In part one of this article (July 12, 2007) we established that it may not be helpful to worry about our investments during relatively "normal"; market conditions and behaviors. Take silver and gold for example.
- June, July and August regularly means a seasonally weak price action for silver and gold.
- During this time of year investor and commentator expectations and sentiments are generally negative.
- Metals price chart patterns forming which are similar to previous bullish patterns such as 2005 where a year and a half correction preceded a significant price advance.
In our opinion recent market action in silver and gold appears to be consistent with what we would expect to see this time of year. Therefore keeping the right frame of mind while following our indicators helps us stay disciplined to make logical rather than emotional investment decisions. During a seasonally weak time of year with relatively normal market behavior and positive indicators we feel very comfortable adding to our investment positions. Without the right frame of mind some may be inclined to sell out of their positions at what may potentially be exactly the wrong time. As of July 2007 we are not worried about our precious metal investments and we are adding to our positions.
So when is it time to worry about our investments? We believe that in the short term it is very difficult to know when an investment will stop or start rising in a new general trend, but long term we think an assets value and therefore investment potential is much easier to estimate. In our every day world, we think there are many signs that the market is likely over valued and likely a good time to "worry"; about ones investment. When we list our examples, try to imagine recent bubbles such as "The New Economy,"; 1990's "dot-com"; debacle or arguably the recent "real-estate bubble."; Remember, if everyone is involved and "in-love"; with a particular investment, who is left to buy?
Signs of overvaluation:
- Wide spread acceptance of the investment by the general public.
- Wide spread participation in the investment by the general public.
- An accepted rationalization as to why this particular investment can not go down. Examples: "New Economy";, "They aren't making any more land";, "Everyone needs somewhere to live"; etc.
- Mega book stores displaying many best selling books on how to make money in the current most popular investment of the time. Think back to mutual fund books in the 90's and real-estate books of the 2000's.
- Television shows as well as entire networks devote topics to a popular investment such as "flipping homes,"; "renovating homes,"; "buying homes,"; etc.
- Late night television infomercials selling the easy get rich quick method of making money in the current most popular investment.
- Popular talk shows featuring a professional advising the public to get involved with his simple "can't lose"; investment plan.
- Conversations at social gatherings revolving around the current most popular investment with outrageous success stories.
- Stock charts that relentlessly climb higher and higher without the much needed healthy pull backs and seasonal corrective patterns.
- Investors quit their "day job"; to seek out new fortunes by investing in the popular investment class.
- Nightly news casts and special features on how well the investment market is doing and how much money is being made.
- A huge increase in small startup companies looking to capitalize on the craze.
In our opinion the real world indicators of an investments over valuation is everywhere. The key is to recognize a generally over or undervalued investment and invest accordingly. The above indicators are not perfect investing signals but they are warning signs that should tell an investor to pay close attention.
We keep ourselves in the right frame of mind for making investment decisions by following a set of general rules and principles, a predetermined investment system and custom built market timing charts. Our rules and principles help us remember signs of over valuation, normal market action, investor psychology etc. It is our system and our custom built charts that helps us invest in silver and gold with the intention of capitalizing on what we think is a long term major trend. This is how we keep the "worry"; out of investing.
If you enjoyed this common sense approach to the markets, we encourage you to sign up for our free newsletter at www.investmentscore.com. You can also learn about our system and custom built timing charts at this website.