At this point in the stock market's overall phase many people are blundering around wondering what both the market and they as investors will do next. Is the market in a consolidation phase, is this a dead cat bounce in a continuing bear market, or is the 15% rise from the recent trough the start of the next great bull market?

This environment is creating feelings of fear, doubt and anxiety amongst those without a solid plan for either engaging the markets for the first time, or re-engaging the market for the more seasoned traders and investors. People feeling these emotions are perplexed. There is conflict in their minds. They are fearful of entering trades in case they lose money, yet they also fear missing out on making profits. They are doubting their ability and questioning when they should start buying shares, particularly when all the news is full of doom and gloom.... but the market has bounced. These emotions are, in turn, making them anxious and indecisive. If they have lost money in the past as a result of being ill-prepared they now only want to make ‘good’ trades, and not take any ‘bad’ trades.

The key to making good trades is confidence. The key to developing trading confidence is preparation and trust. Before getting into detail about confidence, preparation and trust, I will explore what a good and a bad trade is.

There will always be winning profitable trades and there will always be losing trades. Randomness will ensure this. But there does not necessarily need to be ‘good trades’ and ‘bad trades’. It is possible to always execute good trades. A profitable trade is not necessarily a good trade nor is a loss trade necessarily a bad trade. Both profit trades and loss trades can be good trades. Similarly, profit trades and loss trades can also be bad trades.

The majority of people who give this trading caper a go will define a good or a bad trade by the outcome of the trade. This is a big mistake because it sets the trader up for conditioning themselves with a losing state of mind. The outcome of any individual trade is affected by almost a limitless number of variables. The majority of these variables are beyond the control of the trader. This means that we could define a loss outcome as bad when the cause for the loss was a variable that was out of our control. (Another mistake for the trader with this situation is blaming the variables outside of the trader’s control thereby relinquishing responsibility– more on this later). Similarly, we could define a profit outcome as good when we actually made a trading error by doing a trade that should not really have been done but a variable outside our control caused the profit outcome (this could be called luck).

Being attached to the outcome and defining a loss trade as a bad trade will create a negative frame of mind. As human beings we tend to take winning for granted and put more significance, logical and emotional, on losing. Also, most trading outcomes will be negative, especially for the beginner, leading to more negative conditioning than positive conditioning. In turn, this will lead to a lack of confidence, the opposite of what is required to make good trades.

If good and bad trades are not defined by the outcome of the trades then what is the definition of a good trade? A good trade is a trade that is executed precisely according to your trading process. It follows that if you adhere to your trading process all the time then you will make good trades all the time. This requires emotional detachment from the outcome of every trade. Your process becomes your trading focus. Consistent traders are attached to their process not to individual trade outcomes.

One of the most important steps in a trader’s development is the shift from a focus on the outcome of each trade to that of focusing on the processes of trading. Process thinking will allow you to focus on what you can control in the market – namely, adhering to the criteria of your trading rules, and executing ALL entry and exit signals without attachment; and not on the myriad of variables within the market over which you have absolutely no control what so-ever – namely, the opinions, actions, research and decisions of thousands of other market observers, traders and investors, which may positively or negatively impact on your trades.

In the next few blogs we will discuss the trading process and how confidence, preparation, trust and taking responsibility come into the picture and how to achieve them in the trading environment.

Duality occurs in every part of our lives yet most people don’t recognise and understand this. This lack of understanding leads to too much significance being placed on one side of the duality equation which causes imbalance and disturbs equilibrium. There are positive and negative poles on either side of life’s equations that we deal with every day.

Polarity is good/bad, hot/cold, up/down, in/out, win/loss, tall/short, big/small, beautiful/ugly, dark/light, bright/dull, long/short, rough/smooth, rich/poor, happy/sad, love/hate, fear/faith, clever/stupid, healthy/sick, action/apathy, active/lazy, calm/anxious, fast/slow, pleasure/pain, mountain/valley etc etc. Without one pole the other pole would be indefinable. Each pole must exist to give the other meaning, credence and legitimacy.

The positive sides are not necessarily the right states all the time and, if so, cannot be attained all the time. For example, feeling sad when losing a loved one is a normal human reaction and a necessary process to experience but too much sadness for too long is not necessarily a good thing. However, feeling hatred at any time can cause imbalance in our lives as can anger or frustration. There are times to be fast and times to be slow.

This brings us to relativity. Very seldom, if ever, is there total positive (love) or total negative (hate) but degrees of each and where we see events, ourselves and one another on the scale depends on our perception of where we are relative to others or relative to what we define as good or bad through our value system. For everything that we are involved in, we anchor ourselves somewhere on the scale and everything else is relative to our perceived anchor position.

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(100% -ve)                    (Our anchor)                                             (100% +ve)

Where we are relatively anchored at any given time is not necessarily good or bad, it just is. This is our universal truth. We continually judge our perceived relative anchor position and thereby attach relative meaning to our current position, individual events and outcomes. We then react to the self created meaning by thinking certain things about ourselves, mostly negative things, which causes inappropriate responses. The challenge is to create positive thoughts and appropriate responses that empower and motivate us into positive action to move our anchor in the direction that is “good”. A good starting place to discover what is “good” can be found in the Bible, the laws of your land, reading about highly respected people or their biographies etc. Such input creates our boundaries and should play a major role in defining our value systems.

With respect to trading, we need to understand and fully accept the duality and polarity of winning and losing and their relativity to each other. One cannot exist without the other and each requires the existence of the other to define it.

When we lose, the challenge is to ensure that we improve the way that we perceive the loss such that it doesn't affect the way that we should execute the next trade. Equally, when we win the same challenge exists. We must execute the next trade the way it should be done without changing our process.

The challenge is to work out a process that embraces both winning and losing in a way that achieves your trading goals and moves your anchor in a direction that improves how you feel about what you are doing. All the time we must recognise that duality exists in all we do.

Following on from last week's blog on the Storm Financial debacle I thought this week we could take a look at an issue that irks me and fellow independent traders and investors – the issue of the fee’s charged by fund managers and financial planners. As many of you are well aware these fee based industries make their money by earning a fee off the back of your investment.

So you walk in the door to talk to “Let me take care of you Financial Advice group” believing that they are professionals and must know more about managing money than you do, because that is their business and yours is medicine or engineering or plumbing, whatever the case may be. Unfortunately this may not always be the case. Despite the supposed need to be licensed and have done an appropriate course or courses in product and client knowledge, the majority of these advisers are driven to generate fees to earn an income. And who can blame them for that. They are spending time handling compliance paperwork and have to become familiar with heaps of different investment products to promote. This is time consuming work so they deserve to earn a crust. However, here comes the problem. It is only natural that, despite all the claims that they are working in the best interests of the client, they have a vested interest in encouraging you to invest your money in the products that generate the highest possible or most consistent fees for them. In the majority of cases they will receive an introducing fee and a trailing fee or even an ongoing portion of the management fees.

The upshot is, that at the end of the day these guys get paid regardless of whether your investment goes up or down. Their supposed ‘duty of care’ last’s about as long as it takes for them to get the first commission cheque, then you are just another number in a pool of commissions and fees that they receive from their stable of fund providers. In a roaring bull market when everyone is making money, times are good, and everyone’s happy, these fees and charges can be easily glossed over as the glassy eyed investor is shown fantastic returns (even though the returns underperform the market in 90% of cases) and a myriad of tables and charts ‘proving’ to them how markets always go up and investments in the share market always increase in value over the long term, despite the occasional glitch.

The problem bubbles to the surface though when markets tank, investments depreciate in value, dividend streams are reduced, and investment growth is negated. Despite this though, the fund managers and investment advisers are still clawing money out of your account in the form of management fees, performance bonuses and other charges. Through their mismanagement of your money, you have lost a considerable portion of your investment, retirement fund, nest egg, or whatever else you like to call it. Yet these guys still dip into your funds on a regular basis to extract their management fees which could also be based on “FuM” (Funds under Management) for money invested via the financial planner even if the FuM are in cash.

As GES noted in his comment on last week’s Blog: “93% of financial advisers are purely and simply salesmen armed with an instruction manual on how to close a sale.” In other words they learn how to close sales not how to manage risk, time the market or spread their clients’ capital across the market appropriately. This is supposedly the fund managers’ job or the investment manager’s job.

Well if that’s the case why is there even a need for financial planners if their role is to look after the performance of their clients investments but they don’t because the fund managers do that? The answer is that there is NO need for them if that is their role. The issue is that this is their perceived role by investors whereas their actual role within the industry is really as a distribution network for investment products, i.e. sales people.

This is a major problem with the whole financial advice industry and only adds further voice to my ongoing belief that everyone can, and perhaps must, learn to manage their own financial situations. It is a skill that everyone can learn with the correct tools and education– provided they are guided along the path and have the desire and commitment to take control of their finances.

A story doing the rounds on the internet at the moment is quoting some startling numbers regarding bonuses paid to the staff of a major US fund manager and investment bank. This organisation lost more than $27 billion last year, and was ‘bailed out’ by the US government. Despite this massive loss and the use of tax payer money to rescue this organisation of thieves and crooks, staff received bonuses totalling in excess of $4 Billion!

Whilst no such massive events have occurred in Australia, there are still those who have been awarded bonus payments and performance fees whilst their funds performance has been negative. This has got to stop. The regulators have to take the lead and eradicate this nonsense from the industry. The financial planning industry blossomed in the 1990’s as the regulators saw the industry as the answer to client compliance issues. Storm Financial and many other cases show that it is not. It is simply a “middleman” industry that massively increases cost and doesn’t achieve what it was intended to do while lining the pockets of commission based financial planners with easy money.

Making the industry fee-based ONLY based on time spent with clients and actual time spent on managing their investments would go a long way to solving the problem. This would require a major change to the status quo and a complete reset of the industry. If this was possible I have no doubt that itwould see a massive outflux of financial planners from the industry leaving the real McCoy’s behind that do know risk management, money management and how to time the market. They would be expensive but when market conditions come along like we have had over the last 18 months their clients would appreciate their skills.

In the mean time, I encourage you to become an active and responsible investor and do what it takes to educate yourself, or in other words, do what it takes to become your own financial planner and fund manager. Who knows, one day you might even be able to pay yourself a performance bonus – one that actually relates to performance rather than simply the generation of sales revenue and commissions.

The current controversy surrounding Townsville based financial planning group, Storm Financial Group, should serve as a wake up call to ALL Australian investors – not only those that invested through the use of Storm’s highly geared, and ill-advised strategy, but everyone involved in the stock market. Storm’s plight needs to serve as a wake up call to investors and to the so-called market regulators otherwise the painful heavy losses of those concerned has been in vain.

What is blatantly obvious to everyone in hindsight – that Storm were using gearing in a dangerous and ridiculous manner – was evident from the outset to those who understood the risks involved with these strategies. One publicised Storm client was leveraged at 9:1!! Whilst sure to produce fantastic returns in a rampaging bull market, which they did, the whole strategy would implode in a bear market, which it did! The promises of huge returns to investors simply could not be sustained once the bull market ended and the market corrected, which was an inevitable certainty.

These over-geared ‘investments’ quite simply caved. The uneducated, unprepared, and unsuspecting investors watched helplessly as their investments collapsed to initially be worth nothing, and then recoiled in horror as they became subject to margin calls and huge interest payments on their extended borrowings. Many of these people will be forced to sell their houses and other assets to meet their responsibilities, which I’m sure many did not have a full understanding of when they were enticed into the ‘investment’ in the first place.

Storm is estimated to have had around 14,000 clients being serviced by 34 investment advisers – around 400 clients per adviser! Could these advisers seriously claim to realistically know and understand each of their clients’ financial situations? Or were they merely interested in acquiring new clients in order to generate more commission based revenue? It has been reported that clients were paying around 7.5% commission to have their money placed into the index related products being offered. Financial planners earning commission based on the size of investment is a flawed system that needs to be totally reformed. Commission based financial planners are simply not incentivised to share the same objectives as their clients and, once capital is placed into the managed funds that pay their commissions (which ultimately comes from their clients’ capital injections), have no responsibility for the performance of their clients’ investments.
Storm also had a mutually beneficial relationship with the CBA. Whilst Storm needed the bank’s financial backing it reciprocated by using the geared investment products offered by Colonial Geared Investments and Colonial First State. The bank thus earned huge fees from the business being generated by Storm’s over-geared investment strategies. Colonial Geared Investments provided the margin loans that were then used to increase the size of the investments made into these funds generating more fees. Challenger and Colonial First State were also the responsible entities for the Storm funds – charging them for this service as well.

This is what happens when all concerned, the fund manager, financial planner and client, become euphoric through magnified returns. Euphoria induces a riskless state of mind where large downside can no longer be perceived. Cloud this further with massive revenues through fees and you have a recipe for disaster. When profits were being raked in, the riskless state of mind couldn’t perceive downside and when leveraged at such high levels, unless profits are realised on the way up, when the market corrects ALL capital, profits and base capital, are at risk at the same level of leverage. (It was only realised AFTER the fact that the client geared at 9:1 was geared to that level.)

Where were the regulators when all this was happening? Why is it that despite all the hype of the relevant authorities and government bodies, that none of this was exposed or investigated BEFORE it imploded? Quite simply, none of this should have been allowed to occur in the first place. It is unfortunate that it is only after the fact and the damage has been done to the ‘mum and dad’ investors that the authorities step in and rattle their blunt sabres and chant their worthless rhetoric.

The regulators have introduced draconian compliance processes in the last few years that are not only a drag on the industry but have also added huge costs to the industry. These costs have fostered a brand new revenue stream for auditors and accountants. And investors are still getting fleeced by unscrupulous operators like Fincorp, Westpoint, Opes Prime, Storm Financial, MFS and plenty more that have been and are still to come. It is at the conceptual level of types of financial products that the regulators need to step in, not with draconian compliance processes that line the pockets of auditors and don’t stop con artists dreaming up any kind of financial product that is doomed to collapse at some stage. Greedy people in the USA did just the same as Storm at an even higher level of leverage (30:1) and now people the world over, innocent and implicated alike, are paying for their greed.

The shear size and complicated nature of the dealings and relationships involved in the Storm mess will take years to sort through and resolve and will continue to impact people financially and psychologically for the rest of their lives.
In short though, it highlights a number of key points that we here at ShareFinder are constantly reminding our clients of:-

1. Take responsibility for your own financial situation. No-one knows and understands your position as well as you do, and no-one will manage your money as well as you can with the right tools, education, and support. (i.e. Start the journey yourself rather than totally outsourcing your financial future)

2. Learn and understand risk management and money management techniques. Why would anyone who understood risk borrow money and then “invest’ it with someone who then geared this borrowed money still further through the use of highly geared and over-leveraged margin loans? This is what Storm did. Risk management and money management techniques should ensure that you will never lose your entire investment capital base and certainly not two or three times your total capital base.

3. Become your own fund manager. Why pay exorbitant fees and charges to a financial planner, fund manager, or investment adviser to manage your money when you can learn to do it yourself? In the vast majority of cases these advisers are simply placing your money into the products that generate the most fees for them or into the products that are on their list. The advisers are guaranteed an income stream off the back of your investment, in some cases for years and years, regardless of the performance of the fund or structured product and regardless of the fact that very little additional time is required to manage your investments on an ongoing basis once they are invested. This is what Storm did and what most other commission based financial planners do.

4. Be aware. Ask questions. Delve deeply into anything before throwing your money at it. If the majority of Storm’s clients had truly understood the nature of the investment vehicles they were being exposed to, would they have still invested in them?

5. Be realistic. Promises of massive returns for little or no work on your part are doomed to failure at some stage. The share-market works in cycles, and extended bull runs will always come to an end – usually when people least expect it, and usually when the unsuspecting public are the most exposed! This is what Storm did.

Many lessons can and need to be learnt from the Storm debacle. The risk of not learning from this and other simular cases is that it can and most certainly will happen again. It has before, is now and will again.

In my honest opinion the financial service industry needs to be reset. The days of the lumpy financial planner sitting behind an oak desk and watching his money pour in due to him selling trail fee based products rather than providing a service for a fee and producing performance, needs to end.

The unfortunate thing is that it funnels down and rots from the top. Fund managers providing financial planners with commissions based on the funds under management, needs to stop! The opulent junkets in exotic locations enjoyed by financial planners being wooed by fund managers using their investors’ money, needs to end forever, not just while the going is tough. Now is the time to act and reset the financial planning industry.

Investors who are using financial planners need to change to fee based planners and not trail based financial planners and/or advisors. From all reports only 7% of the industry is currently fee based; a pathetic attempt by the industry, given the call to end this nonsense has been going on in the press for nearly 20 years.

In closing, I challenge passive investors to strongly consider active investment. By “active” I don’t mean trading shares in the short term, I mean acquiring the investment skills to take control of your money and manage your own portfolios either through your own Super Fund or through other entities such as a trust or your own investment company. You can establish processes that take no more than 15 minutes a day. The benefit may be that you are hundreds of thousands dollars better off over the remainder of your investing lifetime.

Don’t worry, you’re not alone. Currently more than 450,000 Australians have established a Self Managed Super Fund. Although some have established a SMSF for taxation reasons many have done so to take control of their finances. It’s by taking control of your financial destiny that will allow you to be able to sleep well at night.