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Lessons From Warren Buffett

The Smart Profits Report: Issue #425
Tuesday, May 29, 2007

Lessons From Warren Buffett: Two Ways To Avoid Getting Burned By “Competition-Style” Investing
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

When this guy speaks, economists, investors, and the financial media across the globe sit up and take notice. He’s one of the most well-known, successful, and respected investors in the world - and with a personal fortune of $44 billion, one of the wealthiest.

So it’s not surprising that his investment decisions almost always make news. Most of them simply notch up more wealth for him, his shareholders, and the folks who take heed of him.

I’m talking about Mr. Warren Buffett, the 76-year old brains behind Berkshire Hathaway. But some people are questioning the merit of one of his recent decisions. Are they right, will we be learning lessons from Warren Buffett, or will he prevail? Let’s take a look…

“The Apprentice”… Warren Buffett Style

What would you do with $5 billion in two years?

At the annual Berkshire Hathaway shareholder meeting earlier this month, Buffett surprised attendees by announcing that he will search for his successor by jumping on the reality show bandwagon.

Buffett will select three or four top candidates for the position and give them $5 billion to manage for two years. The winner of the $5 billion challenge will get the nod to run Berkshire Hathaway.

On the surface, it sounds like a nifty idea. And while it won’t be on TV (at least not yet), Buffett’s “reality show” has the makings of great drama. But if you look a bit deeper, this type of selection strategy has some serious flaws, because of the mistakes and rash decisions that such “competition-style” investing can trigger. And it’s got some important lessons for us, too…

Win At All Costs? Not So Fast…

Warren Buffett’s selection process has obviously caught the eye of the media, most notably in Austan Goolsbee’s New York Times article, where he likens Buffett’s tactics to Donald Trump’s reality show, “The Apprentice.”

There’s certainly one aspect of this that is a big concern: Is a “win at all costs” reality show strategy the appropriate way to invest or choose an investment manager - especially one running the massive Berkshire Hathaway operation?

After all, if one of the contestants makes $3 more (on a $5 billion investment portfolio) over the course of the two years, is that significant? But the key issue here is that this type of competition easily encourages participants to take undue risks in order to be first past the post.

For the record, I’m sure Mr. Buffett and his staff has taken these issues (and plenty more) into consideration. But investors would do well to avoid the pitfalls inherent with competition-style investing. Here are some things to watch out to make sure you don’t fall into one of these traps.

• Monitor Your Risk When Seeking Higher Returns

If you want higher returns, you usually have to take on a little more risk to get them. But one of the most prevalent investing concerns is that investors don’t fully understand these risks often dazzled by the potential upside and ignoring the downside when evaluating opportunities. Stay disciplined.

• Don’t Increase Your Risk Just To Make Pre-Determined Performance Goals

It’s one of the classic mutual fund manager mistakes. They’re notorious for taking inordinate risks to attract new clients or make a certain amount of money. If a fund has a chance to make a top 10 list at the end of the year, they know that such acclaim and publicity will lead to much greater capital inflows - with higher fees and bonuses to follow. That means managers can be tempted to take bigger risks with existing investors’ money. If the risk works out, they reap some fat rewards. But if the wheels fall off, the fund will lose capital and credibility.

If you find your investment returns lagging your goal for any given month, quarter, or year, don’t fall into the trap of hiking up your risk to make up the shortfall. Doing so, just to get to an arbitrary performance mark, will more than likely put you on the fast-track to lose money, not make it.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Action Center

• In September 2006, one trader proved exactly why ignoring risk and the “all or nothing” investment mentality is so dangerous. He lost $4.5 billion in one week for his Amaranth hedge fund by taking huge long positions in natural gas futures contracts. Trouble was… nobody was interested in trading so far out and in such large volume - leaving the fund extremely overweight in extremely illiquid assets. The lesson here: Make sure you assess your risk and don’t invest too money much in one place.

• Warren Buffett is a master of knowing the best places to invest at the best time. And listening to proven experts like this is one of the best ways to accelerate your wealth. In a recently-published report, an elite group of the world’s best investors and money managers have revealed 31 proven “secrets of the masters,” showing you the tips and wealth-building strategies you need for success. You’ll hear from renowned experts like PIMCO bond king Bill Gross, Jeremy Grantham, Richard Russell, John Templeton and John Bogle and many more. Follow this link and find out how to book gains of 119%, 190%… all the way up to 4,001% a year.

Related Articles:

• Mutual Funds: How To Interpret The Actions of Mutual Fund Managers
• Financial Risk Management: Know Your Risk Tolerance Before You Trade
• Trading With Confidence: How You Can Develop More Confidence In Your Trades

The Chart Of The Week

Sun Microsystems (Nasdaq: SUNW) is approaching a key support level at $5. A close below this level will have dire consequences for this stock. If it doesn’t close below there, look for more choppy trading between that support level and the gap resistance at $5.60 that was established in late April.

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Cutting-Edge Technology

The Smart Profits Report: Issue #424
Tuesday, May 29, 2007

Cutting-Edge Technology: The Hottest Trend Of 2007 In Technology & Finance
By Karim Rahemtulla
Investment Director, Mt. Vernon Research

It’s one of the leading stories of 2007… I’m not talking about the weakening economy, the rampaging stock market, or the beaten-down dollar.

I’m talking about a sector that continues to blaze a hot trail, despite fears that it’s again wandering close to “bubble territory.” One that you see featured on the news and shows like “60 Minutes” all the time. It’s exciting. It’s intriguing. It’s groundbreaking. And in many cases, it’s changing the world. That means if you know where to look, investing in it can make you a lot of money.

I’m talking about cutting-edge technology.

Tech Titans Lead The Way

When I ran a venture capital forum, I saw everything:

• Multi-platform communications systems…
• Expansive Internet security systems being tested at the United Nations…
• Hydrogen-powered boats…
• Spectacular new resin technology…

You name it, we saw it.

This year, we’ve seen the launch of Microsoft’s Windows Vista. But Bill Gates & Co. isn’t stopping there. Capitalizing on the lucrative web advertising business, the firm just bought web ad stalwart aQuantive for $6 billion. Mr. Softie is also trying to make a move into the IPTV (Internet Protocol TV) business - cutting edge technology that delivers entertainment over the Internet.

Over at Apple, the jazzy new iPhone is set to hit the market this summer. It combines a cellphone and music player, with users able to dial numbers and select features by touch, rather than with buttons.

Filtering The Fantastic From The Fluff

But the trouble with cutting edge technology is that it’s often difficult distinguishing the fantastic innovators from the fizzling flameouts. And unless you’re willing to cut a fat check and wait a few years, you may or may not see a dime of profit.

It’s high risk, for sure. And it can generate some high returns. But sometimes, there is no return and your money is either locked up for ages, or lost for good. But don’t despair… there are certainly opportunities to make big money from publicly traded companies. You just have to stay off Wall Street’s well-beaten path. Here’s an example…

Immersion Profits With Haptics Technology

In February, I wrote to you about haptics technology - a fast-growing invention making its presence felt in a wide range of applications such as video games, casinos, automobiles, the medical industry and cellphones.

In fact, Motorola just introduced its new RAZR 2, which includes haptics. And Samsung’s SCH-W559 touch-screen phone also uses haptics from a company called Immersion Corp (Nasdaq: IMMR). Strategy Analytics estimates that by 2012, 40% of the world’s cellphones will feature haptics-based touch screens, compared with only 3% today.

Haptics is basically tech-speak for tactile force-feedback. It’s the kind of technology that makes video game controllers vibrate as you play a game, thus making the action more realistic.

We’re following the progress of Immersion very closely - a company that owns the most important patents (600 in total) in the industry. When Microsoft came sniffing around, trying to wiggle its way around the patents, Immersion took them to the mat - and won through a settlement. Microsoft knew it had no shot.

So when Sony tried the same thing, it sparked a long and occasionally bitter patent infringement lawsuit. We pored through reams of court documents, patent office filings, and spent hours interviewing the company. Result? It paid off for readers of our premium content newsletter, the Xcelerated Profits Report, and is continuing to pay off.

At the end of February, Sony decided to settle out of court, handing Immersion an immediate cash injection close to $125 million. In addition, Immersion will receive royalties on all haptics-based Sony PlayStation consoles and games.

It was the news we’d been waiting for… and Immersion shares took off, shooting from $7.23 before the settlement to a current price around $11. And because we instructed readers to lower their cost through a covered call play, we’re now up 80%.

And we’re hot on the trail for more…

Two More Tech Pioneers Trading On Results, Not Dreams

We just added two more hot tech companies to our portfolio, both of which also boast cutting-edge technology, are laden with patents, and have been trading for just a few months.

They’re new, they’re undiscovered (Wall Street doesn’t have much clue about their prospects yet) and are loaded with profit potential in the months ahead.

• One is a pure medical technology play - cutting-edge all the way, with its approved device selling for $4 million a pop. When you consider the advanced technology these machines have proven to deliver and the fact that they work in a critical field, it’s a no-brainer for hospitals.

• The second company, also still in its infancy, has the potential to blow apart the communications and entertainment business. Yeah, I know you might have heard that a thousand times before, but this puppy is for real. The company has doubled its sales to $200 million between 2005 and today, and its cutting-edge technology essentially squeezes more capacity from the same cable and telecom infrastructure. As you can imagine, that’s a CEO’s dream.

What isn’t a dream, however, are the prospects for all three of these companies. They’re selling solid products, not flimsy dreams. In addition, they’re all using patented technology that offers a good measure of protection and gives them the ability to monetize the technology quickly and take any offenders to task. Just ask Sony and Microsoft.

Cutting Edge Technology Without The Torture

The last two companies are brand-new additions to our Xcelerated Profits Report portfolio, so it would be unfair to my subscribers if I revealed their names here (but if you’re interested in getting your hands on the information, see below).

My point is to demonstrate to you that the cutting-edge technology sector need not be a nerve-jangling minefield, where you’re constantly sweating over a company’s progress and share price. While another company’s technology might be better on paper, it doesn’t amount to a hill of beans unless it’s viable, it sells - and most importantly for you and I, makes us money. We’re in the business of turning these hot tech opportunities into cold, hard cash. And you’ll find us talking about them in depth in the pages of the Xcelerated Profits Report.

Good investing,

Karim Rahemtulla

Today’s Smart Profits Action Center

• The U.S. technology sector continues to grow. In 2006, the “high-tech” industry added 150,000 new jobs - a 71% surge over the 87,400 created in 2005, according to the American Electronics Association and U.S . Labor Department. Job growth in the engineering and tech services industry hit an all-time high, while job creation in the software services industry grew for the third straight year.

• That strong industry growth is reflected in technology companies’ share prices. As the stock market has exploded to the upside over the past year, investors have renewed their interest in the technology sector. Since hitting a 52-week low of $18.85 in mid July 2006, the Technology Select Sector SPDR (AMEX: XLK) is up 33%.

• Contrary to what some in the media say, tech investing doesn’t have to be risky. You just need to know where to look (and it’s usually not where Wall Street is looking) and what to look for - a solid, in-demand product that is actually generating sales and changing the industry. That’s exactly what we did with Immersion - and are doing again with our latest two groundbreaking technology companies. For more details on how to get in at the ground floor of these excellent opportunities, check out the Xcelerated Profits Report here.

Related Articles:

• Investing In Tactile Feedback: Haptics And Other Groundbreaking Touch Technologies Rumble With Investor Profits
• Contrarian Investing Strategy: The Most Profitable Way To Invest In 2007
• Greed & Fear: Gauge The Fear And Greed Factor To Boost Your Investment Success

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Financial Risk Management

The Smart Profits Report: Issue #423
Wednesday, May 23, 2007

Financial Risk Management: Know Your Risk Tolerance Before You Trade
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

As I pushed the button to call the elevator, a guy walked up beside me and got on. He pushed the button for his floor and turned to ask what floor I needed. As I looked over, I recognized him instantly. It was Jeff Garcia, the three-time Pro Bowl quarterback. Just to make sure I was right, I asked him if he’d spent any time in Philadelphia last year.

He chuckled a bit and said, “Yes.” If you don’t follow football, Garcia almost single-handedly resurrected the Philadelphia Eagles’ season last year, leading them from impending disaster to a playoff spot, where they fell one win shy of the conference championship.

So what does my encounter have to do with investing? It concerns the critical area of financial risk management. Let me explain…

Financial Risk Management: Investor… Know Thyself

I was teaching an investing workshop at the hotel, and Jeff Garcia was gracious enough to chat with me later that evening about how he invests his substantial NFL salary. And when we talked about his investment strategy, he told me a tale of two investors…

• When he first broke into the league and had some money to invest, his money manager took on much more financial risk than Garcia liked. It got to the point where Garcia was so uncomfortable with the strategies that he had to pull his money.

• Since then, he’s found an advisor who really understands his goals and financial risk parameters. He’s let this guy handle his money for many years, and I could tell by the look on his face that he’s truly comfortable with the way he’s doing it.

This is a crucial point - and brings us to our own coaching session. So let’s see what we can learn from a Pro Bowl quarterback…

It’s always strange to see how many investors ignore this point… but if you don’t know your tolerance for risk before you invest in the stock market, it’s going to be tough for you to know when to get out. But fortunately, these tips should help you with your financial risk management…

Know Your Goals & Your Financial Risk Parameters

Most people start investing with a simple goal: “Make as much as I can as fast as I can.” While it sounds good in principle, this unfortunately leads to the opposite effect: Losing as much as possible as quick as possible. Here’s why:

• Sure, it’s possible to make huge profits from investing. But to do that, in almost all circumstances, you have to take huge risks.

• And most folks aren’t prepared, either psychologically or from a knowledge perspective, to take on this kind of risk.

• So when they do, disaster is almost assured before they even start.

And while some very high-return, relatively low-risk opportunities do exist, they are few and far between. For almost all day-to-day opportunities, the markets force us to accept larger levels of financial risk when seeking out higher returns.

Know When To Trust Your Gut

When I heard Jeff Garcia talk about how high investment risk levels scared him, I was pretty amused. Here’s a guy who weighs 190 pounds dripping wet, yet on any given Sunday, he’s got some 350-pound defensive tackle staring him in the eye, with the sole intent of doing him massive bodily harm. To me, that’s “high risk!” But for Jeff Garcia, it’s routine.

When I told him this, he laughed and said they’re different types of risk. He’s right. When Garcia thought his portfolio was at risk, he just did the same thing he does when a monstrous defensive lineman is chasing him: He ran the other way - and fast!

This probably saved him a huge amount of money. And you can do the same thing. When you feel uncomfortable with the level of financial risk you’ve taken on, don’t lose sleep by staying in those positions, waiting for them to potentially nail you. Instead, move into something that better suits your tolerance for risk. You’ll sleep better when you do.

Know That You Should Care The Most About Your Money

While money managers and financial advisors are often great, some of them take on extra financial risk in search of higher returns… and higher commissions. If you sense danger in your portfolio, don’t be afraid to take matters into your own hands and move the money. Don’t let hot tips, pushy friends or relatives, or perceived tax benefits persuade you to do something that makes you uncomfortable.

I found Jeff Garcia to be a truly likeable guy - unassuming, humble and polite. Even the notoriously tough Philadelphia fans grew to love him last season. And his investing experiences through financial risk management have some good lessons for us all.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Action Center

• Although the stock market is riding high right now, remember that bear markets are usually triggered during good times. Don’t get washed away in the euphoria and ignore your financial risk management strategies. Professional investors always pay attention to risk; amateur investors fall into the trap of abandoning it as they chase higher returns. As investment expert Dr. Steve Sjuggerud says, “If you focus on the risks, the returns will eventually come for you. If you focus on the returns, the risks will eventually come for you.”

• One of the best ways to manage your financial risk properly is through “position sizing.” This basically means you invest the same amount in each of your positions, thus ensuring that you’re not risking any more money than you’re comfortable with - and more importantly, that if a trade goes bad, it can’t cripple your portfolio. Decide how much you want to risk, then stay disciplined and stick to that number. Learn more in Smart Profits #193 , Position Sizing: The Most Powerful Investment Concept.

• If you really want to manage your financial risk more effectively and maximize your gains in the process, you’re going to need more than one investment approach and more than one trading strategy. To see how one group of professional investors do this all the time, resulting in gains of 80%, 48%, and 46%, click this link.

Related Articles:

• Risk Management and Position Sizing: Three Ways To Give Your Trades A Tune-Up
• Risk In Investing: Don’t Take Insane Risks When You Have Options
• Become a Better Trader: Small Changes You Can Make for Big Profits

The Chart Of The Week

It’s tough to find many folks with anything good to say about the dollar these days. But bear in mind that when sentiment goes that negative, it usually means the market has stretched too far. The Euro made a new all-time high versus the dollar in April before retreating by 200 ticks. While this could be just a normal pullback before it makes an assault on new highs, it’s more likely that the dollar will strengthen in the intermediate-term, making it a less “hated asset.”

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The British Pound

The Smart Profits Report: Issue #422
Friday, May 18, 2007

The British Pound: A Dose of Inflation Makes The U.S. Dollar’s Pain The British Pound’s Gain
By Martin Denholm
Managing Editor, Mt. Vernon Research

I just returned from a trip back home to England… and my wallet has come staggering back with me, battered and bruised, after spending a week in the financial equivalent of one of those English rugby scrums, thanks to the strong British pound. Boy, what a beating!

For example, think U.S. gas prices are bad? (And with the national average price per gallon having just a hit a record $3.10, I wouldn’t blame you). Consider this: Just a week ago, I pulled off the rain-soaked M6 motorway in my car to fill up. I had one-quarter of the tank left when I started. But by the time the beast was full, the price totaled £45. That’s about $90!

Sure, most of that money gets plopped into the British government’s coffers in taxes, but the fact is, you still have to pay it regardless of where it goes.My deflated dollar purchasing power isn’t surprising, considering the British pound hit a 26-year high of $2.01 against the greenback on April 18, and is currently trading around $1.98.

As a Brit, when I lived in England and visited America, a strong pound was great for me. But not any more. Today, the rate is downright awful for Americans traveling to England or continental Europe. In addition to the pound hitting a 26-year high, the dollar’s downward slide recently culminated in the euro notching up a two-year high. The Australian dollar also soared to a 17-year high.

Many people look at this and wonder if it’s because of dollar weakness, or strength abroad. With regard to the America-Europe currency relationship, it’s a little of both. Let’s take a look at two main drivers: Economic growth and inflation…

A Tale Of Two Economies

Over the past several years, both the U.S. and U.K. economies have performed pretty stoutly, with the strength reflected in the respective stock markets.

But despite the fact that corporate earnings results remain impressive and the stock market continues to plow ahead with gusto, some cracks are starting to appear in the U.S. economic growth picture.

For example, government figures showed that U.S. GDP growth crawled in at a 1.3% annual rate during the first quarter, down from 2.5% in the fourth quarter of 2006. It was the slowest pace in four years. And some economists think that number could yet be revised down below 1%.

This has led to speculation that the Federal Reserve may have to trim interest rates in order to maintain growth - a move that would dent the dollar, relative to places like Britain and the Eurozone, where interest rates are rising and making investments there more appealing.

And after several years of mediocre growth (and that’s putting it politely), even the 13-nation Eurozone economy is finally expanding. First quarter GDP growth rolled in at 3.1% year-over-year, beating estimates that called for 2.9%. That led the European Central Bank to call for “strong vigilance” to stave off inflation - a strong signal that interest rates are set to rise to 4% in June.

In Britain, however, GDP growth is still robust - and set to continue. The Bank of England says strength in the banking and communications sectors will help push growth to 3% this year - the fastest since 2004 - and projects the same in 2008.

But you don’t have to look very far without stumbling across the dreaded “I” word: Inflation…

Britain’s Dose Of Inflation

Coming on the same day that British Prime Minister Tony Blair finally announced that he’ll be leaving office, the news didn’t receive as much attention as usual. But across town in London, the Bank of England made an announcement of its own: Interest rates would rise by another 0.25% to 5.5%. It was the fourth rate hike since August 2006.

And the main reason for the move? Inflation.

Britain’s solid economy has resulted in strong employment growth. Unemployment just dropped to the lowest level since October 2005, with 31.6 million people now in work. Good news, for sure. But that’s also causing inflation to tick up. Average earnings climbed 4.5% during the first quarter, with total wage inflation rising to 3.7%.

In turn, that means the overall inflation rate has jumped to 2.8% well above the bank’s 2% target. In response, Bank of England governor Mervyn King has signaled that interest rates will likely have to rise to curb inflation, stating that the bank will do “whatever it takes” to bring it back down to the 2% level.

Economists agree. The rate on September interest rate futures contract is currently trading around 5.9%. When rates do rise, the pound should receive a further boost, and you could see more money flowing away from dollar-denominated investments to more attractive U.K. investments instead.

By contrast, the U.S. inflation rate is relatively benign, with consumer prices rising just 0.4% in April from 0.6% in March. Core inflation (which excludes energy and food prices) rose just 0.2%. With inflation in check, the Federal Reserve hasn’t had to touch interest rates for almost a year. That, coupled with a slowing economy that may yet need a Fed rate hike to prop it up, hasn’t enticed investors towards the dollar.

A “Three-Month Window” For Rate Hikes

There are other factors that have contributed to the dollar’s slide against the pound and euro. For example, the U.S. is still running enormous deficits.

Energy prices have also sent inflation higher in Britain, with Mervyn King underlining the impact in a recent letter to the British government (one that was required once the inflation rate hit 3% in March). That’s a major reason why the Bank of England has raised interest rates recently, which has helped the pound.

And although the bank expects energy price inflation to decline sharply over the course of the year, it states, “The overall path of CPI inflation depends on what happens to other prices.” And the fact that inflation is already so high means interest rates should rise again in the coming months, as the bank strives to get inflation back to its 2% target rate.

Bear Stearns says there is a “three-month window” for further hikes, so if you’re looking to speculate and grab higher yields, now might be a good time to cash in on British inflationary pressures, rising interest rates, and continuing strength for the pound.

Good investing,

Martin Denholm

Today’s Smart Profits Cribsheet

• Although central banks can help curb inflation by raising interest rates, remember that monetary policy is a fairly broad tool, and it often takes a few months for interest rate changes to have an impact on the economy. So when the Fed or Bank of England makes a move, don’t expect instant results.

• If you think inflation is high in the U.S. or U.K., spare a thought for the poor folks in Zimbabwe. The inflation rate just ballooned to a whopping 3,731%. Like many countries, Zimbabwe is suffering from higher energy and food costs. But a collapse in the currency and a high unemployment rate has left the country rooted in economic crisis, and sent the overall cost of living shooting out of control. Fuel and food shortages are commonplace across the country, with the crisis set to continue, as the country is forced to import basic goods and ration electricity supplies.

• If you’re looking to diversify your portfolio and take advantage of the strong British pound against the U.S. dollar, take a look at EverBank’s World Currency CD. In addition to grabbing an interest rate of up to 4.5%, you also benefit from further currency appreciation of the pound against the dollar. The CD has flexible maturity terms, has no monthly account fees, and is FDIC insured. We should point out that the publisher of the Smart Profits Report has a marketing relationship with EverBank, but that’s because we believe it has the most competitive products on offer. So for full details, please click here.

• Got any views on the fate of the U.S. dollar - or indeed any other economic/investing issues? Dont’ be shy - we’d love to hear from you. While we may not be able to respond to all e-mails, we’re always interested to get our readers’ opinions on topics like this. So feel free to drop us a line here: editor@mtvernonresearch.com

Related Articles:

• Global Markets Investing: Get 300% More Bang For Your Investment Dollar And Diversify Your Portfolio
• Federal Reserve Interest Rates: How To Prepare For A Potential Price Shock
• Gasoline Prices: How To Win Big In The “Ethanol Decade”

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Market Entry Strategy

The Smart Profits Report: Issue #421
Wednesday, May 16, 2007

Market Entry Strategy: Three Ways To Grab A Better Entry Price Than “At The Market”
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

As investors, we’re always looking for an edge in the markets. And today we’re going to discuss finding an edge in our market entry strategy through entry prices.

You see, while many ordinary investors simply buy “at the market” (i.e. the current price), there are some better ways that you can execute entry points. Let’s look at a few market entry strategies you can use to get more effective entries and gain an edge over the crowd.

Is Your Market Entry Technique Consistent With Your Trading Strategy’s Market Concept?

For example, if you have a system that identifies trading channels, you need some sort of market entry strategy that will allow you to sell near the channel tops and buy near the channel bottom.

Some trend following systems count on getting a good entry on the long side by buying on a pullback. Since these are longer-term systems looking to capture longer-term trends, this can be an excellent strategy.

On the other hand, if your entry strategy is based on a breakout or breakdown system, then you’re best served by following the price after confirmation of the move. That’s because simply waiting for a pullback will most likely lead to either of two unwanted results:

• The price will never pull back and you miss the entry on a good trade.

• Or the price pulls back and just keeps moving against the breakout for a loss (a routine occurrence in breakout trading).

Do You Have To Get In Right Away?

This is a great question if you follow long-term newsletter recommendations or if you base your trades on fundamental data.

Jumping in at the exact minute you hear or read about the recommendation is probably not the best market entry technique. If a popular newsletter with a big subscriber base makes a recommendation, lots of folks are going to be jumping in. And unless the stock is very liquid, it will be a bit like someone yelling, “Fire!” in crowded theater: Everyone wants to pile through the same door at the same time.

• If you’re a long-term investor, instead of fighting a newsletter “cattle call,” try waiting for the price to pull back a bit after the initial run-up. A 50% retracement of the move caused by the recommendation is a good rule-of-thumb to use.

• If you’re a shorter-term investor, or following a technical system, in most cases you should take entries as they occur.

Master The Art Of “Stalking”

Just like a cat stalks its prey, looking for the best possible moment to pounce, a trader can stalk a trade to get the best possible market entry price. This is a concept that respected trading coach Van Tharp talks about in his famous “Ten Tasks Of Trading,” and you can tailor it to your own strategy. For example…

• For Long-Term Investors: If you’re entering a long-term trade, based on fundamental analysis, it’s beneficial to add some technical analysis here to help you with the timing of your entry. And remember that in almost all cases when you’re executing a long-term trade, waiting for the price to enter an uptrend is a good idea.

• For Short-Term Investors: To help you stalk a trade, you can use the Level II screen here. This tool helps to give you a rough idea of the very short-term supply-demand balance for a given stock. When used with an understanding of its strengths and weaknesses, the Level II screen can be a very useful stalking tool to help give traders an edge in getting the best entry price for their trade.

Strong Market Entry Strategies Can Pay Big Dividends

Designing your market entry strategies to give you as strong an edge as possible is a task that takes extra time, but can pay big dividends in the long run - especially when combined with effective money management, asset allocation and proper use of stop-losses.

So take a look back at some of your previous entry points and see if there’s anything you could have done differently to get a better price. If you apply today’s techniques to your next trades, there’s a good chance you’ll grab a better market entry price and make your investments more successful.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• Having the patience and discipline to execute a trade effectively is one of the most crucial skills you need to develop if you want to be a successful investor. Determining your entry point, then waiting for the stock to hit that price requires thorough research, self-control, and confidence in your system. If you’re tempted to enter a trade early, remind yourself why you picked that level. Jumping in impatiently and letting your emotions guide you will put you on the fast-track to losses.

• However, it’s important that you never try to time the market. It’s virtually impossible to do this successfully on a consistent basis. Instead, set two price levels. The first is the pullback price. The second is the breakout level - an area that you believe the stock will hit. The pullback price will give you the best entry price, but if the pullback doesn’t occur, you’ll be ready to enter at the breakout level instead.

• Following a predetermined set of rules allows you to stay disciplined, rather than act on emotions. To see how you can take advantage of a rock-solid trading strategy that will give you the best entry and exit prices every time, click here for more information.

Related Articles:

• Trade Your Way To Financial Freedom By Van K. Tharp
• Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap
• Time Value: With Options You Need to Be Right on Time
• Get The Entry Price You Want: The 3-Step System To Magnify Your Profits

The Chart Of The Week

While the Dow’s great run is well reported in the financial press, the small-cap Russell 2000 index hasn’t been able to follow suit and significantly break out from its February 2007 highs. Considering that the Russell has been the leading index over the past several years, its failure to continue to lead is a signal worth watching.

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The Stock Market

The Smart Profits Report: Issue #419
Wednesday, May 9, 2007

The Stock Market: Fight The Froth And Battle The Blow-Off… Four Tips To Combat A Toppy Market
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

There’s one common denominator that shows up in most great stock market bull runs: They make everyone giddy.

When the stock market is roaring along - as it is now - the talking heads on television have an excited tone to their voice. Brokerage firms run more ads because people want to put more money into the market when assets are rising. And average investors finally stop procrastinating and pull the trigger so they don’t miss out on “the rest of the big move.”

Don’t be one of these “average” folks who follows everyone else like a sheep, and jumps blindly in at the height of the froth.

Yes, the stock markets are exciting right now. Yes, you can’t turn around without the Dow hitting a new all-time high. But no… you shouldn’t be piling in now for fear of missing all the excitement and the promise of gains.

There are better ways to play this market right now. Let’s look at some of the telltale “froth signs” and see how prudent investors should combat the current situation.

Four Signs Of A Frothy Stock Market Climate

• Dangerously Fast Dow: Through Monday (May 7), the Dow Jones Industrial Average had risen in 24 out of the past 27 trading sessions. The stock market has not powered up consistently like that since July-August 1927. While this looks like a very strong market to some, there is a warning sign here that you must heed. The markets are a complex mix of give-and-take. Nature, it is said, abhors a vacuum. And markets abhor one-way streets.

• Tight Trading Range On S&P 500: Monday also marked the lowest trading range day that we’ve seen in the last five years. The S&P Futures had a range of just 3.75 - a number so low that it’s only happened twice before in the last five years (July 2004 and November 2006). Low volatility is always a sign of stock market indecision. Right now, the market has two big central bank announcements to deal with this week - the U.S. Federal Reserve and the European Central Bank. Both will let the world know their rate policies in the next couple of days. And this basically has the market holding its breath and waiting to exhale.

• China Concerned About Stock Market Froth: Top-level banking officials in China are concerned about the frothy state of the market. Deeply concerned. As renowned analyst Dennis Gartman reported in his letter on Monday:”Mr. Zhou Xiaochuan, the Governor of the People’s Bank of China, is in Basel, Switzerland, for a meeting of the Bank for International Settlements. The press assembled there is hovering on every statement that Mr. Zhou has to make. One has our interest here, for Zhou said that he is indeed worried about what seems to him to be a ‘bubble’ in China’s stock market. He said that the Bank is ‘monitoring’ the market on a regular basis. Mr. Zhou is not given to wayward comments, and he knows how seriously the world shall take his use of the term ‘Bubble.’ Mr. Zhou is not naive. He is a seasoned operator on the international scene, and we suspect he used the term ‘Bubble’ only after careful consideration. He knows that all bubbles end in tears. But he, like we, has no idea when the bubble shall burst. He knows only that it shall.“

• Goldman Sachs Momentum Looking Weaker: Stock market bellwether Goldman Sachs is showing momentum divergence. This means that while the stock is making new highs, it’s doing so with less “push” and less strength than the previous highs. I’ve illustrated this in the “Chart of the Week” section below.

What’s An Investor To Do?

When the market is showing these key signs of “frothiness,” the bottom line is this: Don’t jump in with both feet.

If you’re fully invested, by all means keep riding the wave. Just make sure that as you do, you have your stop-losses in place, and keep adjusting them as long as the stock market keeps moving in your direction.

If you have money to invest, the most prudent decision is to hold some of it back until the market has had a chance to relieve its overbought condition.

But be aware that frothy stock markets can have blow-off tops that have rapid gains before any correction comes into play. And a Fed announcement is the type of trigger event that can cause a blow-off top, or kick the stock market over the edge toward corrective activity.

Great trading,

D R. Barton, Jr.

Today’s Smart Profits Cribsheet

• Here are some more thoughts on dealing with stock markets that have hit extremes. Make sure you: Spread your risk by having a diversified, balanced portfolio… “position size” (i.e. allocate the same amount for each investment, so no one losing position cripples your portfolio)… and employ stop-losses. The latter is one of the best risk management strategies you can use, because it ensures that you stay disciplined with your investments by never taking a heavy loss, but also grabbing profits when your positions rise. Find out more in Smart Profits #193: Position Sizing: The Most Powerful Investment Concept.

• The Stochastic Oscillator indicator, mentioned with regard to Goldman Sachs today, is a technical tool developed by George C. Lane in the late 1950s. The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

• If you’d like to harness the power of short-term momentum investing to your advantage, check out the Momentum Alert. Run by Oxford Club Investment Director Alex Green, you’ll find out how to profit from stocks that are in significant uptrends and enjoying heavy institutional buying right now, as well as companies whose earnings growth is accelerating and market share is increasing. Visit this link for more details on the Momentum Alert.

Related Articles:

• The DJIA Index: As The Dow Goes 14 For 16, Beware The Momentum Indicator Warning Signs
• Stock Market Trend: Stock Market Enters the Danger Zone with 4 Significant Trend Warning Signs
• Technical Analysis Indicators: Harness The Power Of Leading Indicators And Bollinger Bands

The Chart Of The Week

Goldman Sachs (NYSE: GS) is truly one of the great success stories of the last decade or so. The firm is simply a profit machine - and the share price reflects this. However, if the stock is any indication of the underlying market fundamentals (and many think it is), the divergence between the recent highs made and the stock’s momentum are a reason for caution.

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Uranium Prices

The Smart Profits Report: Issue #418
Monday, May 7, 2007

Uranium Prices: Global Fuel Shortage Triggers Blistering Bull Market in Nuclear Energy
By Mark Whistler
Small-Caps Specialist, Mt. Vernon Research

Here’s a quick quiz for you… Take a look at the chart below and see if you can guess which commodity it represents.

Any ideas? It’s uranium prices.

To put the commodity’s incredible rise in perspective, as recently as 2004, uranium prices were just $15 per pound. Today, it’s $113. That’s a 653% rise in just three years. In 2007 alone, the price has ballooned 57%.

The reason for this historic surge in uranium prices is simple: Decades of underinvestment, a lack of exploration, and strict regulations have led to a crippling worldwide supply shortage. In fact, a Merrill Lynch research report reveals that global uranium supplies are nearly 20% below worldwide demand.

And with the world crying out for a cleaner environment and alternative energy sources other than oil and fossil fuels, that means uranium - and the nuclear power it provides - has never looked more promising. Consider the current statistics:

• Nuclear energy now supplies 16% of the world’s total power.
• There are 441 power plants in 36 countries that depend on uranium.
• Nuclear energy now powers about 350 million homes and businesses worldwide.

Two Reasons Why Uranium Prices Won’t Fizzle

Aside from the regular supply and demand economics, here are two other reasons why the uranium boom isn’t likely to turn to fizzle any time soon:

• Nuclear Takes Over From Fading Fossil Fuels: The International Energy Agency says the world only has enough fossil fuels to meet energy demand until 2030. That’s bad news, considering global population growth is expected to jump from 6.5 billion people today to 9 billion by 2025.More people means more need for energy… and more strain on natural resources. The U.S. Energy Information Department predicts that from 2002 to 2025, global energy consumption will soar almost 60%, due to population growth. But as fossil fuels diminish, nuclear energy could pick up the slack.

• Coal Is Dirty… But Nuclear Cleans Up: Coal is one of the dirtiest energy resources, causing acid rain and spewing out greenhouse gases like sulfur dioxide and nitrogen oxide that leave cities choking under a blanket of smog. Carbon dioxide levels are now the highest in 150,000 years. In China, the country burns coal to generate nearly 80% of its electricity - a statistic that means China is “home to 16 of the planet’s 20 worst cities,” according to the World Bank. In Beijing alone, coal-fired power plants spit out 800 million tons of dirt and soot on the city every year.

But nuclear energy is a cleaner, sustainable alternative. For example, nuclear power has reduced U.S. greenhouse gas emissions alone by 128 trillion tons per year… reduced global carbon dioxide emissions by 1.6 million tons… and prevented 90,000 tons of heavy metals from being released into the earth’s atmosphere.

The UNECE predicts that by 2030, nuclear energy could surpass coal as the world’s leading energy source.

These factors are contributing to an increase in nuclear energy development - and the U.S. is doing its part…

Uncle Sam Goes Nuclear

Because the U.S. has around 520,500 million tons of coal and abundant natural gas supplies, expensive U.S. nuclear investment hasn’t been a priority. But the environmental concerns of fossil fuels, coupled with heightened greenhouse gas regulations that will make coal power more expensive is boosting support for U.S. nuclear development. And recent new energy legislation includes special tax and loan incentives that encourage nuclear reactor development.

Moreover, many energy experts believe nuclear power can provide increased energy security by loosening America’s risky dependence on oil supplies from volatile nations.

The shift is already underway. TXU Corporation has already shelved plans to develop its coal-powered plants, focusing instead on building new nuclear facilities in Texas.

In addition, 15 currently operational reactors have had their licenses extended from 40 years to 60 years - with others expected to follow. And with over 20 proposed nuclear facilities currently under review, it could pave the way for faster expansion of the nuclear industry in the U.S. and boost development overseas, too.

For example, China’s government is doing its best to beef up its nuclear power…

China Scrambles For More Power Through Nuclear Energy

China currently has 10 nuclear plants online… but is working to add 30 more. This is a remarkable amount, but the country actually needs the equivalent of 200 fully-operational plants to meet its rampant energy needs. It needs to triple its electricity output over the next 15 years, just to keep pace with demand.

And such sizzling demand means one thing: Rising uranium prices.

Countries like Japan and France, which rely heavily on uranium for the health of their economies, are also keen to secure supplies. France, for example, generates more than 80% of its energy from nuclear power.

That could trigger even more uranium development and keep prices at sky-high levels.

And to cap it off, the uranium market is about to enter a brand-new phase…

Sunday, May 6, 2007: Not Just “Any Given Sunday”

On April 16, the New York Mercantile Exchange (NYMEX), the world’s largest commodity trading exchange, signed a major 10-year deal with the world’s leading nuclear information group, Ux Consulting Company (UxC), that will see uranium futures contracts trade for the first time, and serve as the price benchmark for this explosive industry.

Coincidentally, the announcement came just 10 days after uranium prices surged 19% in a week - from $95 per pound to $113. It was the largest single-week jump since price monitoring began in 1968.

Uranium futures trading will get underway this Sunday (May 6), giving investors a brand-new way to participate in this soaring market. In the long-term, this could easily propel prices higher, so it’s well worth having some uranium in your portfolio.

Good investing,

Mark Whistler

Today’s Smart Profits Cribsheet

• While other commodities such as oil, gold, and natural gas all endure their ups and downs, uranium is defying logic. In July 2003, prices hovered just under $11 per pound… but then set off on one of the most outstanding bull markets in history. Prices haven’t dropped once since then and now trade at $113 per pound.

• The uranium industry received a further boost last week when Australia’s anti-nuclear Labour Party scrapped its 25-year ban on uranium mines. Despite not holding power nationally, this is important news, as the party rules all six of Australia’s states and two territories… and thus has the power to veto any mining work. In addition, pro-nuclear Australian Prime Minister John Howard announced that his government will try to overturn laws that prevent nuclear development in Australia and, from 2008, set up a nuclear regulatory body. Australia boasts the world’s largest uranium reserves.

• In addition to the water industry, uranium offers one of the most explosive long-term investment opportunities of the 21st century. Both commodities are soaring amid critical supply shortages that have sparked fierce demand and sent price rocketing higher. Over the past year, the Xcelerated Profits Report team has honed in on such investments, picking two winners each in the water and uranium industries. To find out more about how you can gain access to an exclusive team of professional traders and profit from both these explosive investment areas, please follow this link.

Related Articles:

• The Water Industry: Water Wars Begin On The World’s Most Precious Resource
• Commodities: How to Create Your Own “Mini Hedge Fund”
• The Best Commodities Website on the Internet

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Global Investing

The Smart Profits Report: Issue #417
Wednesday, May 2, 2007

Global Investing: Legendary Investor Predicts Triple Bubble… Here’s Four Ways To Beat It
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

When it comes to getting information about the business world, global investing and your investments, there’s no doubt that television and the Internet are the most popular mediums. But while that’s great for news, it’s bad for insight. So much of what is spewed out is general and created for mass consumption.

It’s also why I’ve had to become much more selective in whose work I read… especially for “big names” - the nationally known folks. And when it comes to gaining truly good insight, there are just a handful of guys that provide quality analysis. Bill Gross is one. And Jeremy Grantham is another.

So why should you pay attention to these guys?

Listening To The Legends

Bill Gross, the “bond king” from Pimco is one of the most astute money managers around, running the world’s largest bond fund and fifth-largest mutual fund. He has a net worth of $1.2 billion and scoops a $40 million annual salary from Pimco.

Like Gross, Jeremy Grantham is another legendary money manager. As one of the original founders of GMO (Grantham, Mayo, Van Otterloo & Co) and current Chairman of the Board, his analysis is sound and his reasoning on timing is prudent. And today, he’s warning about a global investing bubble.

So while it’s not time to panic, it is time to plan - because the best time to prepare for a hurricane is before the wind starts blowing.

Beware The Global Investing Bubble: Why You Should Prepare Instead Of Hope

First let’s look at the two requirements for any investing bubble:

• Excellent economic fundamentals.

• Large amounts of liquidity leading to high levels of leverage.

Grantham makes a strong argument that both are evident in the global picture today - and actually believes that we’re currently approaching a global investing bubble in all three major asset classes - real estate, stocks and bonds.

So even if you’re a “perma-bull,” there are a few compelling reasons why you should be wary of a bubble. So let’s investigate:

• Liquidity Is Generous And Leverage Is Cheap: You really need look no further than the sub-prime lending markets to see that cheap leverage is available across the globe. Investors have grabbed such strong returns from real estate and stocks for so long that many want to continue to take full advantage. That means looking for more ways to gain better leverage and get bigger returns per dollar invested.

• Global Economic Fundamentals Are ALL Above Average: In Garrison Keillor’s Lake Wobegon, all the children are above average. But in global economics, all countries cannot stay “above average.” Yet that is where we find ourselves today. The Economist charted the GDP growth of 42 emerging and developed countries - and found that all were above Switzerland’s average 2.2%. Perhaps even more importantly, never before have all the emerging countries’ economies outperformed the U.S. in GDP over a 12-month period - until now.

• The Ratio Of Returns Vs. Risk Is At All-Time Lows: Jeremy Grantham’s GMO group looks at portfolio returns in three main categories: Lower risk (heavily weighted in fixed income), moderate risk, and higher risk (more weighting in emerging markets). Their work shows that return-to-risk ratios have dropped to the lowest historical values ever. Simply put, this means that much bigger risks don’t bring extra returns. In fact, they’re giving smaller adjusted returns.

When Leverage And Liquidity Are Ignited

In recent history, the stock market has provided two prime examples of what happens when leverage and liquidity are high and a trigger happens in overstretched markets.

• May 2006: In just a three-week period, we saw emerging markets slump a whopping 25% amid signs that the carry trade in the Japanese Yen might be winding down.

• February 2007: Cracks in the sub-prime market and a largely unrelated 9% single-day drop for the Chinese market showed that although the markets have climbed the cliff impressively, there is certainly loose footing at the edge.

But now is not the time to panic. Instead, you need to do some smart planning…

Four Ways To Avoid Getting Busted By The Global Investing Bubble

Here are four steps you can take today to avoid getting caught up in any global investing bubble fallout:

• Beware The Bias: The best thing you can do is make sure the filters you use to view the markets aren’t too rose-colored - i.e. biased to the upside. Stock prices and real estate prices don’t just move up. However, sitting on the sidelines long-term is an unacceptable alternative, because large returns are still possible. Remember that if this is a global investing bubble, almost all bubbles end with explosive moves to the upside.

• Balance Your Portfoli Take a look at your portfolio and make sure it’s not too heavily weighted towards emerging markets or regions more susceptible to high volatility.

• Forget Timing: Don’t try to time the market top or global investing bubble. It’s a difficult business at best - and one that nobody gets right on a consistent basis.

• Stop Loss! Any prudent investor always makes sure he has stop-losses in place - and sticks to them.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Cribsheet

• With a mass of conflicting market data swarming the market, investors often face a difficult task separating fact from fantasy. While the explosion of the financial media has certainly given investors more access to information than ever before, it’s also triggered “one-size-fits-all” commentary. But a great way to cut through the fluff and gauge the mood of the market is to analyze the CBOE Volatility Index (VIX). Many successful traders use this proven tool to evaluate whether investors are overly complacent (not concerned about a market correction) or fearful (worried about an imminent selloff), so they know the best time to buy and sell. For more on the VIX, check out Smart Profits #381, The Market Volatility Index: Using The VIX To Straddle And Strangle Stock Options.

• Even better… you should listen to the pros. Today’s message mentioned two of the best money managers in the business - Bill Gross and Jeremy Grantham. The proven expertise of guys like this is invaluable - and both Gross and Grantham are featured in a new report that reveals 31 proven “secrets of the masters.” The successful wealth-building strategies they reveal will show you how to consistently dodge the stock market’s bullets and turn every $10,000 into $56,300. For more information, click on this link.

Related Articles:

• What Does Bill Gross Know?
• Stock Market Trend: Stock Market Enters the Danger Zone with 4 Significant Trend Warning Signs
• The VIX and VXO: How You Could Have Predicted The Market’s Recent Meltdown

The Chart Of The Week

March 2007 marked the 24th straight month that Americans had a “negative savings rate.” Because this trend has continued for so long, it’s caused many to sweep it under the rug. Many explain it away because of “wealth” reasons: With more equity tied up in their homes, Americans don’t see the need to save. In next week’s article we’ll look at why this is a lame argument on several fronts. But for now, take a look at the chart, showing Americans’ dwindling savings rate.

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