Buy-and-hold investing is dead.
In the aftermath of the global financial crisis, the fact is that there are far too many strong financial institutions and armies of traders manipulating the financial markets. And that has relegated buy-and-hold investing - a hands-off strategy that for decades was a mainstay for retail investors - to the rubbish heap.
Today's investor has to employ a hands-on approach that uses so-called "capital waves" - the huge swaths of cash that flow from one market to another around the globe - to generate quick profits, says Money Morning Contributing Editor Shah Gilani, a former trader and hedge-fund manager whose trading service, the Capital Wave Forecast, has kicked off 2011 with 17 straight winners.
"Trading is the new normal," Gilani said in an interview. "Capital movement is the benchmark of normalcy."
Gilani recently sat down with Money Morning Executive Editor William Patalon III to discuss the recent successes of his trading service - and to give readers a glimpse of what's to come in the financial markets.
"There were several capital waves that ebbed and flowed in the first quarter that created opportunities for us," said Gilani. "There was money moving in and out of Treasuries, the euro, stocks, and commodities."
Identifying and understanding "capital waves" is the first step to unlocking massive amounts of wealth and not getting beached by Wall Street, according to Gilani. The second step is to avoid trying to fight the tides of investment capital that are swirling from market to market in the modern world. Instead, investors should ride their momentum to big-time gains.
What follows is a full transcript of Gilani's Money Morning interview. In it, he discusses the areas in which he's had success predicting profit-making opportunities this year, as well as his current investment prospects.
William Patalon (Q): Shah, congratulations on a very fine start to the New Year. I understand that you've notched 17 straight winning trades. Let's start with that.
You're known for identifying capital waves, and then developing strategies that enable your subscribers to profit from them. What waves were involved here, and how did you profit from them? Are you optimistic this streak can continue, at least in a general sense?
Gilani: There were several capital waves that ebbed and flowed in the first quarter that created opportunities for us. There was money moving in and out of Treasuries, the euro, stocks, and commodities. The usual suspects were involved: fear and greed, perception and possibility.
As far as optimism and the markets are concerned, I have never been more optimistic in my life. That's because we've never been "here" before - not in my 30 years trading, and not ever in the history of the markets, or the world. It's really exciting.
Trading is the new normal. Capital movement is the benchmark of normalcy. And there's nothing normal about how fast capital now moves. But what's truly great is that if you embrace rapid capital movement across the globe as the new normal, you can't help but be optimistic that positioning opportunities are coming in waves.
(Q): After identifying these capital waves, how were you able to "decode" them for profit? Perhaps you could use one or two trades as specific examples?
Gilani: We made some quick money on volatility, for example. I believe we made about 52% on our VIX position in less than a fortnight. [Editor's Note: VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of Standard & Poor's 500 Index options.]
We are in and out of the VIX - often. We don't always make a killing; sometimes we use the VIX as a hedging device against our other holdings. There are several ways to employ the VIX.
Another example - perhaps an even better one, as it pertains to capital waves - is a technology play we made.
I'm always reading. And the great thing about reading a lot is that as you read a wide range of materials you start to detect trends and shifts in sentiment. Those are the very essence of capital waves.
Well, what I came to realize in this particular instance was that all these papers, articles, trade journals, et cetera, were pointing to a particular set of technologies that were being increasingly relied upon for transactional business at point-of-sale terminals and via mobile devices.
So we bought into VeriFone Systems Inc. (NYSE: PAY), an electronic-payments-solutions company, and made a quick 82% on select options as the stock itself rose a very healthy 27%. [Editor's Note: Gilani did an excellent analysis of VeriFone for Money Morning as well, recommending it as a straight stock play; readers who followed his mid-December guidance were up 31% as of Monday's close at $52.96.]
That's how you find capital waves; you just have to look for them and they're there.
(Q): Are any or all of these aforementioned capital waves still in force? Or are you looking at new ones?
Gilani: Are they still in force? Absolutely. That is, until capital reverses course and moves elsewhere. But that's the whole deal. It's about dealing in capital movement; it's like being dealt a hand in poker or blackjack. It's only one hand; there are always more hands to play as long as you don't blow all of your chips. Or, as I always say: If we miss a trade or an opportunity, no worries.
(Q): Are there new capital waves developing? What are they, and what's driving them?
Gilani: There are too many to mention. Well, actually, how much time do you have? I can go on for days about what's coming our way, but I'll keep it short.
We're going to see intense, massive movement into and out of commodities, stocks, and currencies. As far as the credit markets, they are on a rollercoaster like they've never seen before. What's about to unwind over the next two years is going to make what we saw from 1972 to 1987 look like a flat line.
(Q): What's your outlook for the U.S. economy right now? What are the reasons to be upbeat? What are the causes for concern?
Gilani: My outlook is cautious but optimistic. My optimism is predicated on politics, so that's like buying a pig with a poke, as my Scottish mother used to say. If we get our act together, and don't merely address - but actually fix - the debt issues facing this country, look out. Otherwise, we're Japan 2.0.
What we have to do domestically is kill the goose that laid the rotten egg. I'm talking about financial services. That sector has become nearly 25% of our gross domestic product (GDP).
That's sick.
For decades now, bankers have been shuffling paper to enrich themselves. They're using other people's money to gamble and counting on taxpayers to bail them out.
Don't get me started here. This really makes me sick.
We need to innovate. And not on paper, but with paper - predicated on leveraged paper tigers; we need to get back to what America is made of. I'm talking here about real people, and a real middle class emerging to make real things and make this country great again.
(Q): What's your outlook for the U.S. stock market right now? What sectors do you favor? What sectors do you feel should be avoided?
Gilani: I love to hate banks right now - but that's going to change. I'm watching and I know that when the time is right, American banks will be a great opportunity. I love technology. And commodities. I love international businesses and global reach. I am a little scared that the politicians we are counting on will end up being bought by lobbyists and sell out America, as they have done for too many years now.
We'll see.
(Q): A lot of our readers are major fixed-income investors. What is your outlook for the U.S. and worldwide bond markets? What kinds of bonds, if any, do you like right now? Which classes of bonds worry you?
Gilani: That's a great question, but a difficult one. There's no easy answer.
The outlook this year for U.S. Treasuries and municipal bonds is not good. They're going to take a bath in cold water. It may take 18 months, but it's coming.
I like all classes of bonds right now, but they all worry me. It's that fluid. Of course, that makes bonds - Treasuries, munis, emerging markets... all of them - a great opportunity to trade right now. I love to trade fixed income and we are going to make a lot of money in fixed-income opportunities over the next few years.
(Q): Silver continues to draw huge interest from our readers. What is your view of silver right now? Where do you think it goes from here, in terms of price? How about gold?
Gilani: I love both silver and gold. That is, until they crash again.
I was in the silver market in 1980, when the Hunt brothers tried to squeeze silver. I rode it up and I took profits, but then I gave it all back. It was silver that taught me about capital waves and how nothing goes up forever. It taught me how traders play the public, and how manipulation is everywhere.
As far as silver today, we'll ride it up and we'll ride it down and we'll ride it back up again. The same is true with gold.
I don't fall in love with anything anymore. Nothing lasts forever.
(Q): What else do you feel investors need to watch and keep in mind? Why is that so?
Gilani: Investors have to watch their time horizons. Take profits and don't get greedy. Get back in if you've made money and you still love the position. Keep ringing the register. That's the new normal. We're not going back to slow and steady - ever.
(Q): It seems as if your service, the "Capital Wave Forecast," is made for this kind of an environment. Do you agree? If so, why do you feel that way?
Gilani: That's right. The "Capital Wave Forecast" is the culmination of all the life lessons I've learned as a trader and money manager. Basically, we have to be more fluid. We have to be elastic. And we have to adapt our investment strategy to new truths - a new reality - that continues to evolve.
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