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Tuesday, March 15, 2011

Japan, Black Swans and Gold 3

Above is a Daily chart of gold. You can see that Gold has fallen down to its 50 day (exponential) moving average. When markets deleverage (this means everybody sells everything they have borrowed money to buy) everything gets hit. This is a buying opportunity in Gold.

Does this mean gold can't fall farther? Of course not. But gold is only falling because people who have borrowed money to buy it are panicking. Others who do not understand why they have bought it also panic. Cooler heads will step in and eventually buy here when they feel that "weak hands" have all let go.

This brings us to the TWO GOLDEN RULES of INVESTING.

RULE 1. BUY WHAT YOU UNDERSTAND. Do not buy because your friend told you to. Or because that news letter told you to. Or because your investment advisor told you to and he's really smart. If you feel like something might be a good idea, research it, and make sure you understand why you are buying it. If you do not know why you are buying something when a round of deleveraging hits you will panic sell. Or worse, when the reasons to buy have changed, you won't know it and you won't sell. Then you'll lose everything.

Are you a software engineer who understands Apples' unique positioning? Great. Go for it. Is your friend a software engineer who understands Apples' unique positioning. Stay the hell away. When Apple makes a big mistake your friend will know it, but you won't.

Are you a lawyer that gets why some ruling helps some biotech company? Great. Go for it. Is your friend that lawyer? Stay the hell away. When conditions change your friend will know it. You won't.

RULE 2. DON'T BE A DICK FOR A TICK. It's an old trading maxim. It means: if an investment is a good buy, don't wait for it to become a great buy. You'll miss your buy. And when an investment begins to sour, don't try and get the last few cents out of it. You'll end up taking a huge loss.

If you can do those two things you can manage your own money.

But I don't understand anything in the markets, you might say. Good. Then go to cash. But at least research cash. Try to understand what cash is. And try to get into the right form of cash.

In my opinion Gold qualifies as good form of cash. But don't take my word for it. Figure out why. I explain my views at

But figure it out for yourself.

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