trending cycle with a few dips signifying ‘crashes’. Just the other day

the Australian Stock Exchange reported losing $28 Billion dollars of value

from their board. The month before they had reported record earnings so in

reality, it is merely an adjustment, but we will talk more about bubbles and

crashes later. The point to take on board at this juncture is that everything

goes up and down depending on market forces, supply and demand and all

that stuff you slept through in high school economics class.

The above email is a scam letter designed to have you reaching for your

keyboard and taking these people on as your personal financial advisers.

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They will have a product to sell you, most likely it was a newsletter and some

software that allowed you to trick the market and leap in and out at just the

right moment. They are long gone (a reason why such an old email was used

as an example) but the major elements are there so let’s look at the email and

deconstruct it.

First of all the email address. Who is ‘madlyn1538j78@mailcity.lycos.co.jp’? Is

it Mad Lyn or Madlyn? Why the number sequence? Most people use their

birth year, this looks ‘computer generated’ to be totally random and

untraceable, or un applicable to a specific person. Mail City? Sounds solid! I

wonder why Lehman brothers never used them? Then again, didn’t Lehman

go down recently? Perhaps they should have had all their email handled by

Mail City. And Lycos have a branch in Japan?

Now read the heading and opening hype. Lots of !!! and UPER CASE! To

show how staggering and stunning and awesome this news is and how they

have the solution now you are all keyed up and anxious about not getting your

share of the wealth. Then that:

The Five Major Energy Markets are:

*Unleaded Gasoline

*Electricity

*Natural Gas

*Heating Oil

*Crude Oil

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rubbish. By whose authority to they decide these are the major markets for

energy, let alone there being five of them? You see, once they have the fear

factor established, they need to build a little credibility before they can offer

the Solution. They do this by making statements like ‘the five energy markets

are…’ and it seems close enough to the truth and what do I know anyway and

yes, I need help! The references to major sources of information that are

respected and credible also help swing the deal.

Some of you reading this will shake your heads that anyone would swallow

this but the reality is the majority of the population have an IQ of 98. Which

means lots of people are lower and the same higher, but this is not about

them. It is about hitting enough of a chord with enough people of average

smarts to make a profit. Why are our newspapers written to a 9th Grade level

for the most part? So they don’t alienate the majority of readers, that’s why.

Having said that, some of the biggest losers in Bernie Madoff’s ongoing ponzi

scheme were some of the brightest sparks in American society today. Brains

alone doesn’t guarantee you won’t fall for a con job. Speaking of Ponzi

Schemes, why don’t we kick off with this staple of the scammer’s bag of

tricks?

Ponzi Schemes In A Nutshell

While Charles Ponzi became notorious, and even gave his name to the

scheme, for his scam technique in 1920, it was first described in Charles

Dickens’ 1857 novel ‘Little Dorrit’. Basically people invest a sum or sums and

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receive interest payments in return. In reality, the first investors receive

payments from some of the money paid in by the people who come after

them. The scheme operator rakes in his cut until the tipping point is reached,

usually when no more investors can be found. There is no money left to pay

the later investors and the whole scheme falls apart.

Ponzi schemes take many forms. The original Charles Ponzi variety relied on

the arbitrage of international reply coupons for postage stamps. He made so

much money it went into the history books, even though the same scheme

had netted William F. Miller, an earlier scammer, $1 million back in 1899.

Ponzi made millions, even buying a controlling interest in the bank he used to

clear his deposits. He even sued, and won, a newspaper that claimed there

was no way he could honor the promises made.

Not that Ponzi was a brilliant businessman, far from it. He kept lousy records,

usually just investors names and amounts on index cards, He was described

as a ‘financial idiot’ by the publicity agent he hired who could barely add up.

People started to realize that he couldn’t sustain his promises of 50% return in

45 based on the profit made from selling reply coupons if only because there

were only 27,000 coupons in circulation and his investors had ploughed in

enough money for millions of the things.

Of course it all fell apart eventually and he did time in Federal and State

prisons before being deported. He ended up in Brazil and died a pauper after

fleecing some $15 million dollars at a time when that kind of money would be

close to several hundred million today.

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Ponzi schemes are a little different to Pyramid schemes. Pyramid schemes

rely on investors recruiting new investors. When they stop, dry up or lose

interest, the money going into the scheme dries up. A typical scheme is the

‘Airline’ pyramid. The pilot starts it off and recruits the co-pilot and engineer as

well as an airplane full of people. These people pay him $100 each and he

bails out of the plane. The co-pilot takes over the pilot’s seat and the

engineer, his. As the plane is filled up, whoever moves into the pilots seat

takes the money and bails and they all move up, recruit more people and so

on. To get a seat on the plane they have had to pay in $100. If the plane

crashes before they get a chance to bail out, they lose their $100. The plane

will crash eventually as too many people are in the plane and the time it will

take to get to the pilot’s seat is so long they lose interest and fail to recruit

more passengers. All pyramid schemes follow a similar line.

Ponzi schemes on the other hand can go on indefinitely. Madoff only crashed

because the GFC in 2008 had people needing to withdraw their money en

masse, about $7 billion in one fell swoop. Ponzi schemes rely on some

esoteric investment approach that gives them the edge other people don’t

have. The ‘Ponzi’ (such as Madoff) interacts with his investors on a regular

basis instead of the pyramid scheme relying on new investors introducing

more investors long after the scheme’s starter has fled.

Ponzi schemes can last for decades simply because the charismatic ‘hub’

convinces investors to reinvest their returns. Many of them are quasi

legitimate and, all other things in the market place being equal, would have

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succeeded, at least for some time, as planned. A run on the bank or a

downturn in global markets can force the hand of the scheme owner and bring

everything crashing down.

The easiest way to detect a Ponzi scheme is by applying the ‘Too Good’ Rule.

If it seems too good to be true, it probably is a scam. The genuine cases of

huge returns in rapid order are so few and far between they are stand out like

sore thumbs. A quick look around has not found any sore thumbs or even

discarded band-aid wrappers so that should tell you something right there.

Any return above 15% is suspect automatically. When banks are paying long

term depositors 5% and real estate is claiming at best an 8% annual increase

in value and even the stock market thinks 10% returns is a sign of volatility…

use your common sense. These ponzi schemes and other scams all rely on

the greed and duplicity of the investor. Most people investing in such

schemes, especially the really high return ones, all felt something wasn’t

Kosher but they were too greedy and ever willing to run the risk for the high

returns. Add in the charismatic ego stroking manipulator running the deal and

they were led happily by the nose to the slaughter.

Pump And Dump

Insider trading is illegal just about everywhere in the world. It refers to the

practice of those on the inside, in the know, making a gain over those on the

outside, the general market. It is all about the unfair advantage working for a

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company might give you. If you are in ‘Mergers & Acquisitions’ and you know

that Stock A is hurting because that is a company you are secretly negotiating

with to buy, it is not appropriate that you buy their stock now while the price is

low and then cash in once your company has bought them out of their

difficulties and their stock goes up.

Perhaps you work for Stock A and know there is a merger coming up so you

buy your own stock now, then sell once it rises? Or you might know the

contents of the annual report because you had to collate and write it. You sell

off your company stock now because tomorrow when you hand your report in

and it is released to the public and stock holders, share price will plummet.

That’s insider trading.

Pump and Dump is a bit like that. A group of insiders (even if they don’t have

any connection to the company whose stock they will pump) join up and buy

into a small, volatile company with low priced stock. They then talk the stock

up big time. They encourage others, (usually their clients if they are brokers)

to buy this Stock A, it is the next sure thing and already climbing, they’d be

foolish to miss this, this is the next dot com bubble but it won’t burst before

you make your money and get out and no doubt, the check’s in the mail.

Whatever it takes to get people to buy Stock A, these insiders will say it.

Of course they have a point where they all sell their stock to the ever growing

crowd clamoring for more Stock A. They take their profits and move on, in

other words they pumped the stock up then dumped it before the reality hit

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home and the stock lost value as market forces would reveal it is not worth

what people are paying for it.

Short And Distort

This is the opposite to Pump and Dump. The ‘insiders’ pick a stock and then

begin a smear campaign to cause the stock to lose value. They have a plan to

benefit by selling short. They have taken a position and will short sell the

stock to make their profit.

While the instruments they use, such as calls, puts, short sells and so on, are

all legal, it is the way they use them that is illegal. They are influencing the

market not by trading legitimately or improving the success of a company and

thus its stock, but by telling lies, inventing rumors and so on.

The ‘insiders’ are deliberately setting out to manipulate the market to suit

themselves at the expense of investors such as you and me. They don’t care

if people lose their money so long as they make money. They have no

conscience and are criminals, no better or worse than those that rob people at

gun point.

The greed factor is still present although one could argue that investors and

speculators need to base their decisions on something. Some hint of a

company’s success or failure potential is needed otherwise it is all crystal ball

gazing without the crystal ball. This is why the investment decisions should be

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made after due diligence has been exercised. This means research and

monitoring of the financial press and internet to properly identify potential

investment opportunities and not to fall foul of those opportunists that pump

ad dump or short and distort.

Off Shore Investing

There used to be a time when American (and Canadian) investors and

speculators were protected to some degree from the big bad world out there.

At one time, different time zones, currency fluctuations and the high costs of

international telephone calls meant it was hardly worth the effort to invest on a

foreign board. The internet has changed all of that. Today we can follow the

action in real time anywhere in the world. We can invest in foreign companies

and be a part of the next Asian Tiger boom.

We can also crash with the best of the rest in Europe or Australia, too. While

the genuine exchange trading is little different and no riskier than trading in

America, the tyranny of distance means we may fall foul of unscrupulous and

even bogus brokers who advise us to invest in stocks no local would touch

and for very valid reasons. We don’t know the reasons or the history of the

company and even the market itself will have traps for the foreigner that the

locals will shake their heads in wonder as to how we dumb gringos can fall for

these obvious money losers.

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It might sound impressive to say you were up late because you had to monitor

the situation in Shanghai, but that tends to make you look a little silly when

you lose your hard earned life’s savings on a les than brilliant buy in Beijing.

Prime Bank

Trading on the reputation of legitimate entities is a common ploy many

conmen and scammers use to build their credibility. There are about 50

‘Prime Banks’ in the world, the top half hundred of all major banking

corporations. These prime banks trade high quality and low risk instruments

and are trusted to be safe. World paper, International Monetary Fund Bonds

and Federal Reserve Notes are the stock in trade of these establishments and

are considered safe, blue chip places to put your money. Scammers know this

and use this common conception to con you into trusting their operation. They

will say it has the backing of a ‘prime bank’, but rarely if ever actually name

the bank itself. Of course, we don’t want to let the cat out of the bag and have

every penny day trader ruin this ground floor opportunity, now would we? So

the investor swallows the hook because the prime bank bait is so yummy.

Those who run prime bank scams claim the investor’s funds will be used to

purchase these safe instruments, then trade them for big profits. In reality,

these prime bank instruments don’t exist and the investors lose every cent of

often hundreds of thousands and in some cases, millions of dollars. The

scammer can even claim market forces and that every investment has a risk

attached and so on and too often gets away scott free.

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Bulletin Boards & Online Scams

The advent of the internet has made it so much easier for stock market

scammers to operate. They no longer have to take out ads in financial

magazines, newspapers and newsletters to attract their marks. They can post

their ‘offers’ on any one of hundreds of bulletin boards, online groups and

forums that cater to the many millions of people keen to make money on the

stock market. The ease of trading online has created a new vocation, that of

Day Trader where just about anybody with internet access can hover over the

market reports and buy and sell in real time. Some make a good living off the

‘penny dreadfuls’, others take a longer term approach but there has been a

huge bubble in the number of people working the market from home and

some do make money this way.

With so much activity and debate flying around it is not surprising that

scammers have seized on the internet as a way to get their message across,

also. So many will claim to have insider knowledge or know the trends and

how to analyze them. They will have all the answers and be doing huge

numbers and just can’t wait to even out their Karma by sharing what they

know and how they got to know it with you. For $39.99. Or even for FREE,

which is definitely more suspicious.

In the real world, name one professional that works for free, at least for people

they don’t know who are not a charity or special cause? Even Warren Buffet

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shares his knowledge with the world because a publisher figures the book

would sell a pile of copies and they can supply a ghost writer to do the hack

work and so on. But you know who Warren Buffet is and at a pinch, you could

probably meet him. Not so these almost always anonymous or pen name

using investment gurus you find online.

The fact they are able to hide behind a wall of anonymity and that they choose

to do so is a warning by itself. Even those that use a name and appear real

might not be who they say they are. Due diligence means running a few

checks on these people. Anyone who is real and prominent online has more

than the one presences. You should be able to find other references to them,

posts they have made and blog comments and so on. If they are legitimate

they will have done these things to promote their own business. If you can’t

find anything other than the same web page selling the same next sure thing,

be concerned.

Even if the forum, blog or bulletin board is not being used to recruit victims

directly, they can influence people’s buying decision and may be a tool in the

Pump and Dump or Short and Distort campaign being run by some

unscrupulous brokers. Some people seem to think if it is online or in print then

it is trustworthy. The truth could not be further away than this. You must be

very sure of the veracity of the post and preferably identity of the poster

before using it to influence how you risk your money.

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Just like the email scam letter we opened this chapter with, scammers will

send you tons of emails. Once they get your email address they will milk it,

often sending dozens of similar sounding offers. Even replying with the

‘unsubscribe’ feature activated will often do little to stop them spamming your

inbox.

Identifying a scam from a genuine opportunity is not difficult. The scams use

lots of !!!!!! and UPPER CASE ALL WORDS AS IF YOU ARE DEAF! They

promise returns that are far in excess of every other offer you have come

across to date. That’s another thing, most god things will be invite only and

you are not on the invite list. If you are, look at who else is on that list. If all the

email addresses start with a similar first few letters to yours you know they are

using a ‘scraper’ to collect email addresses and then broadcast to them en

masse.

If you are spammed and scammed with some kind of investment opportunity,

report it online at http://www.sec.gov/complaint.shtml to the Security and

Exchange Commission or send them a letter or fax:

Securities and Exchange Commission

Office of Investor Education & Assistance

450 Fifth Street, N.W.

Washington, D.C. 20549-0213

Fax: 202-942-9634

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Crash And Burn Or Crash And Bubble?

Sir Isaac Newton formulated a theory about gravity that is summed up in ‘what

goes up, must come down.’ This holds true for the stock market, too. The

thing is, the stock market keeps going up, at least over the long term. For too

many though, they are leveraged to the hilt and can’t leave their money in

place and wait for the next up period. This means that when value is wiped off

the stocks they hold, they have to sell at a loss and walk away broke. Much of

this wealth and poverty stuff is merely perception, at least it would be if people

didn’t get greedy. I know, we used the ‘G’ word again.

The 5 F’s – Why We Invest

Say you want to invest in the stock market because of one of the Five F’s:

• Friends – All your friends are investing and you feel left out with

nothing to talk about at parties.

• Fads – It is the latest fad thing to do. Everybody is doing it now they

have given up wanting to be celebrity chefs or home renovating

magnates.

• Fear – You fear not having enough to live on as you age or everybody

else getting rich and you stay poor or some other fear, rational or

otherwise.

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• Fun – It is simply a fun thing to do like any other hobby and you swear

you won’t invest more than a set amount of your ‘play’ money.

• Fanatics – You have a tattoo of Gordon Gecko on your left butt cheek

and believe ‘Greed Is Good’ was the ninth commandment.

The thing is, you and I both know all the best stocks are already way to

expensive… right? Actually for a long term player the conservative, blue

ribbon stocks are the best, especially if you have left instructions with your

broker to sell should the price drop beyond certain levels. But what are those

levels and what if you haven’t left instructions? Basically, don’t panic. History

has shown that the stock that plummets with the rest of the market one day

will claw its way back up and past previous levels soon enough. It is the ones

that skydive on their own that seem to splat rather than bounce when they

reach rock bottom.

If you buy 10 shares of Coca Cola at $100 each you will get a safer deal than

buying 100 shares of a major newspaper at $10 or 1,000 shares of a dot com

startup at $1. Coca Cola have been around for over 100 years and are pretty

solid. Newspapers, even major ones, are looking for new revenue streams as

pixels replace paper in so many ways and that dot com start up might not get

past GO! Let alone collect $200.

On the other hand, Coke shares might edge up a cent or two this week

compared to the dollar movement in the newspaper as it fights off rumors of a

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buyout and merger with a major media player and the dot com dudes rocket

up five bucks a share following some positive press about their latest free

software release. Of course next month the newspaper is in receivership and

the dot com dudes are back at college after their Mom wanted her garage

back.

Long term market investors pick their investments with care and then play the

long term game. Day traders newbies and risk takers go for volatility and

movement with the chance of a big payday balancing out the risk of losing the

lot. Make no mistake, the reasons why we invest usually fall within one of the

5 F’s.

Wazza Bubble?

A bubble occurs when for some, usually inexplicable reason, investors put so

much demand on a stock that the price is driven upwards. It inflates far higher

than the value of the company can justify. This has been likened in the past to

a bubble forming, getting bigger and bigger until eventually, the bubble bursts.

Imagine blowing a soap bubble which too often seem like they will just get

bigger and bigger but eventually they run out of soap or whatever it is and

they float away before bursting, leaving little behind but traces of soapy water

and no longer anywhere near as beautiful as when they were floating away,

perfectly formed and full of dazzle and color.

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The opposite to the bubble is the crash. This is when for some, equally often

inexplicable reason, everyone decides they have to sell their stocks and so

the value drops as people panic and just try to get what they can for their

stock before the price drops even further. Some have said the relationship

between bubbles and crashes is like clouds and rain. You can have clouds

without it raining but you can’t have rain without clouds. Historically speaking

a market crash has always come after a bubble, so the heavier the cloud

cover (larger the bubble) the heavier the rain storm (crash).

Somewhere between the bubble and the crash there is a ‘correction’. A

market correction occurs when the market seems to come to its senses for a

moment. Whatever caused the bubble is brought back into line by a

correction, perhaps wiping off some of the value of the stocks but not crashing

entirely. As a rule of thumb, a correction should not exceed a loss of 20% of

the face value of the stock on the market.

In the history of the stock market there have been some notable bubbles, all

followed by crashes. The one constant thing about these bubbles is the greed

shown by the investors. Greed is what drove the stocks to bubble in the first

place and greed is what feeds the frenzy during the crash, along with fear of

being left behind holding the empty bag. While you may shake your head and

wonder how our ancestors could be so gullible, so greedy and so naïve keep

in mind that nothing much has changed. We have just gone through a huge

bubble and crash we called the Global Financial Crises and that, too, was all

down to greed. Not just greedy Wall Street types but every day middle class

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Americans cashing in on the equity of their homes to fund their consumption

addiction for electronic goods, vacations, SUVs and all the trappings they feel

they are due because they are told that by people who make their money

manipulating us in these ways.

The Tulip Bubble

In 1593 Tulips were imported into Holland from Turkey and like new things

everywhere across time, they quickly became sought after and something of a

status symbol. This pushed the price up and when a non-fatal virus caused

them to change colors and patterns, they became even more desirable and of

course, more expensive. As tulips grow from bulbs, they are fairly robust and

easy to trade it. Pretty soon people were trading the bulbs and making large

amounts of money. By 1634 there was quite an industry in action around the

growing of bulbs. The professionals began to work the market to ensure they

had sufficient stock and so there was a scarcity at times which increased

demand and consequently increased prices.

This was where that greed factor came into play, along with some human

stupidity as people began to trade ever more valuable objects for tulip bulbs.

This included the family estates, homes and even cashing their life savings to

buy up enough bulbs to make a killing, then retire. More and more people

bought in thinking they could offload the bulbs to unenlightened foreigners

silly enough to pay more than they had for these flowers.

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At the height of the madness the value of the already overpriced tulips

enjoyed a twenty-fold increase in value in just a single month. We would still

be buying tulips today for a couple of million bucks a bulb if the usual bubble

bursting hadn’t happened. As with every bubble, cooler heads soon realize

this can not go on forever and so they sell while the selling is good. As more

and more see the sense in cashing in now while the market is so high a funny

thing happens. With more bulbs on the market for people to buy, the price

starts to drop as sellers compete for buyers. Before long, wholesale panic

sets in and prices plummet, often leaving people with piles of now worthless

tulip bulbs and no house or life savings.

In 1637, as prices began to drop people indeed panicked and tried to sell for

whatever they could get. Dealers reneged on contracts and refused to honor

them. It was so dire a situation the government stepped in to halt the crash

(sound familiar?) and offered to honor contracts at 10% face value. This

however caused the market to plunge even lower making such restitution

impossible. Everybody suffered the consequences that followed. Even those

who had sold early and kept their profits now had to endure years of

economic depression.

The South Sea Bubble

Less than 100 years later in England the economy was doing well and people

in the middle and upper classes had money to invest. At the time the East

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India Company was paying out large, tax-free dividends to the 499 investors

that shared the spoils from trading (and ruling) that far off eastern land. Keen

to find other areas to make money from, the South Sea Company was formed

to manage all trade in the Pacific and South America.

The popular misconception was that the people in the Spanish colonies of

Mexico and elsewhere in South America were keen to swap their gold and

jewels for good English wool. Investors bought the stocks as fast as they were

issued and re-issued. The South Sea Company was roaring along attracting

considerable investment but there were a couple of minor issues to contend

with. The first was war with Spain, which made trading with their colonies

problematic. The second was incompetence. The managers were more adept

at obtaining investment capital than spending it wisely with entire shipments of

goods left rotting on the wrong docks and so on.

Around this time a Scotsman, John Law, was making a small fortune for many

investors in France, and a much larger one for himself and the French King,

all backed by land owned by France in America. The Mississippi Company did

very well and spurred those in England to want to share this wealth. The

difference being that Law’s company was properly run and backed by real

property, not so the South Sea Company. Started in 1711, it wasn’t until 1720

that things came to a head for the South Sea Company. While there was a

time when just about any venture could attract investors, it was now time for

the inevitable run and crash. IPOs had been floated for ventures that claimed

to make vegetables out of sunshine and one famous offering that advertised

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“A COMPANY for carrying out an undertaking of great advantage, but nobody

to know what it is.” That one had investors throw in the equivalent in 2011

money of over $100,000!

Those in the know realized that the game would soon be up and so they sold

out and toddled off with their profits, leaving everyone else to have it slowly

dawn on them that the bubble had burst, their stocks were worthless and they

had better sell up fast. Of course that just made the collapse even more rapid

and definite. To avoid complete devastation of the British banking system,

once again the government stepped in. A law was enacted and not repealed

for over 100 years that outlawed the issuing of stock certificates and helped

stabilize the banking industry.

Florida Real Estate

While Charles Ponzi himself did partake in the selling of Florida real estate

that was little more than swampland and often underwater at high tide, he was

not the only crook that made a fortune in the mid-1920’s. At that time the USA

had just made more money from selling war materiel to both sides in the

Great War (at least until the USA entered on the side of the Allies in 1917)

than at any time in our history and so we were as prosperous a nation then as

the British Empire was in 1711. People with money need somewhere to spend

it or speculate with it and a lot of these people were escaping the harsh

northern winter climate for a warmer one in Florida.

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The influx of people meant the demand for housing rose and so it was not

long before everyone was selling real estate and prices went through the roof.

Land prices quadrupled in just one year and by the end of 1926 the market

had become saturated. There were no more ‘greater fools’ around willing to

throw the silly sums at real estate agents and brokers. Some speculators

looked around and saw that it as time to solidify their investments so they sold

out and wandered off with their profits. The rest of the crowd more or less saw

the writing on the wall at the same time and everybody was looking for a

buyer. Prices fell, then plummeted, then fell some more.

The Great Depression of 1929

The Big Guy. From the start of September 1929 to the end of October that

year, the stock market dropped 40%. It then continued to slide downhill until

July 1932 by which time it had lost 90% of the value it had enjoyed in the

summer of 1929. At that time many middle class Americans had poured their

savings into the stock market and various stock market traded instruments as

it was seen as a no-risk place to watch your money grow. Since the Great

War had ended the stock market had done nothing but climb and the odds of

it taking a nose dive were slim to none, surely?

So what went wrong? Mostly it was the ignorance of the uneducated investor

throwing money anywhere that seemed a good thing, helped along by the

unscrupulous manipulation of the market by those in the know; brokers,

traders, investment bankers and so on. The market grew frenetically and the

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frenzy of investing just took on a life of its own. Once again people were

caught up in the hype and hyperbole of the market and the greed and easy

riches to be had.

With the help of insiders manipulating stocks to grow based on rumors then

cashing in, they kept the ball in the air for several years but pretty soon too

many balls were being juggled and it fell apart. Once the insiders twigged and

sold their stock, the rest of the herd got a whiff of panic and danger and

started to try and cash out themselves. The inevitable crash followed and

some took it personally, leaving their offices by the window instead of the

elevator.

The Crash of 1987

The Great Depression dragged on for over a decade until once again, war

offered us the chance to turn our industrial muscle into money. After 1941 the

stock market resumed its climb and life was once again very ‘bullish’ for

decades to come. (Bulls think the market is rising, bears fear it will fall, hence

bear or bull market) Everything chugged along uphill until 1987. While many

had predicted it and knew it should come, it was thought the government

interventions of the body President Franklin D. Roosevelt initiated after the

Great Depression, the Securities and Exchange Commission, would keep the

market safe. Not so.

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One reason for the crash is that once again, investors had failed to think

about the real worth of the companies in which they invested. They longed for

fancy newspeak mission statements used words like synergy, paradigm and

leverage rather than take the time to do their homework and find out the

company was massively in debt without a product to profit from. The 1980s

were the days of Gordon Gecko and take over after take over. Once taken

over by one company buying a controlling stake (might be as little as just 21%

of the shares on the market), the assets of that corporate victim would be

stripped. Stock, products, patents, research, pension fund cash and real

estate holdings would be sold off and the proceeds divided up as dividends.

The remainder would often be sold off to some other corporate raider and all

the while the staff would be wondering if they had a job to come to next

Monday morning and the suppliers if they would ever be paid. Often not as

the gutted company would be placed into liquidation and the hands of the

receivers. None of which bothered the corporate raider who would use a

string of holding companies to form a barrier to any liability law suit. Greed is

good, remember.

Investing into these corporate raiders was great, until the usual turn of events

and the crash began. These events included the SEC investigating claims of

insider trading and the selling of junk bonds and other worthless products,

usually cobbled together as a way to cash in on some of the assets of a taken

over company. The market lost confidence and investors started to sell off

and cash themselves up. The rest, as they say, is history.

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The 1997 Asian Crisis

The Asian Crisis actually began to gain momentum as far back as 1989, the

fallout from the 1987 crash giving the impetus to the Asian market to follow

into the abyss. While the Japanese have a well earned reputation for imitation

and more often improvement, in the case of the stock market they seem to

have taken hold of the bull by the horns and not let go while the bear has run

roughshod over their market for years. That is to say anytime the Japanese

economy shows signs of recovery, the market tends to tank.

Recovering from WW2 gave the Japanese a goal and they chased it with the

kind of zeal they are renowned for. In the 1970s and 80s ‘Japan Inc.’ was the

business model and people all over the world were sending executives to

Japan to study their methods, even reading four hundred year old sword

fighting texts like Mushashi Miyamoto’s “Go Rin No Sho” or “Book Of Five

Rings” to get some insight into the Japanese success story.

Between 1955 and 1990 Japanese land prices went up by 70 times and

stocks increased over 100 times. Japanese of all ages jumped into trading

and it became something of a national sport. The everyday man and woman

in the street embraced the stock market even more completely than

Americans had prior to 1929. To some outside observers it was clear the

Japanese economy was a gigantic bubble.

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When the bubble burst it was felt the close watch kept by the government on

the market would fix any problems however when the government did

intervene it actually made the situation much worse. In time, the other ‘Asian

Tigers’ suffered their own crashes culminating in 1997 with the markets in

Thailand, Taiwan, Singapore, Malaysia, the Philippines, South Korea and

Japan all taking major hits. It was shortly after this that China decided to join

the 20th century, just in time for the 21st.

The Dot Com Crash of 2000 to 2002

From March 2000 to October 2002, the NASDAQ Composite index lost 78%

of its value, falling from 5046.86 to 1114.11. Most of the damage was limited

to firms in the Silicon Valley, just about all connected to online enterprises and

startups, hence the title ‘Dot Com Crash’. A lot of the blame has to lie in the

lap of the market itself for the speed in which the bubble grew.

While the internet and computers had been around for some years, it wasn’t

until 1995 that the ‘Information Superhighway’ took off. All of a sudden anyone

with anything to do with young geeks and a garage had money thrown at

them by investors eager to cash in on the ground floor of the next Hewlett

Packard, Microsoft or Apple. Information technology was the buzz word at the

head of a new swag of buzz words; paradigm, internet, online, consumer-

driven navigation, tailored web experience and networking had investors

salivating, pouring millions into IPOs without any thought to the veracity of the

product or company.

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Young men in their teens and early twenties were becoming ‘siliconaires’ and

buying up expensive real estate, flash cars and lots of expensive toys. In 1999

alone there were 457 IPOs, 117 of which doubled in price on their first day of

trading. By 2001 the novelty had wore off as many of these next great sure

things failed to produce revenue. That year there were just 76 IPOs, none of

which came close to doubling their stock price on their first day of trading.

The simplest explanation for the Dot Com bubble and crash is too much too

fast. The market went crazy and everyone with money wanted to cash in on

technology. Afterall, there were no more tulips to buy and who wants to go to

the South Seas nowadays, right? Once again, human greed took over. It is

one thing to throw money into an IPO but if that company then fails to make

revenue the value of that stock drops because the company isn’t worth the

price asked. That happens to all companies and all asset classes, even those

they always swear can never lose value… like real estate.

The Housing Bubble And Crash 2007 -2009

The S&P 500 showed a high of 1576 in October of 2007. By March of 2009 it

had declined 57% to just 676. The S&P 500 is the market that, like the

NASDAQ Composite and its focus on technology, looks closely at the real

estate market and is therefore the best indicator of market trends and health.

The trend was down and its health deteriorating.

One thing leads to another and the Dot Com crash created a recession which

caused the Federal Reserve to keep interest rates at an all time low for an

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extended period of time. This led to a glut of savings around the world and

these savings needed to be invested… somewhere. The end result was a lot

of people started buying bricks and mortar, real property. As the demand

grew, so did the prices asked and subsequently the values placed on these

properties. Banks loaned money to anyone and everyone and new

instruments and products were invented that cashed in on the advances in the

calculating capabilities of computers.

People also drew on the equity in their homes and took out loans and credit

cards and had vacations, bought new cars, went on spending sprees and

thought the good times would never stop rolling. Of course they had to at

some stage. Because of the new algorithms investment bankers could use to

calculate ever more complex investment products, a lot of the mortgage

market had been converted into AAA rated securities and sold on, then resold

and resold again. Each time the banks made commission and profits and so

they thought it was all good. Of course once the market became saturated

and there was nobody left to pay the ridiculous prices asked for houses for

sale, that meant there were no new mortgages being written and so the

collapse began.

Once again, it got to the point where the market ran out of bigger fools to keep

buying up everything on offer. Major banks went bankrupt and industry giants

called in their favors and campaign contributions and got the tax payer to bail

them out. The rest is (recent) history. The bottom line is that many hundreds

of thousands of Americans lost their homes, their jobs and their futures and

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not all of them deserved this due to their own greed, but rather the greed of

people who are now once again back at their desks making money and

deciding whether to vacation in Venice or stay close to home and hit the

Bahamas again this summer.

And The Winner Is…

The winner is always the Big End of Town. The small time investor can hope

to get to a point in the future and cash in their investments and get their

money back, having enjoyed income in the form of revenue over the years

they had their money tied up in that stock. If they invest wisely they should

even out the odds and while some stocks in their balanced portfolio may have

died a horrible death, others would have improved and most stayed pretty

constant.

Those who speculate and hope for short term gains need to be on the ball

and on top of the market 24/7. They need to know how to put and call , go

short or long and all the other terms, trends and tactics that are used to make

money in the short term. If you don’t have the knowledge and the capability to

do this then you should not risk your life savings playing the markets. Make no

mistake, that is what you are doing, playing.

You have little if any direct influence over any particular stock. If you talk it up

in an attempt to drive the demand and thus the value higher you are breaking

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the law. The same if you go for doom and gloom. Of course you need to have

some clout to be able to make an impact and most of us simply don’t have

that much influence. You can’t make a hostile take over bid for a stock you

own and try to get a controlling interest, not on your salary J.R.

That leaves you with a few, sensible options to consider. First of all, are you in

the market for income or capital gain? If capital gain then you want a stock

that increases in value that at some stage you can sell off and take the capital

gain earned. If you want income, then you need a stock that pays (preferably

franked –meaning tax already paid) dividends on a regular basis. The risk is

that the stock choice is poor, something happens to the company or market

and so on.

If you buy ‘blue ribbon’ stocks then over a ten or twenty year spread they

should always be worth far more at the end of the time period than when you

bought them. Most studies show growth between 8-12% per year, very similar

to real estate. Over the long term. The advantage real estate has over shares

is that you can live there, or rent it out and it is always there. The down side is

that real estate has taxes and maintenance that needs to be paid and factored

in to your profit or loss calculations. You can usually liquidate (sell) stocks a

lot faster than you can a house or apartment.

For those thinking of investing but not wanting the doubts and uncertainty of

stocks, think bonds. Government bonds, while usually much lower in terms of

interest paid, are as secure as one can hope for. Other instruments like

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annuities can also provide a guaranteed return over a period of time. Of

course they can fail, it has happened but the likelihood is much less than

buying stock in a startup IPO. The bottom line is to do your due diligence and

ask lots of questions.

If you take on a financial advisor and they say to invest $ in Stock A, ask them

how much Stock A do they hold? If they hold nothing, ask why? An honest

answer will come flawlessly. A man who is merely getting a high commission

from the owners of Stock A will um and argh. If the stock isn’t good enough for

the advisor’s money, why does he (or she) think it is good enough for yours?

This simple litmus test never fails to tell you a lot about your financial advisor,

if nothing else. While of course a financial advisor, probably a young college

graduate on a salary, can’t be expected to have investments in everything you

would hope they know a good deal when they see one. After all, that is what

you are paying them for, right? So if Stock A is such a good deal you should

not miss it, how come they have?

The Bottom Line

Which brings us to the bottom line and the bottom line is that money talks,

everything else walks. Where is the money? Who has the money? Who

makes money? Too often investors, or more appropriately, speculators, think

only ‘WIIFM’. What’s In It For Me? They should be thinking what’s in it for him

or her, the person telling them to invest here, buy this stock, sell that one etc.

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Our brief sojourn in the realm of investment and the stock market should

have, if nothing else, shown us that the root cause of all investment issues is

the greed of the investors involved. Feeding frenzies to cash in on the next

sure thing be it tulip bulbs or McMansion in Arizona create bubbles and

bubbles always burst. They have to. Markets that expand beyond sustainable

limits in record time can only go bust. History tells us this time and time again

yet too many fail to heed the warning signs.

Many who plummet are arrogant and ignorant. So arrogant they think they are

too smart to be taken by a con man, after all a con man would have to be

smarter than them and there ain’t no such animal, right? Wrong. Most conmen

are not super high IQs, they just have a natural charm and ability to spot a

sucker. That same arrogance leads them to disaster even when there is no

con involved. When it is simply the market forces at work, jostled around by

human nature and greed, insecurity and hope.

The ignorance plays its part in hiding clues that should scream warnings to

the players but fail to be properly identified as warnings. Speculators play the

game without knowing the rules let alone having any actual skills. We are so

‘comfortable’ with the market thanks to the conditioning of Hollywood and the

media that many think they know what they are doing when they don’t. It’s a

bit like training for softball and turning up at a hockey match, something has to

give.

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What gives is one’s money. Make no mistake a lot of money can and is made

on the market every day, whether the market is rising or falling. Some people

make all their money only when the market plummets. While people are

choosing a window as their exit strategy, others are rubbing their hands with

glee. Do you know how to make millions when all around you is losing the

same amount of value every hour? The real players do and they make most

of that off people like you and me.

The secret to making money on the stock market is to know the game, know

the rules, the players and the strategies and to play like it’s your own money,

something the brokers and traders rarely do. You can play the market in real

time simulation, online. A search for this will reveal numerous brokerages that

offer games where you play for free using the actual rises and falls of the

market, usually 30 minutes or so delayed to prevent abuse.

Invest the time to educate yourself on the market and the way it can be used

to make money, as well as how it can bring you to financial grief and ruin.

Don’t be in a rush to throw your money away and always ask ‘What’s In It For

Them?’ as often as you ask ‘What’s In It For Me?’. Good luck.

About The Authors

The Credit And Finance Series is a collaboration between Grantian Network

Inc. and author Perry Gamsby.

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Perry Gamsby holds a Master of Arts in Writing from Swinburne University of

Technology, Lilydale, as well as vocational qualifications in small business

management and adult training and education. He has been employed in the

credit industry as a debt collector, credit manager and for a period in the

1980s and 90s was a Licensed Commercial Agent. Perry lives overseas

(currently in Sydney, Australia) where he is a freelance writer and contract

college lecturer.

The Grantian Network, is a private company based in Delaware, USA and

focused on developing adult education products that can be communicated

both online and by direct delivery. This series of Grantian Network Inc. books

are aimed at the individual, whether they be private or in business, who have

to understand and operate within the financial scene in America and around

the world, today.