If you want any chance of getting ahead, you must speculate. Four central banks – the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England – have rigged the stock, bond and commodity markets.
Their goal is to make stocks fall, but without causing a terrible crash.
But why on earth would they do that?
The global economy is going through the end stages of 40-plus years of credit growth.
This period has seen huge growth in government and private debt. For instance, U.S. government debt is more than USD$14 trillion. And Australian consumer debt now tops $1.5 trillion.
Paying Off Old Debt With New Money
That’s a problem. Because most governments will never repay the debt honestly. The only way they’ll repay it is dishonestly, through inflation. In other words, they’ll devalue their debt by increasing the money supply. It means the debt they racked up in the past is worth less. But it also means your savings will be worth less. So individuals have to work harder and borrow more money.
The reason for that is higher inflation means indebted governments can pay off old debt with new devalued currency. It can then create new debt that it will eventually repay with future devalued currency.
It’s how central banks and governments have worked for the past 40 years. And they’re in no rush to stop.
The thing is, even they know there’s a limit to how far they can push credit growth and inflation. And they know it will be hard to repeat what they’ve done for the last 40 years. So, they’ve got to go with their next best option – propping up the market to stop its collapse.
Central banks will continue to let markets fall until they near breaking point. Then they’ll come to the rescue… announcing a bond-buying program, money printing, currency intervention… or some other crazy scheme.
This will boost the market, and may even filter through to the economy as businesses invest, believing the economy is on the mend. But, it’s short lived. Soon enough, the market realises the stimulus won’t help, and stocks and commodity prices fall.
Until again, the market nears breaking point… and the central banks intervene again. And so it goes on. The result they’re after is to institutionalise central bank intervention… so intervention becomes the norm rather than the exception.
In other words, they’re rigging the market.
But one day even that plan will break down. Yet for now the market wants central banks to intervene.
If this all sounds like gobbledygook, don’t worry. Because in simple terms it just means that markets are set for more volatility.
And that creates a dream environment for stock speculators.
Whether that’s buying small-cap stocks to bet on the market going up… or short-selling stocks to bet on the market going down. Either way, it’s forcing investors to be speculators…
And speculating is something you have to do. But that doesn’t mean you should use all your cash. You’ve got to be smarter than that.
We suggest you use our “safe” money and “punting” money approach:
Make sure you put most of your “safe” money in a bank savings account or term deposit. This should be as much as 80% of your savings. But with deposit rates falling, it also helps to own a few blue-chip dividend payers… say between 10-20% of your assets.
Not forgetting gold and silver.
In our view, precious metals are a must-have in any portfolio. This is your long-term investment money. An asset you should keep until you’re well into retirement. And with any luck, an asset you’ll never have to use (there’s no better legacy than leaving a few bars of gold and silver to the kids or grandkids).
After you’ve sorted out your “safe” money, anything left over is your “punting” money.
That’s where small-cap stocks enter the frame.
Going After Big Gains
In our view small-cap stocks are the best place to put your punting money to work. You get the potential for big triple- and quadruple-digit gains, yet you only have to put a small amount of cash on the line.
In terms of reward versus risk, nothing beats it.
And with the volatility we mentioned earlier, it improves your chances of locking in big gains within a short timeframe.
That’s why it’s important to have a robust risk-management system. We recommend the use of trailing-stop orders to lock in profits or cut losses when selling a stock. And buy-up-to prices when buying a stock.
This is something to pay closer attention to this year to make the most of the volatile market. It will mean tighter buy-up-to prices (by that we mean setting the maximum buy price closer to the previous closing price) and potentially tighter trailing-stop prices.
Plus, set shorter-term price targets and taking profits earlier. For instance, taking a 50% profit in a few months rather than waiting for a 100% profit over a year or more.
While we’d prefer to hold small-cap picks for longer, we’d rather lock in a profit now (or take a small loss) than give back those profits or take a bigger loss.
From the Archives…
Why Spain’s Economy is the Next Big Problem for the Eurozone
2012-03-30 – John Stepek
Water: A Long Term Trend to Follow
2012-03-29 – Patrick Vail
How to Avoid the Welfare State Hunger Games
2012-03-28 – Kris Sayce
What Happens When You Put Someone With No Market Experience in the Top Job?
2012-03-27 – Dr. Alex Cowie
The Star Stocks of the Resource Sector
2012-03-26 – Dr. Alex Cowie
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.