" Missed Earnings Estimates - Betting Against The Wall Street Consensus" by Fred Carach

In my career as a speculator a career that is now well past forty years I have always been a contrarian. I have always bet against the Wall Street consensus because that’s where the money is. I can safely say it has never been more profitable to bet against the Wall Street consensus than it is today. Wall Street today as never before in its history is dominated by “herd behavior.” Day after day, the Wall Street herd stampedes in and out of stocks based on nothing more substantial than today’s headlines. Headlines that are so unsubstantial and of such transitory importance that 60 days from now no one will even remember them. Wall Street’s stupidity has become one of my favorite article topics.

My topic today is one of Wall Street’s greatest stupidities, “missed earnings estimates.”

To explain this stupidity more fully let me fabricate a tall tale. Let us imagine that five skid-row bums decide to become stock analysts and issue estimated future earnings reports.

For their first venture, they pick a stock that is currently being followed by only two analysts. Their stock pick XYZ is earning a profit is well thought of and is rising in value.

They are too bullish on the stock. Their new higher consensus estimate swamps the more realistic estimate of the two old pros who have been following the stock. XYZ does well but not well enough. Its earnings are up a respectable 18 cents a share for the quarter but the new consensus estimate was not 18 cents a share but 20 cents a share.

XYZ has committed one of Wall Street’s greatest crimes. It has missed an earnings estimate. The stock is brutally mauled. Therefore, the next consensus estimate is reduced say 1 cent a share to 19 cents. Once again, XYZ misses its earnings estimate. It reports an earnings increase of only 15 cents a share and once again, the stock is hammered. The stock analysts having now been burned twice reduce their consensus earnings estimate increase for the next quarter to only 15 a share. Once again, XYZ misses the consensus earnings it reports an earnings increase of only 12 cents a share.

In the eyes of Wall Street, this is the kiss of death. What is even worse is that the reported earnings increase has been falling for three straight quarters from 18 cents a share to 12 cents a share The stock is crushed. It is easily possible for a stock that has missed three straight earnings estimates to fall 35% or more in value.

For a contrarian speculator like me this stock is now a raging buy. The overwhelming probability is that XYZ will annihilate the next quarter’s earnings estimate. How do I know this? Let’s take an honest look at XYZ’s real performance. By any rational measure, it has performed very well indeed. In the last three quarters, it has increased its earnings by an impressive 45 cents a share and its reward for this stellar performance is that the stock has fallen 35%. Why has the stock been crushed? It has been crushed because five skid row bums who have nothing whatsoever to do with the company they are covering fabricated over optimistic numbers.

At this point, you might inform me that stock analysts are not skid row bums but respected Wall Street professionals. My response to that is that when you follow these alleged pros for as long as I have it is not hard to conclude that they might as well be skid row bums. These guys will put you into the poor house.

Welcome to the wonderful world of Wall Street where stupidity reins supreme.

There are two additional reasons to love this stock. The first reason is that there are multitudes of stocks on Wall Street whose earnings are strongly seasonally influenced. XYZ has reported three weakening quarters. Thus there is an excellent chance that the next quarter will be it strongest quarter of the year.

The most powerful reason however is the fact that the consensus estimate has been too bullish three times in a row. There is nothing more disastrous for stock analysts than to overestimate earnings for three quarters in a row. The investors who follow their reports are getting killed and they are not going to be happy about it. The consensus earnings estimate will now be ruthlessly cut perhaps to only 8 cents a share. The overwhelming probability is that XYZ will now report a strong quarter and will easily blow away this fear induced low-ball estimate. A return to the 18 cents to 20 cents a share range would not be out of line.

In Wall Street lingo, this is referred to as a “positive earnings surprise.” XYZ has beaten the consensus earnings estimate. There is nothing that Wall Street adores more than a positive earnings surprise and this one is big.

In such a scenario, the stock could be expected to explode in value. Welcome to my world, the world of the contrarian investor.

Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309

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"Stopwatch Investing - Betting Against The Wall Street Consensus" by Fred Carach

I have spent more than four decades betting against the Wall Street consensus. I wrote a book about it. As I look back over the decades, the most remarkable aspect of the Wall Street consensus is that it has been getting dumber and dumber. You have got to admit that this is a truly heroic achievement.

In my book and in a series of articles that I have written I have pounded away at this enigma. Let us take a look at stopwatch investing one of Wall Street’s reining stupidities. There are so many of them that it is hard to know where to begin.

When I broke into the market in the 60s, people were married to their stocks. They were junior Warren Buffets. Buffet has famously stated on many occasions that his favorite holding period was forever.

A typical holding period back then was until retirement. After you retired, you would shift to bonds. Only crazed speculators would contemplate buying a stock that they were not willing to hold for at least five or ten years. The thinking back then was that the only sound reason to buy a stock was that you understood and believed in the stock and you wanted to be an owner of a company that had a bright future and produced what you believed was a great product or service. After all, if you did not believe this why would you want to own the stock? In other words, you were a conviction investor. You were not conditioned to bolt from your stock at the first sign of trouble. As a matter of fact, it is quite possible that your stock could fall by 15% or 20% with out you even being aware of it. Back then, there was no CNBC and most newspapers did not carry the stock tables. People thought nothing of going months at a time without knowing the current sale price of the stock. After all, they knew why they owned the stock.

It was common then for stockowners to always be bragging about the stocks that they owned and they would promote them at every opportunity. If you owned Pepsi, you would only buy Pepsi. You would never, ever buy Coca-Cola. If you owned GM, you would only buy GM cars.

Contrast this behavior with that of a typical stockowner today. He has been taught by the gurus on CNBC and elsewhere that he who is wise is ready to bolt from his holdings at the first sign of trouble and that a 5% or 10% drop in a stock is the end of the world. After all, how many 10% drops can you survive?

What this leads to of course is stopwatch investing. If you have been in this racket for any length of time I am sure you will agree with me that it is truly amazing how often even blue chip, high quality stocks drop 10% and even 15% for no rational reason at all. Forget about 5%.

Today’s investors have for the most part been indoctrinated into believing that he who is smart always puts in a stop-loss order at 5%-10% below his purchase price. This results in vast masses of stop-loss orders that are just under today’s prices and appear to be triggered every time you turn around.

If the stock has not moved in 30-60 days you are ready to bail out at the first sign of trouble.You have been taught to think small and to be ready to bolt at the first sign of trouble to protect your pathetic 5% or 10% profit. It is rarely more than that. This is no way to get rich.

There remains a question that has not yet been answered. The question was how many 10% drops can you survive?
I know the correct answer to this question. The correct answer is thousands of times and I am living proof that this is the correct answer.

Provided of course that you make the smart money move and refuse to turn a loss that exists only on paper into a real loss by selling the stock. If you research your stocks and if your judgment is worth a damn you can expect to be right at least 60% of the time. Hell, chimpanzees that throw darts at stock tables are routinely right more than 50% of the time.

The fatal curse that kills stock investors is not so much that they pick bad stocks but that they keep second-guessing their stock picks. This will absolutely kill you. You will go from being right 60% of the time to being wrong most of the time.

No doubt you are wondering how I bet against the Wall Street consensus. I hope you are sitting down. Brace yourself. One of the biggest money making strategies out there is to selectively add to your position after your stock has fallen 10%-20%.

The holding period that will maximize your profits is not 15 minutes or 60 days or god forbid 90 days but 2 to 5 years. Follow the strategies that I have outlined and your losses will turn to profits like magic.


Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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"Buying Uranium When It Is In the Gutter" by Fred Carach

The March 2011 Japanese nuclear disaster gutted the uranium mining industry big time. Price declines in the range of 50%-80% from top to bottom were common. A bottom appears to be in but the issue at hand is can the nuclear industry recover? Popular belief about the industry’s future is that it will probably never recover. It is just too dangerous.

What popular opinion is ignoring is that the nuclear industry is not a luxury that can be dispensed with but a critical necessity.

The great white hope of the general population is the renewables solar and wind. These perennial solutions have been touted since the oil crisis of the 70s. What is shocking when you look at solar and wind is how amazingly little has actually been built. Everyone talks endlessly about these saviors but production rarely happens. There is a very sound reason for this. The more you dig when you investigate wind and solar, the more problems you discover. Humans are strange creatures. They want their energy 24/7 and not just when the wind blows or the sun shines. Go figure!

The nuclear industry is not going away because it is indispensable. There is no ready substitute that can match the sheer size and brute force that a nuclear reactor can command.

The ultimate proof of this is that despite Japan’s nuclear disaster reactors continue to be built. Today there are 443 operational nuclear reactors. An additional 62 are under construction and 156 are in the planning stage. Only Germany appears to be willing to pull the plug with out regard to the consequences. It still intends to close all nine of its reactors by 2022 and rely on the nuclear reactors of France and the Czech Republic to supply them with their energy requirements. How sweet it is!

Today’s 443 active reactors require about 180 million pounds of uranium per year. Global production is 130 million pounds a year. The 50 million pound gap is being made up by a limited fuel reprocessing capacity and Russia, which is dismantling its nuclear warheads under the so-called HUE (highly enriched uranium) Agreement. This program ends in 2013. Russia states it will not renew the program because it is running out of warheads. There is at least a 25 million pound global annual shortage and no mine in the world produces more than 20 million pounds a year.

US nukes alone consume 57 million pounds a year while we produce only 4 million pounds of uranium a year. Half of US annual uranium consumption is being supplied by Russian nuclear warheads.

Kazakhstan is the leading global producer at 27% followed by Canada at 20%. These two leaders account for 47% of the world’s production almost all of Canada’s production comes from the fabulous Athabasca Basin. The richest known uranium ore body on earth.

The price of uranium peaked in July of 2007 at $136 a pound. Today it is selling at $52 a pound. This is a big problem. The industry breakeven point is around $65 a pound. The present is grim but the future s bright. The policy that I follow is to establish an initial position in all the uranium plays that I like but not add to them until uranium breaks through the $65 a pound level.

The largest pure player in the industry is Cameco, which I do not own. I am an unrepentant small cap investor. The stock peaked in 2007 at $56 and now sells at $20 and is currently profitable. Once you leave Cameco, the carnage really begins. The number two in the industry is Denison Mines its 2007 high was $15 and it is now selling at about $1.50. It currently has a market capitalization of $704 million. It is currently producing uranium but at a loss of about a penny a share. If uranium breaks above $65, a pound its profit potential is awesome. Beneath Denison, I own a mix of non-producers that have been mauled by savage price declines but who own huge acreages of uranium mining claims in relation to their capitalization, which has been decimated. They are listed alphabetically with a brief thumbnail sketch.

ESO Uranium- this is a stock whose value has been absolutely pulverized. Its five-year high is $1 and it is currently selling for about 10 cents a share. It has 112 million shares outstanding. This means that the whole company is selling for roughly $11.2 million dollars. The Paterson Lake property is its flagship property in the fabulous Athabasca basin. It owns the mineral rights to 180,000 acres in the basin. If my math is right, the market is valuing each acre of land that it owns at less than $100/acre. It also has additional properties to which I am assigning no value to.

Energy Fuels- the five-year high on this little jewel was $4.94 a share and the five-year low is 9 cents a share. It is currently selling for about 34 cents. It has about 124 million shares outstanding for a total capitalization of about $42 million. It is concentrating its limited resources on building the Pinon Ridge Mill in Colorado. The first uranium and vanadium mill built in the United States in over 30 years. Currently there is only one uranium mill operating in the United States in Utah. Energy has acquired six ex-producers located in Colorado and Utah that can supply the mill with ore.

Fission Energy- the five year high on this stock is a $1.40. It is currently selling for about 85 cents. It has 102 million shares outstanding or a total market capitalization of $89 million. This company has ten projects located in the Athabasca basin and in Quebec. Its Davy lake project alone is 185,000 acres. This is another acreage rich play.

Forum Uranium- the five-year high for this stock is 81 cents and the five-year low 2 cents. It is currently selling at a whopping 9 cents a share. There are 160 million shares outstanding. You could buy out the whole company for a princely $15 million. Forum has 5 projects, which are located in the Athabasca basin and the Thelon basin, Canada’s second rated uranium play. For a stock selling at 9 cents a share, it offers extraordinary value. Its Key Lake Road project alone located in the Athabasca Basin comprises about 223,000 acres and its North Thelon project alone has 607,000 acres.

Now at this point the astute reader unless he has read my book should be questioning why I am so keen on acreage and mining camps or plays and why I never mention ore bodies. After all, if there in no ore then the mining claims are worthless. Not really. Do you have any idea of how many millions of dollars which the juniors don’t have to begin with would have to be spent to be reasonably certain as to whether or not a mining claim like Forum’s Key Lake Road project with its 223,000 acres did or did not have an economic ore body?

Penny mining stocks are not paid to do geological work on their mining claims. However, they should do $200,000-$300,000 if possible every year in geological work to try to prove up their claims. They are paid to assemble land packages in strategic, proven mining camps or mineral plays and to hold on to them until the next turn of the wheel sends all the stocks in the mineral play skyrocketing upwards. All will go up. The market does not discriminate and the junior penny stocks will go up more than the majors. Even if it later turns out that, they have nothing.

If it did not work that way, I would not be wasting my time with penny stocks. The market is only concerned about land packages in strategic locations. And the larger the better. Proving up ore bodies is the job of the majors.

Strathmore Minerals- the five year high on this stock was $5.04 a share and the five-year low was 13 cents a share. It is currently selling for about 45 cents a share. It has 89.9 million shares outstanding. The total market capitalization is about $40 million. To my mind, its 86,700 acres in Wyoming and New Mexico are the finest uranium properties owned by any junior in the continental United States. The market is currently placing an absurd value on Strathmore’s holdings of $460/acre.

UEX Corporation-the five year high for the stock is $9.43 and the five-year low is 36 cents. The current price of the stock is 92 cents a share. There are 203 million shares outstanding and the total capitalization is about $188 million. The share price of this high quality junior was absolutely pulverized. It has 824,000 acres of mining claims in the fabulous Athabasca Basin. Ten of its properties in the basin are joint-ventured with AREVA Resources, which is owned by the French government. There is nothing more positive for a junior than to have senior sponsorship.

Uranium Resources- the five-year high for this stock was $14.99 and the five-year low was 36 cents. The current price for the stock is about $1.00. There are 94 million shares outstanding and the current market capitalization is $95 million. This producer has been in operation since 1977 and has produced 8 million pounds of uranium from its 183,000 acres in Texas. It specializes in what is referred to as in-situ uranium recovery. In this process uranium is leached out of the ground and rises to the surface through a web of pipes.

If you have read this far I think you will agree with me that these stocks have been absolutely pulverized and represent enormous value if uranium can sustain a price above $65 a pound. One final word of warning. If you read my book you know that I am a fanatic on diversification. If you put more than 1% of your investment capital in any of these plays other than Cameco and Denison you are on your own. 

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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"My life As A Speculator-How I Make Money By Losing Money," Fred Carach

I have been at this game for a very long time. I made my first investment in the stock market in 1961 and I have never been out of the market since then, not even for a single day.

I don’t believe in sure things. What I do believe in is risk-reward ratios and that is the concept that I build my life around. I think that believing in certainty in the world of investing is an exercise in delusional thinking that will destroy you. The higher the tolerance for uncertainty, the greater the rewards.

At this point the “I refuse to lose my money crowd” will proudly point to the fact that they have never lost a dime in their investing because they only invest in sure things like government guaranteed savings accounts or treasury bonds.

I go nuts. The first thing I do when I hear this argument is to frantically search for a chair so that I can break it over their idiot skulls. How can anybody be stupid enough to believe that any government guaranteed investment earns you a positive rate of return after inflation is beyond me? At this point dufus proudly points to the official government statistics that prove that the rate of return on government treasuries is above the rate of inflation. The stupidity takes my breathe away.

There is however, one exception to this rule. From time to time governments will embark on a kill inflation now crusade. During these short crusades, it is indeed possible for the true rate of interest to exceed the rate of inflation.

Except for these short term crusades I do not know of a single nation on the face of the earth whose bonds will pay you a positive rate of return after inflation if accurate numbers are used. I regard government bonds as guaranteed certificates of confiscation. The longer the term of the bond the more certain the confiscation.

For the sake of argument, let us suppose that we have discovered that the ten-year bonds of Outer Mongolia will pay you a positive rate of return after inflation using true numbers. I am talking miracles here. When the bonds mature in ten years, you do indeed have a positive rate of return. Or do you? There is the little matter of converting the Mongolian currency into dollars. You have a positive rate of return only if the Mongolian currency is convertible into dollars at a rate that is equal to or higher than it was at the time you purchased the bonds. In other words you could not only have a loss but you could have a very large loss on what you presumed to be a guaranteed return and this problem exists with every currency on earth.

The point that I am trying to make is that your investment in Mongolian bonds is certain only if you know with certainty what the exchange rate is going to be ten years into the future.

Recently a 21-year-old kid questioned me about my investing. He wanted me to recommend an investment that he could not lose money on. When I told him that I have never in a lifetime of searching found such an investment a look of total scorn appeared on his face. He told me that only stupid people invest in things that they can lose money on. Smart people only invest in sure things. When I asked him what he regarded as a sure thing, he said a savings account and then real estate.

This belief in sure things is not rare; it is as common as dirt. Nothing is more common than the belief in a sure thing. People spend their whole lives looking for it and when they think they have found it, they bet the ranch. All too often, their sure thing turns out to be a mirage and they lose everything.

I am a great admirer of Warren Buffet who is beyond dispute one of the greatest investors of all time. Recently however, he said something that was so stupid that it blew my mind. He said that the first rule of investing was not to lose money. The only trouble with this is that to follow that rule we would all have to be psychic and be able to predict the future. Since the only true psychics are safely tucked away in mental institutions, which is where they belong. It therefore follows that we cannot invest in anything because we cannot be assured in advance that we will not lose money.

If you look at the cover my book, you will see a green felt table with dice on it. It is a true depiction of how I invest. In well over forty years as an investor, I have owned more than 750 positions and have been successful more than 60% of the time. Anyone who tells you that they are right more than 80% of the time in this business is a liar.

It is time to reveal the secrets. If there is a key to investment success it is above all else the willingness to lose and to put your money at risk. The willingness to take a loss overrides all other investment considerations in importance. Nothing else even comes close. It is hard to overestimate just how unwilling people are to even consider the possibility of taking a loss. Let alone taking a loss. There are vast numbers of people who doom themselves to a career of working at a fast food joint after they turn 65 because the miserable returns they have earned on their safe investments did not even keep them up with inflation. If we are being truthful these people actually lost money by investing in a sure thing but they would rather die than admit it. For reasons that I have never been able to understand these people are quite proud of the fact that they have never taken a risk. Having dispensed with these pathetic losers, we can now consider the next category of investors.

Investors who are emotionally capable of accepting the fact that if they don’t want to be working at a fast food joint after they turn 65 then there is no choice but to invest in investments that have risk but earn you a real return. The crisis that will determine their success or failure as investors rests largely with how they react when they have a “paper loss.” It is impossible to overestimate the importance of paper losses in the career of investors. A paper loss is a loss that would occur on an investment if you sold it at today’s price.

It is dogma today in the trend chasing community that dominates the stock market that all paper losses of more than 10% are real losses and that the only real investors are those investors who have the courage to accept this fact and act on it. In this community selling your losers and thus turning your paper losses into real losses is regarded as proof that you have what it takes to be a real investor.

I have spent more than four decades proving that these people are wrong. I have made a career out of turning paper losses into profits. It isn’t hard. The only thing you have to do is to hold on to your investment until it returns to the profit column. These geniuses will tell you that this can never happen because all stocks that fall more than 10% are destined to go to zero. Nothing can shake them from this belief. Including the fact that many of them have a list of stocks that they have sold at a loss that is longer than their arm. Stocks that would be in the profit column today. If they only had the courage of their convictions and held on to them.

It gets far, far worse. My ultimate crime is that I routinely increase my position in stocks that I am holding at a loss. After all why shouldn’t I. I know what these stocks are worth. I have spent decades analyzing stocks. In other words, I make money by losing money. The biggest profits I make tend to be stocks that I have increased my position in after they went down. The trend chasers who dominate today’s markets are adamant in their belief that adding to a losing position is suicidal. Then again, if you mindlessly buy stocks about which you know nothing solely because they are going up. You face a crisis when they go down. Don’t you? This incidentally is the stock and trade of the trend chasing community. After all, they do not have an opinion that is worth a dam as to the true worth of the stocks that they are buying and selling.

John Wayne summed it up nicely:

           “Life is tough but it is even tougher when you are stupid.”

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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"Why You Keep Losing Money on Great Stocks-The Trend Chasers Dilemma" by Fred Carach

Investment attitudes have changed greatly since I broke into the investment world in 1961. In those days, everyone was a conviction investor. You bought a stock because it was a great stock and you believed in the company. As long as you believed in the company, you held on to the stock. After all, why would you sell a stock in a company that you believed in just because it was temporarily declining in value? If you were right about the stock, it would turn around and head upward in due course. You were by definition a long-term investor. After all, great stocks remain great stocks for years. They don't become dogs five minutes after you buy them. Today the conviction investor with his long-term holding pattern is an endangered species.

The day trader, the momentum player and the trend chaser have replaced him. By definition, these players are short-term stockholders. Their iron conviction is not that you should buy great stocks and hold them. But that you should only buy stocks that are going up. After all, if the stock is not going up why would you want to own it no matter how great it is? And if the stock is going down how great can it be? I can remember when I thought this was so wise that it should be carved into the sides of mountains in granite.

It took me years of painful losses to learn the error of my ways. When you have been around for a while, you learn a very inconvenient fact. Stocks rarely go up more than 15%-20% without having a correction and that correction can eat up 50% or more of the prior advance. Indeed, it often eats up the whole prior advance and more.

This results in the trend chasers dilemma. After all, he is not a conviction investor. The only reason he bought the stock was that it was going up. How does he keep his profits from turning into losses? The answer is a sell discipline. It is called a stop-loss order. The stop-loss order is an automatic sell order that your broker executes to sell your position if your stock falls to a predetermined sell point. Depending on what the trend chasers tolerance for losses is it will almost always be set at one of three selling points. It will be set at either 5%,7.5% or 10% below the current market price. Setting the loss at 10% is the most common sell discipline by far.

The sad truth of the matter is that trend chasers don't do nearly as well as advertised. The reason is that the market refuses to cooperate with their stop-loss orders. You see, "the boys" have a pretty good idea of where the stop-loss orders have been placed. Their favorite game is to blow the trend chasers out of their positions by hammering the stock down 15%-20%.This false decline that they have created blows all the trend chasers out of the water. As soon as they stop selling the stock returns to its old trend line this time with "the boys" on board. This is called "painting the tape." The trend chasers just never wise up. It is truly remarkable how many times they can have their head handed to them on a silver platter and they can never figure it out. Then again most of them are punch drunk from all the 10% losses they are being hit with.

To get an idea of just how flawed the short-term trading strategies of the day-trader, and momentum player are let's see what happens when we apply it to some of today's super stocks.

Let's start our analysis with Research In Motion, largely because I have just read Fortune Magazine's article on the 100 fastest growing companies not just in the United States but in the world. Research In Motion is ranked number one with a three-year average annual earnings per share growth rate of 84%. During the last five years, this stock with its titanic growth rate has risen from $20 a share to $75 a share. An increase of 3.75 times. A $10,000 investment in the company would have grown to $37,500. During this run, it had 9 declines of 10% or more. Three declines of 10%, one decline of 20%, one decline of 22%, two declines of 25%, one decline of 32% and one horrific decline of 70%.

Our next high-powered dream stock is Google, a darling of the momentum players with fantastic relative strength. If there is any stock that would make trend chasing work this is the stock. In the roughly five years that Google has been listed, it has risen from $85 a share to it s current price of $469 or an increase of 5.52 times. A buy and hold investment of $10,000 in this stock would have risen in value to $55,200. Of those lucky and wise investors who bought the stock when it was issued at $85 I would estimate that only about 5% still own the stock and all of them are buy and hold, conviction investors. There are no trend chasers who still own the stock. How do I know this, by following the price action of the stock? In the five years that it has been traded, This super stock in spite of its fantastic relative strength has had an amazing 15 declines of 10% or more. It has had 6 declines or 10%, two declines of 12% and one decline of 15%,17%, 19%, 22%, 27%, 30% and 40%.

Apple is another high flier of repute. In the last five years the stock has risen from $17 to $174 currently. A rise of 10.24 times. A buy and hold investment of $10,000 would have risen to $102,400. During this time, it has had 14 declines of greater than 10%. Apple's declines are as follows: one decline of 10% and 11%, two declines of 12%, one decline of 14% and 15%, two declines of 16%, two declines of 20%, two declines of 26% and one horrific decline of 40% and 45%.

Our last jewel is Amazon in the last five years this stock has gone from $38 to $84 an increase of 2.21 times, which would turn an investment of $10,000 into $22,100. This stock has also had 14 declines of 10% or more. I was surprised at the consistency in the number of declines for each stock. I was expecting more deviation. Amazon has had five declines of 12%, one decline of 14%, 20%, 22%, 24% and two declines of 27%, and one decline of 35%, 38% and 42%.

Now let us examine the S&P 500 index. I think it did the job it was created to do. Diversification worked. There were only four declines of more than 10% in the five year period. There was one decline of 11%, 18%, 22% and 32%. In addition, all of these declines occurred after September 2008 when the market crashed.

People have very delusional expectations of what kind of return they can expect with these super growth stocks. I reached that conclusion close to forty years ago and have been a conviction investor of contrarian-value plays ever since.

If you can stand the pain, I am sure that buy and hold is the best strategy for growth investors. However, I doubt if more than 5% of buy and hold investors can stand the pain and zero percent of trend chasers. What invariably happens is that the trend chasers are repeatedly blown out of their positions with 10% losses each time.

When you stop to think about it how many 10% losses can you take?

Fred Carch is the author of Forty Years A Speculator.

"The Recession May Not Be Over With But The Bear Market Is" by Fred Carach

With every passing day, it is becoming more and more apparent that the bottom of the bear market occurred on March 9, 2009 when the Dow bottomed at 6547. Since that day, it has been rallying strongly. There are two very strong reasons for believing that the bear market is over. To begin this is a very old bear market.

The crash that began when the Dow reached its peak at 14,164 on October 9, 2007 is now 20 months old. The average bear market lasts 18.5 months and has an average decline of 36%. At its March 9 bottom the Dow had fallen a horrific 54% and the S&P had fallen an even more horrific 57%.

As market declines go this is the second worst market decline since 1885, a period of 124 years. Only the Great Depression decline of of 1932 was worse. It declined an amazing 89% from the 1929 peak to the 1932 low. Since 1885 their have only been nine bear markets that have exceeded 40%.

Market declines of greater than 40%

August 1896 bottom down 44%

November 1903 bottom down 44%

November 1907 bottom down 47%

August 1921 bottom down 44%

July 1932 bottom down 89%

April 1938 bottom down 46%

April 1942 bottom down 51%

December 1974 bottom down 44%

March 2009 bottom down 54%

When you look at the figures, you realize how extraordinary and brutal this crash has been. If you do not believe that, the March bottom was the low then for all practical purposes you have to believe that we are heading for a second great depression.

I just do not see how this is possible. There are just too many safety nets that have been built into the system that did not exist in the 1930s. In the 1930s, there was no FDIC insurance on bank deposits and 5,000 banks failed which crushed the economy. The Federal Reserve Board did almost nothing and did not lower interest rates, which the economy desperately needed. When people lost their jobs there was no buffer, all spending stopped.

Without spending the economy hit a brick wall. There was no unemployment insurance and there was no social security as there is today, which allows people to keep on spending even during a severe recession like this one. Lastly, there was no activist government that was willing to spend whatever it takes to keep the economy running.

Fred Carch is the author of Forty Years A Speculator.

"The Case Against Day Trading" by Fred Carach

Things have not been going well for the day traders for quite some time. Indeed probably since the stock market Internet bubble blew up in 1999. Vast numbers of them have departed the scene since then having been whipsawed one time too many. The strange thing is that for every departure there is a replacement and sometimes two replacements or more. The lure of easy money is strong indeed. The overwhelming majority of these rookies are going to be blown out of the water in short order.

This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.

The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.

My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.

All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.

After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.

The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.

In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.

There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.

If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.

Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.

Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com