Wall Street Craps – 2012 Global Ebook Finance Award-Winner

Bank & Bond Yields Are Not Attractive: Yields for bank savings accounts, domestic bonds, and money-market funds are near all-time lows.

These investment vehicles do not provide any chance to grow your capital at the higher rates of return that many people desperately need today. What many people do not realize is that bonds can be a place to lose money by decreases in the value of the underlying security. And while savings accounts, money-market funds, and other cash equivalents are at historic low yields, they can serve an important role in your portfolio as a temporary safe haven away from risk.

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Comment: Cash has its place as a safe haven. It’s just not a place to get much in the way of returns. However, there are ways to playing the bond market that closely follow the price patterns of the general stock market with lower risk and higher yield. For more on this, check out the Best Bond Strategy link on the right sidebar.

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“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

Benjamin Graham ~ Legendary stock market expert

Stay Away From Foreign Markets: The political risks and higher management fees involved with investments in foreign currencies and securities make these areas more challenging for average investors than similar domestic investments.

However, there are new ways to participate in foreign investments through domestic companies and specialized sector funds that make these games more reasonable to play for savvy individual investors with time for additional study. But overall you’ll discover that the U.S. stock market offers the best risk/reward trade-offs for your capital.

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Comment: The way to play foreign markets is through Exchange-Traded Funds. But I strongly discourage investor’s from venturing into this  investment realm. It’s easy to fall in love with the story of India, Brazil, or China doing better than the United States, but playing their markets is an entirely different beast. Unless you have a unique source of inside information, you’re better off ignoring foreign markets and put all you attention on the United States.

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“Most new investors try various markets, lose money, and finally acquire some knowledge through bitter experience. This is roughly analogous to learning how to drive by having a series of accidents.”

Samuel Case

Beware Of Alternative Investments: The hidden fees, low liquidity, and/or high entry costs associated with real estate, limited partnerships, insurance products, and managed investment accounts present problems for many investors who possess limited funds and short-time frames.

The appropriate place for these investment vehicles are with people who already possess substantial financial resources and can afford to put aside a limited portion of their assets without any pressure for liquidity, income, or immediate return.

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Comment: Alternative investments is an area that has attracted a lot of unsophisticated investors along with professional salespeople from failing investment-type businesses (mortgage brokers, real estate agents). It appeals to those public investors who blame their failures in the stock market on everyone and everything else except themselves. I frequently receive cold calls from people trying to sell me limited partnerships in land, oil, natural gas, gold, and land leases. I always ask, “If it’s such a great deal, why do you need me to participate? Why not go to the bank and convince them and you can have all of the profit to yourself?” The reason always boils down to risk which is understated. So stay away from “alternative investments” and the alluring stories of the professional salespeople who push them.

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“Investors operate with limited funds and limited intelligence. They do not need to know everything. As long as they understand something better than others, they have an edge.”

George Soros

Don’t Invest In Hard Assets Or Collectibles: People buy hard assets like gold and silver or collectible items such as fine art, jewelry, and rare coins at retail prices, but can only sell them at wholesale prices.

A player in these investment games usually has to get lucky on the upside to the tune of 15% to 20% just to break even. As a result, the odds of winning are too low. These games only seem to rack up consistent profits for those who are well positioned on the inside of the transaction. (Note: Expensive collectible items often incur additional costs related to storage and insurance. It should also be noted that these types of alternative investments are common with those investors who seek capital appreciation with unreported income.)

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Comment: The safe way to play gold is through the Exchange-Traded Fund that goes by the symbol of GLD. It is traded on the New York Stock Exchange and offers investors a convenient, low-cost, and efficient way to trade gold. Some people get into trading the shares of gold mining companies such as Newmont Mining or American Barrick Gold, but these stocks involve high leverage and management concerns. But in terms of physical gold, other precious metals, and collectible items, an investor must only think of them as illiquid speculations with poor bid/ask spreads. And in my book (literally), it doesn’t qualify as an investment game with good odds to play.

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“Quinn’s First Law of Investing is never to buy anything whose price you can’t follow in the newspapers. An investment without a public marketplace attracts the fabulists the way picnics attract ants. Stockbrokers and financial planners can tell you anything they want, because no one really knows what’s true. The First Corollary to Quinn’s First Law states that, even when the price is in the newspapers, you shouldn’t buy anythig too complex to explain to the average 12-year-old.”

Jane Bryant Quinn

Don’t Play The Options And Futures Games: Leave the options and futures investment games for the professional traders to play.

The odds of winning at these games are too low and the price of apprenticeship too high for part-time amateur players. For anyone who is not a pro, these games only serve as quicker ways to lose your money. If fast action is what you really crave, then it would be much safer to take an occasional trip to Las Vegas or Atlantic City.

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Comment: With the popularity of computer-driven charting methods, a novice can get a false sense of knowing exactly when to buy and sell options and futures contracts. But the real problem lies in not having the emotional experience of trading with their own money in highly volatile markets. While brokers who push the virtues of options and futures like to claim the benefits of limited loss (in the case of options) and unlimited reward potential, it really doesn’t dawn on an amateur investor what it feels like to lose 100% of their capital in a short period of time with no hope of recovery. A few experiences of this will quickly cure you craving for this kind of dangerous financial action.

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“Options carry a particular high degree of risk. Investing in this area without a good understanding of how options work is like running through a dynamite factory with a burning match – you may live, but you’re still an idiot.”

Joel Greenblatt

The Golden Nugget Hotel and Casino is one of my favorite places to gamble in downtown Las Vegas. If you walk into the front door of this casino, you’ll immediately find people gathered around the giant oversized slot machine near the entrance. Go another 20 feet into the casino, and you’ll see row upon row of assorted slot machines and table games such as blackjack, roulette, Caribbean poker, and craps. If you go further back into the Golden Nugget, you will eventually find the casino games of baccarat, poker, and high-limit Asian card games.

As a first-time visitor to a large gambling casino like the Golden Nugget, you can become awestruck by the intense action surrounding all of these different games of chance. In a similar way, a new person to the investment world can be easily overwhelmed by the many choices of where to invest their money. And like being at a Las Vegas casino, a person who chooses to play in the investment world must eventually make a conscious decision of what “games” or, more accurately stated, what types of investment vehicles to try.

For savvy investors, the choice of investments is largely determined by the game or games that give them the best statistical chance of winning. Otherwise, you become known in both the gambling and investment worlds as a “sucker.”

WHICH GAMES SHOULD YOU AVOID?

The investment world is also much like a financial casino in that investors have many different choices of where to put their money at risk. These choices include such things as real estate, stocks, bonds, precious metals, commodities, foreign currencies, options, futures, mutual funds, foreign securities, insurance products, limited partnerships, managed investment accounts, government notes, savings accounts, and collectible items such as fine art, jewelry, antiques, classic cars, rare stamps, baseball cards, and numismatic coins.

Most of these investment vehicles possess one or more major drawbacks for average investors. Meanwhile, all of these investment options have features that may sound good to average investors. It takes some experience to realize the big difference between what “sounds good” and what “is good” for investing in terms of transaction costs, management fees, liquidity, surrender fees, diversification, yield, risk, and profit potential.

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“The true secret of success in the investment and speculative world is not so much which good securities to buy, but rather which investments to avoid.”

Morton Shulman