Its mostly due to Algebra.

The challenging and fascinating part of this is the intellectual challenges involved. Why is this conounding and frustrating? Its mostly due to Algebra.

Long ago, thanks to my math and science background, I have developed a focus on not the outcome, but the process. That was how all of those math classes got graded: You needed to show the formulas that led to your conclusions. Anyone could get the correct answer through a random but not reproducible approach. The goal of calculus was to teach the methodology, so that you increased the probabilities you would end up with the correct answer in the future.

Markets don't quite work that way.

Consider the long list of folks who have been right in their analysis, but wrong in the timing of the market reaction to this; Then think about some of the weaker bullish arguments -- there have been an enormous run of absurd arguments, false theories, ridiculous analyses. Regardless, these get overlooked by many as the markets continued upwards. Right answer, wrong process.

I never hear the Bulls argue "Markets go up most of the time, so just buy stocks and tough it out through the weak periods." I recognize the truth of that statement, but I also recognize it makes for a lousy marketing campaign. So instead, we get what passes for analyses like The Fed Model (flawed), Money Flow (spotty record), Random Walk (junk science), Earnings emphasis (non-correlated).

Many of these strategies have been unequivocally proven wrong -- but because their ultimate conclusion was to buy, the erroneous process gets overlooked.

Seven Secrets of Billionaire Investors

I. Safeguard Your Money

1. Make preserving capital your top primary goal (1).
2. Arrange your affairs to minimize or eliminate taxes (6).
3. Avoid or minimize risk (2).
4. Spend less than your income (19).

II. Create and Consistently Apply Your Own Method

1. Develop and rely on your own investment philosophy, criteria and method(s) (3).
2. Develop and test your own personal system for selecting, buying and selling (4).
3. Wait until your entry criteria are fully satisfied before investing. When your criteria are not yet fully satisfied, refuse to enter into the investment (8).
4. Be patient waiting for investments that fully satisfy your criteria (10).
5. Search only for investments that meet your criteria and do so continuously. Accept only advice from experts you respect and ignore opinions of others (9).
6. Act instantly to enter an investment when you find one that fully satisfies your criteria (11).
7. Hold your investment until your predetermined exit criteria is fully satisfied (12).
8. Consistently follow your investment philosophy, criteria and method(s). Don’t hesitate or second-guess yourself (13).
9. Get out of investments entered into by mistake as soon as you notice the mistake (14).

III. Concentrate, Don’t Dabble

1. Concentrate your money on a few items; do not diversify in terms of different assets (5).
2. Stick to investing in your specialized area of expertise and understanding (7).

IV. Learn to Earn

1. Accept mistakes as learning experiences (15).
2. Use learning experiences to increase returns and to make money more efficiently (16).

V. Delegate
After you have designed your own investment philosophy, criteria and method(s), delegate most or all of your investment responsibilities to other people who will apply your philosophy, criteria and method(s) (18).

VI. Make Your Work Your Play

1. Relate investing to satisfaction of your personal values (likes, dislikes, and priorities), not merely for the money (20).
2. Love the process of investing, not the particular assets purchased (21).
3. Live and breathe investing 24 hours a day (22).

VII. Put Up And Shut Up

1. Invest and trade your own money. If you are managing other people’s money, put your own money into the pool along with your clients’ money (23).
2. Keep as a secret your open positions and intended investments. Avoid telling other people about them (17).

Copyright 2007 Raymond T. Lee, LeisurelyCashFlow.com. All rights reserved.

Consider the following aspects to thinking contrary to the crowd:

Consider the following aspects to thinking contrary to the crowd:

1) You cannot be a full time contrarian. Why? The crowd is actually right most of the time. Remember, they are what moves markets, why equities go up, why a pop song becomes a #1 hit. Indeed, the crowd is why indexing works.

2) This gets reflected in such cliches as "Don't fight the tape" and "The Trend is your friend;" The crowd is neither right nor wrong, but instead is its own truth, a self fulfilling prophesy. This leads to some unexpected outcomes.

3) Beware extremes: The crowd will take markets much higher and much lower than they should go based on reasonable, logical common sense metrics.

4) There is safety in numbers. No one gets fired for groupthink. In every nature documentary that you have ever seen, its the gazelle at the edge of the herd that the lions devour. The rest of the herd is safely huddled together. Thats the anti-contrarian lesson (if your a gazelle)

5) Whenever the crowd loves or hates something, it worth noting. That's when contrarians are the ones who will make a giant score. Think short-sellers in Enron or Tyco, or the buyers of tech stocks in late 2002.

6) Where Contrarians shine is when the crowd morphs into an angry mob. Once the bulls become convinced the market is invincible, their full throated cries will be readily apparent. So too, the bears, usually in the depths of a recession.

7) It is worthwhile to quantify consensus vs variant perception -- rather than rely on gut feelings. A few years ago, I put together a guide to the Contrary Indicators of the 2000-03 Bear Market. It outlines both the anecdotal AND the measurable contrary signals (and 2003 was a great buying opportunity). Use both the anecdotal and quantitative approaches in concert.

8) The idea of Variant Perception is that when most investors know something, it is already built into the stock price. Therefore, going along with the crowd will not generate alpha or above market performance.

9) Consensus equals closet indexing. While I favor indexing for many investors, investing with the consensus can be more expensive. The cheaper way to achieve the end goal of consensus investing at a lower cost is to simply buy and hold index funds.

10) Forget forcasting: Most people do not even understand the present with any precision or accuracy. There's a reason for that: there are powerful interests with a vested stake in presenting the world in a certain way. Their spin on events serves their own narrow purpose, often to the detriment of the public. (Hence, my tendency to push back and be skeptical of what I am spoonfed).

I include in this group of malevolent spinners the Politicans, Wall Street (especially bulge bracket firms) , Government data sources, big Mutual Funds, Media, and Industry spokesgroups.