Amazon.com: The Alchemy of Finance (Wiley Investment Classics): George Soros, Paul A. Volcker: Books

I've heard the name George Soros and decided to check out another successful investor besides Warren Buffet and Benjamin Graham. This book is one of those books that took a corner stone concept in my mind and pulled the rug out from underneath it!

I finished two economics classes at Iowa State with a B-. The two concepts that stick with me are Marginal Utility and Supply and Demand. Marginal Utility states that there is a U shaped curve the the demand for a product. The first donut is really good. The second is almost as good. The third is the top of the curve, I've had enough. The fourth decrease my enjoyment and the fifth gives me a tummy ache making me worse off that when I started eating donuts.

The second concept was supply and demand. The power of glorious capitalism and miracle of supply and demade to sort out any issue when it comes to how much of what to produce? The first thing George taught was that supply and demand are NOT plotted on the same curve. Supply is completely separate from demand. The second thing is that for the two curves to be on the same graph, it was require "perfect knowledge" of suppliers and demanders. Just as a Marxist command economy does not have the perfect knowledge of what and how much to produce, neither does the market.

The advantage of the market is that with cycles and periods of boom and bust, expansion and contraction the economy drives forwards. Its just that there is a manic depressive psychopath at the wheel and a lot of people get run over along the way.

The major benefit of Marxism is that the economy is much more stable. Some may say there is less opportunity, but there is certainly less up and down.

The major benefit of the Markets is that there is instability, wide changes, and lots of opportunity to make and loose and fortune. But why are things so unstable. George was writing at time of credit boom and cheap money made for cop orate merger mania. Credit was contracting and driving down the value of collateral. Gee, just what is happening with now withe burst housing bubble. I just need to figure out what George did and then I can do the same thing!

Not quite that easy. The next super cool concept was "Reflective Connection" between ideas. His point is that the markets are not scientific, but closer to quantum physics. The act of studying a "thing" effects how the thing reacts. That is a much deeper understanding of the bi-polar Mr. Market. Why aren't there drugs to regulate this problem? Its called the government. The issue is, as a boom takes shape. No one can stop it. Everyone rides the tide until the bust. Then the contraction takes place and creates a crisis. Only a crises can bond affected parties together to remedy the situation.

Take our housing boom. Could the government really do anything to stop it? Not really, except raise interest rates, but would have affected other sectors. Could Bank of America stop participating and stop it from happening? Not really, if they didn't make the loans, someone else would have. Not that the bust is here, BOA can buy Country wide, all the banks will tighten lending strategies and a lot of mortgage brokers will be looking for other jobs. The Government couldn't forcee the new bundle mortgage derivative product, so it didn't regulate it. Now in hindsight, regulations will be put into place to prevent this type of bubble from occurring again. But don't despair, it 10, 15 or 20 years, a new bubble will form and the same thing will happen again, just in a different way. Regulation is necessary, but not preventative.

Now this is the depressing part. It takes a crisis to get all the parties to focus on an issue and get it under control. As soon as the pressure of the crisis is over so will the teamwork. Then business will go about as usual. We never fix anything, we just band aid it and move on. Pick any topic you want, and you'll see the same thing. This is why the boom lasts longer than the bust. The bust is painful, but never as long as the boom. You just have to muddle thru it until the next bubble starts to form somewhere else.

This is inherit in free markets and explains the misconception that markets are supposed to bring stability as equilibrium is reached. Instead, they lead swinging extremes of boom and bust, expansion and contraction. Things are always better than they really are or worse than they really are. Its just a matter of following the trend and not being the last one out the door when the trend reverses.

Perhaps that's a better detailed explanation of the cliche, "Bulls make money and Bears make money but Pigs get slaughtered." The trend will always reverse, its just that know one knows when or why? They make up the why after it happens and attribute it to some event that is probably more coincidence than reality. That's why you feel bad thinking, "Man, I never so that coming!" But the next time "that" happens, it doesn't turn a trend. Humm, that's the Reflective part!

The beginning third of Geoges book was great. The experiment was waaayyy over my head. The end, like the market was a bust. There was no "secert" to making money in this crazy economy. No magic bullet that worked in the 80s and now will work in 2008.

What George did teach me was not what anyone wants to hear. He said that when he was studing specific events. His trading went to hell. When he wasn't paying attention any more, his trading when to hell. When he was actually writing down and journaling the thought process behind his trading he did much better. There is a word for this. Its in every self help book on the planet. Got it yet?

Its called, "Goal Setting"! By writing down his plan, George was making a goal. When the market went against the trade, George held on, past the point of normally jumping ship and reversing himself. Most of the time that worked. Some of the time, he got whacked. Reading the experiment section, he dwells on the losses to the point you think he is not making any more. Until you see tha stuff that is working is up and he does 120% in one year!

So its less of what your do and more about why your doing it? What is your goal, what is your plan? Write it down!

Not knowing how to make money in a down market, I just went to cash. After 6 months, I stopped following the markets and looking to get in. I've missed a few rallies. Now I'm getting in with my few favorite stocks with a buy and hold as they are all 50% off their value.

True story, I meant to sell my 100 shares of Panera Bread at $38 which would have been a loss from buying at $55. I clicked the wrong button and put in a buy order. Which was filled before the price dropped to around $30. Oh I was pissed. But it was a great price on a good company. PNRA is the only stock I'm up on right now. I've picked up some GRMN, and HANS as they are two favorites from the past. I will hold them thru a year for the lower tax rate, but then, they will be back up and they are the kind of stocks that will run up. I also plan to start selling covered calls on them.

I've picked up some SIGM Sigma Designs as that stock is a fav of my optometrist. Chicos, CHS, is featured in Rule #1 and I lost a bundle buying at $30, $20, and selling for a loss. Its down to $5 now and the company is still strong, it just needs to reorganize so it can turn around. I'm still 60% in cash, but now I'm back in the game and it feels good to "worry" about not check the markey and prices as now I have something to watch. While I'm there, I'm looking to see what is the next big boom or bust and how can I profit from it?