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The First Thing I Read Every DayBy
Monday, December 5, 2005
Russia, South Africa, and Argentina are now selling dollars and buying gold... Just yesterday, China's People's Daily (the official voice of China's Communist party) reported that it is reasonable to expect Asian central banks to do the same.
This is big. I learned about all this in the past few weeks by reading The Gartman Letter. It's the first thing I read every morning.
I don't know how he does it. But somehow, Dennis Gartman consistently reports on things before they hit the mainstream financial press... then shares his profitable perspective on it.
Gartman is bullish on gold, saying in yesterday's letter that he expects a year from now, gold will be "demonstrably higher than it is presently." However, he says "gold is too much upon everyone's mind at the moment to be a buyer now."
He expects a buying opportunity "$40-60/oz below where it is presently at some point after the turn of the new year."
Gartman will probably turn out to be right - again. Gold received a line on the cover of last week's Barron's, and in our offices, we are hearing anecdotal evidence of individual investors finally buying gold – a contrarian signal.
Like Gartman, we believe gold is a long-term buy. Gartman may be right about a short-term correction, but in my newsletter True Wealth, we're not planning on trading in and out. We've been in gold for years... and we'll be in for years to come.
How does Dennis Gartman consistently come up with winning trades?
Fortunately for you and me, he shares the trading rules he lives by with his subscribers. Once a year, on the day after Thanksgiving, Dennis Gartman publishes his Rules of Trading.
Let me share a few with you today, in Gartman's own words:
1. Never add to a losing trade; rather do more of that which is working and less of that which is not: Adding to losers will eventually lead to ruin... maybe not the first time, and maybe not the second, but eventually and completely. Remember Long Term Capital Management and its legion of Nobel laureates who broke this rule repeatedly and went into forced liquidation. Learn this lesson... well and early!
2. "Markets can remain illogical longer than we can remain solvent," is from our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are inefficient despite what the academics try to tell us.
3. Sell that which shows the greatest weakness, and buy that which shows the greatest strength: That is to say, when bearish, throw rocks into the wettest paper sack, for they break most readily. In bull markets, ride the strongest winds.
4. An understanding of psychology is often far more important than an understanding of economics: Markets are driven by human beings making human decisions, often error prone, other times wisdom driven.
5. Be patient with winning trades; be enormously impatient with losing trades: Note it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as one's losses are small and one's profits are large.
6. The Hard Trade is the Right Trade: Mr. Peter Steidelmeyer taught us that if it is easy to sell, don't; and if it is easy to buy, don't. Instead, do the trade that is hard to do and that which the crowd finds objectionable.
When I read through Dennis Gartman's Rules of Trading, I see that he and I think a lot alike.
When everyone is getting rich in real estate, for example, it's hard to suppress the emotional desire to conform – and the greed to climb in. The easy trade is to join the crowd. The hard trade is to sell real estate... but it's the right one.
Down in the trenches of investing, these rules are difficult to follow. But they're the right way to make money in the markets.
Fortunately, because these rules require acting against people's natural emotional instincts, they will always work. Always have, and always will.
Good investing,
Steve
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