The following comment was just added to my previous post, and although the author doesn't realize it, the comment proves my point as well. So here is the comment.

OK so if I have the world's most rock solid psychology how does that aid me on knowing where to buy and sell? Obviously you need a good method too right? Or what if I have terrible money management practices i.e. I take a dollar profit, but use 3 dollar stops? That won't work either. So all 3 are important. I disagree that psychology is 100%.

The only reason someone could post this comment is because they believe that all three areas are important. Whatever you believe, you are right. And that proves my point that everything is 100% psychological. One of the keys to everything, and it forms the basis for my consulting about systems, is that you can only trade your beliefs about the market. Those beliefs (whether you made them up or were indoctrinated in them or actually adopted them because they seem useful) are the basis for everything.

Here's an interesting quote from Harry Palmer, the founder of Avatar. "If you believe you create your life out of your beliefs, you are right, unless you don't believe that, it which case you won't, which means that you did."

Posted by Van K Tharp at 05:28 PM | Permalink | Comments (3) | TrackBacks (0)

Some people say that trading is 10% system, 30% position sizing, and 60% psychology. While I agreed with that assessment at first, I now believe that trading is 100% psychology -- 100% mental. Here's why?

First, I'm an NLP modeler. To duplication success you have to find a number of successful people and determine what they do in common -- what are the common tasks? And then, in order to teach others to perform the tasks the same way, you need the three ingredients of each task. Those ingredients are the beliefs (isn't that mental), the mental states (isn't that mental), and the mental strategies (also mental).

Let's take the simple task of picking up the phone and acting once you see a trading signal. We're not robots, because we have to process that signal. And this is what happens. First you must see the signal and then you must recognize that is it a familiar signal that you should take. Then, because we act from feelings, we must feel good about it. And then you act. Recongizing that it is familiar and feeling good proven that even the simple task of acting on a signal is psychological/mental in nature.

Bottom line -- trading psychology is very, very important to your success.

Posted by Van K Tharp at 10:46 PM | Permalink | Comments (3) | TrackBacks (0)

One person commented that I should not compare the U.S. dollar against the Euro because the dollar is the world's reserve currency. And that I should get my facts straight.

OK, 2003 was the best U.S stock market during the secular bull market, But our market that year was one of the WORST performing stocks markets in the world in 2003. Here is a direct quote from CNN's web site in early 2004.

Take Japan for instance, where traders closed out the year in grand style Tuesday, sending the Nikkei up 1.7 percent before the New Year break. The index posted 24.5 percent gain for the year -- its first win since 1999. Then there's the 36.6 percent jump in Germany's Dax, the 32 percent move in Hong Kong's Hang Seng, and so on.

Factor in the dollar's 14.2 percent drop against the United States' major trading partners (NOT JUST THE EURO) and -- from the perspective of U.S. investors -- the gains get even better. Morgan Stanley Capital International oversees a group of individual country indexes that are considered benchmarks for international investors. The U.S. index has risen 26.5 percent this year. In dollar terms, all but three of the remaining 23 country indexes (Britain's, Holland's and Finland's) surpassed that mark.
Morgan's index of world stock market performance excluding the United States is up 34.1 percent for 2003.

Does that make the point? For 2003-5 one of the best investment strategies you could have had was "anywhere but the U.S."

However, this is not to "knock" the U.S. Americans tend to be very isolated in their thinking. They just see the dollar and the American stock market as the only markets. One of my jobs as a trading coach is to help people see the forest rather than just a few trees.

Posted by Van K Tharp at 05:49 PM | Permalink | Comments (0) | TrackBacks (0)

I have been saying, since early 2000, that we are in a Secular Bear Market. Lately, with the Dow 30 hitting new highs people have been questioning that. But let me explain that by a secular bear market I'm not predicting lower prices. In fact, short term I'm not predicting or forecasting at all. And the secular bear market has nothing to do with prices and everything to do with valuations. So here's the bottom line, what I am predicting is a long steady decline in the PE ratios of U.S. stocks probably down to the single digit level over the next 10 years. And that decline has happened since 2000. I'm not sure about downloading a chart here, so I won't try, but if you could look at such a chart we've declined from PE ratios in the high 40s in 2000 to about 19 now. There was a slight upward blip in 2003, which might be called a mini bull market within the secular bear. But even 2003 is suspect. During 2003, the U.S. stock market went up 25%. But almost every other market in the world went up more than the U.S. market. And the dollar declined about 40% against the Euro during 2003, so if you were fully invested and matched gain of the market, you actually lost about 15% real wealth during that period.

Let's say that the U.S. government decides to inflate its debt out of existence and inflation climbs to double digit rates. People would scream. The dollar might be worth 5 cents in terms of todays dollar and the DOW Industrials might reach 40,000. But during that increase, PEs could easily decline to the single digit range and you'd actually lose a lot in terms of real money. If the dollar was worth 5 cents, then a DOW 40,000 would actually translate into a DOW 2000 in todays terms.

Now does it make more sense? This is not to scare you but to give you a perspective about how to make better decisions. Crisis always involves some opportunity somewhere.

But what about 2006 -- today's mini bull market. And where are some of the opportunities. Well, I'll comment on that in the next post.

Posted by Van K Tharp at 09:42 PM | Permalink | Comments (1) | TrackBacks (0)

Let's take a look at the other country I visited "down under" -- Australia. I spent a week in Sydney, nearly a week in Hobart (Tasmania), and another four days in Melbourne, so I got to see a good part of the country.

Generally, Australia strikes me as a hedonistic, fun-loving country. It's also going through a fantastic bull market, both in commodities and the stock market. For example, we had large numbers in attendance at my workshops in Sydney, which usually only happens during bull markets. I also learned about CFDs (contract for difference) which allow you do buy equities at a huge leverage -- and you pay interest on what you borrow. I heard lots of stories about people with $15,000 buying $15,000 worth of CFDs, fully leveraged with the idea of making a fortune, only to find that they lost their $15,000 very quickly. People just don't understand the risk in leveraged instruments. However, if you understand R-multiples and position sizing principles that I've already mentioned in other posts, you'll learn that 1% risk means 1% and it doesn't matter whether you are trading equities, futures, forex, options, or CFDs.

Hopefully, must Australian friends will all read those posts and make sure you understand that. My understanding is that CFDs are an export (to Australia) from England. They were developed by the gambling establishment because gambling profits are not taxed in England (and many other countries) so when it was possible to invest in something that was developed by the gambling community (instead of the brokers), everyone went for it.

Posted by Van K Tharp at 01:59 PM | Permalink | Comments (1) | TrackBacks (0)

"So your recommendation of the New Zealand dollar given in Safe Strategies for Financial Freedom no longer stands."

It's important to remember that we gave you "strategies" in that book. At the time the book was written, we said that we'd probably buy NZ dollars at that time, but remember things change over time and what worked when the book was released may not be valid right now. So although the strategy is still sound - the recommended currency could differ each year.

The New Zealand dollar recommendation was based upon the idea of going where your money is treated well and where the currency is basically sound. Thus, what you need to do with that strategy and any other strategy is apply it to today's conditions. Please, do your own homework and don't just take recommendations as they are written. Markets and financial conditions change regularly.

Van

Posted by Van K Tharp at 08:02 PM | Permalink | Comments (0) | TrackBacks (0)

I want to start making some comments about my trip DOWN UNDER. I wish I could have made them while I was there. But I just didn't have convenient Internet Access. And I don't consider a hotel that charges 55 cents per minute for internet access to be convenient.

That said, let me talk about New Zealand first. Kala (my wife) and I both agreed that we'd probably love to live in New Zealand. It's absolutely gorgeous and I only got to visit the Northern part in the six days I was there. First, it's a fairly large country (about the size of the UK) but it only has six million inhabitants. There are two results of that. First, the top soil is probably quite rich and still full on minerals...perhaps equivalent to the U.S. about 150-200 years ago. Today we only have a few inches of good top soil and its been depleted of most of the great minerals.

The second thing that I also noticed about New Zealand is the animals. Unlike the U.S. where most of the animals raised for meat consumption are basically kept where they can hardly move so they can get big and fat quickly. What they are fed is not necessarily healthy (like growth hormones) and it certainly isn't rich in nutrition. However, in New Zealand the animals are running free over the countryside eating the rich natural plants (i.e., grass) that grows in their rich soil. I even saw fields filled with turkeys.

Now how does that show up in an obvious way? It shows up in the food. It's wonderful. The best Mexican food I've ever eaten was in Auckland. The best Thai food I've ever eaten was in Auckland. Why? I'm sure its because they use New Zealand meat and agricultural products.

However, there is a sad contrast. The U.S has managed to export lots of fast food restaurants there. McDonalds, Burger King, and KFC are appearing all over the place. I went into a McDonalds to check on the price of a Big Mac, just to see how it checks out in terms of price (see below). And McDonald's was the only place where I saw locals who looked really fat and I thought that was quite sad.

Okay, the New Zealand dollar was worth about 64c or so when I was there. However, a big Mac meal could easily run $15 New Zealand dollars. Thus, its not very favorable compared with the U.S. And housing is definitely not cheap. Most housing was in the million dollar range (New Zealand dollars, of course). But the average New Zealand house is very, very small compared with the average U.S. house. Thus, housing in New Zealand is also very expensive.

Next up.... a few more thoughts on New Zealand.

Posted by Van K Tharp at 08:09 PM | Permalink | Comments (4) | TrackBacks (0)

I want to talk about poker again. I played in a $5 tournament with 280 players. I can't even remember cashing in on such a tournament, but I know I can last a long time, and the most I'd lose is $5. The tournament started at 2:30 PM and I was playing until almost 7PM. The reason is that I not only made it to the "make money" level, but I finished second. I finished 8th in a tournament with 115 players once. In that one, I and had a chance to win, but because I was second in chips at the final table. But I ended up going against the chip leader all in on the first hand. I lost on the river and ending up making $195 by finishing 8th. It cost me $20 to make $195. In this tournament, it cost me $5 to make $231. A new record day for me.

But the story is not over. On Saturday, I did the same thing, but the results were a little different. This time I finished first out of 343 players and doubled my payday. Again a new record. Coming in second on Friday made me think I was lucky. Coming in first and second on two consecutive days made me think I was pretty good. However, I then entered some 9 player tournaments in which the top 3 get paid. I could make money in any of those and in the first one I was eliminated first.

A big ego hinders trading and playing poker.

Van

Posted by Van K Tharp at 10:42 PM | Permalink | Comments (3) | TrackBacks (0)