Fleck's Thoughts

A reader was kind enough to send in a collection of his favorite "thoughts" from Bill, which are reproduced here.

Working hard to learn as much as you can about everything is what builds a "database" and if you are lucky enough to be good at investing along the way, you meet people who share some of your ideas, and that helps you cast a wider net. I have been extremely fortunate to have met and become friends with so many smart guys, but that was a byproduct of other work, not a goal unto itself.

NO ONE knows how high these metals will go or when the bull market will end. It is not possible to have any idea where prices will go, nor when.

MR. SKIN: As everyone in this game knows, you never really feel like you have enough of whatever works, and too much of what doesn't. FLECK: He makes a great comment about positions. It always seems to work that way. Mr. Market can be a tricky guy.

I never recommend anyone to do anything.

"Values" have nothing to do with timing short sales, you need catalysts. Otherwise, you can be tortured for a long time and get wiped out before you win.

It's impossible to know in advance what the "catalyst" will be.

When it comes to investing the power of psychology is the "force" that persuades people to hate what is cheap and love what is expensive.

Now that I'm not running a short portfolio, I spend most of my time doing nothing, action wise. I'm waiting for the right opportunity, and most of the time without a lot of positive reinforcement, as whatever is going "not well" usually commands your attention.

It's the power of psychology (in investing). It can't be underestimated, nor handicapped easily.

We need to abolish the Fed.

Mr. Skin: He who "knows" what everyone "knows" - knows NOTHING. This, of course, is the "contrarian creed".

Trading involves GUESSWORK and guessing means you will be wrong sometimes. It happens, and you must accept that. You just MUST be sure that you don't get wiped out while you are guessing.

People need to understand that silver is a wild animal, so be careful (as one needs a plan to manage the volatility).

In managing a portfolio, you face a constant battle of controlling your risk, while not wanting to cut off your winners too soon -- while battling your own emotional baggage.

It's the beauty of hindsight, we are never wrong looking back at what we "coulda done."

Trading a bull market is hard, BUT so is not trading it, as the corrections make you feel like a fool. Let's face it, making money isn't easy, though having some sort of a game plan always seems to help.

Mr. Skin: As the LODM so well put it; patience is a long lost commodity in the brave new world of running OPM. With "Instant Everything", long term becomes the daily close while short term is the next trade.

Mr. Skin: The big caveat always remains - "...he who reaches for yield, loses principal..."

I don't HAVE TO be in any trade, I can wait for it to set up in a way I like. Bonds are ending a 30-year bull market. I don’ t intend nor do I need to nail the exact top.

Sometimes markets are just weird.

Subscriber: Today's volatility reminds me of one of your readers' comments from 5/ 5/06, which is framed and hanging on my wall: For Ask Fleck readers with trouble making decisions about holding on during volatile days in silver and gold, here's a true story people can learn from. In 1983, I worked in the Soybean Meal pit for one of the best traders on the floor. 1983 was a severe drought year. Prices gyrated higher and then went to the moon. I remember when soybeans opened limit up and had a large "limit bid pool" of buy orders. Along came a huge trader, who was already quite long beans. He hit every bid in the limit up bid pool, and then sold more as soybeans came off limit bid. In doing so, he triggered all the "stop-loss" orders in the brokers' decks, and beans were soon offered limit down (10% off the highs) in a matter of minutes. This large trader then calmly bought back the entire "limit down pool" of sell offers, and within minutes the entire soybean market went back to limit up bid again (right where it had opened). This trader made a fortune during the panic and ended the day just as long as when he started. The lesson? Commodities, including gold and silver are inherently volatile. Many investors will panic when the trend suddenly goes against them, but the smart ones know either how to hold tight during vicious corrections, or better yet, know how to use the volatility created by "weak longs" and "black box" stop-loss orders to their advantage. FLECK: That is a brilliant vignette. Everyone should read it twice.

Over the course of the day the early dullness devolved into watching paint dry… so I decided to hit the gym with an hour to go.

I try not to trade much, to me, trading is a form of guessing, and each time you guess you stand a decent chance of being wrong. When I trade, I trade almost exclusively gold stocks, NOT gold. I only trade for defensive purposes, i.e. not to get hurt, so I sometimes get smaller when I'm worried and when I feel safer I add back positions. I don't view trading as a profit center as some folks do.

The lesson/moral when it comes to shorting is that it takes extreme patience. In waiting to START a position, NOT waiting WITH a position, but even that doesn't guarantee success on the short side, but it's a good place to start.

RE: Shorting. My rules are research doesn’t matter. You must do it but it won’t change anything. What matters is WHEN you get short, WHEN you press the idea, WHEN you cover, either because you won, or it isn’t working. In other words, shorting requires that you get the timing right and is thus dramatically harder and more dangerous than investing on the long side.

How do you value any major index or company in nominal fiat currency that has no yield and is being created at will? FLECK: Great point. When the currency has no value, it causes misallocations of capital and distortions such that normal analysis may not work so well. If, in theory, a company slid at one multiple while we were on the gold standard, it could sell at some far higher multiple now, assuming the same exact conditions economically. Of course, conditions would never be the same, and this is all just theory, BUT having the currency be no good as you point out is the REAL danger.

Silver is very volatile and you should expect to see it drop about 10% at any moment in time and plan accordingly. That isn’t new, that is just silver’s personality.

But, I must warn you; silver is very, very treacherous on corrections, so be careful. I myself am not involved.

These are markets. They are run on emotion and psychology and on any given day anything can happen.

Markets sometimes make no sense.

I can calculate the value of a dollar. It is zero and the Fed intends to make it worth less. I have no choice but to own gold. The only question is, how much?

I never, ever, EVER sell volatility, as I have noted on many occasions.

I usually buy near term options because I think something may happen and I almost never roll short dated calls. I only buy longer stuff when the premiums get super low and I have a big opinion (but am unclear on timing) on something that I want more exposure to, with less risk (almost always with puts, not calls).

I usually plan on taking 3-5 steps (usually 2 or 3) to build a position to where it will ultimately be. Sometimes my opinion changes, and I decide to re-size the position, usually up, because if I decide that I don't like how things are going, I usually then exit the idea.

I do pay attention to the short interest and factor it into my trading.

From Mr. Skin: The market truism - "...sell when you can - NOT when you want to..." is always a good plan.

Treating people right usually pays off over time.

As we each fight our daily battles, it is important to remember that however tough the day is for us, lots of others have it far, far worse.