Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

How To Invest Properly In The Stock Market

|Includes: DB, The Coca-Cola Company (KO), WFC

Investing properly in the stock market or anywhere else in life requires one simple rule, before making any investment and that is:

"How much potential gain can I achieve relative to the level of risk I am willing to take on, and when those two working together can not come up with a simple answer, then it is time to sit in cash" .

Under normal conditions (which we have not seen in the stock markets since the 1980's and the early 1990's) one could look at interest rates and then do what is called a "Discounted Owner Earnings Analysis Using a Two-Stage "Dividend" Discount Model" (table below) and one could quite simply estimate what the value of a company is by just filling in the Owner Earnings (Warren Buffett's Free Cash Flow Formula) and then finding out what the discount rate is and then filing it in as well. Here is an example of one of these calculations done back in the early 1980's when I actually bought my first shares of Coca-Cola at the ripe old age of 20 years old. I paid about $1.12 for the stock at the time (split adjusted) and sold it in 1998 when it became extremely overvalued at about $43 a share. I was in KO three years before Buffett was and did quite well or made about 40 times my investment in 15 years and it was one of my best moves ever.

But for those that bought my shares in 1998 and held, they have not made a dime in 18 years simply because they bought an extremely overvalued stock.

Now this is a real world example that was done to show everyone that if one buys at a bargain price and buys an insanely well managed company, that one should do very well if one diversifies properly. But if one over pays = well you see the result above.

Even now if one looks at our Friedrich Charts and Datafiles on Coca-Cola (NYSE:KO) you get this:

So even now our Friedrich Algorithm tells us the KO is far from inspiring.

What did I notice that made me buy it in 1984? Well besides having awesome growth numbers Coca-Cola also had Roberto Goizueta as CEO whom I consider the greatest CEO in history. What he did to make the stock shoot up so much during his 16 years as CEO was simply that when he took over, Coca-Cola used to own all its bottlers and thus its capital expenditures where huge as they had to pay for factories, trucks and its Free cash flow was non existent. Well my father and Great Uncle owned Coca-Cola for years and I used to read the Annual Reports that they used to get and working in a restaurant since the age of ten I saw how popular Coca-Cola was and even more how addictive it was. But the secret to Roberto's success was that he sold off all its bottlers or split them off but then kept the Coca-Cola trademark and forced each independent bottler to only buy from Coca-Cola. Thus Coca-Cola just sold the syrup (sugar and water) to the bottlers and that's it. So free cash flow went from non existent to off of the charts and profits erupted as well as they made 1 penny profit for every serving of Coca-Cola sold through out the world (billions of servings). Well in 1997 Goizueta died from Cancer (heavy smoker) and new management started buying back the bottlers and thus Coca-Cola experienced basically zero growth from then on and thus anyone buying my shares in 1998 has not made a dime since. So in the end the Price you pay really does matter and with the markets currently being more overvalued now than they were when I sold my Coca-Cola, it is important to understand the difference. How do I know they are overvalued? Well I can no longer do a "Discounted Owner Earnings Analysis Using a Two-Stage "Dividend" Discount Model" as the Federal Reserve has dropped the Discount Rate from the 9% it was in 1984 to here:

Thus the model that was invented in 1932 by John Burr Williams can not be used anymore because when you do every company with positive owner earnings comes in as a strong buy for when you a take the assumed rate of 5% and subtract it from 0.5% you get a negative -4.5%, which means that the whole analysis system is shot to hell. Under normal conditions the analysis above works as well as anything I have ever used but because of the manipulation by the Federal Reserve, analysts are rowing boats now in the middle of the ocean without paddles and thus any analysis they do using these older methods is impossible to do and thus worthless. Thus this is why I created Friedrich as he does not rely for example on the AAA corporate bond rate for Graham's Intrinsic Value analysis or the Discount Rate for Burroughs analysis above. By eliminating the interest rates from the equation I have allowed an investor to still analyze stocks, but to use the growth of revenue instead and introduced debt levels of the company as well into the equation. When you do that you see quite clearly why Friedrich is showing us that we are in an extremely overvalued market, but don't take my word on it here is a chart that shows it as well, sent to me by my friend Ben M. who has this wonderful website running

What is an Everything Bubble? Well that is a market environment where both Stocks and Bonds are extremely overvalued and the reason they are is because of the interest rate policies of the Central Banks of the world that have dropped interest rates a combined 600 times since 2009 or about once every three days somewhere in the world. Things have gotten so bad that about $7.5 trillion of the worlds debt is now yielding negative interest rates and basically the central banks of the world have exhausted all instruments of manipulation left in their arsenal.

Now the danger as a result of this is to financial institutions globally. Basically with negative interest rates you have to pay the bank to hold your deposits and banks have to pay you interest in order for them to loan you money, which is 100% the opposite of how capitalism works and the direct result will be that investors will no longer deposit money in the banks and that banks will no longer loan out money and thus that is why investors are still looking to bonds and stocks as the only game in town. Well as a result interest rates on bonds are at 3000 year old lows (going back to Ancient Egypt) and the principal on those bonds are at all time highs. So anyone buying these instruments is thinking they are safe but in actuality are looking at 50 to 1 odds though they are being told that they are 2 to 1 odds by their stock and bond brokers (not all but most) . So they are being sold an overvalued can of goods by snake oil salesmen.

The system is crumbling right in front of their eyes and no one is noticing. Germany which you would think is the super economic power of the world is heading down a rabbit hole due to its insane socialist policies and the weight of those policies is killing that nation's and Europe's largest bank Deutsche Bank (NYSE:DB). The bank itself is extremely mis-managed and is a major train wreck waiting to happen and here are just some of the reasons.

The insane thing is that some so called Value Investors and traders believe that the bank is close to bottoming out here, but the bank itself is levered at 40 to 1 and Lehman Brothers and Bear Sterns (who caused the collapse of the markets in 2007-2009 of -59%) where only levered at 25 to 1. Levered at 40 to 1 means you have borrowed 40 times your assets and that is clearly seen in the disclosure by DB that they have $52 TRILLION with a "T" of derivative exposure on their books and that maybe why you saw Warren Buffett close out all his derivative positions just a few months back. DB's stock price is down -92% from its high and if it is forced to file for bankruptcy and is allowed to fail by the German government it will set off a Lehman Brothers moment in Europe and that will be the negative catalyst that will sink the markets. The US government in all its wisdom just fined DB $14 billion in fines related to the last crisis and that is the equivalent of beating up a homeless person with a baseball bat after he asked you for $1.

The Federal Reserve has been on all these road shows telling us that the US Banks are in great shape, but then if that is the case why did Wells Fargo (NYSE:WFC) Employees (5000 of them) need to create dummy accounts for clients without their knowledge. They did so as banks have gotten to the point where they just can't make profits on deposits or loans as these negative interest rates are generating the makings of a banking crisis. On top of that insurance companies are in the same boat as they take in insurance premiums from customers, but with negative interest rates have no place to park that money, and are forced to take on debt as they can not payout claims as the claims are going out faster than the premiums are coming in. So everyone is forced to take on more risk and make unwise decisions, which will eventually blow up in their faces. Warren Buffett is building up cash as he sold most of his European Insurance holdings, as he clearly knows that they can not make money in a negative interest rate environment. So Warren is mending the nets and sitting on the sidelines in cash as there has been no benefit to taking on a lot of risk as the markets are overvalued. His largest holding is Wells Fargo and it will be interesting to see what he does there as even he is just a grain of sand on a 1000 mile beach like the rest of us and can not control events.

Thus with the Presidential Election bringing even more uncertainty going forward the last thing you want to be is a hero right now and invest. A Trump victory will surely cause the markets to panic in the short run as Wall Street is 100% behind Hillary and our Health Care/Drug stocks are suffering now as she may rock the Drug industry if she wins as she has plans to increase the power of ObamaCare. So uncertainty is at the extreme right now and Wall Street keeps moving forward with Blinders on and is buying without having a clue what they are buying is worth. CEO's keep taking on more and more debt and buying back stock so they can cash in their options (as they know what is coming) and want a Golden Parachute ready and jump out of the plane like D.B. Cooper did, when the time comes to do so, with all that cash.

I will keep searching globally for stuff to buy as we keep moving into new countries with Friedrich (eventually 27), but it is shocking to see that what we have seen in the US since we launched Friedrich, we are seeing just as bad, if not worse, in the rest of the world. China for example is basically close to overtaking Japan in regards to its Debt to GDP ratio meaning that Asia's two largest economies are heading down the rabbit hole soon from all that debt and even the wealthiest Chinese says that China has the largest Real Estate bubble in history

I have no idea when the crash of crashes is coming but Friedrich is protecting us by not giving us anything to buy. While others are paying $500,000 for a Toyota Prius that in the showroom costs $25,000 we are going to patiently wait to buy a Prius for $15,000, once the idiots realize that they paid 20 times what the car was worth and will panic once they realize that fact. When that happens Friedrich will give us tons of opportunities to buy but we must be patient and wait and I will close today by showing you two quotes by Warren Buffett on patience, which he feels is the most important lesson to learn as an investor.

On patience, in two examples by Warren Buffett

"No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant."

"I don't look to jump over seven-foot bars: I look around for one-foot bars that I can step over."

Today Portfolio managers are rushing into the markets to do their window dressing before the markets close, so they can trick their clients by buying all those stocks that did well this quarter and sell their dogs so their portfolio holdings look good to clients. We own elite companies from the start with elite management at the helm and are always looking for more, so we don't need to play these window dressing parlor tricks. Our goal is to hold our holdings for as long as possible and let Friedrich tell us when to sell if we can and have him tell us when to buy. The Friedrich Investing System is very easy to use as he just tells us what to do. But in the end the most powerful part of Friedrich is that he protects us from entering markets that are way overvalued and manipulated and should show us when is a great time to go for it and invest with both hands. When that time will be depends on whether the manipulation going forward by Central Banks and Wall Street keeps this overvalued express train from hell going, but at some point something will break as the laws of physics and math can not be altered and 1+1 = 2 but those who think that 1+1 = 40 like Deutsche Bank does in their leverage is in for big surprise that could cause the next financial crisis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.