"Our blunders mostly come from letting our wishes interpret our duties"
~Author Unknown

Stock market's behavior of last 10 days or so has been a complete puzzle to me. It seems like with all the "technical" indicators and experts out there pointing towards an impending market crash and absolute collapse of the US Economy, fear has been making a slow but steady comeback into investor's minds and in my book it's a positive sign, but we by no means "all long" territory yet...

I think as it's becoming evident every day, what was initially perceived to be a short housing sector led recession/slowdown, is now quickly converging into a full blown capitulation of anything that could be vaguely defined as consumer discretionary. Last week a multitude of stocks in sectors most sensitive to the prolonged slowdown have established new lows- casinos, autos, lodging, recreational vehicles, regional banks, airlines, old media (newspapers and TV), construction, retailers. The list could gets long very quickly...

Even the formerly bullet proof oil and gas, materials and agricultural darlings have posted double digit declines in the last several days with more declines on the horizon... What is even more troubling- the VIX volatility index is still only trading at around 26, far away from the 30+ capitulation level reached twice earlier this year...

Why is it important? Let's step back for a second- what happened during the last few capitulation days- back in August 2007, January and March 2008? Every time when it seemed like things were almost slipping into the "sell everything and forget the stock market forever territory", Federal Reserve stepped and bailed investors out with the rate cuts. They first cut the discount rate in August in response to the "quant" hedge fund fiasco. More rate cuts followed again in a response to the worldwide stock market collapse that now seems to have been triggered by a rogue trader in Society General, and finally- one more emergency "super cut" was presented in response to Bear Sterns fiasco. "Liquidity magic" worked like a charm every time- indices pulled off spectacular rallies and recovered above the previous lows...

But now we come to today's situation. Fed is now clearly worried about rising inflation expectation and thus no more "savior" rate cuts could be expected. My guess is that we'll see more reactive actions from the government in the form of new stimulus checks, possible bailouts and infrastructure investments, but all of these rescues take time to pass and thus won't be a quick band-aid if things get really rough out there for a day or two.

One can certainly argue that we might have seen the lows for the year- as stock prices now have approached levels not since late 2005. I've also read many different experts saying that VIX is no longer a good "indicator of fear" because of lower holiday volumes, summer vacations etc... But I am personally afraid that the "talking heads" are likely to be wrong again- I think VIX is low simply because this time the declines of the major indices are not disorderly or unexpected... They are completely reasonable and based on the actual economic picture- markets have been simply getting better in pricing the actual dire economic situation into the stock prices. The excess liquidity generated by the silly actions of Federal Reserve washed up in the most logical but very unwelcome place- basic materials, oil and gas and other commodities, which in turn made the already unhealthy economic situation much worse...

Now, any company that is heavily reliant on the US consumers driving, dining out or buying the next new "ipod", "iphone" or "blackberry" is feeling the pinch. Finding good stocks to "short" has actually been easier lately than finding good "long" ideas. If the company provides a service or sells a product that could be considered as vaguely discretionary, and also has a lot of debt, negative cash flows and might need refinancing in the next 6-12 months, it spells TROUBLE...Think GM and Ford, or pretty much any of the indebted automotive suppliers, RV manufactures or casinos and/or lodging companies that could not make money even when the economy was much stronger... Plus the usual safe heavens in the form of emerging markets are no longer bullet-proof. With Fed outsourcing its rate tightening job to other central banks around the world- the whole world economy is rapidly slowing down...

In addition to that- I am now growing a bit more skeptical whether we will see the usual "earnings pop". It certainly doesn't seem that we had much success so far- FDX, NKE and RIMM come to mind for now. We'll see if AA and GE do any better this week- but for now simply try to stay safe...

Please feel free to e-mail me your questions at skepticalcapitalist@gmail.com

"The difficulties of life are intended to make us better, not bitter"
Author Unknown

I think after being in a relative silence for the last several weeks because of being consumed with the legal and administrative burden of starting my Pro career, it's time to catch up on the usual economic news and graphs.

The question on everybody's mind is whether the slump is likely to continue- unfortunately, I don't really have a concrete answer :) But there are some signs out there that it might not be quite over yet...

Let's start with another opinion- US Economy is quickly slipping into the "doom's day" scenario that could have been largely avoided if inflation was brought down under control last fall- quickly rising food and basic commodities prices, deteriorating credit situation because of additional write downs and massive simultaneous deleveraging around the world are starting to cause a chain reaction. Unfortunately, actual length of the recession/stagflation is now more important, in my opinion, than any absolute decline in any one sector. Think of it this way- any struggling business that thought that they had enough capital in reserves to weather a "usual" 3-4 quarter economic slowdown, now could be better off shutting down because things are not expected to get better in the short/medium term. Hence banks will have to write off more loans/ increase provisions for bad debt, because credit problems from housing related sectors (banks, mortgage lenders, home builders etc) are now rapidly spreading into sectors that would be your "usual" suspects when things out there get really nasty- autos, casinos, media, hospitality and/or anything that could be vaguely defined as consumer discretionary...

1. ABX indexes in pretty much all securities not rated as AAA have posted more declines and now are trading below the February lows. So much for the "write up" expectations that many have hoped for just two months ago...

Source: Markit

2. Situation with commercial mrtg backed securities is slightly better than it was back in February. It looks as if markets are becoming a bit more rational and instead of the "across the board" panic selling of March- you can actually clearly see the difference between securities of different "vintages", with AA and higher rated commercial mortgage backed securities issued in 2005 and early 2006 selling at relatively low spreads, but most of the lower grade and "younger" vintage paper is selling at spreads close to or higher than back in the early spring...

Source: Markit

3. Inflation expectations have been edging higher and higher and despite of all the "deflation" talk out there, represents pretty significant dilemma for the Fed. I am also starting to become really concerned that Fed's strategy of "monetary policy outsourcing" is going to significantly hurt the emerging markets and thus could possibly lead to a worldwide recession instead of the local North American one...

Source: ClevelandFed.org

4. What's more it now seems as if Fed Funds expectation have changed from the "virtually guaranteed immediate raise" in August predicted by futures several weeks ago, to an uncertain "maybe" in September...

5. So how close are we to the bottom? I've been growing more and more skeptical recently... According to a small research firm called TrimTabs Investment Research- BLS has been underreporting job losses by a pretty wide margin because of their survey deficiencies and thus things out there could be actually worth than headline numbers are suggesting. Below is the quote from their May macro release- while a bit late :) gives a pretty good summary why BLS's numbers aren't that good and are subject to some serious revisions- in contrast TrimTabs's numbers are based on daily treasury withholdings and thus are much better indicator of the real time health of the economy and they indicate things are getting worse not better...

"We believe the BLS is under reporting job losses for five reasons: The BLS survey period covered mid-April through mid-May, a period when the U.S. economy was just beginning to weaken. • The BLS applies flawed seasonal adjustments that typically mask subtle changes in the employment environment. • Only 40% to 60% of the BLS establishment survey is complete by the initial release date and is subject to large revisions in subsequent months. • Most of the initial respondents to the BLS survey come from government employment centers and large corporations so the survey does not adequately capture changes in employment in small and medium sized corporations. • The BLS applies a "birth/death" adjustment to their employment survey results which is nothing more than an educated guess."

To sum it up- may be my most recent shift towards defensive utilities/healthcare sectors hasn't been quite aggressive enough...

Stay safe out there, skepticalcapitalist@gmail.com

"Promises are like babies: easy to make, hard to deliver"
Author Unknown

Here we go again. Ben Bernanke and Co last week delivered another strong message to the commodities bears all around the world- "we can't really tell if it was/is a bubble until after it blows up"... Unfortunately, it does seem as if my last week's prediction about Fed's inability to raise rates in the middle of the "political season" is actually becoming a reality.

Faced with a tough tradeoff between growth and inflation "Chairman Ben" and Co came up with a clever way, but also potentially dangerous way of solving the "Bernanke's dilemma"- "outsource" the inflation fighting role to other economies around the world instead of doing the dirty work themselves. In his speech last week, Fed's Vice Chairman Kohn delivered a message that seems to have not only borrowed major points from the stories of the "commodity" bulls, but also gave a pretty clear answer to "will they really raise interest rates in August?" question- "Not gonna happen!"

"The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear.(VY-Heh?) The upward trend in prices of food and energy over the past several years, however, importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities.

...Additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability"

The translation basically goes like this- "US monetary policy has nothing to do with ever rising commodity prices. These high prices are merely an indication of sky rocketing demand from BRICs. And because the US Federal Reserve and the US Economy have had nothing to do with this rise, they should not be obligated to participate in the clean up. The "new guys on the block" (BRICs) and stubborn Europeans need to fight the inflation battle on their own!- slow down economic growth engines using all means necessary- raise rates, further adjust currency exchange rates etc. US won't be raising rates any time soon." -Case closed...

Mr. Market's reaction?- Dow down 400 points or so, Gold up $50, new multi year low for the DJIA, new highs for Crude Oil and virtual death sentence for some/(all?) the Big 3 US auto and RV/Boat makers. I certainly admire the creativity of this "heads I win, tails you lose" interest rate logic- it is almost guaranteed to win some political points here at home. But it is also a very dangerous one for the world economy- relying on China and India to remove the excess liquidity from the world's economic system, is in my mind equivalent to a firefighter waiting on his colleagues to return from vacation in the other state, to help him put out a house fire that has been already been raging on for a while- it is very possible that by the time they come back, there won't be a house to save...

Continued...

It was just a few months ago when Wall Street put out an "all clear" sign for the US Equities with "always" optimistic analysts predicting a "high double digit" rebound in earnings for the latter part of 2008. Federal Reserve cheerfully predicted that inflation expectations will remain well anchored and thus are not of a particular concern. Unfortunately, recently situation took a rapid turn for the worse- with M2 Money Supply growth skyrocketing into double digits, excess liquidity had to end up somewhere and ever rising commodity prices offered a very safe refuge.

So instead of already being out of what could have been a relatively minor recession absent the rate cuts, we are now possibly only one hurricane away from oil prices clearing the $150 a barrel barrier and with it GM, Chrysler, Ford and major US airlines rapidly entering the insolvency territory. But even with all US indices now closing fast on the "bear" market territory, stubborn Fed still refuses to do its main job of fighting inflation, and keeps arguing that their lax monetary policy has nothing to do with high prices?

Come on Ben, give me a break- M2 Money supply growth in double digits during the first quarter of 2008, got very close to that of China, country whose GDP is growing at 10 times the rate of the US. Where do you think this liquidity has gone? Dah?

Anyway, enough rambling- Fed has made its decision, and while I think it was not a very smart one, I have to now figure out how to profit from it. My healthy short position has certainly helped me to preserve most of my gains, and being some 15% plus ahead of the market is definitely a terrific result so far, but now I need to figure out how to resume the upward trend.

I don't know what it might be, but absent a rate increase move from the Fed- oil and other commodities could very well go higher and when/if that happens- US indices could possibly now go much lower- say another 7-8% lower?. Plus with US Fed outsourcing the interest rate increases work to the emerging markets and European Central Bank, these markets could actually fall faster and harder than anyone expect them. This sell off is also likely going to produce some terrific buying opportunities, and thus with capital preservation goal as a major theme, I'll for now buy deeper into the defensive utilities and healthcare sectors...

I hope that I am completely wrong, but it certainly does not look pretty out there- with VIX nowhere close to the "fear" territory, capitulation of the major indices looks likely to continue for a while longer, so stay safe out there, Vad - skepticalcapitalist@gmail.com

"Be not angry that you cannot make others as you wish them to be, since you cannot make yourself as you wish to be"
Thomas à Kempis

I guess I will never stop being amused by the investment related media headlines out there... One day we hear a story about the "major bubble" in oil, another day "about oil prices going to $250". Same divergence with interest rates, investment banks or for that matter with anything else that is a "soup du jour" of the moment- I guess it is an almost bullet-proof strategy- throw a bunch of things on the wall, make lots of extreme statements and then see what sticks, and at the end declare that you were right.

Recently, forecasting shapes of what seems to be an inevitable eventual recession has become a very popular topic of conversations. Here some of own views and opinions on the subject. I will try to describe them in the "media-like terms" hoping it won't be too boring ...

Some believe that the US Economy is in for a V-shaped recession- a quick and painless slump followed by a fast recovery; others think we might see a W- shaped one with one quick dip followed by a short recovery and then followed by another larger dip with an eventually inevitable upward move. And the last group, ("Elliot Wave" crowd) thinks that we are destined to live in the L- shaped world - with the US Economy entering a decade long Japan-like period of stagflation for the years to come...

I'll start by eliminating the third scenario outright- in my opinion the repeat of Japanese scenario here in the US is pretty much impossible, because we are 1.Nation of spenders, not savers 2.Are as far from the deflation as one could be- "have you seen the inflation numbers lately?"

On the other hand, I believe that the first two shapes of economic downturn are still very much possible- and the end result could very well depend on the next move of the Washington wizard called Ben Bernanke. So below is a hypothetical scenario planning exercise to make sure that my portfolio is ready for the eventual outcome whatever it might be.

Let's now introduce some core factual statements:

1. US Economy is going through a period of highest inflation in more than a decade- all the talk about core, non-core inflation is irrelevant at this point- you can only call high energy and food prices non-core and temporary if they indeed lasted for only a short period of time ...

2. Inflation is always a direct of excess monetary liquidity. High commodity prices are merely a symptom and thus are not likely to be cured until the excess liquidity is drained...

3. Healthy financial sector is a fundamental requirement for any well functioning growing economy- without normal access to credit- the economic system as we know it cannot function...

4. Banks are very unlikely to start lending in a normal fashion again until they become confident that the value of their collateral is no longer eroding.

5. Financial sector especially the investment banks are facing significantly more restrictive regulatory environment and lower leverage

6. It is very rare, however, when you see a combination of persistently high overall inflation and accelerating deflation of the core collateral in the financial sector (real estate) -simultaneously.

7. The longer the current restrictive credit situation drags on, the more likely it is going to spill over to new areas- Fed has to force the banks to start lending again

8. FDIC is now going to virtually force banks to raise more capital whether they need it or not in the short term- expect more capital dilution and dividend cuts...

9. Thus one stakeholder in the financial sector is going to suffer more than the others- shareholders

Continued from Part 1

In addition to that Fed is now facing another trade-off- trying to protect as many banks as possible from the insolvency and buying them some more time with lower rates, and at the same time trying to contain the increasingly unstable inflation expectations from spiraling completely out of control.

11. In my opinion, achieving both objectives is at this point virtually impossible and thus Fed could either:

• Own up to its mistakes, raise interest rates swiftly, bankrupt many of the smaller and mid size banks, but kill the inflation genie and deflate the commodities bubble. In the process this will send the entire global economy into a deep but relatively short lasting recession - shape "V" as the media would say...:)

• Keep talking "big game" but not take any "real actions". Force banks to raise more capital by diluting existing shareholders and cutting dividends whether they eventually need it or not. Keep rates low and pump more liquidity in, until commodities or some other bubble, once again blows out of proportion. But inflation in this scenario is very likely going to enter the next stage of a usual cycle -with workers demanding higher wages in turn moving prices even higher etc... Eventually Fed will be forced to raise rates higher than in scenario 1 and thus will inevitably send the economy into a more severe recession- shape "W" as the media would say. (Inflating the housing issues away should allow for the headline GDP to contracts only slightly in the first leg of the cycle).

12. Neither one of the options is pretty at this point, but in my opinion while the first one is clearly the more logical, it is also very politically challenging- with election season in full swing- rates will be tough to raise without a republican "blood bath"... So Fed is going with the option two -which in turn means that because regulators are now going into a severely brutal "raise more capital at all costs" mode, even the healthy bank's shareholders are now bracing for more dilution.

13. Thus my decision to buy into financial sector last week even in a small way was not a correct one and I am reversing it. It also means that S&P and DOW could very well retest/ move past the January lows in the nearest future and thus adding a few more shorts and more defensive play like utilities might not be such a bad idea.

On the positive side, however- the corporate health outside the financial and consumer discretionary sectors still looks ok and income tax withholdings as released by the US Treasury http://www.fms.treas.gov/dts/ have actually picked up in the last few weeks of May and in early June. The most recent data in my interpretation is consistent with a GDP growth of at least equal to or may be even slightly higher than that in Q1 2008...

After playing with the data I have also found what seems to be an interesting correlation between the four weeks lagged S&P 500 index and growth in withholdings- it is by no means bullet proof, but certainly seems to point to a limited short term S&P downside (2-3%) with the next move up of roughly 5-6%.

And to finish off- here is one more opinion- I think that behind the all the "doom and gloom" noise out there, it is important to clear any disillusions and fears. In my opinion, 10 years from now- all major US indices will be trading at higher nominal prices than they are trading today, period. I am willing to make this bet with pretty much anyone-but I also doubt there will be many takers though as it is pretty much bound to happen for two main reasons:

1. In the world of "fiat" money inflation is not going away and thus while real stock prices might be higher or lower, nominal prices are simply destined to go up!

2. US Economy is still the most vibrant, flexible and productive one in the world and thus it will find a way to reinvent itself and will surely grow in the real terms again at some point :)

So with that in mind, I think that assuming one could weather some serious volatility in the next 12-24 months or so- pulling all the money out of stocks and reinvesting them in cash or money market funds is very likely to be the most counterproductive thing a passive investor could do. However, protecting the principal investment should be the most important goal of any investment manager and thus hedging with short positions is as usual a very prudent decision...

Stay safe out there, skepticalcapitalist@gmail.com

"Money never starts an idea. It is always the idea that starts the money"
Owen Laughlin

Many people have been asking me about the screeners I use to pick my stocks. Unfortunately, the precise detailed methodology and criterias would likely take several very long pages and would be very boring. I use a combination of multiple screeners when doing my research and constructing the actual portfolio. Plus the decision to buy is only the start and the decision to sell is actuall more important- in my mind it is also more difficult...

Instead I am actually presenting the results of another monthly screen that actually covers most of the basic factors I covered in my MSN Strategy Lab Articles. Please consider this screen as one more educational presentation and not a recommendation to buy or sell any securities in any shape, size or form. Due your own due diligence and read this disclaimer to understand all the potential conflicts...

Stay safe - Vad @ skepticalcapitalist@gmail.com

P.S. NEITHER Vad Yazvinski NOR skepticalcapitalist.com are investment advisors, hence this we DO NOT endorse or recommend any securities or other investments. All information on this Site, as well as reference materials or links to other sites, has been compiled from publicly available sources believed to be reliable and are for general informational purposes only.

"History is the sum total of the things that could have been avoided"
Konrad Adenauer

Rate hike chatter is getting louder every day... Futures are now pricing in a 25% probability of a rate hike in June and almost a 50% chance of a hike in August. What's more now even a 50BP hike is a possibility. One interesting thing about Bernanke's Fed so far has been the fact that futures have a been a solid predictor of their actions...

source: ClevelandFed

source: ClevelandFed

Now what does that all mean for the markets? I think that the severe declines of the last week are the answer. But as usual in any market there will be winner sectors and losers. Below are some excerpts from a research paper that studied the impact of Fed's actions on various sectors called "Sector Rotation and Monetary Conditions" by C. Mitchell Conover; Gerald R. Jensen; Robert R. Johnson and Jeffrey M. Mercer

"We focus on the efficacy of a particular timing-decision variable advocated in prior studies, that being a simple gauge of the stance of Federal Reserve monetary policy. In particular, our objective is to determine whether there are potential benefits associated with using monetary conditions to guide a sector rotation strategy. Our results show that, in general, using announced Fed policy changes as indicators of when to shift a portfolio to a more aggressive or defensive posture, would have allowed investors to significantly enhance portfolio performance. Specifically, performance is enhanced by shifting into cyclical stocks following Fed changes that signal a more expansive monetary policy, while the appropriate response to a signal of a more restrictive Fed policy is a shift into defensive stocks."...

... "One of our more interesting and potentially useful findings relates to the rotation portfolio's performance during expansive relative to restrictive monetary periods. As indicated, the rotation portfolio assumes a defensive posture during restrictive monetary periods, and it is during these periods that the most prominent improvement in portfolio performance is observed. During restrictive monetary periods, the rotation portfolio returns approximately twice the benchmark return, yet the rotation portfolio has considerably less risk. This result suggests that the primary benefit associated with using monetary conditions to guide an investment strategy is that the strategy can be used to improve the disappointing performance associated with bear markets"

Below is the table of results of their findings slightly modified by me... The punch line is that resources sector actually on average does quite well? A bit surprising, but math is math...Another clear cut message- Technology does not do well during restrictive cycles- I will have to think hard about being so wide open in the IT field...On the other side just as expected- financials have not done too well when rates went up, neither did discretionary consumer goods...

P.S. STD- stands for Standard Deviation...

I think my MSN Portfolio needs a serious rebalancing...
skepticalcapitalist@gmail.com

"But, logic, like whiskey, loses its beneficial effect when taken in too large quantities"
Edward John Moreton

Time for another economic update in graphs- today's it's focused primarily on financials- once again I think things are not "all clear" yet as many assume- I'll let the graphs do the talking though...

Let's start with an introduction- banking sector's health seems to be quite different depending on the state. The list should not surprise anyone- right column is heavy on states where housing prices are collapsing- but there are also few states that don't quite come to mind when one is thinking about the housing crisis like Virginia, Maryland and New Hampshire...

Source: FDIC

Net Interest Margin in smaller banks (<1B in assets) is contracting rapidly despite the fact that yield curve now is very beneficial for banks, which again supports my hypothesis that a number of smaller regional banks are having trouble attracting lower cost deposits and that many might collapse later this year...

Source: FDIC

Reserve coverage ratio has been declining since 2005 and now stands at only 120%- this might mean higher loan loss provisions in the next few quarters.

Source: FDIC

Now here is the punch line- I think all the pundits claiming that the Financials are "dirt cheap" are pretty much basing their case on the assumption that since the commercial loans (CRE and C&I) side of the business has held up so far, it won't deteriorate in the future- I think this logic is flawed, what's more it could be outright dangerous- because CRE and C&I loans are by definition much larger in size; and thus outlook for a smaller bank that has high commercial real estate exposure on the asset side and does not have real diversified funding base on the liability side (like DDAs (checking accounts) or other lower cost sources) could change literally overnight...

I think the graph above is an indicator that regardless of all the noise in the media- we aren't yet close to the bottom of the credit cycle in financials- closer to start than to finish...

Expect the commercial side to look similar to the residential side before it's over...

In my opinion, we could very well see the volume of bank failures explode in the next few quarters- (so far only 4 this year)... They are likely to be concentrated in smaller regional banks that have heavy exposure to CRE and C&I loans and no diversified deposit base. Larger banks are also likely going to write off a lot more commercial loans and thus real earnings probably won't improve much until 2009, which in turn means there are still a bunch of good shorts in the financial sector...

Stay safe, Vad skepticalcapitalist@gmail.com

"The essence of success is that it is never necessary to think of a new idea oneself. It is far better to wait until somebody else does it, and then to copy him in every detail, except his mistakes." Aubrey Menen

Becoming a successful "intelligent investor" is not something one should expect to achieve in a very short period of time... Too many of the very smart, well educated and successful people out there believe that picking stocks is just as easy as running their own business or that one can create a mathematical model that will tell them exactly what the stock is worth. Unfortunately, it's not quite that easy. As we all know, most of the professional managers out there fail to beat the market year after year, and number of those who have been able to do so consistently is so limited that you probably know them most of them by name.

Just think about again- every year hundreds of newly minted MBAs leave Top business schools around the world and join the asset management industry in their quest to become the next Warren Buffet or George Soros. Most of them are more intelligent and driven than an average person out there- but still the vast majority fails measurably... I personally always wondered why does this happen and how could I possibly avoid their mistakes? Finding an answer to this question is not an easy, but as with everything else, I have my own skeptical opinion...

After one of the many rereads of my favorite books about investing psychology "Reminiscences of a Stock Operator" by Edwin Lefevre, I realized that a large portion of this question might have already been answered almost a 100 years ago -

"... The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages..."

Too many of us approach investing just like we would anything else-with great passion and determination to make it work- we plunge wholeheartedly into the "mysterious world" of stocks, spend countless hours reading about "magic, bullet proof formulas", listen and watch to Bloomberg and CNBC and dream about the next "Berkshire size" investing opportunity out there. But unfortunately, there lies our biggest flaw- we become so devoted to our new passion- that we let emotions drive our decisions, we let our affection for a particular stock to overrule the common sense and we deviate from what at first seemed to be our well thought out, "iron clad" strategy.

As if our human nature wasn't enough, the continuous and never stopping media flow of new tips, "important" information and "expert" opinions lead us to sell winning stocks when we should be sitting tight or force us to "fall in love" with a money losing stock and ride it all the way down to zero. And this emotional urge is frequently so difficult to resist that many finally give up, pull whatever is left out of the market, put it in the money market or some other cash equivalent account, where inflation slowly takes care of whatever is left...We've seen it happen over and over again and it is very unlikely to stop anytime soon.

That's' precisely why I think learning the behavioral/psychological side of financial world is as or may be even more important than the traditional quantitative one. And I am not talking about the technical analysis (TA) driven world of "self fulfilling prophecies", I am talking about good-old boring fundamental ones- like herding, group-think, loss aversion, mental accounting etc... The list is simply too long and obviously can't be covered in serious detail within one article- if you want to learn more on your own- the good place to start would be Wikipedia...

Continued in Part 2...