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Wednesday, January 2, 2008

Beware of the "Doom and Gloomers"

Public Challenge Account:

Currently Long one March 08 Sugar #11 10.00 Put at .08 ($89.60) in optionsXpress Account
Value of option at the time of this writing: .08 ($89.60)

Profit goal for the option is the .21 to .25 area ($235.20 to $280)

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One extremely important piece of advice I feel I always must give people trying to start out in this business, is to stay as far away as possible from what I call the "Doom and Gloomers". When you start out, it won't take long before their email and snail mail starts showing up at your doorstep. I've been in this business for 12 years. And from my very first year, these people have been doing their thing.

What 'thing'?

Generally, a doom and gloomer will try to convince you that the worst meltdown in the history of the financial markets is on it's way. A favorite phrase of theirs is "that will make the Great Depression look like a walk in the park". They do this in an attempt to pump some investment scheme of their own.

But doom and gloomers will not simply forecast bad times. If bad times are on the horizon, it is only prudent and wise to try to foresee such possibilities. A doom and gloomer does not do this. They forecast the end of the world. Catastrophic times. They won't tell you a bear market is on the way. They will tell you that a stock market crash is on the way, and you'll be rationing off your children for a piece of gold. I'm not kidding. My wife knows nothing about this industry, but the spam mail we get nearly every day in the mailbox? Even she can quote from it and understands the rediculousness of the claims on the part of the 'doom and gloomers'. And they've been doing it for the 12 years that I've been engaged in trading and investing. Through one of the largest bull-runs mankind has ever experienced; they have been predicting the 'Crash of 1996'. 'Crash of 1997'. 'Crash of 1998'. 'Crash of 1999'. 'Crash of 2000'. 'Crash of 2001'. 'Crash of 2002'. 'Crash of 2003'. 'Crash of 2004'. You get the idea.

Why do people continue to fall for the predictions of the 'doom and gloomers' year after year? Paul Kedrosky wrote an excellent article entitled: "Why Bears Always Have the Best Arguments", that pretty much covers all the bases for that question.

So will we experience a financial catastrophe? Perhaps. But that doesn't mean you should listen to 'doom and gloomers'. Even a broken watch is right twice a day. Doesn't mean you should use it to tell time. It is much better to look for warning signs, and come up with a strategy that can survive bad times. But succumbing to fear is not a solution. It's a reaction.

Take 2007. We experienced some horrendous news, and somehow, still managed the DOW ended up having an up year. It is still to be determined to see if we enter a bear market. So why not react to the market, rather than try to predict it? Because the last time I checked, the only person capable of prediction is God. Not any investment analyst.

That being said, I'm not some starry eyed optimist that can't see some serious handwriting on the wall. I would not be surprised to see lower prices. If 12800 is violated on the DOW, we're probably in for a bear market. It's not the end of the world. The end of the world is in God's hands. We make the markets go round. In fact, a 30% drawdown bear market is a healthy thing every now and then, and something to be expected every few years. But I won't go around crying like chicken-little with my head cut off, as would a 'doom and gloomer'. Instead, I'll attempt to look at the situation objectively and in a balanced manner . . .

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This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

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