Yesterday, we discussed Infrastructure spending, following the WSJ article on more tax cuts as a stimulus.

We know from history that rather than temporary tax cuts or spending, its been the big infrastructure projects that leave behind usable assets for the private sector are the biggest bang for the tax backed buck.

Think Interstate Highways, Apollo Space Program, Darpanet (internet), Manhattan Project.

Question: What sort of projects should the US be doing in terms of Infrastructure development?

Do Student Loans Make Eduction Affordable ?

You just assumed they did. It turns out to be a far seedier picture, if you ask College Scholarships.org!

Jess Bachman, who did several of the fantastic illustrations for Bailout Nation, turns his attention to this infographic of the scam that is Student Loan collections:

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click for ginormous graphic

click for video

via C/SPAN

Last week, we reviewed the History of US Interest Rates: 1790-Present via Doug Kass.

Following that Stephen (of Wells Fargo Advisors) pointed us to this fascinating 60 year cycle in interest rates.

It is quite compelling, to say the least:

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Chart courtesy of McClennan Publications

Much ink has been spilt over the question of whether government bonds are in a bubble or not. The bond bubble believers love to cite stats along the lines that bonds are witnessing inflows at the same pace as equity funds did during the TMT bubble.

The bond lovers respond an asset with a finite life and no hope of limitless capital gain can’t really be a ‘bubble’, and beside they argue the ‘fundamentals’ warrant current valuations. (i.e. inflation is low and will remain so). However, to me this is largely a sterile debate over semantics. The issue shouldn’t be whether bond are a bubble or not, but rather are bonds a good investment or not? Ben Graham defined “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”.

Do bonds offers long term investors a sensible level of return? I’ve always thought that in essence bond valuation is a rather simple process (at least one level). I generally view bonds as having three components: the real yield, expected inflation and an inflation risk premium.

The real yield can be measured in the market thanks to inflation-linked bonds. In the US, a 10 year Tip is trading at just under 1%. Expected inflation can be assessed in a variety of ways. We could use surveys, for instance, the Survey of Professional forecasters shows an expected inflation rate of just under 2.5% p.a. over the next decade. In contrast, the nominal bonds minus the TIP yields implies a figure of more like 1.5% p.a. The inflation swap market is implying a 2% p.a. inflation rate over the next ten years.

The inflation risk premium (a risk premium to compensate for the uncertainty of future inflation) is generally held to be between 25bps and 50bps. Given the uncertainties surrounding the impact of monetary and fiscal policy I’d argue that using the high end of that range seems reasonable.

Using these inputs a ‘fair value’ under normal inflation would be around 4%. Of course, this assumes that the current market 1% real yield is itself a ‘fair price’. This seems like a questionable assumption to me. In the UK we have a longer history of index linked bonds – introduced in 1986. The average yield since the introduction is 2.6%, in the last decade the average real yield has been 1.5%. Given this ‘parameter’ uncertainty is would be reasonable to say that ‘fair value’ for 10 year bonds is somewhere in the range of 4-5%.

The current 2.5% yield on the US 10 year bond is clearly a long way short of this. So unless you believe that Japan is correct template for the US (i.e. inflation will be zero for the next decade), government bonds don’t offer an attractive return as a buy and hold proposition.

Another way of looking at this problem is to ask how much weight the market is putting on a ‘Japanese’ outcome. Let’s assume three states of the world (a gross simplification, but convenient). In the ‘Normal’ state of the world bonds sit at close to equilibrium, say 4.5%. Under a ‘Japanese’ outcome yields drop to 1%, and under an inflation outcome yield rise to 7.5% (this assumes a 5% inflation rate).

The table below lays out my own estimates (kind of an agnostic view, with a prior biased towards the ‘Normal’ but cognizant of the other two risks), then bond should yield around 4.4%. I can then tinker around with the probabilities to generate something close to the market’s current pricing. In essence, the market is implying a 70% probability that the US turns Japanese.

It is possible to build a speculative case for bond investment (i.e. riding the deflationary news flow down), however, as ever this leaves participants with the conundrum of  Cinderella’s ball  as described by Warren Buffett “The giddy participants all plan to leave just seconds before midnight. There is a problem though: They are dancing in a room in which the clocks have no hands!” Personally I prefer to stick to investment rather than speculation.

As we approach the 21st anniversary of the triumph of freedom and capitalism over oppression and central planning, I keep wondering if we squandered the victory. Political rhetoric aside, you cannot go back in the record book and put an asterisk on it. Free markets are the engine that drives history in “our” direction. The decline in American hegemony corresponds with the rise in computerized manipulation and government involvement in markets. This is the economic equivalent of a generational snatching of defeat from the jaws of victory.

The real disgrace is the nations on the wrong side of history have learned from the beat down and changed. Russia is the “wild west” of capitalism with the fastest growing number of billionaires (they skipped over the m’s and went straight to the b’s). China has created a strange hybrid of capitalist effort in benefit of the Central Planners. Leaders sleep lightly, however as the masses will not stay down forever.

I expect as we return from Labor day weekend the CEO’s and CFO’s of America’s best companies will lean back against the degradation of capital markets. One decent bond issue by JNJ or P&G could remove half of their shares from the public marketplace. If you worked at P&G and saw your 401k reduced to pennies by the electronic carpet bombing of HFT, would you not support an effort to become less public? With bond rates lower than ever, shouldn’t the concept of taking the upside “private” be tabled at Boards everywhere? I do not “think” we won – I know it. The shocking thing is how we have forgotten what we were fighting for.

-Kevin Ferry Chief Market Strategist Cronus Futures

“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days.”

-Richard S. Fuld Jr., Lehman Brothers former chief executive (NYT)

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The fantasy world inhabited by Lehman Brothers CEO Richard Fuld was given a surprisingly sympathetic ear from an unexpected forum yesterday: The Financial Crisis Inquiry Commission.

This is a deeply disturbing development, as it leads to the unfortunate suspicion that the FCIC does not have the slightest clue as to the causes of the housing collapse, recession and and market crash.

There are two issues here: The first is “why did Lehman collapse?” The second is “Why didn’t the Fed rescue them?” Let’s look at both.

I’ve spilled far too many pixels explaining why Lehman crashed and burned, but for those of you who may have forgotten:

1. Under-capitalized, over-leveraged: Lehman Brothers was the biggest bankruptcy in US history. To avoid that fate, LEH mneeded to be sufficiently capitalized, and use only moderate leverage (LEH embraced 40 to 1 leverage). Rather than have a sufficient capital base, the bank chose instead to chase profits: A greater capital cushion meant less underwriting activity, smaller gains, greater risk. The downside of having a de minimus capital structure is when bad investments are made, there is no room for error.

2. Bad Modeling Assumptions: LEH made numerous false assumptions in their econometric models: a) Residential RE never goes down; b) The derivatives market is always liquid, with ready buyers available; c). We can always borrow short and lend long with no liquidity concerns;  There was substantial evidence and warnings that ALL of these assumptions were false, but they were ignored by management as a risk to profits.

3. Excess RE Exposure: Lehman was the biggest securitizer of mortgages on Wall Street. They underwrote more mortgages than any other bank on Wall Street. By 2004, LEH was originating $40B per year in mortgages to feed their own CDO machine (which as Roger Lowenstein has pointed out, was more lucrative than the stock and bond business).

4. Reliance on Ratings: Lehman’s entire business model was predicated on the ratings of Moody’s and S&P being reliable. However, LEHMAN was one of the prime purveyors of credit rating payola — they were paying the NRSROs a fee to slap a Triple AAA rating on junk paper. If they did not know the credit ratings were utterly worthless, they sure should have.

5. CDO Ownership: Lehman kept the senior-most layers of CDOs they created for themselves, but bought credit default swaps on them “for safety.” Consider that they were not confident enough of the models which forecast the solvency of those tranches, yet they used the same models to determine AIG was a credit worthy counter party to insure them.

That’s why LEH collapsed, and it was apparent (at least to us) back in June 2008 they were in trouble.

Why did the Fed not save them? There were several reasons:

1. One off: The Bear Stearns bailout was supposed to be a “one of a kind,” not the start of a series of rescues. The Fed hoped to hold the line at only one such taxpayer backed rescue. The fear was if they did a 2nd, they could not say no to the rest of the Street. Lehman was in effect the Fed’s Maginot Line (it also was out flanked and rendered strategically useless).

2. Fed Overreach:  Bernanke was widely criticized for the Bear rescue as a huge overstep of authority. Even former Fed Chair Paul Volcker overcame the inherent reluctance of formerFOMC chairs to to criticize sitting Fed heads to express his concern about the over reach and power grab.

3. No to Private Rescue: Dick Fuld turned down a private rescue just months earlier. Warren Buffett offered Fuld billions, plus the equivalent of the Berkshire Hathaway Good corporate Housekeeping seal of approval. FULD TURNED BUFFET DOWN. How could the Fed, in good conscience, bail out a firm that refused to accept a Buffett rescue? Indeed, his terms for LEH were far more generous than what BRK ultimately offered Goldman Sachs and GE.

4. Insolvent: Lehman books are why a loan never happened. LEH was essentially insolvent, with liabilities that vastly outweighed what few assets there were. This insufficiency is why a loan was simply not possible — it was  considered a guaranteed loss.

5. Moral Hazard: How much of a clusterfuck must any financial firm be before a rescue is deemed an outrageous moral hazard? For the 3rd and 4th reasons above, Lehman was believed to be “Beyond rescuing.” And it was due to the specific choices Lehman’s management made.

To think that Fuld’s brand of psychopathic revisionism was given a sympathetic hearing is deeply disturbing.

I haven’t written this before, but now I am compelled to: I now fear the FCIC report is going to be an ideological farce. The nightmare report scenario is a collection of false statements, half truths, misunderstandings, confirmation biases, and rhetorical nonsense.

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Previously: Financial Sector: Beware LEH, CIT (June 3rd, 2008)

Understanding Lehman & AIG (March 22nd, 2009)

Bear Stearns, Lehman Execs Kept Billions . . . (November 23rd, 2009)

Grading Financial Regulatory Reform (June 25th, 2010)

Bull markets are born out of distress — witness March 2009. Bear Markets are born out of prosperity — witness 2008-early 2009.

Liquidating/de-risking out of equities and acquiring/re-risking into fixed income has been the mantra of most individual and institutional investors over the course of the last three years. Since early 2008, retail investors have sold over $200 billion of domestic equity funds, while purchasing nearly $600 billion in fixed-income products. That gap of over $800 billion is unprecedented as is last decade’s spread in performance of bonds vs. stocks the largest in history. But history tells us that the S&P 500 performs famously in the following decade and ultimately moves contra to a peak in flows.

-Doug Kass

Retailers need a fresh start Andy Xie Caixin Online Aug. 30, 2010

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BEIJING: China’s gross domestic product surpassed Japan in the second quarter of 2010. The international media gave this milestone considerable attention. The domestic media hasn’t paid as much attention.

As natural disasters, environmental degradation and property bubbles take the center of attention, the domestic media isn’t likely to focus on this number. Besides, China has 10.5 times as many people as Japan does. The same GDP still puts China’s per capita income at less than 1/10th of Japan’s, which is hardly a moment to celebrate. Nevertheless, it would be useful to look back on how far China has come, study the risks in China’s future, and, if the country can overcome the existing challenges, how much further the country can go in the next 10 years.

China’s economy took off in 2002: nominal GDP has grown at 18.5%, exports in dollars at 21.7%, and electricity consumption at 12.8% in the following eight years. (I extrapolated the economic performance for the remaining months of 2010.)

In terms of levels, the nominal GDP has increased by 2.9 times, exports by 3.8 times in dollars and 2.9 times in yuan, and electricity consumption by 1.6 times in eight years. Japan had a similar performance in 1960s, Korea and Taiwan in 1980s. But, they were much smaller. What China has done is unprecedented in terms of scale.

When growth lasts many years, it makes a huge difference over time. It is the miracle of compounding. China and India had about the same value in GDP 20 years go. In 2010 China’s GDP is roughly four times India’s. There is little doubt that China has done many things better than India or most other emerging economies. Otherwise its economy couldn’t be so much bigger in relative terms.

The “Reform and Opening Up” policies have been the center of China’s economic policy in the past three decades. This has undoubtedly been the most important factor. China’s exports have become the largest in the world from virtually nothing three decades ago, and almost nothing two decades ago. In the last decade alone, the exports have risen 5.2 times. Being the workshop of the world has been the most important part of China’s economy so far. Without China’s export success China’s economy wouldn’t be near where it is today.

Joining the World Trade Organization made the critical difference for the country’s export success. It has given multinational companies the confidence to base so much production in China. As China’s domestic market becomes big, it gives MNC’s another powerful reason to keep production in China. No other country could offer the economies of scale from selling locally and exporting abroad, plus low production cost.

China’s production cost is no longer the lowest. Bangladesh’s labor cost is merely one fourth of China’s. Indonesia’s labor cost was twice as high as China’s before 1997. It is now comparable to China’s and is rising slower. Some industries that don’t require the supply chain nearby are likely to leave China. Shoe and garment industries, for example, may move to other countries. But, most other industries will stay in China.

Infrastructure development has been China’s second important competitive advantage. China has continually delivered strong infrastructure development due to the government’s ability to mobilize resources. The state ownership of land and banks are the critical factors. Land and credit are usually the constraints to infrastructure development in most other countries. Without such constraints, China could go for size to achieve economies of scale.

The development of the national expressway system, for example, is a good example. Only an interconnected system of size could deliver economic benefits. A few isolated expressways couldn’t deliver much benefit. This is due to the so-called network effect. In a dozen years, China has completed over 60,000 kilometers of expressways, with another 30,000 under construction. The expressway system has made the national population mobile, integrated villages and small cities into the national economy, and sharply decreased logistics costs.

The development of ports and industrial parks has made it possible for OEM industries to locate in China. Together with the highway system, they have made it possible for China to become the largest export country in the world. Inability to build infrastructure quickly is perhaps the bottleneck in most developing countries. Money is a constraint in that regard but is not the most important. Land acquisition and government implementation capability are the most important barriers.

In addition to traditional infrastructure, China embraced the Internet early, the latest necessary infrastructure for a modern economy. When China decided to embrace Internet in the 1990s, it laid the foundation for China to benefit from and be part of the global economy. It is hard to imagine that China could be where it is without the Internet. If China hadn’t embraced the Internet, its economy today could be only half as big as it is.

Third, China’s large and productive labor force has contributed more than any other factor to China’s growth. Until five years ago, the nominal wage remained stagnant in nominal dollar terms for over a decade, even though labor productivity increased at nearly 10% per annum and total factor productivity at over 4%. Chinese labor’s increased productivity showed up in declining prices for Western consumers, rising profits for multinational companies, and rising tax revenues for the Chinese government. This is why more and more multinational companies have come to China to produce, and Chinese local governments have invested more in infrastructure to attract them.

China’s wages are rising from a low base. Many people are worried about China’s competitiveness. As I mentioned earlier, some shoe and garment manufacturers may move to other countries. Other industries may do so but not without difficulty. And some may stay, but pass the higher cost on to consumers. They need to regurgitate some of the past price reductions. Also, multinational companies may have to accept lower profit margins. The consumer products that China exports retail for 3-4 times the factory-gate prices. There is plenty of room to absorb China’s labor-cost rise.

China’s rapid growth has coincided with a weak dollar. The dollar index peaked in 2002 and has declined by one-third since. The Tiger economies and Southeast Asia had very high growth from the mid-1980s to mid-1990s, which also coincided with dollar weakness. The dollar plunged after the Plaza Accord in 1985. A banking crisis kept it weak into the first half of 1990s. The tech bubble bursting in 2000 was really the trigger for the dollar weakness this time. It slowed capital from flowing into the U.S. The current financial crisis is keeping the dollar weak.

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Andy Xie is a former Morgan Stanley analyst now living in China.

FREAKONOMICS is the highly anticipated film version of the phenomenally bestselling book about incentives-based thinking by Steven Levitt and Stephen Dubner. Like the book, the film examines human behavior with provocative and sometimes hilarious case studies, bringing together a dream team of filmmakers responsible for some of the most acclaimed and entertaining documentaries in recent years

Produced by Green Film Company and distributed by Magnolia Pictures, Freakonomics features a dream team of Academy Award® and Sundance Film Festival winning directors and will be distributed across all platforms in a concentrated timeframe.

The trailer for Freakonomics is now available at http://www.magpictures.com/freakonomics/, along with other film details, theater screening schedule, and resources for purchasing movie tickets online. The film will be screened in advance of the 10/1 theatrical release in select cities across the country-please let me know if you are interested in attending a screening and I can put you in touch with the appropriate contacts. Also, Freakonomics will be available for download via iTunes on Friday (9/3), marking the first time Apple has partnered with a film in advance of its theatrical release.

You see, even a blind squirrel can find an acorn once in a while...

This was an archived video of my weekend chart show that I provided for members last Sunday. A number of members have found my videos helpful in their journey not to mention that I enjoy doing them.

It is with great pleasure that I offer this interview with James Altucher. James has been one of the most outspoken bloggers and traders of our generation and, as a consummate contrarian, his opinions frequently fly opposite to conventional wisdom.

As managing director of Formula Capital, an asset management firm and fund of hedge funds, James brings a lot of professional experience to the table. In addition, James has written four books on investing: Trade Like a Hedge Fund, Trade Like Warren Buffett, SuperCash, and The Forever Portfolio. In his spare time, James also currently writes for The Wall Street Journal and AOL Finance.

Like many interviews before, we'll be covering a lot of ground and we hope you find it both helpful and enjoyable to read.

Q&A With James Altucher

Kirk:  Hi James. Thank you for taking the time to do an in-depth interview with us. I'm excited to have you here as I know many will find your perspectives helpful. When and how did your interest in the market begin?

James Altucher:  From 1995 - 2000 I was building websites for entertainment companies. I built websites for HBO, Miramax, New Line Cinema, Loud Records, Bad Boy Records, Interscope, etc. It was the best time of my life. For HBO, for instance, I did a website called "3am" where I spent all my time interviewing drug dealers, prostitutes, homeless, whoever I could find at 3 in the morning in NYC. Other entertainment companies wanted that kind of flavor and suddenly I was doing websites for almost every media company in the city. The company I started, Reset, built up to about 50 employees and then we sold it. So I had some money which I promptly invested in Internet companies. All in the bust. So I decided I needed to learn more about the stock market.

Kirk:  How did those early experiences transition into a lifetime career?

James Altucher:  My original background was in computer science. I majored in it in college and went to grad school for computer science. So I started writing some software to model the markets and understand when the markets went up and when they went down. I did a lot of basic statistical arbitrage. I also began a thorough study of every investor I could find. I read every book on (and then wrote a book on) Warren Buffett. Around 2002 I started investing money for other people based on the software I was writing. One hedge fund manager gave me some of his personal money to invest. Other hedge fund managers allocated their money for me to invest. Even though my interests ranged from arbitrage to value investing I was mostly doing very short-term daytrading of S&P futures for these initial clients and I was doing it very well with rarely a down month.

In late 2003 one of my investors came to me with a small issue. He owned a company that had just gotten an offer for $10mm and he wanted to know if he should sell it. With my business partner, we told him to turn down the offer and let us do an auction to help him sell his healthcare company. A few months later, one of the companies we reached out to offered him $41.5mm in cash, which he accepted. We then helped him allocate that money into about 20 different hedge funds, after interviewing probably over 200. At this point I became much more familiar with every type of hedge fund strategy and started a fund of hedge funds after that experience.

Kirk:  What would you say is one of the most important lessons you learned early on?

James Altucher:  The only three things that are important are discipline, persistence, and psychology. Without those three things there isn't a strategy in the world that will work for you. With those three things, just about any strategy will work.

Kirk:  Good advice. What would you say was most instrumental in your development toward becoming successful in the market?

James Altucher:  Being able to learn from my mistakes and adapt quickly to different strategies. Not just trading and investing strategies but life strategies.

Kirk:  What have been some of the most difficult lessons for you to learn?

James Altucher:  The pain from the first initial losses I suffered in 2000 are still with me. This may sound ignorant but it really felt like I was losing a loved one. Now, in retrospect, I'm thankful for those losses else I wouldn't have grown as a person in the ways that I have and I would not have had some of the amazing experiences I've had over the past several years.

Kirk:  That's important James. This is something I have seen all of the time in winners - they find a way to learn and get stronger following failures while losers do the exact opposite. So, how has your approach toward the markets changed and improved over the years?

James Altucher:  No human or strategy can consistently beat the market. The best traders I know are some of the most humble guys out there and have no arrogance on their market opinions at all. They are able to switch opinions and strategies very quickly. I would say that over the years any arrogance I had about any strategy has probably disappeared and now I'm appreciative of just about any strategy out there as long as it comes with persistence, discipline, and positive psychology.

Kirk:  Tell us a little about what you're doing right now professionally.

James Altucher:  I do a lot of investing in private deals. The markets have been so volatile that I think many good private companies have been reluctant to go the private route and I'm willing to take the chance of investing in some of those private companies. I'm on the board of bit.ly, for instance, which is a URL shortener commonly used on twitter, facebook, etc. I also do a mix of long-term value investing in microcaps, and short-term basic stat arb investing similar to how I've been trading for the past decade.

Kirk:  How would you describe your overall approach toward the market?

James Altucher:  The market has many, many, intelligent participants who are smarter than you or me. Try to really figure out what your edge is before you pull the trigger else it's gambling. And, by the way, there's nothing wrong with gambling either if you have the qualities of a good gamblier: discipline, persistence, and psychology.

Kirk:  How do you use technical analysis in your approach?

James Altucher:  I don't believe at all in a chart-based approach. It always seems when things are at a bottom that most of the chartists say we are heading for a total collapse. But, if by "technical analysis" you are referring to terms such as oversold and overbought then I am a big believer that in the short-term stocks that are oversold tend to bounce (this is not as much true for "overbought").

Kirk:  How does fundamental analysis play a part in your analysis?

James Altucher:  For my longer-term investments fundamental analysis is very important. I like to know the following:

Does the management team have a track record of success and honesty?

Does the product have a strong demographic tidal wave behind it?

How realistic is it that the company will surpass the hurdles in its path?

Kirk:  On average what would you say are your average hold times?

James Altucher:  Varies from seconds to years.

Kirk:  How many positions do you trade at any given time?

James Altucher:  Varies from 1 to 30.

Kirk:  How has your performance been at the hedge fund?

James Altucher:  I've run a variety of different vehicles but I don't publish the performance.

Kirk:  How has your style changed and improved over the years?

James Altucher:  I've probably dabbled in every investment style under the sun.

Kirk:  What would you say are your primary strengths and weaknesses as a trader/investor?

James Altucher:  My strength is also my weakness. I'm experienced and knowledgeable in many different investment strategies. But perhaps I'm a bit of a dilettante in approach.

Kirk:  What have you been working on recently if anything to improve your performance?

James Altucher:  I'm trying to sleep 9 hours a night and read new things every day.

Kirk:  Please describe a typical trading day for you? How do you organize and dedicate your time?

James Altucher:  Every day is really different.

Kirk:  A few years ago you founded Stockpickr and quickly sold it to TheStreet.com in 2007. Tell us what you learned from that experience and why you think stockpickr was so important?

James Altucher:  Around 2006 I was trying to sell my fund of funds. A bank made an offer and the one caveat is that they wanted me to sign a six year employment agreement. It occurred to me that if they needed me to sign a six year agreement then I hadn't really built any equity value in the fund of funds I was managing. My business partner and I decided to focus on another expertise we had, which was being involved in financial media. I was a writer for thestreet.com, forbes.com, yahoo finance, and the Financial Times.

I wanted to make a site which cut out all the BS and got right to the essential point of all financial media: the generation of investable ideas that would, ideally, make people money. Ultimately, the people who know the most about public companies are not the media companies but the super investors that invest in public companies. The Warren Buffetts and Carl Icahns of the world. The knowledge these people have compared to me or anyone else writing for a financial site is like comparing a giant to an ant. If Warren Buffett buys Goldman Sachs (GS) at $100 what are you going to do? Run into him at a cocktail party and say, "Warren, Warren, Warren, how could you? You fool!" Of course not. Then you would be the fool.

Stockpickr was built on the principle that as long as these super investors have to disclose their filings through 13Fs, then let's all benefit from it before the laws change. And, in the meantime, if we all share our portfolios, and our reasoning for each stock, and see the overlaps and the correlations, and get to ask each other questions (through the Stockpickr Answers section) then maybe we can get more ideas, build a more diversified portfolio, and make more money.

In terms of what I learned:

Most of the financial industry is a scam. Many good hedge funds built up when they were less than 100mm in assets and now when they have $5bb under management they charge 2 and 20 just by owning GE, INTC, GOOG, and other stocks they have no edge in.

I learned a lot after I sold Stockpickr to thestreet.com and learned more about the inner workings of a public company.

Most young people should stick with very low volatility holdings and focus any extra money they have on investing in building their careers.

You won't do badly if you follow the top 2-3 new investments of the top 20 super investors out there.

Kirk:  Who do you consider "must follows" in the investment world and why?

James Altucher:  Warren Buffett. He's not a value investor but a demographics investor. Despite his ho-hum low-key Nebraska attitude he is the best guy ever in terms of figuring out what the world is going to need 5, 10, 50 years from now. His footsteps are always good to follow. He's the only must-follow. Other guys (Carl Icahn, Dan Loeb, George Soros, Stanley Druckemiller) are all must-follows but do you own due diligence.

Kirk:  Please provide some perspectives on how you research and find your investment ideas.

James Altucher:  I visit with lots of smart hedge funds managers, and read constantly looking for good smallcap or microcap ideas. I talk to management teams, customers, hedge fund managers who are long-term holders, etc.

Kirk:  I've often said that it isn't what you trade, but how you trade it, that makes the difference between success and failure in the markets. Do you agree with this statement. Why or why not?

James Altucher:  I 100% agree. For me, a lot of it boils down to psychology and discipline. And just when I think I have a handle on it, I always get a bit fooled.

Kirk:  How you manage your downside risk when you are wrong James? If you can provide a recent example and how you managed a mistake I think many would find it helpful.

James Altucher:  I do a lot of event-driven investing. One recent example: A company I was invested in was expecting a positive outcome from the FDA. I was expecting the FDA to have a positive outcome. The positive outcome happened. The stock went down that day. I got out. Once an event happens that I was expecting and the stock reacts in a different way then its time to get out. The times when I lose the most money (to this very day) is when I don't follow this rule.

I also keep position sizes small per position as a % of total equity.

Kirk:  Can you share some of your personal trading rules?

James Altucher:  It's hard to say since I have many different styles of investing. The main ones are: make sure you have an edge of some sort. And if stuff happens that is unexpected, then get out.

Kirk:  I've been reading you for many years, James, and you've been a contributor to many different websites. Thinking back to all of your previous columns for these websites, what would you say were your top five favorites of all time?

James Altucher:  Hmmm, I have a lot of favorites. I'll stick to the non-stock specific ones:

College is a waste of time

I reviewed my own book for the FT and explained why I would never write a book again (and, of course, I broke that promise)

Why am I the one getting "the call" for the biggest investment opportunities ever

7 reasons to hate me

The religion of Lost

Kirk:  Many of your columns are contrarian to popular herd think. Are you naturally a contrarian about all things market-related or do you have to work on it, James?

James Altucher:  I don't think I'm a contrarian at all. I like the ipad, for instance. And I like popular TV shows like Entourage and True Blood. And, like most people who have 401k plans I think stocks will go up over time. And I hate to do things like spend money on buying a home, paying for lawyers, sending kids to college, etc. Who likes those things? They are the contrarians.

Kirk:  That's funny. I think your reply to that question explains just how contrarian you really are! Continuing that same line of thought - why do you think being so contrarian is such an asset for investors? Isn't it better to align yourself with dominant market trends instead of fighting the tape?

James Altucher:  The only time when I think I'm really a contrarian is if the stock market has done up 500 S&P points (I'm taking an extreme example), I get very nervous. It's hard to chase up only because I have visceral memories of doing it in 2000. When the market goes down 500 points, it's a good time to buy throughout history. Even though, "this time could be the end of capitalism" it never is.

Kirk:  Why do you think so many people have trouble matching and beating the market consistently?

James Altucher:  Because there are so many smart people trying to make money who also have discipline and a good psychology that it is very difficult to defeat these people (and their computers). Its like me trying to beat an Olympic athlete in a race. The only way I can do that is to find my own advantages (like, if I can challenge the same athlete to Scrabble, for instance).

Kirk:  Looking over the second half of the year, what are some investment themes you think investors should be paying attention to now?

James Altucher:  Stocks are sitting on an enormous amount of cash. They've also been buying back stock and there have been few IPOs. Ultimately the stock market is about supply and demand and the supply of shares out there versus the amount of cash out there (latent demand) is at its lowest ever.

Kirk:  I know from your comments recently that you think the market has a lot of upside potential. Can you briefly talk about why you are so bullish?

James Altucher:  On July 1st I wrote the following article for WSJ - 7 reasons why the S&P 500 is going to 1,500.

Kirk:  What would cause you to change your view and become bearish, James?

James Altucher:  If Obama raised capital gains to 40% I'd get very nervous. Hopefully he won't make the same mistake Hoover did, who repealed Coolidge's tax cuts in 1930. If a major war started in Europe or a nuclear attack happened on US soil. However, even with those events, you can position your portfolio to survive these disasters. This is the subject of my next book The WSJ Guide to Investing for the Apocalypse. It's about how to invest for all the things the media likes to worry us about: pandemics, wars, terrorism, global warming, lack of clean water, etc.

Kirk:  As a nationally ranked chess master, do you think many investors would benefit from learning how to play chess to improve their performance in the markets? Why or why not?

James Altucher:  In order to get good at chess I had to spend (mostly because I wasn't dating girls at the time) a good 15 hours a day when I was a kid reading chess books, playing in Washington Sq Park, and taking lessons. That discipline helped me get discipline in other endeavors. The downside is that I use chess as an escape now (like, when I'm talking on the phone or in a losing stock position I don't want to think about).

Kirk:  What would you say to those who are just starting to learn about the markets and investing their own money. What advice would you give to others who are just starting to learn about the markets?

James Altucher:  Read everything. Try to figure out what your edge is (ignore the GOOGs and INTCs and GEs of the world). And maybe try to use your money to start a business instead of invest. With investing, best case you can return 10-20% consistently. Best, best, case. But if you start a business you can earn multiples of 10,000%.

Kirk:  Are there any good books or other resources that you highly recommend for individual investors?

James Altucher:  Don't read any of my books!

Kirk:  If you had it to do over again would you choose a different career path?

James Altucher:  Yes, after I sold my first Internet business in 1998 I should have immediately focused on starting another Internet business.

Kirk:   Finally, if you had one piece of advice to share with all investors what would it be?

James Altucher:  Try to sleep 9 hours a day and work on a standup comedy routine in your spare time.

Kirk:  Thank you for sharing your perspectives with us. We so much appreciate it and look forward to following your views in the future. Take care!

James Altucher:  Thanks for asking me these questions. I wish someone valuable like Buffett could answer these instead of someone like me but I'm honored to be asked. If anyone wants to chat further you can find me at twitter at jaltucher or just email me at altucher@gmail.com.

A few of my favorite links to review over the weekend...

Markets by the numbers (MarketBeat)

Investor fears outweigh stunning earnings gains (USA Today)

This week's top stories (Street Insider)

Other than the Friday jobs report, what on tap for next week? (Minyanville)

A historical look at the market's performance in August (CXO)

Will a hot July heat up the rest of 2010? (Robert Hum)

How unusual is this year so far? Not so much (Bespoke)

Based on history, hope for U.S. stocks (Jon Markman)

What do the monthly moving averages suggest to investors? (dshort)

Are risky assets back in vogue? (Michael Kahn)

Bill Gross offers his investment outlook (Pimco)

Why the recession ended (Dirk Van Dijk)

A 2nd half slowdown update (Calculated Risk)

Why you should ignore the GDP report and most economic data for that matter (Jim Rogers)

ECRI falls deeper in to the abyss (Bond Squawk)

More double dip chatter (Daryl Montgomery)

If and when these 10 factors come about, the market will have already priced it in (Zero Hedge)

What's really going to drive economic growth in the U.S.? (Market Talk)

Where is all that sidelined cash heading next? (Gary Alexander)

If you are listening to conference calls - a new trend between business want versus need (Herb Greenberg)

Forget about earnings - that news is already four months old (Irwin Kellner)

Federal debt and the risk of a fiscal crisis (CBO)

Who owns America's debt? (Mint)

Is the Fed really out of bullets? (AI Blog)

More stress testing skepticism (Bloomberg)

Lobbyists go to work on financial reform (NYT)

It's time to put the brakes on trading speed (Traders Mag)

Time to prepare for runaway inflation? (Finance Trends)

Or, maybe deflation? (BI)

Lost your home? Good news - more money to buy an iPad (BL)

What does the sector timing model say? (TickerSense)

Inside the Glenn Beck Goldline Scheme (Ritholtz)

The only gold stock worth owning? (James Altucher)

Is a robotic car in your future? (Freakonomics)

Why currencies plan an important role in earnings (Jutia)

Dollar weakness = stock market strength (Jeff Miller)

Time to go long Chile (Wall St. Cheat Sheet)

Eight reasons to buy China (James Altucher)

The five places to invest before you retire (Jon Markman)

Making the case for owning Morgan Stanley (Alice Schroeder)

Top stocks ranked by momentum and sector (The Patient Fisherman)

First rate companies with great balance sheets and attractive dividend yields (Technology Investor)

Five stock ideas to research this week (James Altucher)

You know I don't like so-called safe stocks. Here are three (Value Line)

How about an update on the Livermore Active Issues Index? (CSS Analytics)

Three small firms with heavy trading volume (Jack Hough)

10 earnings surprises for analysts (CNBC)

Cheap, big-cap stocks (Wall Street Pit)

Magic Formula stocks near yearly lows (Magic Diligence)

Cramer's comeback stocks (CNBC)

Like watching whales? Although not as nice as Alphaclone, but the price is better (Whale Wisdom)

S&P's list of LBO candidates (Greenbackd)

Companies ripe for stock buybacks or dividends (BW)

Interest in speculating in nanotech continues (StockerBlog)

Trading rules from the Marines (Slope Of Hope)

The 7 deadly sins of trading (Essentials of Trading)

Do you love to predict the markets? Resist the urge! (PrudentTrader)

Be honest with yourself and learn from your mistakes (Attitrade)

A hungry trader makes for a risky trader (CNBC)

Many traders need far less talk, much more focus (Anni)

What should you do when you have an unusually high losing day? (StockGuy22)

Stock trading lessons I learned from a dog (Crosshairs Trader)

It is fairly simple to test this thesis that “moving averages no longer work since 1990" (Mebane Faber)

The stories of moving averages' demise are greatly exaggerated (MarketSci)

Combining trend-following and countertrend indicators (Jay Kaeppel)

Does average volatility of individual stock prices, as a measure of market risk, usefully predict stock market behavior? (CXO)

Three factors to look for in every pullback setup (Trading Markets)

7 psychological quirks that destroy investment returns (Monevator)

A look at how we make choices (Ted)

Low stock allocations can be riskier than high stock allocations (ValueWalk)

How to read financial statements (Howard Gold)

How short-selling sleuths spot accounting gimmicks on financial reports (Matt Andrejczak)

How do you organize your thinking about investments? (The Research Puzzle)

How to find enduring moats like Buffett (John Reese)

Using candles to identify market behavior (Danial Gramza)

A few of the ways a portfolio should be diversified (Intelligent Speculator)

Seth Klarman's book recommendations (ValueWalk)

ETF list of new highs can help you understand money flows (ETFreplay)

Leveraged ETFs, volatility and range-bound markets (Vix & More)

Direxion brings dynamic volatility hedging to ETFs (Vix & More)

Losing faith in the market? Try these ETFs (ETFdb)

Do you need a hedged equity ETF (ETFdb)

Inside the not-so-simple currency ETFs (ETFdb)

Interesting - the most heavily shorted ETFs (ETF Channel)

A closer look at hedge fund ETFs (ETFdb)

A definitive guide to China ETFs (ETFdb)

Keeping track of the S&P 500 index trackers (Morningstar)

Understanding the risks of target-date funds (Mint Life)

Don't be a Madoff victim - how to avoid investment fraud (Digerati Life)

After bailing out the banks, more Americans now ranked as poor credit risk (Clark Howard)

A free money-management spreadsheet (Get Rich Slowly)

A new kind of wallet for spend happy Americans (Clark Howard)

How did we get to the point where almost half of our citizenry is excused from paying any federal income tax? (Smart Money)

Do-it-yourself treadmill desk (Lifehacker)

Tips for handling information overload (WebWorkerDaily)

How to create an environment in which you will thrive (Psychology Today)

Entrepreneurs, much like traders, have nothing to fear but fear of failure (Open)

Put Wolfram Alpha to good use (MakeUseOf)

Perhaps I should take a daily nap (Get Rich Slowly)

Get some exercise this weekend and trade better next week (LifeHacker)

"Winning is not a sometime thing; it's an all time thing. You don't win once in a while, you don't do things right once in a while, you do them right all the time. Winning is habit. Unfortunately, so is losing." - Vince Lombardi

Earlier this month I shared a quote in the email newsletter that seems to have struck a strong cord with a few of you...

"The ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits." - Curtis M. Faith

That quote came to mind this morning when having a conversation with a fellow trader who I think is in what I call "justification mode."

Justification mode is when traders (or investors) find themselves having to justify poor performance on something that seems logical and which helps comfort and protect their ego without having to own up and face a big mistake.

In this trader's case, like a lot of people it seems he went and stayed short when the market rolled over last month. Although he won't admit it to you now, I know from our prior emails he was sucked in by the infamous "death cross" and, in spite of a strong reversal, has now refused to reverse his short (and losing) positions. In fact, his ego is so involved with this short-trade that he's recently doubled down when the market refused to roll over even using lots of leverage to prove his point. Now he's in a painful position of being trapped between owning up to the mistake and taking the painful loss or doing what so many tend to do - find a way simply to justify his actions and let a growing loss have the potential to wipe him out entirely.

In our conversation this morning, this trader kept talking about "the market is in a trading range" and "ready to roll over." That's fine and well as long as the price action confirms that view, but it hasn't yet. As I asked him this morning, "Can you afford simply to stay wrong just to protect your ego?" He didn't know how to respond. In fact, it became clear that he didn't even realize that his ego was becoming such a strong influence over his entire market analysis. I suspect, as he does as well now after talking to me, that if this trader's positions were different, for example aggressively long the market instead of short, this same trader would not be seeing a "trading range" or a market "ripe for reversal." Instead, he would see nothing but more upside potential. This is why human traders, with human egos, are often at a significant disadvantage.

Trust me, at one point or the other, we've all done this. I know I have been in justification mode many times even when I didn't even realize it until much later on. However, over time, I've learned to spot to tell tale signs that I've fallen trap to this and then have learned to take immediate corrective steps to right the ship. Moreover, as many of you also know, at all times I also trade in a way that makes sure that when I do make mistakes (which are often) that they NEVER have the potential to wipe me out. When your ego gets so involved in your trading, the potential for catastrophic losses are tremendous which is why we've all have to learn and know when we've fallen into justification mode.

As most experienced traders will tell you, the most difficult thing about trading well is that you've got to learn for yourself how to stop protecting your ego and readily own up to mistakes quickly before they do significant and lasting real damage. No matter how hard you try, you will never be able to entirely separate your ego away from your trading. Those who tell you that you can, are, in my view, just wrong and have little understanding about how to trade well. As long as you are human, you are going to trade with both emotion and ego, but the better traders among us simply learn how to work with both in ways that limit their negative influence.

To help you do that, be sure to always ask yourself the following question especially when you find yourself trapped by poor positioning: "If I held the exact opposite bias, how would that impact my overall analysis of the market right now?" In other words, if you are currently short the market, how would your analysis change if you were long? That will help you think in a way that will help you at least spot the clues when you're in justification mode so you can take the necessary corrective action even when it hurts your ego to do so.

I'm spending the week with Mom here in Utah to celebrate her 70th birthday!

If you've never been to Zion, it is a wonderful place to go during your summer travels!

Good breaks. Bad breaks. We all have them, don't we?

Thinking back to the past six months, this has been an unusual year for me both in the markets and on the golf course. So far in 2010, for whatever reason, I've had a unusually high number of really good and bad breaks. More so than I can ever recall over a six-month time span.

On the golf course I've recently had some of the best and luckiest golf shots of my entire life. From three very close hole-in-ones, to holed bunker shots (one even from 180 yards), to three eagles on par fours, to several crazy pitch ins, a few 30 foot double-breaking putts and crazy drives where I've hit rocks out of bounds in the rough and have the ball bounce back to the middle of the fairway, it has not been boring on the golf course this year!

Likewise, I've had some really bad breaks as well. From plugged lies in the bunker, golf ball stuck in a tree, golf balls laying under tree roots in the fairway, several times I've hit the pin to only have the ball bounce off the green, and so on. Several times this year it has felt that the Golfing Gods were dead set against me. If you've played any golf, I'm sure you know that feeling!

The very same has been true for me with my trading this year. For example, over a dozen times since the start of the year I've made a trade just before a big positive and unexpected catalyst that has been quite profitable. I have also sold several large positions (i.e. taken profits) just before a major price reversal. However, just as often, I've had positions blown out of the water from completely left field. In fact, I don't recall a six-month period filled with so many great trades and really ugly ones. None of which I really could have avoided very much by simply following my own strategy.

Through both the good and bad on the golf course and in the market, the key for me was to simply to remind myself each time that both really good breaks and really bad breaks even themselves out over time. Things sometimes go very wrong, while sometimes everything goes very right and without any excuse or justification. But, over time, I firmly believe skill ultimately proves out and will make the key difference between long-term success and failure.

I remembered this lesson last week after watching Goydos shoot a 59. Here is a guy that has been playing poorly and who has had his fair share of bad breaks, but for at least a day, he could do no wrong (even though he didn't win last week's tournament). I've seen the same thing happen when watching not only myself, but also others on and off the golf course. For example, I've seen traders go through periods where everything they touch is gold and then switch to having a colder hand than a snowman sitting in Minnesota in January. It is just the way things go and we all have to realize the ebb and flow to both life and the markets.

No matter how much we would like to, we can't control what happens to us entirely BUT we can control how we react to good and bad breaks we experience.

Traders by nature tend to be control freaks and when things go wrong, most of us will naturally look for specific reasons to explain or blame on the poor result. It is just our nature to do that. But, sometimes bad trades happen when every decision you make leading up to the trade was the correct one. I've seen more traders than I care to think about change their whole entire strategy and mindset after just one big beat down and in doing so their trading often spirals out of control. Please resist the urge to do that when, not if, that happens. Many times you've just got to accept the fact that bad things happen even when you're doing all of the right things. Sticking with your same trading and investing strategy is often the right way to go even though it doesn't seem like it at the time.

Likewise, the same is true in when everything swings in your favor. Whether or not you are willing to admit it, I'm willing to bet that some of the best trades you've ever made were the direct result of being lucky rather than smart. Although not many traders will not readily own up to that fact because our large egos are so intertwined with our trading results, I can say with confidence that if you're blaming all of your bad breaks on other things while claiming full credit for all of the good breaks you've had, then you are not honestly evaluating your performance. In my experience, if you really took a good look at your track record to this extent, you'll find as I have that the good and bad breaks usually balance each other out. For the past several years, in my trading journal I've actually been trying to keep track of the lucky breaks I've had versus the unlucky ones, and while they tend to run in cycles, in general I've found that over time they cancel each other out. I never thought that was true until I actually started keeping track.

Those who win and achieve long-term success I think are those who eventually learn to take the bad breaks in stride and maintain their confidence while not letting their lucky breaks go to their head and overfeed their egos. They learn that sometimes you can do all of the right things, and still lose money in the market and vice versa.

The next time you get a bad break, or even a very lucky one, remember this lesson as it will help smooth out the edges, give you much needed perspective, and keep your emotional state where it should be.

Sunday was "Independence Day" in the United States where we celebrate the birth of our country and declaring independence from Britain. It also got me to thinking, as I usually do on market holidays, how fortunate I am to be doing what I do for a living in this country. While America faces many, many challenges and uncertainties, I'm proud and happy I live here and thankful for the opportunities this country has provided me and my family!

In fact, there's probably no better time than the present to talk briefly about the pros and cons of being an "independent trader."

As someone who has worked independently for most of my professional career, you can say I place a tremendous value on "doing my own thing." As I've often said, at least for me it has been a combination of personal choice (what I want in both life and career) and also necessity (as I don't play well with others). Indeed, there are some tremendous positives for trading independently. After all, I wouldn't be doing this if there were not some significant advantages from doing so!

Here are a few things that first come to mind:

As an independent trader, I set my goals and I'm in charge of my own destiny. I don't rely on any other person for how much money I make or how I make it. Other people's opinions of me are irrelevant to my own destiny. At the end of the day, bottom line trading results (not office politics) are all that matters.

Most people in "normal jobs" don't have the opportunity to set out on their own and do something they really want and love to do and also make plenty of money doing it.

I spend most of my time every day doing things I really like to do (trading, reading, researching, running screens & mentoring others). These are things I would do even if I were not paid to do them because it is what I like to do the most! Every day I plan my work on things I want to work on, not what others want me to work on. That level of professional autonomy is rare.

The sense of accomplishment when you achieve success in the markets independently is unparalleled. There's nothing like finding and taking a good trade that produces lots of upside gain. This is especially true when that trade is unpopular and unforeseen by the herd.

Through my research I've been able to learn about many things, many industries, many countries, and many people. At this point, I can have a conversation with just about anyone no matter what they do for a living or where they live because I know something we can probably talk about based on what I've learned and know about others.

It is always interesting and I'm NEVER bored. It is so true there is no better drama on Earth than following and being a participant in the markets daily.

There are no meetings. People, often in corporate America but in many walks of professional life, waste so much time on so many irrelevant things like business meetings. At least if I'm going to waste time, it will be something worth wasting it on!

There is no commute or dress code. I fall out of bed at 5AM and go to work in shorts and a tee shirt. I don't have to dress up or even take a shower. In fact, I only own one dress suit and that's because I may have to go to an occasional funeral or wedding. Finally, I don't have to spend an hour or more in the car every day just going to and from work. That's a good way to live and work!

I can live and trade from just about anywhere in the world. Although we have found a little slice of heaven living here in Southern Utah (Cedar City) where the people are nice, the weather is great, housing costs are low, plenty of excellent golf courses nearby, we have dozens of national parks for hiking within a day's drive, Vegas is not too far away, and so on - if and when we tire of it, we can move anywhere we want to and I can still earn a good living.

Trading independently offers level of personal freedom that isn't present in most jobs. If I want a day off to play golf, help a friend, visit with family, I do it. I don't have to ask anyone for permission! However, offering a paid members-only website places some severe limitations on that freedom!

So, now I've talked about the positives, what are the downsides to trading independently?

While many people think I have a dream job and, in many ways I do, there's no career choice that doesn't also have its own set of unique negatives. Frankly, if most of you actually had to do what I do every day to reach your financial and career goals, I think quite a few of you would begin to question whether "trading for a living" is really the right way to go.

There are many misconceptions about trading out there primarily due to shady marketing practices by those who sell investment services and trading products. Many in this business unfortunately propagate to their own benefit the view that trading for a living is an easy way to get rich without any time or effort. The truth is that it can often be, and has been, a challenging career choice and one frankly that is less than ideal for many people I encounter.

As for the downsides, here are a few you should be familiar with if trading for a living is a career you seek:

You've got to bring your A game to the table each and every day. There is no sitting in a cubicle playing solitaire, visiting with facebook friends, talking with others in the break room about fantasy football, etc. that is going to get the job done for you. Your efforts, whatever they may be, will be directly related to your bottom line returns!

Past success means absolutely nothing. You are only as good as your next trade, your next week, your next quarter, etc. In addition, what you do next always has the potential to unravel whatever success you've acquired previously. Few careers offer you the potential for self-destruction so quickly the way trading for a living provides.

The pressure to perform will create unbelievable amounts of negative stress and energy you'll have to deal with daily. Most people don't have to worry or fear that being wrong will cost them their paycheck. After all, just look at economists, bankers, and politicians!

There will be little to no respect or understanding for what you do for a living. People will assume you're a "day trading gambler." Or, in my view, which is even worse, many idiots will express the view that they could also "trade for a living" if they decided to. This is true even in by those who've shown no consistent success in the markets on a "part-time basis."

Working in isolation you'll often miss close human interaction and the lack of a competitive "team" like atmosphere. Also, building and holding outside friendships, especially for men later on in life, are often very difficult for those who don't meet a lot of people through their jobs.

Sitting 12 hours a day every day at the computer will wreak havoc on your overall health and fitness. Many traders are overweight, have back issues, eyesight problems, etc.

Like many highly skilled professions it requires constant education & learning. In many, but not all careers, once you've acquired a certain amount of skills and knowledge, little more is expected of you. In trading, you've got to always be in learning mode. In addition, what you think you know right now and what is working for you, will not someday in the future. That's the way of constant evolutionary state of the marketplace.

You've got to be a jack of all trades. I've often said that if trading was the only thing I had to do, my life would be a whole lot easier. Instead, independent traders must spend time serving as their very own tax accountant and tech support guru. In my view, there's nothing worse than a hardware or software issue that takes you away from concentrating on the markets.

There will be very long work days and work weeks. Those who say you can trade successfully in 10 minutes a week are liars and charlatans. Most independent traders put in between 50 to 60 hour work weeks and are considered "grinders" rather than trading "wizards." Remember, there are no holidays or weekends for professional independent traders - only more time to devote to charts, scans, research, and strategies!

You've got to have money to make money. There are very high capital requirements involved in being an independent trader as it takes a lot of money set aside from your personal assets to produce a living wage for yourself and your family.

Your "salary" will vary considerably based on things outside of your control like overall market conditions and how your strategy is in sync with the market. It is true, you'll make 90% of your income in 10% of your time. However, overhead costs will remain constant and there's nothing worse than having to grind out trades in an unreceptive market to "make the mortgage."

Even when you make a lot of money and have experienced tremendous success, you've got to still live like a pauper. There are no golden parachutes, annual bonuses, etc. that are going to save you when you screw up in the future. And, trust me, you will screw up. You will make bad decisions. You will be on the wrong side of a trending market. It happens to everyone and it is never fun or profitable! Which is why when the sun is shining, we've got to always prepare for those future rainy days.

Personal, family relationships can be difficult. Like most people, when things aren't going well, many will look for others to blame and take it out on their spouses and family members. Divorce rates are high among independent traders. The only way around that is to find endeavors that release this negative energy (like golf, hiking & daily exercise). In addition, I seldom see successful independent traders who don't also have a very strong family support structure in place. If your life is a mess, your trading will often be as well.

Distractions at home will be both numerous and frequent. As independent traders who work from home, everyone else will think you can spare time for doing other things during the normal work day (i.e. like going to the grocery store, getting the house worked on, taking the cars in for repair, mowing the grass, taking kids to the doctor, doing laundry, etc.) In addition, there are things you'll want to do as well (like playing golf) when you should be looking through charts that are going to distract you constantly from achieving the results you desire.

As an independent trader working a "zero sum game," nothing you do every day as a trader other than making money will be a benefit to others or society in general. While you will have plenty of opportunities to donate to charity in order to give back something, independent traders must work really hard at finding good and effective ways to make a "real difference" for other people. My late father once said to me that "when you die, the good Lord will ask you who on Earth you really helped freely and without personal gain. You better have a lot of names to give to him or you're going to be in big trouble son!" It is true - we all get caught up in our crazy game of beating the markets that we forget how others have to really struggle to "work for a living." Also, even the best of us fail to do enough to make a true, positive AND lasting difference in other people's lives beyond just donating some of our profits to charity.

While I know I've missed a few of the negatives and positives, I think this at least offers some perspective on what it means to trade independently as I have all of these years.

All in all, I have no regrets and I'm happy today as I've been in the past to do what I do for a living. Whatever you do, I hope you feel the exact same way and, if you don't - you have both the courage and conviction to make a real change for the better. Life is far too short for anything less than that!

The great thing about this country is that whatever you want to do, you're still free to do it. It is my most sincere wish that you enjoy and take full advantage of that freedom!

I hope you and your family have a Happy 4th of July! As a quick update, I'm still working on several summer projects (trading, strategy development, mentoring, website upgrade), but regular posting (and an entirely new website) will return by Labor Day, September 6th, 2010. I promise!

Until then, I'm only updating the members' only website while I trade and work on these key projects. But, I'll be back by Labor Day here at the free site. Lots of good things are planned upon my return!!!

A quick update for non-members...

While I continue update the members' only website frequently (premarket report, after-hours report, weekend links, screens, etc.) I've been slacking here at the free site for awhile. Sorry about that!

While not an excuse, my focus of late has been primarily on on trading, helping members (a "summer school session" is planned for Saturday), and also on The Kirk Report's largest website upgrade since I started it back in 2003. Because of all of these three things, posting will remain limited for the foreseeable future here at the free page, but I think you'll enjoy what I've been working on when it is up and ready. After receiving a number of emails from concerned people about infrequent posting, I felt the need to at least let you know what I've been up to lately.

I hope you're having a wonderful summer!

It is often said that markets hate uncertainty and it is true. We do live and trade in uncertain times. But, as traders and investors, we must all learn to love and appreciate uncertainty. With uncertainty, also brings opportunity. Understanding this concept is so very important and learning how to profit from uncertainty consistently is going to make a critical difference between your success and failure.

Traders learn through experience the importance of examining and evaluating the markets through placing percentages on various future market scenarios. For example, at the hedge fund I worked at last week, every morning traders assemble for a 30 minute premarket meeting where everyone at the firm works closely together to outline the various potential scenarios for the market that day and then place specific odds on what they think is most likely to occur and why. One trader every day is in charge of diagramming out the different market scenarios on a whiteboard which resembles a flow chart so that the firm has a structured and easy to follow game plan. That game plan is also copied and stored so that the firm can later review it to learn and prepare in future days. In fact, at the end of every trading day they have another meeting to review the game plan and what went right and wrong and why.

By having the plan in place with various market scenarios outlined and positions to profit from those scenarios, uncertainty is no longer a factor. In fact, traders learn to love uncertainty because uncertain market conditions tend to favor those who are the most prepared to handle anything and everything Mr. Market could throw their way.

When the market does something outside of that original plan (it doesn't happen as often as you might think), there is always a Plan B, Plan C, and so on with a number of preconfigured trading ideas to profit if the market moved in a specific manner different than the most likely scenario. By having this planned structure in place, everyone can then focus on price action and trading setups as they occur instead of flying by the seat of their pants or, even worse, finding themselves held hostage or paralyzed by the ticker.

I had the distinct privilege of looking through the archive of firm's game plans for the past year and was amazed by how well the firm positioned itself according to the plan AND more importantly how it handled itself when the market did something unusual. In fact, just reviewing past game plans would be incredibly useful as a teaching mechanism for new traders who have little understanding of how the pros plan their work and work their plan. If you're like me, you'll begin to respect the other side of the trade much more than you probably do already.

As you might imagine, the process of formulating a game plan based on setting percentage odds for various scenarios was very interesting and useful for me to watch and participate in. It also stressed how important it is to have a plan, but at the same time be flexible enough to adjust as market conditions change. I usually spend at least an hour of prep time before every trading day, but after last week's experience, I will be doing more prep than before. That's how important I think this kind of exercise can be!

So, the question becomes, are you adequately prepared every trading day? In working with many traders over the years, most are not as prepared as I saw with my very own eyes last week. In fact, given the firm's results compared with other traders I know, I have good reason to think that kind of high-level preparation frequently can separate the winners from the losers.

Yes, it is true that we call can get lucky (every trade in theory has a 50% chance of working out, correct?), but over time the market will remove that luck factor and your success will be determined primarily on consistency and how you plan and deal with uncertainty in the markets. If you spend time every morning engaged in developing your own plan, I think you're bound to see steady and significant improvement. As Sun Tzu once said, "every battle is won before it is ever fought" and that's true for those who engage in doing battle with the market in such uncertain times.

In memory of my late father who served honorably in Vietnam...

I would like to send a thank you to all those who gave their lives in service of our country.

Darren Miller from Attitrade and Psychtrader will be here at 12:PM ET to take our questions.

To attend the session live (or read it later) please visit the following link:

Strategy Session: Darren Miller

Many of you already know Darren, but for those who don't I highly recommend you visit his about me page for more information ahead of today's session. Even though I have provided links to a number of Darren's previous articles, you may also find it helpful to review those as well.

We hope to see you there!

Every morning I prepare a premarket report that thousands of traders find useful at the members' only website. Here's a quick clip of this morning's report:

If you think information like this would be helpful to you to navigate days like today profitably, consider becoming a member for $100 bucks a year. I think you'll find it well worth it!

Q: Between your friends in the business which I know are many and through your mentoring have you discovered one personality trait common among the most successful?

A: I think Dr. Brett's post on personality and trading success confirm what I've found as well - i.e. that "trading is probably far more related to talents, skills, and effort than personality features." I agree with this as I've worked with and know all sorts of different types of people who trade successfully.

There is no "one suit" that fits all.

However, I will say this. One thing that I tend to see most often is what I call stubborn determination. What I mean by that is that after a series of significant setbacks, mistakes, frustration and disappointment, the most successful traders always find a way to dust themselves off quickly and return even more motivated and focused about their trading than before. I see that not only in myself but in many of those who trade well. Trading is one of the most challenging endeavors out there and the market will test everything you've got and then some.

As Dr. Brett also mentioned in that very same post there are "certain traits tend to help people make best use of their talents and skills." This is why it is so important for traders to use strategies that also are a good fit for their personality.

There are so many profitable ways to trade, but in all likelihood only a few that match and harness your own unique skills and who you really are. That's why it is so difficult for most who desire success to play copycat with other traders although everyone at some point gives it their best shot. However, unless you are one of the first to discover your very own "trading twin" as I often like to say, you are going to experience tremendous difficulty and frustration implementing another trader's strategy as your own.

One of the first things I like to do when working with a new student in my mentorship group is to spend the first month we are working together on a completely new and different strategy they've have never used in the past. In fact, I'm very careful not to try to train people into adopting my own strategy, but instead start the process of discovering the right strategy that meets their own skill set and personality. To do this, I begin the process by having my student taking an in-depth personality test that helps both of us understand who they are and offer some ideas which strategies could potentially offer the "best chance" of a match.

The reason for this approach is two-fold: 1) students bring a lot of baggage with them with the strategies they are currently using that to make progress we need a whole new approach and opens up an entirely new and fresh path which is important, and 2) students often learn how to do something new and successful in the markets which in turn provides them the much needed confidence. Without confidence, success is difficult to maintain no matter what strategy you use. Confidence only comes when traders use a strategy that they completely understand AND which fits their personality and skill set the most. So, if you're looking for one commonality that I see among the most successful, that is it.

Eddy Elfenbein from Crossing Wall Street will be here at 12:PM ET to take our questions.

To attend the session live (or read it later) please visit the following link:

Strategy Session: Eddy Elfenbein

Eddy has become one of the highest-respected financial bloggers in the world and for good reason. After several years of experience in the financial newsletter industry, working as a sale assistant for several brokerage firms, and serving as editor of prominent investment advisories, Eddy has a unique experience and offers perspectives frequently found no where else.

Today we'll talk a lot about his strategy and focus. It should be a worthwhile session!

Jumping higher after the open, then reversing into negative territory shortly thereafter, stocks got off to a whippy, volatile start yesterday morning.  read more »

Stocks opened moderately higher yesterday morning, then meandered in a sideways range throughout the day. Closing near the middle of its past week's trading range, the S&P 500 rose 0.6%.  read more »

Hello readers, Nick here. Hope everybody had a good weekend and the overall positive market trend has been good to you traders out there.  read more »