January 9, 2007-
My colleague Kaeho mentioned in his last blog that I would soon blog about the benefits of utilizing the long tail of investment strategies over traditional investment strategies. I figured a good place to start is to review how utilizing the long tail of investment strategies has benefited myself and my readers in 2006 regarding my predictions of gold and dollar behavior. It’s safe to say that those that followed the advice in my blogs and newsletters aggregately built substantial wealth from the free advice I provided just regarding these two topics.
If you compare my record of predicting dollar and gold behavior that I provided through my newsletters and blog entries (which I’ll review shortly) against the global chief economists of the world’s largest investment firms, I don’t believe that you will find anyone more accurate than I was last year. In fact, my predictions were significantly more accurate than some expert economists that are bankrolled to the tune of perhaps a million dollars a year by some of the top investment firms in the world. The accuracy of predicting investment opportunities is precisely the greatest benefit of using the long tail of investment strategies.
Anytime you have a different method of investment analysis or a different method of investment strategies than those that reside in the bell curve, people are always going to be skeptical that it’s better than what already exists. Especially, when there have been standards like those of value investing, fundamental analysis, and technical analysis for so long. In some instances, the skepticism is justified; other times it is not, as the newer is truly better. In any event, most people are creatures of habit and resistance to change and new ideas.
So with this entry, I’ll begin a three part series that illustrates how there has been a tremendous shift in the paradigm of investment strategies regarding the best, safest, and most efficient way to invest though almost nobody has realized this yet. The shift has been away from the bell curve and into what I call the long tail of investment analysis and the long tail of investment strategies. It is also the basis upon which I founded the curriculum of maalamalama, starting five years ago.
So we’ll get started here in a three part series, and when I finish this three part blog, then I’ll move on to more detail regarding the long tail of investment analysis and strategies.
To begin, we’ll start back in June, 2006, and review:
How I Used the Long Tail of Investment Strategies to Repeatedly Predict the Price Behavior of the U.S. Dollar, Including Intermediate Short-Term Rallies
In the newsletter I sent out on June 6,
I stated, “The dollar has a high probability of moving further downard. Buy Euros.” On June 7, 2006, in a special newsletter in which I specifically instructed people on how to hedge against the high probability of the dollar moving further downward, I stated, “If you’re a business that pays vendors/suppliers in large quantities of U.S. dollars, the best strategy is to buy forward spot contracts that lock in today’s exchange rates for future accounts payables. Any respectable international banking institution has an F/X (foreign exchange) desk that can handle this. If you’re an individual investor, then the simplest is just to buy foreign currency. Of course you could engage in the much more lucrative active trading of foreign currency, but in this case, I hope you have time to sit in front of your computer all day. So I’m just going to discuss the simpler case of buying foreign currency and the options you have…The best bet is to buy a mix of Euros and [an] Asian currency [basket].”
In response to people that wrote into me stating that they believed the dollar would rally in the second half of the year due to “experts” they heard on TV proposing such views, I delivered another stern warning in my June 27, 2006 newsletter, stating: “ If the dollar doesn’t start weakening significantly by the end of this year and well into the following year, then everyone will be happy. But if you learned anything from my last E-Zine issue, you should always prepare for what looks like a most likely scenario. I’ve already done the digging for you to get to the core of a potentially dangerous situation that is developing. That’s why people that listen to the cartoon network at MSNBC might not prepare. But when I’m looking for the long term fate of the U.S. dollar and global stock markets, I don’t look at surface developments such as short-term rallies in the stock market or the dollar.”
Note from the chart above, that I made these comments as the dollar was rallying, not weakening against the euro.This is precisely why so many people told me I was wrong and that dollar would rally the rest of the year. People got swept away by media and news reports about the dollar’s rally that they suffered from myopia. That is the beauty of utilizing the long tail of investment strategies. The truth always resides in the long tail, and not the bell curve, of investment strategies and analysis. The long tail of investment strategies will not allow one to be blinded by such short-sightedness and instead, extends one’s investment vision to the true underlying trends that are inevitable. The public masses that I refer to as the thundering sheep herd, however fail to see this the overwhelming majority of time.
From the date of my first newsletter that suggested people buy euros and Asian currency baskets and use spot contracts in business to hedge against the inevitable fall of the dollar for the rest of the year, the Euro strengthened about 6.5% against the dollar, the dollar rallied against the Japanese yen by about 5% (the only bad performer in the basket of Asian currencies), the Thai baht strengthened more than 8.5% against the dollar, and the New Zealand dollar (a currency that is included in most Asian currency baskets) gained over 11% against the U.S. dollar.
On July 25th, in my newsletter I mentioned that I believed the U.S. dollar was poised for a rally and that gold would fall.
Well for the next month, the dollar traded sideways, but then rallied for about six weeks in September and the beginning of October against most major currencies.
On August 22, 2006, I sent out a newsletter in which I stated, “Just a couple of weeks ago, I had an interesting discussion with a businessman here in Asia, which by the way, was just one of many discussions that followed the same pattern. This Asian businessman told me he was certain the dollar here in Thailand was going to strengthen to around 40 baht or higher to the dollar. I told him my opposition views, and he told me he “strongly disagreed”. I asked him what he was basing his opinions on, and he told me unemployment statistics in the U.S., economic growth rates, and all the major economic indicators reported by the major media gave him great confidence in the U.S dollar strengthening significantly against the baht. Only I had dug way deeper down the rabbit hole than just following major media news and everything I had uncovered told me something to the contrary [in Thailand]”
I warned this person that he should hedge against his considerable dollar exposure in his business because the Thai baht would continue to strengthen against the dollar for the rest of the year. He scoffed at my suggestion, and told me there was no need.
If you think that it sounds like my July25th newsletter prediction that the dollar would rally contradicts my advice to my discussion with the businessman in Thailand that I discussed in the August 22nd newsletter, it did not for the following reasons. I believed that the U.S. dollar would rally short-term against the Euro but not see any significant strengthening against the Thai baht in particular, though I believed at the time that it would also rally short-term against most Asian currencies. Furthermore, a short-term rally in a bear descent, does not constitute optimism for a belief that the U.S. dollar would rally by more than 6% against the Thai baht.
I clarified this position on my September 13th newsletter, in which I stated, “Since the topic of this discussion is the fact that governments consistently lie and can not be trusted, let’s take a quick look at possible reasons why the [Thai] baht has remained strong against the dollar despite the dollar’s strength against other currencies. The sale of Shin Corp. brought the Shinawatra family 73 billion Baht. My guess is that the Shinawatra family is in the process of greatly diversifying this huge windfall of Baht into other currencies, including Euros and possibly Yen. A weaker Baht would translate into losses of millions of baht in foreign currency exchange transactions for the Shinawatra family.
In the past, Bank of Thailand Governor Mr. Pridiyathorn Devakula said the baht’s appreciation against the dollar was primarily caused by the inflow of foreign capital for the purchase of Shin Corporation shares. He said, “There was a broker [associated with the Shin deal] selling [foreign] currency in the market. I just learned about it today, but I don’t know how much money is involved. I don’t know how many shares they’re going to sell.” If foreign capital inflow to purchase one company’s shares can create significant price movements in a nation’s foreign currency to cause the creation and destruction of billions of dollars nationwide, then something is seriously flawed with this nation’s currency policy.
Can you imagine if the sale of General Electric in the United States to a European company caused Americans to lose trillions of U.S. dollars? And can you imagine Fed Reserve Chairman Ben Bernanke saying that he just learned about a huge currency transaction that will affect the strength of the U.S. dollar but being fuzzy on details? Never in a million years, right? That’s what makes the BOT Governor’s statement so unbelievable. So though people living in Thailand might have thought I was wrong on my call about a bullish run in the dollar continuing, I have been right on this call… And in Thailand, behind the scene shenanigans is probably the only reason the dollar hasn’t strengthened against the Baht.
Thaksin Shinawatra was the Prime Minister of Thailand at the time before the coup that ousted him soon afterward. One of the longtail investment strategies I utilize is to delve into corporate-government relationships to understand the direction of currencies and stocks. For the reasons mentioned above, I did not believe the U.S. dollar would rally against the Thai baht in particular.
I also took the opportunity in my September 13th newsletter during the midst of the dollar rally to also clarify that I did not believe the rally was the beginning of a trend: “In addition, in my newsletter when I wrote that I had predicted the dollar’s climb six weeks ago, even though I believe it will continue to climb and strengthen for maybe another month or two, that doesn’t change my long term view that I think the dollar, as a fiat currency, is junk.”
If that isn’t a strong enough comment about my belief that the dollar rally was temporary and not the beginning of an upward trend, I don’t know what is. Finally one last comment on my Dec. 7th blog just to nail home the point: “I believe that the dollar has much further to all. Not a just a little bit, but a LOT more.”
Why the Long Tail of Investment Strategies is 1000 Times More Powerful than Traditional Anlaysis.
If you notice from the dates of my newsletters, there is no 20/20 hindsight taking place here. I called for reversals of rallies before they happened and predicted that they would be short-lived and predicted long term trends before every one else in the mainstream media jumped on the bandwagon. This is what longtail investment strategies allows you to do.
To have the vision to know where markets are heading before the mainstream media knows. Anyone can call trends as they happen or in the middle of their occurrence as so many analysts do. This is why so many people, such as the businessman I mentioned above (that believed the dollar would see considerable strength by the end of 2006) are fooled time and time again. They listen to mainstream media calls that are inaccurate and give a snapshot of the here and right now, instead of what WILL eventually happen.
Even financial websites are notoriously misleading. Just within the past month I’ve seen headlines that scream “What happens to the U.S. dollar if oil goes to $50 a barrel?”, “What happens to the U.S. dollar if gold drops below $600?”. and “Use global events to predict the dollar’s behavior!” Sure there are cause and effect relationships between the price of oil, the price of gold, and the strength of the dollar but there are also much more important factors than just the relative prices of these commodities that affect the strength of the dollar. To suggest that there is a linear relationship between (1) gold and the dollar or (2) oil and the dollar that can be utilized to make money in currency trading is not only naive but understates the true drivers of dollar strength and weakness. Long tail investment analysis is much more sophisticated and uncovers not surface relationships such as these but it digs down to the core of economic situations to root out the most likely direction of the U.S. dollar.
Recently, I told some of you that the dollar seemed poised for a short-term rally again BEFORE this current rally in 2007 started happening. This, at a time when all sentiment toward the dollar in the media was universally negative. I didn’t write about this in a newsletter or blog, because I think this blog, along with the next two entries, will clearly illustrate that long tail investment strategies are the best way to identify how to invest most efficiently and profitably. As well, anyone can learn how to do what I do by learning the same long tail investment analysis techniques that I detail in my online investment course that I describe on the homepage of this site. In the future, I will probably not provide such detailed analysis going forward, for what is far more important than predicting the temporary rallies is the long term trend. Use long tail investment analysis and knowing this is quite easy.
Finally, I know that I haven’t explained what exactly is the long tail of investment strategies in great detail here, so I promise I’ll describe this is in greater detail in future blogs. If you can’t wait until then, feel free to visit my homepage at https://www.maalamalama.com for more information. Stay tuned for Part II of this blog where I’ll discuss how the long tail of investment strategies allowed me to predict the price behaviour of gold in 2006 with even greater accuracy than the price behavior of the U.S. dollar.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.