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No. of Recommendations: 27
Early this morning I was sitting on a sandstone shelf up on Listey Knob, sipping my chocolate milk and waiting for the sun to rise over Hunter’s Ridge, when suddenly the sky changed, the soft pre-dawn glow turning gray, and a fell wind came from the east, sweeping across the hollow and up the ridge, heavy with rain and bearing the sickly-sweet scent of jasmine.

The hair on the back of my neck prickled, and I looked behind me, imagining danger, but there was nothing there. The fog from the creek seemed to follow the jasmine wind, gray and sinister, soon obscuring Hunter’s Ridge; I would not be seeing a sunrise today. And there were no birds, no squirrels, no insects – all was quiet and still.

This was not a West Virginia wind; there is no jasmine in West Virginia. Was I imaging the faint scent? Or had the cold wind swept across vast distances, from Spain, or Italy, or even China?

* * * * * * * * * * * * * * * * * * * *

There has been discussion on these boards of the minimum portfolio size to justify the expense of Pro.

Depending on your personality and desires, I think your portfolio can be as small as, literally, zero. For $1,000 and a lot of effort and participation on the boards, you will get an intensive course on many aspects of investing: evaluating companies and their stocks; all aspects of portfolio management (when to buy, when to sell, how to diversify, how to use leverage, amount of cash and hedges to be held, etc.); techniques for hedging and shorting; option strategies for income, gain and defense; and the use and evaluation of ETFs.

You do not need a portfolio to learn these lessons; as several people have suggested, you can use virtual trades to mirror Pro transactions and learn from them.

You will be paying a minimal fee for an important course taught by experts, with additional day-to-day help from an unusually talented community, too numerous to name, but prominently featuring Spinningwood, stamleo, fullofcarp and RockyTopBob, among many others. What would such a course cost at Carnegie Mellon University or Yale, if you could even find it there? Certainly a *lot* more than $1,000 per year.

Of course, at some point you will need some money to make use of this education. If you have a small portfolio and do not expect that you will be able to add money to it over time, then the suggested limits (IMO, in these circumstances, about $100,000) are appropriate. But if you are young or middle-aged and working, with prospects for saving in the future, then I think there is a strong argument to be made that Pro is very worthwhile strictly for learning purposes – at least so long as you are prepared to commit the time and effort to take advantage of the opportunity.

All of this is JMO, of course. But, honestly, my main view of Pro, despite having a portfolio commensurate with being a stingy, grouchy old guy, is that it is a learning experience. Speaking only for myself, I do not really care if my returns are somewhat better because of investment advice; I am so darn conservative I focus almost entirely on preservation of principal. But I really enjoy learning this stuff, and helping my children learn it, and for me that is the true value of Pro.

Which perhaps explains why most of my posts involve broader topics, outside of the specifics of implementing Pros advice – this in no way evidences a lack of interest in the Pro recommendations; it is just that I am here mostly for the education.

And, of course, part of an education is writing your essays and getting clobbered by constructive feedback . . . .

* * * * * * * * * * * * * * * * * * * *

Chill winds are indeed blowing across the oceans, mostly from Europe, but also from the Far East.

Europe is already in a recessionary hole and cannot seem to stop digging – one is reminded of the great line from Darrell Scott’s song, You’ll Never Leave Harlan Alive: “. . . you spend your life digging coal from the bottom of your grave.”

China apparently was surprised by its latest round of fabricated numbers, which is sort of mind-boggling when you think about it – when you make up your numbers, how can you be surprised by them? No one really knows what to expect from China, but it clearly is having trouble.

Meanwhile, here in the US, we face our own set of problems – recent indicators (e.g., new order data and employment reports) seem to support the idea that we may already have entered our own recession, despite a possible nascent improvement in the housing market. And yet, despite an economy that is at best sending out troubling warning signs, with cold winds blowing in from across the globe, stock market valuations seem high and very resilient.

Valuations seem high because prices are comparable to the prices in the euphoric bubble of 2007, and PE ratios are low only when forward earnings are used uncritically, ignoring the fact that margins are an artificial and unsustainable 70% above historical norms.

Valuations are certainly resilient; the VIX is at incredibly low levels given the environment, and nothing seems to be able to deliver a solid blow to the market these days (Monday being an example). Why the resilience? When I thought about this, the answer seemed obvious, and in fact was stated by John Hussman in his July 23 letter: “investors are scared to death of missing the widely anticipated market advance that they expect to follow a widely anticipated third round of quantitative easing.” We are basically Fed addicts, waiting for our next fix!

Hussman uses the phrase “widely anticipated” repeatedly to make the point that, IHO, further Fed easing is already priced into the market.

Let me give one more fun Hussman quote (he must be a riot at parties): “What interest rates are telling you; what the Federal Reserve is telling you; what the equilibrium created by lenders and borrowers is telling you – is that time is economically worthless and that economic malaise will extend for years.”

A principal point of Fed policy is to drive us out of cash and into higher-risk investments, especially equities. This effort has been very successful – it is probably the main reason the stock market has recovered to such a high level despite the absence of a similar recovery in the economy. Everyone knows that “you can’t fight the Fed.”

I know very little about economics, and am not really entitled to an opinion. But I have decided to stay true to my grumpy nature, which is to push back when someone pushes. Boldly Beneficent Ben wants me to invest in the market? Well, money managers have no choice; they have to go with the Fed Flow, or they will lose their jobs. (Jeremy Grantham has been harping on this point for a while now.) But there is one thing I can do that not even the most powerful hedge fund managers can do; I can ignore Ben, ignore CNBC, ignore the herd – and just say, “No.” I am sitting on about 80% cash (part of the other 20% is my Pro portfolio, which of course far outperforms all my “willful behavior” portfolios), and am more than 20% hedged, so I am actually slightly market-negative.

And I am just going to sit here, reading my Archie comics, sipping on my Bosco chocolate milk, shooting at rabbits down in the hollow from the front porch, and wait. Ben can do what he wants; I do not care. I will do some physics, lecture my kids, work on the old Dodge Dart out back, and wait. If inflation comes slouching towards Bethlehem, I will do something. But for now, it is me against Ben, mano a mano.

This may seem gloomy – which would be strange, since my investing views are generally so sunny and bright – but remember, this is only investing. It is important, but at a second or third tier level. So much comes ahead of it – family, health, engaging with the fascinating world around us –we should not let investing thoughts color the other areas of our lives. JMO.

* * * * * * * * * * * * * * * * * * * *

I drank the last of my chocolate milk, shrugged away the chill, and walked back down the trail to my clearing on the ridge. Today I am going to think deeply about spontaneous symmetry breaking and the Higgs boson; for a break, I will take the dogs down to the creek and throw in a line; although small, the creek has deep pockets and you can land a decent brook trout from time to time. If I don’t catch anything, which is almost always the case, I will stop of Lorgi’s on the way home and pick up a fried fish sandwich (the dogs will have BBQ scraps).

And the chill wind? Well, it just petered out on the rocky ridges here – it takes a lot more than that to put a dent in a West Virginia day.

Rich

A Drumlin Daisy
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No. of Recommendations: 10
Hi Rich,

I agree with you on the Pro portfolio size. I have taken the following mental approach to accounting for my Pro membership fee:

Year 1: 100% of the fee was educational value. Surprisingly, I got some entertainment value out of it as well, and I adjusted next year's numbers accordingly.

Year 2: 80% of the fee was educational. 10% is entertainment; 10% is a management fee.

Year 3 (where I am today): 50% of the fee is educational. 20% is entertainment. 30% is management.

I plan to adjust my mental accounting next year as follows:

Year 4: 30% to education, 30% to entertainment, 40% to management.

It will likely stay fixed like that forever. I expect to always learn something and always enjoy the service, but will place slightly more emphasis on the performance angle, since I'm here to make money, after all.

Hmm... As I write this, I realized that this seems to map pretty well to the Fool's mission statement to entertain, educate, and enrich. I really, really didn't mean for this to be a TMF-boosting post, but this is actually how I think about it and how I break it down in my mind. Maybe I've been brainwashed and this is just the result. Hopefully not, but if the brainwashing was really good, I guess I would never know, would I?

Side note: Jeff, I hope I'm not putting too much of a burden on you by expecting equal amounts of entertainment and education... you can consider yourself to be only responsible for a fraction of the entertainment component if it takes some of the pressure off, since most of my entertainment is derived from board posts by other members like Rich.

Now for the acid test: is my portfolio big enough to justify the Pro fee? Since I only plan to account for 40% of the Pro fee for management going forward, and I'm locked into a multi-year plan that IIRC amounts to less than $1000 per year, my management fee for Pro services is less than $400. It is a goal of mine to never spend more than 1% of my portfolio on management fees. So I (or someone using similar mental accounting) would need a portfolio of $40,000 or more to clear the bar.

Whew! For a moment there, I was afraid I might need to cancel the service if the numbers didn't work out, but it looks like I can hang around awhile longer.

Rob
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No. of Recommendations: 4
Hey Rich,

I just noticed you name is ADD. Is that an affliction associated with....

commensurate with being a stingy, grouchy old guy

and I resemble that remark ;-)

Thanks for adding my name to the three musketeers - I'm just the guy who waters their horses.

Why the resilience?

I think it has something to do with the return on your 80% cash. You are correct that many are expecting QE3 but it is also correct that QE3 is already priced in the market.

Today I am going to think deeply about spontaneous symmetry breaking and the Higgs boson; for a break, I will take the dogs down to the creek and throw in a line; although small, the creek has deep pockets and you can land a decent brook trout from time to time. If I don’t catch anything, which is almost always the case, I will stop of Lorgi’s on the way home and pick up a fried fish sandwich (the dogs will have BBQ scraps).

Me, my dog, rifle and my fishing pole will be there shortly.

Regards,

Bob
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No. of Recommendations: 3
You are correct that many are expecting QE3 but it is also correct that QE3 is already priced in the market.

Bob (aka d'Artagnan),

Continuing my earlier post (http://boards.fool.com/1228/yes-it-will-and-that-is-already-...), I am still having difficulty with what that "priced into the market" argument conveys.

Sure, QE3 is expected by many and possibly already digested in the market prices. Only thing is that some think that a QE3 may improve the pace of economic growth, others that it may not have any effect, and still others that it may be disruptive. Not to mention that many influential politicians think about monetary engineering by the Fed more in terms of possible electoral gain than improving the situation for hoi polloi aka "we the people". See: http://www.nytimes.com/2012/07/25/business/economy/fed-leani...

Then, Ray Dalio mentions something else that is already priced into the market: A “meaningful deleveraging for an extended period of time” is now priced into the market, Bridgewater said. With this pricing at a “midpoint of discounted expectations,” individual markets have an equal probability of outperforming or underperforming. See: http://www.bloomberg.com/news/2012-07-24/bridgewater-sees-da...

So, yes, if something is expected by lots of market participants and its impact is fairly unambiguous, then the effect can be pretty minimal when it finally happens. But when there are all kind of things that ought to be priced into the market and people have various ideas about their impact (inflation, deflation?), then the end result is just what the market is: it may go up, it may go down, or move sideways for a while...

Leo
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Hey Rich,

I just noticed you name is ADD. Is that an affliction associated with....

commensurate with being a stingy, grouchy old guy

and I resemble that remark ;-)


Both Attention Deficit Disorder, and Advanced Dungeons and Dragons, are afflictions more associated with youth, than with old guys...
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So, yes, if something is expected by lots of market participants and its impact is fairly unambiguous, then the effect can be pretty minimal when it finally happens. But when there are all kind of things that ought to be priced into the market and people have various ideas about their impact (inflation, deflation?), then the end result is just what the market is: it may go up, it may go down, or move sideways for a while...

...and the outcome in terms of market behavior going forwards depends not on events per se, but surprises -- differences between events and their consequences, and what the market has discounted to this point in time.

So, for example, when the market is pricing in a high probability of things with pretty negative consequences (in the fairly short term, mostly -- that's how the market seems to be these days, mostly focused on a short-term horizon, AKA a high discount rate for long-term effects), such as a vast deleveraging, even-more-negative surprises are unlikely (positive ones are possible and would push stocks up), and vice versa for things with positive short-term effects such as QE3.

That's one of the core bases for contrarianism: if sentiment is dour, surprises are more likely to occur to the upside (pushing markets up), and vice versa when sentiment is exuberant surprises are more likely to occur to the downside (pushing markets down). Of course, the time over which all of this plays out (and surprises occur or don't) is not very predictable;-)
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Rich, hope the hot chocolate didn't go cold?

Minor point but I hope that by part of an education is writing your essays and getting clobbered by constructive feedback you really don't mean clobbered as that would rarely count as constructive and we all know the teachers are way better round here.

Isn't it ADHD these days? Didn't we become hyperactive?

We could move the philosophy channel over to the Times of India and muse whether they are interpreting Einstein right;
http://timesofindia.indiatimes.com/home/science/Einsteins-ri...

or does Tim Cook have a point?

Andy
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No. of Recommendations: 7
We could move the philosophy channel over to the Times of India and muse whether they are interpreting Einstein right

Hi Andy,

That article is correct. The basic idea is that a gravitational field warps not only space (bending straight lines – or geodesics -- in such a way as to create the effect of a force of attraction), but also time (the stronger the gravity, the slower time passes). Of course, Einstein’s theory of special relativity taught us that space and time are intertwined, so it is not surprising that gravity warps both of them.

Here is a really cool thing: time travel is unquestionably possible, so long as you just want to travel to the future and are a good enough pilot.

Here’s how: find a black hole (there is a suitable one, about four million times as heavy as the sun, located at the center of our galaxy), then build up a lot of speed in your spaceship and go zipping by, approaching very close to the event horizon. (You want a very large black hole so that tidal effects will be minimal as you approach the event horizon; for a smaller black hole the tidal effects might tear you and your ship apart.)

WARNING: Do NOT even for an instant dip below the event horizon. You will never return.

Now, just as the black hole’s immense gravity warps space – so much that there is no such thing as a straight line going from inside the event horizon to outside it – it also warps time. The closer you fly to the event horizon, the slower time passes for you.

You will not notice anything, but observers from far away will see something very strange: your spaceship will seem to slow down and almost hover there near the event horizon, hardly moving at all. This is why the Russian cosmologists of the mid-twentieth century -- who really were the greatest of the black hole physicists -- referred to black holes as “frozen stars.” They were looking at them from the viewpoint of a distant observer, while we who use the term “black hole” instead focus more on the viewpoint of the unfortunate souls plunging into one.

Anyway, as you zoom by the black hole, decades, centuries, millennia, even eons will go by in the outside universe. From your perspective, mere minutes will have passed, but in those minutes, perhaps the Sun will have expanded to consume the Earth, and then collapsed into a fading white dwarf. On the plus side, of all your creditors will be long gone.

The closer you approach on your fly-by, the more time will pass. Fly close enough and you will emerge to find an empty universe; everything gone but the black hole and its nearest neighbors, as cosmic expansion over billions of years has moved everything else out of sight.

What happens if you make a mistake and fly through the event horizon, into the interior of the black hole?

No one knows. It is one of the greatest mysteries of physics.

Rich

A Drumlin Daisy
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Aleax,

Attention Deficit Disorder, ... afflictions more associated with youth, than with old guys...

Could you tell that to my wife... I did but she doesn't believ....

Wait, what were we tailing about.

Maxx
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Hi Aleax,

Both Attention Deficit Disorder, and Advanced Dungeons and Dragons, are afflictions more associated with youth, than with old guys...

The younger set is usually labeled with ADHD as Andy said. I was going to answer your post 10 minutes ago before I got distracted ;-). My wife is what MAXX describes. She has 3-4 tasks going at once and never finishes any. It’s not the same as forgetfulness, just the inability to stay on task. I resemble the grouchy old guy more than the ADD type.

Regards,

Bob
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No. of Recommendations: 1
Hi Leo,

I am still having difficulty with what that "priced into the market" argument conveys.

I think Aleax expressed part of it well. Its expectations, since the market is forward looking. When the expectations aren't met, the price comes back out of the market.

The market priced in another great quarter by AAPL as the price rose towards earnings. The expectations were taken back out of the price when earnings didn't meet those expectations.

Money flowed into bond funds as the expectations of the fed lowering interest rates and continued low inflation were anticipated. Now the bond market expects inflation to rise and since interest rates can't go any lower money flows out of bonds.

The market in general runs on expectations. Things like new technology or medical discoveries are rapidly priced into company shares. Someone reading about such things a week later will always see the price has already gone up. A new cancer drug may in fact never cure cancer but the expectation is quickly priced in the shares. That’s the QE3 expectation vs. reality story.

Regards,

Bob

who has your horse watered and your sword polished and also wonders if Ed's pen is mightier than the sword :-)
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Bob,

It's when the expectations involve future weather (CORN) or the future effects of macro stuff like QE3, where everybody has different opinions about, that I have a hard time to do anything with the "it's already priced into the market" statement. With AAPL, for example, you can almost calculate what the market has built into the price with respect to the next earnings. On average, the market didn't expect a great quarter from AAPL, but a better one than the earnings report unveiled.

At any rate, just make sure that you always hold on to your shirt: http://www.cafepress.com/cp/moredetails.aspx?productNo=34202...

Leo

No idea how you could have gotten a hold of my sword. You're sure it was not your own?

Buxom Woman at Banquet: Nice sword.
D'Artagnan: Thank you, Mademoiselle.
Buxom Woman at Banquet: Is it a long sword or a short sword?
D'Artagnan: Well, long enough.
Buxom Woman at Banquet: Do you keep your sword polished?
D'Artagnan: Eh, when there's time.
Buxom Woman at Banquet: And do you do it yourself, or do you have help?
D'Artagnan: Myself, I, uh, won't trust my sword to anyone else.


See: http://www.imdb.com/character/ch0006263/quotes
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