I am often asked what are the best stocks to buy. My answer is always the same – it depends. |It depends on the economic cycle and the best stocks to buy will therefore vary according to where we are within it.

In principle there are four major phases to an economic cycle, namely early expansion, late expansion, early recession and late recession. In addition to this major cycle there are secondly sub cycles including, the 4 year presidential cycle, the Seasons and individual months.

It also depends on the reason why. For example the best stocks to buy as part of a long term investment strategy will not be the same as those selected for short term day trading.

All the above is explained more fully on the website on the new page, best stocks to buy, along with some suggested stocks from my own watchlist.

There were times during 2007 when it seemed we had reached financial Armageddon; dramatic and sustained falls across the indices; oil almost reaching $100 dollars a barrel; gold edging towards $1000; catastrophic banking losses as well as a run on a major bank in the UK . In addition there was the spectacle of seeing a variety of banking luminaries kicked out of their jobs, including: Paul Wolfowitz of the World Bank; Stan O’Neill at Merrill Lynch and Charles Prince of Citigroup. However, the price of their collective failure was to be given the equivalent of the gdp of a small African state!

Yet despite the above the markets actually performed rather well. For example the Dow is up almost 10% up, the FTSE 100 up; Shanghai composite still going strong; Australia’s Stock Market had strong growth in 2007, and so the list goes on. It was the turbulence and volatility attributed to the sub prime saga and the subsequent credit crunch which rattled everyone and was only reflecting the fear element of the classic greed/fear cycle which grips the market in varying degrees on a fairly regular basis.  The difference this time is that it was not confined to the share market but spread to the property market and managed to contaminate even seemingly safe investments such as simple bank accounts, ie Northern Rock.

Market cycles of fear and greed; boom and bust happen in varying degrees in all time frames and as traders and investors we have to understand firstly where we are in this cycle, and secondly how we want to fit within it. Put simply, risky volatile markets will always yield the greatest returns, since higher risks provide higher rewards, and greater losses. As investors we have to match our own appetite for risk to the returns. My own personal view, and a particular hobby horse, is that many investors do not spend enough time either researching or understanding the markets they want to invest in.

This has been particularly true of the buy to let market in the UK where novice property investors have rushed headlong in this arena with little or no research or even a basic understanding of yield. Seduced by developers’ cash back, no deposit down deals and guaranteed returns these investors are now starting to pay the price as interest rates bite and rentals do not cover mortgage payments.

However, it has been the speed at which these problems have erupted and affected so many so quickly.  At the moment the markets do seem to be pointing to a slowdown as traditional markers such as falling consumer demand, rising oil prices and falling house prices can only lead to this conclusion. Sadly we also have to add geopolitical tensions with Iran, Russia and, in the last 48 hours, the fallout from the assassination of Benazir Bhutto in Pakistan, to this brew to conclude that 2008 is probably going to be even more difficult and troublesome for us all.

This morning’s newspapers reported that the FSA (Financial Services Authority) in the UK are determined to stamp out insider dealing, in particular in connection with mergers and acquisitions. Oh look there’s a pig flying across the sky!

They say that “Combating market abuse is one of the FSA’s top priorities and we are committed to working in partnership with the industry to reduce the incidence of market abuse on the UK’s markets.”

Insider dealing goes on in a number of ways and i am amazed the FSA has only identified four cases in the recent avalanche of mergers and acquisitions. The most straightforward is simply to buy shares either directly or by proxy in a company due for either a takeover or merger. However, a cursory glance at the director’s dealings would soon give this away, therefore spreadbetting the shares or buying out of the money calls would also reap big rewards.

“Market abuse” happens every minute of every hour in the financial markets worldwide and the sooner we all accept this is a fact the better. The irony is that it has been the advent of the internet and instant access to these very markets which has revealed the extent to which the markets are manipulated. As traders and investors this gives us a tremendous advantage – forewarned is forearmed!

Regular readers of this blog will know my feelings about Goldman Sachs. Here is a link to this morning’s Telegraph online and to an article which i found particularly amusing – http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/12/16/do1604.xml. Naturally i posted a comment (so far not printed) to the effect that in a previous life i actually managed to penetrate “fortress Sachs” in Fleet Street. Although i was dealing at a very low level in the organisation i was treated with a degree of arrogance and unpleasantness which i have never forgotten.

Before anyone thinks i am waging some sort of vendetta because of this past experience i should add that this happened before i became involved in trading and understood the role that powerful market makers such as Goldman Sachs play in the financial markets. My main site making bread explains this in more detail.

The phrase “Like it or not, one company has now got its tentacles around much of the world’s financial pressure points” from this article just about sums things up.

However, my advice to Goldman’s and, in particular, to those about to enjoy a bonus pool in excess of $20 billion would be to recall that even at the time of their greatest triumphs the emperors and Generals of of Rome would have a humble slave whisper in their ear: look behind you. Remember that you are just a man and that all glory is fleeting.