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Where You Stand is Where You Sit

A 15 year old standing atop a challenging ski slope sees nothing but adventure ahead.  A 55 year old in the same position prays he can get to the bottom without any severe injuries.  Same situation; different perspectives.

In the case of investing, however, it is hard not to follow the perspective of the crowd.  Investor sentiment was on a giddy adrenaline rush during the tech and real estate bubbles that arose over the past decade. But as the market crashed at the end of last year and into this year, fear ruled the day.

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A Golden Bubble?

Warren Buffett has stated: "Gold gets dug out of the ground in Africa, or someplace.  Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.  It has no utility.  Anyone watching from Mars would be scratching their head."

Taking a cynical view of gold is challenging in a climate where gold -- now at over $1,000 per ounce -- has appreciated more than 300% since 1999 and 41% since just this past fall. 

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How to Double Your Trouble

If you are confident you picked the right horse, doesn't it make sense to double your bet?  Not necessarily, at least in the arcane world of investing in leveraged exchange traded funds (ETFs).  You can bet right on a leveraged ETF and still lose.  Not an attractive bargain.

ETFs seek to track the performance of a specific index or benchmark by holding a number of stocks or bonds.  Some ETFs mirror the broader stock market indices like the S&P 500, while others have a narrower focus, such as an oil and gas index.

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Health Care Reform and Our Antipathy to Change

Writing in today's Washington Post about the problems of enacting health care reform, Michael Kinsley states: "Americans are in total agreement that the current situation is intolerable in all areas and that change -- big, immediate change -- is essential.  But as soon as change might actually happen -- as soon as we leave the abstract for the particular -- we panic."

Kinsley cannot seem to get his arms around why this is the case, beyond the obvious reason that there is serious disagreement over the details of reform.  The only explanation he can come up with is that we really don't want reform in the first place.  Not a very satisfying answer.

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Economic Stability Leads to Instability

It has been said that democracy is the worst form of government, except for all others.  The same  may be true of capitalism as an economic system.  Apparently, achieving steady growth and low inflation -- an enviable environment -- can actually cause market bubbles like we have just experienced.  Or as the economist Hyman Minsky put it, "stability leads to instability."

The problem arises when people believe that the future will be like the recent past.  When the economy is humming along, it is quite easy to be confident that such benign conditions will continue.  Confidence makes people all too ready to take on more risk. 

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