I’ve been toying with an idea that I think would improve economic and biometric research, but will never get adopted.  Split research into two components:

  1. Generating research ideas
  2. Doing the research

But here’s my twist: economists and biometricians could submit ideas to a central database, but would be barred from doing that particular project.  No researcher would be allowed to work on his own idea ever again.  Researchers would be assigned research ideas randomly from the central database, allowing for some modest amount of customization as to what types of projects they have the skills to do.

The researchers would then take a fresh look at the ideas, because they don’t have a dog in the fight.  They haven’t been defending a point of view on the idea, so the idea will be investigated with less bias.  This would have the salutary effect of creating more well-rounded researchers that have broader interests, and, more skeptical researchers.  It also might allow journals to publish articles that indicate that a certain area of inquiry is a dead end, which does not get done as often as it should.

This is an attempt to make economics and biometrics into sciences, by forcing more neutrality into the research.  The scientific method requires a neutral observer, but sadly, many researchers become patrons of their pet ideas, and the sorry excuse called “peer review” at the journals does not weed that out.  Peer review reinforces the biases of the majority most of the time.

My proposal will never be adopted because the cozy academic guilds are ever so happy to leave their “research” unchallenged, so that they can keep their cushy jobs, even though they produce little of lasting value.

Summary: if an idea is true, it shouldn’t matter which competent researcher investigates it.  We believe in a neutral observer.  Well, let’s make the observer genuinely neutral, and see how much trash gets discarded, and real truths preserved.

I want to start this evening with Twitter.  In the past, I used to do a decent degree of posts that summarized the news in a given area.  I don’t do those anymore.  Instead, I tweet significant articles 1-3 times a day. In general, I post the title of the article, a shortened link, and a quick comment on why it is right, wrong, important, etc.  If I want the StockTwits.com investment community to see it on their general ticker, I add a $$ somewhere in my post.  If there is a company I reference, I put a $ in front of its ticker, e.g., $AIG, and those following $AIG at StockTwits see the news.

Alternatively, if I want to have a potentially broader audience see it, I could put the hashtag #AIG in the post.  Anyone using Twitter and looking for #AIG will see it.

Beyond that, when I see articles that others have tweeted, and I agree, I retweet them, which republishes the tweet with attribution of the original tweeter to my followers.  Sometimes I get retweeted.  Retweeting can become a way of making something widely known. Sometimes I reply to tweets, or others reply to mine.  There can be some good conversations.

Twitter is not the same for everyone.  Some don’t tweet, but only use Twitter like a newswire.  Some don’t follow anyone, but use it as a means of updating their fans.  Some do both; you have to weigh off the time use.  Typically, I leave Twitter off most of the day, and then do my news updates in one set of tweets; it saves time.

Now, if you don’t do Twitter, and you don’t want to look at my Twitter page on the web, there are still two ways to get my economic commentary.  For those using RSS, you can click on the following link, and you will get my tweets: http://twitter.com/statuses/user_timeline/120209971.rss.  If you want to do this for another Twitter page, use this article.  For those with e-mail, you can use the following utility to either tweet or receive tweets by email.

But if you are going to use Twitter a lot, I recommend that you use Tweetdeck for Twitter.

Tweetdeck allows you to organize the tweets you send, receive, get mentioned in, and private messages as well.  If you’re going to do a lot with Twitter, I recommend it.

Now I recently started using a service that links my blog, my Twitter account, and my LinkedIn account, such that when I write a new post, like this one, it posts at Twitter and LinkedIn.  Tweets go to LinkedIn as well.

Now Facebook, Twitter, Google, Yahoo, and to a lesser extent LinkedIn are becoming identity providers/gateways to using other sites, such that when you sign up for a new site, it can be simple as clicking on a Twitter link.  If you are logged into Twitter, Twitter asks you to confirm the link, and if you do, the signup is complete.

Back to the Blog

There are two aspects to choosing a theme/style for a blog.  First, you want it to look good, and fit the content that you are producing.  A minimalistic style works well for many blogs, particularly if content is simple as well.  But to the degree, that you want to come off polished, a more graphically sophisticated style can pay off.  Whatever you do, make sure you like it — that it fits the personality of what you are doing.

The second aspect of choosing a theme/style for utility.  How many columns do you want?  What do you want to put in them?  How many built in widgets/utilities do you want the theme to have?

This is what I did: I wanted three columns.  Center for main content, left for advertising, right for everything else.  Now, regarding advertising, all advertising at my blog is labeled as such.  That means most advertising deals proposed to me don’t go through when they hear my terms.

The same is true when I write any book reviews, and link to Amazon, or anytime where I have an economic interest in what I am writing about.  Full disclosure is given.  If I or my clients own a stock, and I write about it, I disclose the interest.

As for the right side of my blog, it starts with my disclaimer that tells people that I make mistakes, so do your own due diligence.  After that, my sites widgets divide up the content by time and categories.  After that comes my blogroll, links, and registration/login data, comments, trackbacks, ways to subscribe, awards, and then the odd stuff.

Just a moment on the Blogroll: I use it to identify who I read every day, without fail.  Usually that means they don’t do a lot of posts, or I would be spending too much time reading.  There are many good bloggers that I read irregularly, often because they are so prolific.  I read their best stuff when it gets featured at Abnormal Returns, which is the best linkfest for finance posts.

That brings up the more general topic of linkfests.  It is easier to start blogging by doing linkfests, pointing out what you agree and disagree with, and broadening out from there when you find your voice.

Tracking Popularity

If you want to track the popularity of your web presence, there are a lot of ways to do it, depending on what you are trying to analyze:

RSS — Feedburner

Blog — Quantcast, Google Analytics, Technorati, Alexa

Twitter — Tweet Grader

Total social media presence  — Peerindex, Klout

There’s no end to all the tracking you can do, and it is possible to waste a lot of time with it.

A little bit more about Quantcast, which is my main means of getting data on my readers.  The 3 follow screengrabs give you the summary data for my blog.  Quantcast puts a cookie on the computers that will allow it.  Without knowing exactly who the person is, it correlates other data that it knows about the person to tell me a decent amount of geographics and demographics about my audience, including who their internet service provider is.

 

LinkedIn

I’ve heard the following: Facebook is where younger people pretend they have friends.  Twitter is where older people make friends.  LinkedIn is where you go to make money.  Here’s my public profile.

Unlike at my blog, where I am relatively picky about who I place on my blogroll, I connect with most people who ask me on LinkedIn, if I can figure out any small aspect of advantage to either side.

My only tips for LinkedIn is to create as complete of a profile as you can, and don’t just take the lazy way in communicating with people by simply using default methods of contact.  Try to differentiate yourself, be respectful, and realize that many people won’t want to connect with you, and that’s fine.  Start small, and build.

Amazon

Though not thought of as social media, my book reviews from my blog that I cross-post at Amazon.com, generate approval from those seeking out good economics, business and finance books to read.  And sometimes people comment on my reviews, and vice-versa.  It could change, but at present, I’m in the Top 2000 reviewers using the New Reviewer Rank.

Wall Street All-Stars

Recently Cody Willard, a friend of mine, asked me contribute to a new site he was starting called Wall Street All-Stars, together with some writers that used to write for TheStreet.com.  What I am doing is taking old favorite posts from my blog, generally classics that are timeless, and writing 200-300 words after the end to explain how things are different now, where I was wrong or right, etc.  They are trying to make it a social site from the beginning.  If you get a chance, check out the site — it is about a month old and is a work in progress.

Summary

The internet is big, and I am not.  I don’t have a lot of resources.  But I lever what I can to make myself known, and it has made for me many friends, acquaintances and clients.  It can work for you as well; start small and add a little each month.  See what fits your personality, and where you have an edge versus other on the net, and give it your best shot.  You might end up surprised at the results you get.  Personally, it has been a surprise to me.

I’m writing this post for the Society of Actuaries Annual meeting, to explain some of the nuances of building a blog, and using social media.  I write this knowing that I am still a learner after 4.5 years of blogging.

Goals

The first question is why do you want to blog?  What do you have to say?  Do you have a lot to say, and the expertise to back it up?  You will need that if you want to blog long-term.  You should be able to state your goals in 30 seconds or so.

My main goal is to give back to others.  My secondary goal is to raise my profile, because it indirectly aids my businesses.

Commitment

Are you willing to give blogging regular time?  A few times a day? Once a day?  A few times a week?  Once a week?  As the frequency gets lower, the demand on quality gets higher.  If you can’t meet the tradeoff of quality versus frequency, blogging might not be for you.

Do You Have a Thick Skin?

I can be hurt.  My skin is not so thick that I can’t be hurt, but once you start publishing, the attacks can be significant.  The attacks can be reduced if you are humble, and willing to admit mistakes.

Building Your Brand

It is easier in the short run to start with Blogspot or some other free blog hosting service.  But then you have less control over anything except your content.  From the start, I had my own domain, and using WordPress, almost all of my blog has been self-created.  All of the utilities that I used to create the blog were free or donation-based.

Themes are readily available, which can make the appearance of your blog distinctive.  A little theme editing can go a long way.  Themes also can contain useful widgets like calendars, and other ways of segmenting your posts in order to make them more accessible.

Fixed Content

By fixed content, I mean pages that rarely ever change.  Who are you?  What are your goals?  How can they contact you, should you want that?  I have fixed pages for Book Reviews, My Portfolio Rules, Presentations I have given, etc.

Starting Out

Write a really good post, and point it out to a few bloggers who might be friendly to your point of view.  Ask them for a link, or to be on their blogroll.

Show Link Love

When you find good content, write about it and link to it.  If you do this well, links start coming back to you.  Maybe you will create anew niche, where you curate all the best posts in a given subject area.

Make Your Blog Accessible to Readers

Not everyone wants to make a regular trip to your blog, to pull your posts.  They might like the content pushed to them.

Do readers want to read your posts via email?  Then set up an account with FeedBlitz.

Do readers want to read your posts via Really Simple Syndication [RSS]?  Then set up an account with FeedBurner (a Google Sub).

If you have a good blog, you can allow an aggregator to scrape your RSS feed, and you will be published there as well.  More fame, but they get the ad revenue.

Worse, if you have a really good blog, unpermitted scrapers will republish your work (I have maybe a dozen or more).  I don’t care much about this, but many bloggers do.  You can threaten them with legal action; which usually gets them to stop.

Make Your Blog Visible to Google

Using a utility like XML-Sitemaps, it is easy to have a rich set of links for your site when people search using Google.

Offering Metadata on Posts

When you post, use categories and/or tags so that people can search your content for the things they are interested in.

Comments

Think in advance as to what your comment policy should be.  Unmonitored, monitored on the first post, you reserve the right to delete anything, etc.  Do you even want public comments?  Emails to you could be enough…  I monitor comments, all first posts must be approved by me, and I see all comments via e-mail, and edit/delete objectionable comments.  Oh, one more thing, I have people register in order to make comments.  That doesn’t mean that I get get any true information about them, but it does mean that there is a little hurdle, which means that a person has to be motivated to make a comment.  It makes the comments more high-quality.

Excerpts of recent comments appear on the front page of the blog along with excerpts from other websites quoting my work — a utility called “Get Recent Comments” automatically takes care of it.  Users can also subscribe to comments if they like, post by post, or all comments by RSS.

Using Akismet, or another utility to eliminate spam comments is necessary.  If your blog gets big, you will have to set up a Captcha to strain out machines that try to register with you and send spam comments.  Before I had this, my service provider nearly shut me down because of the huge number of Russian entities trying to use my blog unsuccessfully for spam.

Improving Usability

I added utilities to my blog to allow people to turn my writings to print, PDF, Word, XML, etc.  I used Universal Post Manager to do that.  It also allows users to send information about my blog to other social media sites, such as:

bloggerbuzzdeliciousdiggfacebookgooglelinkedinmyspacenetvibesnewsvineredditslashdotstumbleupontechnoratitwitteryahoo

The Guts

Regular database backup is important.  There are utilities that do it quietly in the background.  In order to speed up the loading of the site, I use WP Minify and WP Super Cache, which caches the most recent version of the site for fast loading, along with the CSS and Javascript.

Tracking the Response

I use Googlebots, via Google Alerts to troll the web for comments about me or my blog.  Feedburner gives me data about how my RSS traffic is doing.

Quantcast and Google Analytics give me detailed demographic information on what sort of people read my blog.  I’ll give some examples in my next post.

Finally, I can get basic data on how much overall use the blog has been getting through simple software like WP Stats, Statcounter, and my blog host, Netfirms.

That’s all for now, more in part 2.

Next Monday I head off to the Society of Actuaries Annual Meeting in Chicago.  I’m giving talks at two sessions: the first one on Monday afternoon is called Being Social–It’s a Game Changer.  It is meant to introduce and encourage actuaries in the use of social media.  My next blog post is going going to explain how I built my blog, and some broad concepts on how I use social media.  The slide deck I am not using because it is an interactive session and not a talk can be found here: My Sojourns in Social Media.

The next day, on Tuesday morning, I am giving a modified version of a talk I have given several times before for the session Systemic Risk: Early Warning Indicators.  Here’s my slide deck for the talk: Who Dares Oppose a Boom? And, Can you Predict a Bust?  It’s a variation on this blog post of mine, Who Dares Oppose a Boom?

Finally, I will end up doing a live video blog for the SOA that afternoon before returning home late Tuesday.  I did not know that the SOA would like me so much after ending being a dues-paying member. 😉

I will possibly have some time to meet with people around these sessions, so if you are in the area, let me know and maybe you can drop by.

When I was a kid, I liked to set up large arrays of dominoes so that I could watch them fall.  Early on, I realized the errors in setup were frequent enough that I left gaps such that if I accidentally knocked down a domino, it wouldn’t destroy all of the work.  I usually put in a number of gaps close to the square root of the dominoes.  Once complete, I would fill in the gaps, and after that would come the show.

When the dominoes are set up, there is an unstable equilibrium.  Any jolt to the system will topple most or all of them.  Now, some would say the jolt causes the toppling of the dominoes, but the dominoes were arranged in order to make them all fall at once.  Whether the designer topples the first domino, or a marble from a kid brother rolls into the room, or there is a small earthquake, the array of dominoes was designed to fall.

So it was for the financial crisis.  These thoughts are my own, though others have uttered them as well.   In order for there to be a panic that destroys a large portion of the financial system, there has to be:

  • High levels of leverage.
  • Leverage that is layered, where many parties are lending, and carry trades are common.  Parties borrow to lend more aggressively.
  • Collateralized lending — financial entities lend far more when lending is collateralized.  Most of the time, the existence of collateral prevents defaults.  But when things get really bad there is no protection with most collateral.
  • Problems with highly rated debt.  When debts are highly rated, in order to get high returns out of them, there must be a high degree of leverage applied.
  • There must also be general confidence that it is highly unlikely that there would be significant losses associated with the asset class.
  • Regulators must be similarly blind, and assume that risks are low in that set of assets.

So when the crisis struck it started in real estate lending, moving from Subprime, to Alt-A, to Prime, each one in turn more leveraged, and less likely to be prone to a crisis.  That’s why the crisis was so large.

The system had been optimized across many asset subclasses where many borrowers were trying to achieve equity-like returns through borrowing.  Thus when the overlevered previously safe asset classes began to fail, the failure was large, and had second-order effects that extended to lenders.

No one should say the current financial crisis was an accident; yes, no one aimed for it, but no, it was preventable.  It occurred from human activity that was left unchecked, building up leverage in safe asset classes, and pushing up the trading value of those assets to unsustainable levels.  Regulators had the power to bring it all to a halt, but they were complicit with the bankers.

That’s what you need to have a real crisis, and that ‘s why we still suffer from it.  The crisis will continue until enough of the safe debts have been rationalized, and the total level of debt gets paid down enough for the average borrower to borrow once again on a basis that has significant provision against adverse deviations.  Maybe we’ll get there in another 2-3 years.

 

Why do we do time-weighted returns for analysis of portfolios?  Because we are lazy, and they are simple to calculate.  We don’t want to be bothered with the effects of cash flows.

Besides, mutual fund managers don’t make decisions to move money in and out of their funds.  They should not be held accountable for the actions of their shareholders.

Really?  I think that is only half correct.  The good fund manager takes account of his implicit liability structure.  When will people leave, when will they come?  For almost all funds, investors are trend followers.  And the the greater the degree of volatility, the worse the investors are at following the trend.  Thus a manager of a volatile fund should run with more of a cash buffer, particularly when markets are moving down hard, because he will have more of his clients cashing out.  The manager of a volatile fund should also avoid taking concentrated positions, because when he is doing well, his own buying may drive the stocks he owns up, only to see them fall harder when he is forced to liquidate positions when the market is doing poorly, and shareholders are leaving.  Wise managers concentrate near bottoms, and diversify near tops.

Now for my poster child, the Legg Mason Value Trust.  Bill Miller is a very intelligent guy, and has a very talented staff.  My main criticism of his management is that it neglects the core concept of value investing, which is “margin of safety.”  The core concept is not cheapness, or as Bill Miller was fond of saying “lowest average cost wins.”

Legg Mason Value Trust enthused investors as they racked up significant returns in the late 90s, and the adulation persisted through 2006.  As Legg Mason Value Trust grew larger it concentrated its positions.  It also did not care much about margin of safety in financial companies.  It bought cheap, and suffered as earnings quality proved to be poor.

Eventually, holding a large portfolio of concentrated, lower-quality companies as the crisis hit, the performance fell apart, and many shareholders of the fund liquidated, exacerbating the losses of the fund, and their selling pushed the prices of their stocks down, leading to more shareholder selling.  I’m not sure the situation has stabilized, but it is probably close to doing being there.

But now to the point: what did Bill Miller earn for shareholders?  The earliest date that I could get data for was 3/31/1993, probably due to the creation of EDGAR in the mid-90s.

On a dollar-weighted basis, he earned 2.71%/year for investors through 10/31/2010.  But for those stout-hearted souls that bought and held, they earned 6%+ more, 8.78%.  But those that did that had to be patient, even Stoic, people who had no need for liquidity, and no propensity for panic.  (There is always enough time to panic. 😉 )

Legg Mason Value Trust was a volatile fund, and as such, it is no surprise that the difference between time-weighted and dollar-weighted returns are so large.  But what does this imply about Bill Miller? He beat the S&P 15 years in a row.  But as posts like this point out, did he go from first to worst?

His neglect of the core idea in value investing, margin of safety, allowed him to do well as the lending bubble expanded, and low quality companies prospered.  But when the tide went out, he was found to be swimming naked.  Far from following Buffett’s principles, or Graham’s, he was just a growth investor masquerading as value investor because “he bought them cheap.”  And they got a lot cheaper, and he had to sell them cheaper still.

So what are the lessons here?

  • Focus on margin of safety in investing.  Analyze balance sheets.
  • Avoid investing in popular funds, even excellent managers make mistakes when lots of money is coming in.
  • Stick to your knitting.  Don’t engage in all manner of fancy logic once you achieve success.  Stay humble.
  • Remember that your timing in investing makes a difference.  Don’t be quick to add to a winning fund.  Better to find a fund with good ideas that is temporarily underperforming.
  • Buy-and-hold often beats the average investor over the long haul.  Some traders might do better, but have you developed that skill?
  • Avoid managers that say a lot of clever things, but can’t deliver on returns.

So be wise, and realize, you are still responsible for your investment success or failure, even if you hand it off to others.

I read an interesting article today called Dead Stocks Walking. Good article, but I want to point out a few things the article missed.

The article deals with large companies that had moderately high valuations, but were still growing.  Today, they are growing more slowly, but their valuations have decreased, and the stock price hasn’t moved much.  What gives?

Without saying it, the article describes the transformation from large cap growth to large cap value for the largest companies.  They have reached the limits of the carrying capacity of their niche in the economic ecosystem, and they now grow far more slowly.

There is a second issue — though many companies earn far more than they did in the past, many waste money by buying back stock, rather than retaining the funds, retiring bonds, or handing out dividends.  Managements that buy back stock should have a firm handle on the value drivers, such that they only buy back stock at a discount to the firm’s private market value.

So, a reason many of these stocks treaded water, was that free cash flow was misused.  Beyond that, they were reaching the ecological limit of their company’s habitat.

I own, and my clients own several of the companies mentioned in the article.  This is a good time to own these stable companies, when they throw off low double digit earnings yields.  And who knows, they may grow earnings and free cash flow from here.

Almost every asset funds a liability.  What gets pitched most frequently to the average American, investment-wise?  Save for your retirement.

And that’s good, mostly.  We need to save as a society, and we don’t do it.  Even our government, who claims to save for us through Social Security and Medicare, does not do it, but expends the money on current obligations of other programs.

But with so many among the Baby Boomers not saving, and with one lost decade behind us in stock investment terms, how will the Baby Boomers survive retirement?  Can they retire?  Or must they learn the phrase, “Do you want fries with that?”

I have written critically about retirement in the past. The ability of Baby Boomers as a group in the US to fulfill their dreams is limited.  They did not save enough, and asset markets offer little in the way of returns prospectively.  Interest rates are low, and P/Bs are middling.

When any bubble pops, there is a limited range of strategies.  Default, defer, reduce.

Default — things are so bad that I can’t make payments now, much less years into the future.  For practical purposes, I am broke.

Defer — things are bad, but if I wait and work longer, I can retire later than I hope for with reasonable outcomes.

Reduce — I can’t retire at the income level I thought I would, but I can retire at a lower level that I can live with.

Sadly, this is messy, with complications from inflation, and the productivity of the economy.  I expect that most older people will work to some degree in their old age, partly to make ends meet, and partly for social fulfillment, because “retirement” can be dull.

There should be no shame in this work, no matter how menial — hey, we were made to work, not relax.  There are no guarantees, and historically, no society has survived.  Thus relying on the present social compact to last is risky.  I write this as one that relies on the division of labor to support those who work in finance.  As one who has studied history, that is not the most stable place.

The concept of the retirement bubble simply means that the expectations of people exceeded their willingness to fund the future.  Also, the 80s & 90s made people conclude that retirement was free.  Put a little aside, and you have it made.

Ignore the distractions of financial assets.  If they didn’t exist, how would we live in our old age?

  • Our children would help us, though in the present day the incentive to have children is diminished by the low rates of marriage and fertility.  But in the present day, we imagine that we will have a retirement funded outside of ourselves.
  • We would save more in commodity terms, which don’t offer a lot of gains outside of inflation.
  • We would find places to work.  After all, we have reliable work histories, and can aid almost any enterprise because we have more knowledge than someone 40-50 years younger than us.

I could add in the idea that children might be less productive than we expect.  No great surprise for the US, given the educational trends here.  That said, we have a lot of capital investments that make our laborers far more efficient than in other countries.

-=-=-=-==-=-=-=-=–==-=-==-=-=–==-=-=–==-=-=-

I don’t think retirement is realistic, and I am not planning on retiring, should I live so long. My Dad retired at 62, which was late in his industry, given the hard labor of installing sewers.  And that was after his brother (my uncle) died, contracting MS after a tragic accident.

In the present day, few have a hard time of it in their jobs  in North America.  For most of us, old age means limitations in our usefulness, but not an absolute limitation in our ability to work.

The US economy will retool to use the labor of older people, outside of what is considered retirement.  We’re the United States; we adjust while the rest of the world does not.

And that gives me some hope.  I expect to see older people in less skilled positions, and perhaps a greater amount of younger people unemployed.  Maybe the young people will emigrate, or maybe they will humble themselves and pick fruits and vegetables, or something like that.  I’m not trying to be mean, but so many criticize immigrants.  We would not have so many immigrants if we had children enough to do the tasks that immigrants do.

-=-==-=-=–==-=-=-=-=-=–=-=-=

If there is not enough income behind the growing population of elderly people to fund them in retirement, then retirement is a bubble, and shoul1d be abandoned.  Tell retirees to defer or reduce their retirement goals.  If they can’t even make on that level, tell them that they have to work until they die.  A sad concept, but true for most of humanity so far.

I’m not trying to be mean.  I am just looking at existing structures and asking how do we support the elderly in the US.  It is not an easy question.

I received a question from a friend of mine and want to give an answer:

Background: I teach high school physics.  In my AP class, I have some cross-registration with the Micro-econ & Personal Finance classes.  In those classes, they play the “Stock Market Game” in which they’re given $25k and compete for the semester for the highest total.  Inevitably, discussion of economics, stocks, and that game finds its way into my class where I am incapable of _not_ getting involved.

Problem 1: The game only lasts for a semester (4 months).  Result: very short term thinking

Problem 2: The teacher pushes stock-chart reading, “200 day average vs 50 day average”, looking at price movements, etc.  There is little (if any) balance sheet reading, company growth investigation, or stock price evaluation going on.

Relevance for here: The kids immediately turn to penny stocks thinking to make a quick buck- “If I buy 50,000 shares of this company at $0.25, I can sell it for a huge profit when it goes up to $0.50.

Question: Do you have any recommendations for short quips / talking points to reveal their folly to them? 

(I had a kid last year almost not graduate when he became so enamored with playing the stock market that he thought he could “crack the code” and make a fortune off penny stocks.)

I have only experienced one good investment contest in my life.  It was in 1983-1984, when Value Line sponsored a contest offering significant prizes.  They did something unique: they divided the market into 10 groups sorted on volatility, and told investors that they had to pick one stock out of each of the ten groups.

Brilliant. this eliminated the ability of people to just pick risky stocks, and bet on getting lucky turning the whole thing into chance.

A portfolio of ten equally-weighted stocks demonstrates more ability than a single pick.  For any single stock, or concentrated portfolio that does well, the answer should be that they got lucky, as humans see it.

As it was, in the Value Line Contest, I finished just short of getting a prize.  My returns were less than a percent behind the lowest winner.

Now as to what you should do, dear friend, in the short run, momentum matters more than valuation, most of the time.  The teacher may be giving them the right advice for the contest.  Personally, I would go to the teacher, rather than the students, and tell him to do a contest more like Value Line did.  If he needs help with the volatility groups, I can provide the data.

But the two main things to point out on penny stocks is this: 1) Most people investing in penny stocks lose a lot of money, because the stocks seem cheap, but they have little in assets or earnings relative to their price.  2) There are penny stock promoters who tout penny stocks so that others will buy at a higher price, so they can sell to them, and the new buyer can experience the losses.

If the contest is structured properly, it should have a minimum capitalization limit, and a diversification requirement.  Tell the other teachers to consider this.

Yesterday, I received a pitch in the mail for a penny stock.  They should put a big red X over my address, but alas, they don’t.

Now for all of my prior penny stocks that I have been written about, all have done horribly.

Now we have AER Energy Resources [AERN] which has done horribly, and does not file financial statements, having “gone dark.”  From a research note on the web, this is what they said:

Please be advised that VictoryStocks.com has been paid $1,300,000 by Sanaz Trading Inc. to perform promotional and advertising services for a one month profile of AER Energy Ressources Inc. which services include the issuance of this release and the other opinions that we release concerning AERN   VictoryStocks.com has not investigated the background of Sanaz Trading Inc. the hiring company. Anyone viewing this newsletter should assume the hiring party or , affiliates of the hiring party own shares of AERN of which they plan to liquidate, further understanding that the liquidation of those shares may or may not negatively impact the share price. VictoryStocks.com has received this amount as a production budget for advertising efforts and will retain amounts over and above the cost of production, copywriting services, mailing and other distribution expenses as a fee for our services. As such, our opinion is neither unbiased nor independent, and you should consider that when evaluating our statements regarding AERN. VictoryStocks.com is owned by: FreePennyAlerts, LLC, 40 East Main Street, Suite 572, Newark, Delaware 19711. Questions regarding this release may be sent to Editor @ VictoryStocks.com.

I only ran into that scam because I Googled Lone Star Gold [LSTG], and that popped up.  Lone Star Gold is a negative income negative net worth stock.  A promoter for Lone Star Gold snail mailed me, complete with handwriting and excess staples, but the horrid disclosure in teeny tiny type was this:

IMPORTANT NOTICE AND DISCLAIMER: This paid email advertisement by XXX (hereafter “XXX” does not purport to provide an analysis of any company’s financial position, operations, or prospects and this is not to be construed as a recommendation by XXX, or an offer to sell or solicitation to buy or sell any security. Lone Star Gold Corp. (hereafter “LSTG”), the company featured in this issue, appears as paid advertising. Mermaid Finance Ltd has paid $1,768,000 for the dissemination of this info to enhance public awareness for LSTG. Although the information contained in this advertisement is believed to be reliable, XXX makes no warranties as to the accuracy of any of the content herein and accepts no liability for how readers may choose to utilize it. The information contained herein is based exclusively on information generally available to the public and does not contain any material, non-public information. Readers should perform their own due-diligence before investing in any security including consulting with a qualified investment advisor or analyst. Readers should independently verify all statements made in this advertisement and perform extensive due-diligence on this or any other advertised company. YYY has received twenty thousand dollars for this and related marketing materials. YYY/XXX also expects to receive new subscriber revenue, the amount which is unknown at this time, as a result of this advertising effort. YYY and XXX nor any of their principals, officers, directors, partners, agents, or affiliates are not, nor do we represent ourselves to be, registered investment advisors, brokers, or dealers in securities. XXX is not offering securities for sale. An offer to buy or sell can be made only with accompanying disclosure documents and only in the states and provinces for which they are approved. 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Each promoter paid more than a million bucks.  Given the light level of trading in the stocks, and the low share price, the promoters were trying to do a significant pump-and-dump.  Personally, I think it would be really tough to squeeze over $1 million off of these tiny horrible companies, but maybe I don’t know the revenue model so well.

As I frequently say, “Don’t buy what someone want to sell to you.  Buy what you have researched, and what you think has value.”  Ignore penny stocks, with all of the ads that are on the web.  Short them if you dare.  These are horrible companies; any stock that has someone paid to promote it is a sell.  Sell, sell, sell!

This could not be simpler, so ignore the touts that promote penny stocks.  Short them if you dare, “the market can remain insane longer than you can remain solvent,” as Keynes said.

Penny stocks are for losers who dream of great gains.  They get the losses that they deserve.