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The new millennium has already been scarred by the implosion of the two largest asset bubbles in history. In 2000, we witnessed the devastation of the dotcom collapse. Federal Reserve Chairman Alan Greenspan responded to the 2001 recession with swift cuts to short-term interest rates. But that did not prevent the capital markets from massive sell-offs triggered by widespread accounting fraud. Investor pessimism was further compounded by the attacks on 9-11. Over the next two years, the fallout spread from the NASDAQ to the Dow Jones Industrial Average and S&P 500 Index. By the time the catastrophe was finished, all three markets had declined by 80, 35 and 45 percent respectively, wiping out more than $7 trillion of investor assets.
After a couple of years of record-low interest rates, the economy seemed to be improving. While much of these stated improvements were the result of manipulation of economic data, the primary force behind the illusion was Greenspan’s irresponsible monetary policy. He did it once again. As an encore prior to his departure, Greenspan created yet another asset bubble; this time in real estate, just two years after the dotcom meltdown.
As early as 2000, savvy investors began moving assets from the stock market into real estate, knowing the dotcom bubble was near its end. After a brief standstill in 2001, the real estate bubble became bloated over the next three years. Millions were convinced that home ownership would lead to riches. For many others, flipping provided a great source of income. Small developers were sprouting up all over the country to get in on this gravy train. Mortgage brokers were earning incomes rivaling their Wall Street counterparts at the height of the dotcom bubble.
It was like a nationwide gold rush. Everyone was making money, from mortgage brokers and bankers, to builders and investors. The appraisal business was booming. Home improvement stores were doing well. But so were travel agencies and retailers. Money was everywhere. Homeowners were taking out lines of credit based on inflated real estate values. And they spent this money on plasma TVs, gas guzzling SUVs, luxury vehicles, vacations, and other things they didn’t need. It was the wealth effect all over again. The economy looked quite healthy at first glance. But it was all a house of cards. In fact, it was a pyramid scheme, soon to suffer the fate of all others in the past.
Early on, a few road bumps threatened to end this free-for-all. The problem was that millions wanted to purchase a home but couldn’t afford to because real estate prices had soared well beyond median incomes. But the greedy bankers wanted even more money, so they opened the flood gates for a mortgage product typically used during high interest rate environments; sub-primes. This raised another red flag because interest rates were already at record lows. But they had a few more tricks to ensure the bubble continued. They came up with previously unheard of interest-only mortgages that encouraged even more financial irresponsibility fueled by greed. Many banks even let borrowers claim whatever income they wanted without providing documentation. Soon, NINA (no income, no assets) loans were being offered by virtually every mortgage company. In many cases, the only requirement needed to qualify for a mortgage was the ability to fog a mirror. Lenders knew people were lying about their income. These NINA mortgages were introduced to encourage applicants to lie. This added to the swollen bubble.
All along, banks knew about the fraudulent activities, from janitors claiming $200,000 incomes, to bribes for appraisers and building code inspectors. They knew this was all creating a huge amount of risk. But they looked the other way, as did Washington because they were getting the results they wanted; lots of money and signs of economic growth. Besides, the banks didn’t plan on keeping these risky mortgages. With the help of Wall Street, they would be sold off to naïve investors. They’d collect their fees and ditch the trash to suckers.
In total, mortgage companies and banks sold over $2 trillion of risky loans to Fannie Mae, Freddie Mac and Wall Street banks, which disguised them as safe securities. These so-called “investment-grade” securities were sold to institutions. The credit rating agencies were in on this scam as well. But the banks wanted more action, so they borrowed big against these loans in order to raise more cash to do more fraudulent business. Together, the $4.5 trillion of new mortgages created since 2004 was leveraged on average by 30 to 1. This added to the largest securities market in the world; derivatives.
As I warned in the 2006 release of “America’s Financial Apocalypse,” since 2004, much of the alleged GDP growth was based on cash-out financings from overvalued real estate, record debt spending by Washington, and millions of jobs fueled by the real estate bubble. In reality, the economy showed little improvement from the previous recession. There was no net job creation, inflation-adjusted wages were flat since 1999, and job quality continued to decline. Most of the jobs added since 2002 were from the government, military, and financial industry. It was all an illusion based on easy credit; credit created by Greenspan; credit that fueled millions of jobs; jobs that would eventually vanish into thin air. Like all bubbles, this one would soon pop. And the consequences would be unlike anything seen in world history.
By the summer of 2007, clear signs of fallout in real estate were evident to a few astute investors. At the same time, the side effect of Greenspan’s printing frenzy – inflation – had been gradually creeping up. Yet, Wall Street and the financial media continued to hype up the economy. Despite soaring mortgage defaults and record foreclosures, the stock market soared to new highs in October 2007. As you will recall, the media was in on this scam as well, specifically CNBC, as they always are.
I warned of these problems in advance to all who would listen. Unfortunately for investors, the mainstream media ignored my efforts to communicate the dangers of this pyramid scheme in order to protect its financial and political agendas. After two years of contact with the media, they continue to ignore me, hoping you won’t realize I exist. For if you find out, the media won’t be able to explain why they hid the truth from you.
By November, major problems with Countrywide Financial signaled the beginning of the end of the largest pyramid scheme in history. Banks were stuck holding millions of toxic mortgages. There were no more suckers to dump them off to. But still, Wall Street and Washington remained in the denial phase, as did most investors because they foolishly relied on the media for the truth.
By January 2008, the collapse began like a snowball raging down the Alps. The snowball continued to grow as it ploughed through the real estate market, destroying everything in its path. There was no stopping it. Each month featured a new catastrophe. First it was the mortgage lenders, then the bond insurers. Finally, this huge snowball collided with the world’s largest banks. All throughout this brief period, the stock market continued to implode, taking millions of homeowners, jobs, investors and institutions with it. But still, Washington, Wall Street, Federal Reserve Chairman Bernanke, bank executives, real estate industry hacks and the media remained in denial.
Only after the bailout of Fannie Mae and Freddie Mac in summer of 2008 did a few pundits concede problems. But still, they downplayed the severity. The media continued to pump out more lies from government and real estate industry hacks, namely economists. Other shills remained in complete denial; namely those on the financial propaganda networks. Most who listened to them have lost their retirement savings. As you will recall, the same denials, deceits, and cover-ups were widespread during the dotcom charade. By the summer of 2008, if you were not able to realize the banking crisis would be just the beginning of unprecedented devastation, it’s likely your mind has been hijacked by the media.
Even now, things continue to get worse. Already, the affects of this historic collapse have resulted in a colossal loss of wealth, spread throughout the globe. In total, paper losses have exceeded $70 trillion worldwide, not counting the economic impact of lost jobs. The snowball is now an avalanche. There is nowhere to hide and nothing can be done to stop it. The Federal Reserve’s printing frenzy is only setting America up for a larger period of devastation down the road. I’ll guarantee it.
All of this – the dotcom meltdown and the real estate and banking crisis –has occurred in less than a decade. And I’ll guarantee you there is much more misery buried within this plot. At the best of scenarios, America is looking at two lost decades. At worst, the catastrophe will last longer and will only end with war. Although much of the fallout remains to be seen, millions are desperate to escape an economy that has allowed their jobs to disappear. Others simply want to recover their retirement savings.
In a few years, you might look back at this period as a tremendous investment opportunity. The infomercial cheese balls and Wall Street hacks are certainly singing this tune. But I want to warn you. More so than ever, you need to be cautious when dealing with the capital markets, because greed, desperation and fear have never been higher. This is a deadly combination that promises to wipe out millions of investors, as it has throughout history.
It’s human nature to be lured towards promises of easy money. And if you’ve lost much of what you had, you’ll be more likely to exercise poor judgment. If you’re not careful, you could fall prey to infomercial scams and televised investment shows that often led them to financial ruin. But never forget this. There’s no magic bullet for anything. Hard work and commitment are the best tools for success. If you think you can take shortcuts from hard work you will fail miserably.
Becoming a great investor is a long process, and many mistakes will be made. What’s really important is your ability to learn from these mistakes and move forward. In particular, if you learn nothing else from this disaster, hopefully you will learn to never watch television for information about the economy and stock market, especially the financial networks. You can’t rely on the print media either. They’re all partners in this deceit. Even the Associated Press and Reuters have lost credibility. The Wall Street Journal, Barron’s, Forbes, Fortune, Businessweek and the others lost credibility a long time ago.
You should have realized how the game was played after the dotcom collapse. If you continue to watch television, you’ll get blind-sided when the next disaster strikes. If you continue to read financial publications, you will be led into the slaughterhouse. I’ll guarantee it. Truly sophisticated investors already know this. I’m telling you this not as an author, but as an investment expert who provides insight to institutional investors who are actually held accountable for their investment performance (unlike mutual funds and pension plans). I’m paid to be right. And others who are paid to be right seek my insights.
It’s more important than ever to realize there is never a free lunch. Yet, online brokers continue to pump out manipulative ads, making you think anyone can trade stocks with ease. Along with Wall Street and the media, they’ve created the world’s largest online casino. And the guys that run the casinos almost always win. Only the very best players consistently beat the casinos at their own game. Unless you are positioned with top-tier insight and skills, you aren’t going to win at this game. I’ll guarantee it.
Before you enter the game, you need to realize that making money consistently in the stock market is one of the most difficult feats known to man. But for sharp investors, it has never been easier. The reason is quite simple. The pool of investors has a relatively new participant – the average Joe and the average Sue. And neither has a clue what they’re doing because they’ve been brainwashed by Wall Street, online brokers and the financial media. Of course we can’t forget about the marketing clowns who call themselves investment gurus. In reality, they’re snake oil salesmen. If you don’t already realize that, you’ll probably remain a sheep for the rest of your life. It’s so sad to see millions of Americans line up for their “easy” remedies to “riches.” The results are always the same. You end up wasting thousands of dollars, while making these con-artists wealthy.
Everyday, online brokers roll out slick commercials using psychological tricks to recruit millions of desperate investors into this online casino. Can you “do it yourself” as commercials would have you believe? Yes, it’s certainly possible. But for most, it’s highly unlikely because they’ve been led to believe it’s not difficult. What is invariably missing from the thought process of most is a full appreciation of risk. Even many experienced investors fail to properly measure and manage risk. This is the most critical aspect of the investment process. If you aren’t able to manage risk, you’re going to get blown out of the stock market eventually. I’ll guarantee it. Because of this, I discuss risk at length throughout both volumes of this book.
In order to become a great investor you also need to develop consistency. The only way to do well consistently in the stock market is to create a viable system. Whether you’re a trader or an investor, you’ll need to develop a system that works for you; not one your friend uses. Your system won’t be some trading software that promises to transform a moron into a millionaire. And it won’t be delivered to you by some investment “guru.” I’ll guarantee it.
Your system will be one you create. It will be a system based upon how you’re best able to analyze information and respond to change. It will be centered on your investment objectives, experience and financial resources. Your system will take many years to develop. In the process, you’ll make many mistakes, so you must proceed slowly and conservatively. Once you develop some consistent success, you’ll become more confident. But you must also recognize when to fine-tune your system because everything changes.
In order to develop your system, you’ll need to stay clear of distractions. You’ll need to spend your time wisely, educating yourself and listening only to those who know what’s really going on; not the guys who have been predicting Dow 30,000 or doom for twenty years. These guys are plastered all over television and the print media. But they have no credibility. They take extreme positions in order to market their services. Always remember this. Extremists never make money. Things change, and you must recognize change before the herd if you want to win at the investment game. Unfortunately, you will never get any valuable guidance from the financial press. They only interview sheep herdsmen. Some of them are economists. Others are analysts, fund managers, traders, and politicians. They have no idea what they’re talking about. But the media has convinced you they do, despite their ridiculous track record.
When the stock market is doing well, the Wall Street hacks pump it up more, spreading delusions of grandeur. This brings in the sheep at the height of the bubble. And only after the house of cards comes tumbling down does the media interview the guys who have predicting doom for twenty years; the guys with no credibility. In both cases, viewers get hosed. They end up buying high and selling low. And Wall Street loves it because that’s how they clean you out. They always win at your expense. Now you know how the game is played. So you won’t have an excuse to get fooled next time.
The sooner you stop watching television and reading the financial press for guidance, the sooner you’ll be able to create a valuable system. Without professional experience, you can “do it yourself,” but only if you dedicate several hours each week to the investment process. You also need to understand it’s going to take you several years of hard work before you transform yourself from a sheep into a sophisticated investor. You’ll need to proceed slowly, while avoiding the forces that steer investors down the road of deceit and financial devastation.
Most investors think they’re on equal footing with the best pros because information is now widely available. This rational is flawed. Information is a cheap commodity. And it can become a deadly weapon if you don’t know how to use it. The key is to know how to interpret information. You’ll need to learn how to differentiate between reality and smoke screens. In short, you’ll need to develop good judgment.
Most likely, you’ll need some help along the way. The sooner you align yourself with credible experts – professionals with a proven track record – the sooner you’ll be able to figure out what to avoid and how to think for yourself. Good luck finding them, because the few that exist have no interest in helping you. They’re out to help themselves. If you select the wrong people to follow, you’ll never become a great investor. And you just might lose everything you worked so hard for. One thing is for certain. I’ll guarantee you they won’t ever be found on television. If you think any of the idiots on CNBC have a clue what’s going on, I advise you to research their individual track record.
Only after several years of these activities will you be ready to begin the journey. Certainly, no one has the discipline to stay on the sidelines until they’re completely ready. In fact, you shouldn’t because a good part of your learning curve will involve making mistakes. But the sooner you begin, the more conservative your strategy must be because you won’t have a clue what’s going on. You’ll need to accept this sobering reality. Perhaps the most deadly part of this journey is that eventually you’ll feel like you know what’s going on. When that happens, you’ll experience a harsh dose of humility.
After reading this book and following the concepts and insights I’ve provided, if you decide it didn’t help you, I ask that you read it again; but not cover-to-cover. Focus on the material that applies to your current maturity level. Study this book and reference it as your investment experience progresses. Over time, more of the material will make sense. After that, if you still don’t think it helped, there’s a good chance you were looking for instant gratification and easy money. Most likely, you’ll be another victim of infomercial scams and manipulative ads by online brokerage firms. Most likely, you’ll be one of millions of sheep who watch CNBC, FBN, Bloomberg and other networks, thinking you’re getting valuable content. Most likely, you’ll eventually lose it all.
This book was meant to be an educational resource. It wasn’t meant to provide you with entertainment. If you want to read entertaining investment books with all of the rah-rah, the feel good messages, and “it’s so easy” themes, there are thousands you can chose from. But this is not one of them. In this book I’ve covered what I feel to be the most important topics rather than focusing on a few because I wanted to provide you with a broad perspective. This is the foundation of my own investment methodology.
Expanded Table of Contents
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