We’re about to hit many deflationary headwinds that simply are not discounted by the market in my opinion:

1. Tax increases. About $100 billion will be soaked out of the private economy to pay down the government deficit. Most of this is due to the expiration of the Bush tax cuts for those making $200k/$250k+. Not only do tax increases have the effect of taking money out of people’s hands, they discourage people from expanding and developing their businesses. Since their after-tax return is now lower, they will be less likely to take risks. Furthermore, due to the crash in small business lending, many small businesses are expanding from after-tax profits, not bank loans, and there will now be less of those to use thanks to the government.

These reasons explain why some economists apply a multiplier of 3 to tax rate cuts/increases. So $100 billion taken in taxes will have a $300 billion negative effect on GDP. This estimate was made by Christina Romer, who works for the White House no less. At $300 billion, that’s 2% of GDP…so we can expect a 2% drop in GDP from tax increases alone! Given we’re struggling to have much better than 2% GDP growth right now, tax increases alone might throw us back into recession.

I don’t think the tax increases will be fully discounted by the market until they happen. This was the case with the Reagen tax decreases (the reverse). Read Laffer’s article about this more in detail (note how the economy rocketed by over 7% for a full year during the Reagen stimulus, and we’re struggling for 3% during our peak in stimulus). This makes me believe we won’t see the worst of things until around March of 2011, as the deflationary effects of the tax increases become fully realized.

2. Europe is messed up, simply put. The recent stress tests were a joke. No one knows what is on their banks’ books, since the transparency levels there are much lower than here. One must ask…why were the stress tests not so stressful? The answer: we can’t handle the truth. Even under their ‘stressful’ conditions, Greece is still able to make debt payments and the stock market doesn’t fall by more than 20%. Doesn’t sound that stressful to me!

3. China isn’t so magnificent. China’s stock market is down 20% for the year. For those that remember, China’s stock market turned up much sooner than the US did (their bear market ended Nov 2008, ours did March 2009). This is why many view China as a leading indicator. Oh, has anyone checked out their property bubble lately either? It makes California look tame.

4. We’re at peak debt. Total government, personal, and business debt is estimated to still be about 390% of GDP, which is still an all-time high. While the consumer and businesses are deleveraging, the government is running insane deficits. So we’re simply trading in personal and business debt for unproductive government debt.

5. We’re at a general level of peace right now. If Israel/Iran blows up or North Korea goes crazy, look out below. The world is struggling in a time of relative peace, and that is a very very bad sign.

6. Have you checked out the ECRI weekly leading indicators lately? Eeeeek! The last time there was a drop of the magnitude seen lately was in the late summer of 2008…and we saw what happened soon after.

Options: While advanced investors may be able to successfully use options to hedge investments or as leverage, options are a suckers game for beginning investors. The appeal of options is that the investor can quickly turn a small amount of money into a large amount of money. However, most of the time, the investor just loses most of or his entire investment if he doesn’t know what he is doing. When you are buying or selling a stock option, you are betting against someone else (whoever is on the other side of the trade). Most likely, this is someone with a lot more information and experience than you, so options are generally best avoided.

Mutual Funds That Charge Loads: Some stock brokers or bankers will try to get you into a mutual fund that charges a load (an upfront fee). This fee generally is just used as an advertising expense; basically, it just goes towards someone else’s commission. These loads can be very hefty, often 5% of your initial investment. There’s little evidence that mutual funds that charge loads do any better than mutual funds that don’t charge loads. If you are going to invest in mutual funds, there’s absolutely no reason to put your money in one that charges a load.

Penny Stocks: This is another area where there is often a lot of fraud and stock manipulation. Penny stocks are often very risky. Many novices who invest in them do not really know what they are doing and may be buying a company at a lofty valuation, even though the stock looks ‘cheap’ at $.80 a share. Remember, it’s the P/E, P/S and other ratios that determine how ‘cheap’ a stock is, not the share price.

There are other reasons to fear an Obama presidency. His anti-business stance isn’t exactly a secret, and combined with a democratic leadership, could create a wealth of burdensome government regulations that eat away at profits and bring the economy to a standstill. Some businesses might actually do better with an Obama presidency, particularly solar, as Obama’s energy policy is to put about $40 billion towards developing renewable energy, paid for by increased taxes on oil businesses and other businesses.

In short, who you think will win the election is something to consider when investing over the next few months. Who our president is, more so than anything, may have a bigger effect on the stock market in 2009 than anything else.

* Don’t hold on to stocks that are making losses. People do this in the hope that there will be a turn around in the price and then they can exit at the buying price.

* Not diversifying sufficiently. Diversification is the basic rule to observe if you desire success, at least desire to minimize risks associated with the stock market investment.

* Investing without studying the stock. You must study every aspect of the company that you wish to “buy” on the stock market. Details of the company’s financial aspects are available everywhere, but still it is found that people just rush in to buying a stock without proper investigation.

* Don’t get attached to the stock. Often people have “favorite” stocks and they hold that stock forever even when it is either not moving, or is going down! Review your portfolio regularly and take actions, even sell it, if a stock is showing negative trends or losses. Emotional investment is not a part of the successful stock market investor.

* Ignoring risks. Don’t ignore the risk factors in the investment.

* Using tips from friends and other sources without doing appropriate research and analysis.
Investing and finding the right stock is never an easy job. To become successful investor, you must do research and analysis of every stock that interests you. Even if you trust the friend, you must still do further analysis before buying the stock.

* Following the crowd. You should avoid crowd mentality in stock market investing. To quote Warren Buffet,” You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” He echoed the same thoughts while warning the investors against following the crowds. “Be fearful when others are greedy and greedy only when others are fearful,” he said.

*Frequent trading.

* Not listing your mistakes and failures. Even the great Warren Buffett, one of the richest man in the world who made his billions on the stock market, lists his mistakes and failures. He then vows not to repeat them. So, knowing your mistakes will make you cautious and will force you to take the right actions the next time a similar situation occurs.

* Focusing on earnings per share and not on return on equity. Earnings per share is a smokescreen, because usually the company retains earnings to increase their equity base.

* Buying a stock and not the business! Warren Buffett has advised investors to buy the business and not just its stock! He has good reasons to say so.

To quote Warren Buffett:
“An investor should only buy shares in a company which he would be willing to purchase outright if he had sufficient capital. From this perspective, an investor should look for a company with business operations that are understood, has favorable long-term prospects, is operated by honest and competent people and is available at an attractive price.

The decision to buy a business is based on:
Business tennets
Management tennets
Financial tennets
Market tenets.”

‘‘The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.’’

– Warren Buffett

If you look a LUB stock chart, you’ll notice the stock has been in a slide since September of 2007. This slide has largely been unrelated to the company itself.

The entire market has been down significantly due to the housing credit crunch. To an extent, Luby’s has suffered along with the rest of the market. Since the company’s market capitalization is only $200M, the stock price can move significantly when one major holder has a margin call placed on his account from other suffering investments. This basically means that there has been a lot of forced selling of LUB for reasons that have nothing to do with the company itself.

A second major reason for the decline has been due to a hedge fund who has been unloading their sizeable holding in the company. Last year, this hedge fund tried to take over the company’s board of directors. The shareholders held a vote and determined they would prefer the company continue to be managed by the Pappa brothers (who have an extensive history of running successful restaurants around Texas). After they lost, the hedge fund threw itself a pity party of sorts and began unloading their position.

There is a ton of upside to LUB. First, they own the land on which 94 of their 128 properties sit. Just this land itself is almost enough to comprise the stock’s current value of 7.20 per share. Additionally, Luby’s has no debt and they’re making money. In the past two quarters, more selling has been triggered when Luby’s failed to meet their projected earnings. By the way, it’s worth noting that only one financial firm makes projections on Luby’s, so there is anything but a mean earnings projection of which they aspire to achieve. Much of the reason they company missed its earnings projection was because of increasing food costs and the expenses of the shareholder proxy vote I mentioned earlier.

To summarize, LUB has been kicked repeatedly, but there’s only so much more it can possibly be kicked. At the end of the day, the stock has no debt, owns most of its land, and it selling a product that people line up for to get their hands on. This is not a get-rich-quick stock. But if you have some money with which to exercise a little patience, bet on LUB to climb to spectacular heights relative to its current basement bargain price.

Disclaimer: The author of this article is a shareholder in Luby’s Inc. (LUB).

In this article, I’ll detail what I view as the five most common signs of a stock scam:

1. A ‘get rich quick’ mentality. Most investing scams will act as if you can turn a few thousand dollars into millions in the market. This is practically impossible. Even a yearly 20% return will take decades before you can turn a few thousand into millions. Most of these ‘get rich quick’ scams will actually try to claim they aren’t a ‘get rich quick’ scheme! Don’t fall for it. If you are led to believe you will be a millionaire with a few thousand bucks in a few years, run.

2. They talk about individual trades rather than yearly returns. Most stock scams aim to dupe the newbie investor. They know that knowledgeable investors won’t fall for the scam, so they try to keep it simple. Most people are impressed at the idea of making $5000 or more in one day due to one trade. Of course, that means nothing. If you have a million dollars, $5000 is only a .5% return, which could be an average daily move. Also, an impressive investor is measured as someone who beats the market over time, not one who makes a few lucky trades.

3. They talk about 100% or more returns in months. Achieving this is virtually impossible without taking a lot of risk and getting very lucky. Even the best hedge fund managers struggle to make much more than 30% a year, and anyone who consistently makes 20% or more a year is amazing. Do you really think some class can teach your average shmo how to make 100% or more in a year?

4. They utilize options. Options are a complicated, risky instrument that should only be used by experienced traders. Most scams use options since they allow for amazing returns when you get lucky. Of course, the flip side is that you can easily lose your entire investment in any option. Newbie investors should never trade stock options.

5. They utilize penny stocks. Like options, penny stocks involve a lot of risk. There can also be a lot of fraud involved in these stocks. There is less SEC oversight for these types of stocks, and they are sometimes used as part of pump-and-dump schemes.

Where the market will go is anyone’s guess. But to succeed in today’s market, one thing is clear. You need to not panic. Trading based on emotion is almost always a bad idea, and emotions are flying high right now. Here are three tips to help avoid making emotionally-based investment decisions.

1. Keep cash on the side. Most investors, even myself, always forget this piece of advice. When you are fully invested, you are more prone to panicking. You cannot take advantage of irrational dips in the market since you are already fully invested. A down day is always a bad day, as you can’t take advantage of stock bargains out there. When you have cash on the side, you can approach the market aggressively and not fear the down days.

2. Set a limit on how much you’ll trade in one day. Nowadays, it’s too easy to just sell everything in an emotional reaction to a down day. When people buy and sell bit by bit, they tend to make better decisions. They set an artificial barrier to preventing themselves from panicking.

3. If you decide to make a trade, wait an hour, take a walk, and then make the trade. This will allow you to think it over, get your emotions out of your system, and decide if you really should make the trade.

Suppose stock XYZ has a bid of 15.05, an ask of 15.10, and a last sale of 15.06. If you want to sell stock XYZ right now, you could only sell it for 15.05 since that is the highest price someone will pay for it. Conversely, if you want to buy XYZ right now, you would have to pay 15.10, since that’s the lowest price someone will sell it at. The last price time a transaction occurred was at 15.06, so slightly above the current ask bid.

Most of the time, the bid/ask spread does not matter much. For large, highly liquid stocks (such as Microsoft, Google, GE, etc.), the bid/ask spread is often just just $.01. However, for smaller stocks, the bid/ask spread can sometimes be significant (.5% of the stock’s price or more).

If you place a market order, you are telling your broker to pay whatever the current bid/ask spread will get you. So in the XYZ example, if you placed a market buy order, you would pay 15.10 for XYZ since you instructed your broker to pay whatever is available.

For stocks with low volume (small cap stocks in general), it is often wise to use limit orders. For example, if you want to buy XYZ but don’t want to pay 15.10 for it, you could put in a limit order of 15.06. Here, you are saying you will pay up to 15.06 for the stock, but not a penny more. If someone wants to sell at that price, you will buy it, but you won’t pay 15.07 or more for a share of the stock.

2. Selling scared.Sometimes, it’s time to face the music and sell a stock that’s been a loser. However, you shouldn’t sell just because you’re scared. You should sell if you think it makes rational, logical sense to close a position. Many times, people sell stocks because the market had a bad day and they’re afraid it will go lower or the stock itself had a bad day. This later turns out to be a bad decision when the stock shoots back up. In many ways, selling stocks is like selling a property or mortgage. You wouldn’t sell a property lower than its mortgages value just to get it out of the way, in the same manner you shouldn’t move stocks just for the sake of getting rid of them.

3. Not keeping any cash on the side.I have to credit Jim Cramer with this tip. This was one of the biggest newbie mistakes he talked about on his Mad Money show. When you are fully invested and have no cash, you can’t take advantage of the market when it has a bad day. You are also more prone to panic selling and making other fear-related decisions. He recommends keeping at least 10% of your portfolio in cash, which I think is a pretty good tip.

4. Buying fad stocks. Sometimes, popular “cool” stocks do well. Examples from 2007 would be Chipotle and Apple, both of which more than doubled (in full disclosure, I own shares of Chipotle). These companies are solid companies with excellent growth, so the gains are justified. Often times though, people buy shares in a stock just because other people are buying shares. The obvious example is the tech bubble, when people were paying exorbitant prices for companies that weren’t even close to turning a profit. The psychology behind people’s willingness to buy these stocks was largely because other people were buying them, so they figured people would continue to buy them. That’s not a good reason to invest in a company (in fact, it’s a horrible one for long-term investing). When investing for the long-term, always make sure the fundamentals are good.

5. Investing in too many stocks. This is another tip I’m borrowing from Jim Cramer. Too many of us buy too many stocks and can’t follow-up with the companies. We often barely know what we’re investing in and have no gameplan in regards to the stock. I know I make this mistake often. If we want to diversify, it’s easy enough to just buy an index fund or ETF. If we end up investing in 50-100 individual stocks, we effectively become our own mutual fund, but without the resources to adequately monitor the companies we are invested in.

Some people are successful at frequent trading, but most are not. So is trading for you? Each person’s situation is different of course. But there is one simple method of giving you a clue if you should even consider frequent trading.

In short, stock trading is a rich man’s game. Trading frequently means racking up commissions, and for trading to be profitable, these commissions need to be small relative to your asset base. Let’s consider someone with a $20,000 portfolio. Even if they are paying just $10 a trade, if they make 10 trades a week (2 a day), this results in about $5000 in fees over the course of the year. That’s 25% of their portfolio! To be profitable against the market, you would need to beat the market by 25% a year, so on average make about 35% a year (since the market makes about 10%). Anyone who can make 35% on average would soon be one of the largest hedge fund portfolio managers on earth.

However, instead of a $20,000 portfolio, let’s say you had a $2 million portfolio. All of the sudden, these fees are now just .25% of your asset base, which is quite manageable. What turned into an insurmountable obstacle is now not a big deal.

Brokers don’t give discounts to people with smaller asset bases so that trading is more reasonable for them. In fact, if anything, they charge people with large asset bases less per trade. This compounds the issue, making it clear that unless you have a lot of money to throw around, trading just isn’t for you.

So if you are considering trading, first consider your asset base. Frankly, if you have less than $500k in the market, most likely trading is not for you. The fees themselves will make it an unprofitable venture.