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Money-Making Market Lessons

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While the recent crash course in market downturns has been painful for advisors and investors, there are valuable lessons to be appreciated.

Lesson One: Who not to trust.

Like the expression, “Fool me once, shame on you; fool me twice, shame on me:” In the summer of 2008, “Smart Money” magazine shouted from their cover page, “Now is the time to jump into stocks and real estate.”

In December 2008, both Morningstar and noted that the market is undervalued, implying a November ’08 market bottom. On October 31 2007, Jim Cramer encouraged viewers: “You should be buying things and accept that they’re overvalued, but accept that they’re going higher. I know this sounds irresponsible but that’s how you make money.”

Making (or losing) money is very serious, ask yourself: Who deserves the right to exercise any authority over your investment decisions?

Lesson Two: Don’t follow the crowd.

A comparison of investor sentiment and stock market tops-and-bottoms shows that the investing masses are often wrong. For example, cash reserves of mutual fund managers reached an all-time low of 3.5 percent right before the stock markets all-time high. That means that 96.5 percent of mutual fund assets participated in the markets melt down.

The CBOE Put/Call Ratio is often used as contrarian indicator as it reflects investor’s fear. High levels of fear tend to define a market bottom and vice versa.

Lesson Three: Know who to trust

The market’s 50 percent drop surprised most investment gurus and money managers (such as Legg Mason’s Bill Miller) who had risen to pop star like popularity. Even Warren Buffett had to endure criticism.

In an investment environment where everything is in flux, reliable guidance can only be gained from indicators with a historic track record of accuracy.

Those indicators point to lower levels once this rally exhausts itself. (A detailed analysis of the most reliable set of indicators is available in the March issue of the ETF Profit Strategy Newsletter.)