This is a guest post by Damien Hoffman of Wall St. Cheat Sheet

Rahul Sood has entrepreneurial cells ripping through his veins. He is most well known for founding luxury computer company VooDooPC in 1991 and selling it to Hewlett-Packard (HPQ) in 2006. Most recently, Rahul has merged his entrepreneurial prowess with his passion for investing. The result is a fantastic investing and trading resource called Bulls On Wall Street.

Bulls On Wall Street uses the popular Twitter platform to crowd-source investing and trading ideas. According to the Bulls engineers, approximately 10,000 people use the $$ and $ tags to discuss stocks on Twitter (the active users are in the range of 2500-7500, depending on how “active” is defined). Rahul’s mission is to build a premium community for the growing number of investors seeking to benefit from social media.

Rahul and I sat down to discuss his incredibly inspiring career path, his exciting new company Bulls On Wall Street, and his secrets to entrepreneurial success …

Damien Hoffman: Rahul, how did Bulls On Wall Street get started?

Rahul: I use Twitter a great deal to research customer feedback, complaints, response to products, etc. I noticed there were a large number of “traders” using Twitter as a way to communicate what stocks they were trading. I wrote a blog on the background of this phenomenon, but the bottom line is after viewing the stream I realized most of the communication was useless commentary — it wasn’t enough for an avid investor.

So, I started an experiment with a few friends. We wanted to take the concept further as there are only a few people who actually provide actionable data that one could choose to follow or not. We envisioned an engine that would show the user who the most influential and effective traders are so they could choose who they want to follow. It also aggregates all of the trading data on Twitter and combines it with research to see what could come out of it.

In a nutshell, the platform is a community effort — a “Gathering of Minds” of investors and traders. There are multiple moving pieces. Currently it’s designed for active traders, but in the future there will be resources for people with day jobs that don’t have time to manage their portfolios. In addition, our educational resource Bulls University is starting to take shape. Bulls University is designed for people who want to learn various types of trading, including swing, technical, fundamental, options, long term investing etc.

Damien: I notice you don’t have a Recommended List of people to follow. How do your community members know which investors/traders are worth watching?

Rahul: There is a system in place that helps you pinpoint the best investors thereby avoiding those bad investments that many of us have been caught holding. Ultimately, the system automatically decides who the cream is and let’s them rise to the top via a complex algorithm. It’s called the Bulls Influence-O-Meter.

Damien: Very interesting. Sounds like a great way to eliminate politics and other behind the scenes biases. Speaking of biases, why did you remain anonymous while launching Bulls?

Rahul: Good question. I started Bulls as a personal experiment to see if my theory of crowd sourcing for research and answers would work.  I remember telling a billionaire friend about the idea and he didn’t like it.  His biggest concern was the potential for pumpers to push their own agenda on others. My goal was to mitigate this risk as much as possible.

After taking my friend’s feedback into consideration, we wanted to ensure that risks of “pump and dumps” could be eliminated, technical analysis was sound, and fundamental research was accurate. We succeeded. It wasn’t hard because Twitter is fully exposed. Even though most people have handles, it’s very easy to spot the winners and latch on to them. You see, it’s not about randomly following traders into their trades — it’s about gathering the data from the top rated traders, and passing that data to the best of the best to evaluate and disseminate the information before taking a position!

Now of course not every investment is a winner. However, with proper risk management I was up over 400% overall in a 3 month period on a very part-time basis. So, the founding group decided it was time to launch a public beta.

We found some of the best traders on Twitter. There are only a handful of truly talented traders on Twitter who provide actionable data. We have the best group — no question about it.  You can search the history of each one and look at all the testimonials. It’s amazing.

So to answer your question, the reason I stayed anonymous is I didn’t want people who follow me personally — on Facebook, Twitter, and my blog — to blindly jump in unless I was sure that it was as good as I thought it was.

Damien: One of the most famous criticisms of public market gurus is “If they are so good, why are they spending time telling others about their secrets?” Can you explain why you and your talented team are interested in sharing their knowledge and trading ideas?

Rahul: You’re 110% correct. Most investors keep their secrets, which doesn’t help the retail investor. The goal of Bulls is to empower the retail investor — to turn the sheep into wolves and expose the sharks.  This is my way of paying it forward and helping others succeed. I am a firm believer that what goes around comes around. That is why we participated and helped to create the Bulls community.

Damien: What are some “pay it forward” ideas you are invested in now?

Rahul: I rarely find good small caps in North America that I like, but I enjoy many of the small caps in China. I invest in anything from organic food, coal, textiles, oil, green energy, and emerging technologies. I also invest in big cap companies on our side of the pond. I have found one American small cap that I love – it’s called Syntroleum (SYNM). Amazing company with one of the best management teams I’ve seen. I like the fact that they’re turning chicken fat into clean green diesel. They will have a plant online in 2010 that will produce 75,000,000 gallons a year of this fine fatty gas. The cool part is they’re 50% partnered with Tyson Foods, which is awesome for a small cap company, and Tyson has plenty of chicken fat to unload.

Damien: Rahul, you are the CTO of a business development group at Hewlett-Packard. How do you have time to research prospective investments?

Rahul: I work from home. I spend most of my time researching new companies, new technologies, etc. It doesn’t take much for me to do research using the Bulls platform and Twitter.  Investing in companies, private or public, is something I’ve always done. As an entrepreneur, I’m afraid it’s in my blood.

I am a very public person and involved in social media. I get people complimenting and complaining to me all the time. Now that my Bulls identity is public, people will understand why I always tell traders to run out and buy 2 HP 30″ displays for their workstations!

Damien: That’s an awesome convergence of your daily work flow. However, I’ve noticed a lot of new day traders who are attempting to trade full-time. Obviously, the loss of jobs coupled with high intra-day volatility has attracted a new wave of wanna-be day traders. Has the number of people day trading receded now that markets have calmed and intraday trading is not as simple as shorting anything that moves?

Rahul: There is a significant trend of retail investors who fired their brokers after the crash of 2008 and they’re trying to take control of their own finances. The number of discount brokerage accounts that were opened in the last year were much higher than normal.

The markets this year were unpredictable, but if one were patient and focused on individual company fundamentals rather than trying to be Nostradamus they probably did very well. I expect this trend to continue. People are starting to trade stocks at a much younger age, and the tools available to us now are like nothing we’ve ever seen in our lifetimes. Do you remember what it was like in 1993?  My goodness man. Brokers, promoters, and telephones. I can’t believe how far we’ve come.

Damien: The industry has made some incredible evolutions. For those who are interested in stepping into the future, but may not know how, can you please explain what steps someone should take to get started at Bulls On Wall Street?

Rahul: Sure.

1) Go to www.bullsonwallstreet.com and view the intro video to get an idea of how things work.
2) Login with your Twitter account.
3) Make sure you follow @bullsonwallst from Twitter to ensure that your tweets appear on our stream when you use the “$$”, “$” in front of a stock symbol, or #bows tags in your tweets.
4) Visit the Premium page and click on some of the videos on the bottom left.
5) Watch the stream for a few days and choose who to follow.

The site is still in beta. So, I would recommend people get a feel for it first. You may want to follow @copperstl, @kunal00, @urban_ryno, @stockgod to start. Visit the Bullpen, our community forum, and ask questions. I would also recommend reading through all the blogs! @copperstl is probably your best bet to follow as a beginner, get connected with her and she can put you on the right path.

In the remainder of my interview with Rahul, we learn how Rahul built VooDooPC and sold it to HP, and Rahul shares his top secrets to success. Those topics plus my acclaimed collection of exclusive interviews (with tons of bonus material) can be found in my upcoming book release: Interviews with the Brightest Minds on Wall Street. To make a free reservation for your copy from our first printing, simply click here and enter your information in the right sidebar.

The Efficient Market Hypothesis has been used as a one-size-fits-all explanation for how financial markets work. The idea that “markets are rational” justified much of the Laissez Faire policies which allowed global markets to get terrorized in 2008. However, Justin Fox’s outstanding bookThe Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Streetferrets out the false underlying presuppositions of our financial world view.

I had the opportunity to do a long form interview with Justin — much too long for the attention span of my beloved blog readers. So, below Justin discusses the myth of financial market efficiency. At the conclusion, please add yourself to our email list to read the full interview in my upcoming book Interviews with the Brightest Minds on Wall Street. Without further ado …

Damien Hoffman: Justin, how did you build the framework you use to write about business and economics?

Justin:  While I was at Fortune in the mid-’90s, financial markets seemed to be doing great things and the US — which had a more financial-market-focused economy — was doing better than the bank dominated economies like Germany and Japan.  I bought into the whole idea that financial markets are pretty good things and free markets work in the end.

One of the things I ended up doing at Fortune was covering the intersection between corporate management and financial markets.  There were lots of different debates and phenomena about corporate America becoming very interested in stock prices and the stock market.

I wrote an article in ’97 about the phenomenon of managing earnings: moving earnings from quarter to quarter, meeting the consensus forecasts, and spending a lot of time negotiating with analysts to make sure the consensus forecast is something companies can meet or beat.  I looked into a lot of academic research done by accounting professors.  There were lots of articles pointing out evidence that corporate managers went to great efforts to manage their earnings — to keep them smooth and meet earnings targets.

This was problematic because the assumption was markets were perfectly efficient and there was no way that tweaking earnings would have any impact on a stock price.  Supposedly, the markets would see through that behavior.  That struck me as a little strange.  No one had even investigated whether managing earnings helped a stock price.

Not long after I wrote that article, a flood of research started coming out to examine why people were managing their earnings.  The efficient market assumption was finally being challenged.  Since then I have spent a great deal of time applying this information to my framework and writing.

Damien: Which intersects with your highly acclaimed book, The Myth of the Rational Market. Can you further explain this myth?

Justin:  First, we must differentiate the financial markets from other markets — for example toothpaste, potatoes, or whatever.  One of the big mistakes financial economists made in the ‘60s and ‘70s was looking at the financial markets and concluding, “Oh wow! These markets must be much more efficient than those for goods because they are much more liquid and their prices change much more often.”  Those economists were missing that financial markets, for the most part, are prediction markets.  Markets are groups of people speculating about the future earnings of a company, the future income from a loan, or cash flows from some derivate.

When the entire market is guessing about the future, it’s very hard to define “correct” or “rational”.  Financial markets can’t make rational decisions unless you have a pretty good framework of knowledge.  It’s fairly easy to make a rational decision about what kind of toothpaste to buy because it’s something that’s repeated through your life.  If you buy a different brand and you don’t like it, you go back to the one you like.

However, in financial markets the future never exactly repeats the past.  So, it’s much harder to articulate the perfectly rational strategy.  The rational action can be different things at different times.

People are not necessarily crazy.  Individual investors can be either rational or irrational.  In hindsight we can concoct a theory of rationality.  However, even at that point , the moods of the market helped create the reality at which you’re looking.

So, it’s all very recursive and makes my head hurt — and other things, for that matter [Laughing].  So, my sense is we ought to still have free financial markets, but we need to recognize that they’re always going to be prone to bubbles and bursts — mass hysterics and mass panics.

Damien: If markets have repeatedly proven irrationality and inefficiencies arise every day,  why do think we ended up clinging to the University of Chicago school of thought like an extremist religion?

Justin:  First of all, some people are still clinging to it.  People like having very simple explanations of the world.  However, in reality, different explanations work at different times.  I don’t think there is any simple theory that explains it all.

Second, from the period of the late ‘70s through 2008, their theories seemed to be working reasonably well.  Meaning, letting financial markets set the agenda seemed to work for the US economy.  There were people from the beginning of the ‘80s who were complaining about the rise of Wall Street and how much debt Americans were taking on.  But the economy kept growing and a lot of people did really well.  So, people stuck to that world view because it seemed to be working.  That was Alan Greenspan’s explanation when he testified before Congress last November.

Damien: Now that Greenspan has testified and the cat is out of the bag with this grand experiment — that it didn’t work out as planned — who do you see stepping into the void with new theories?

Justin:  I don’t think we know yet.  I definitely see reasons for understanding that the efficient market theory explains only certain things and not a lot of other things.  However, I don’t see a new explanation that explains everything.

When I started working on the book, I thought behavioral economics and behavioral finance might answer a lot of questions using the insights of psychology and empirical research into individual investing.  But those theories haven’t offered very good explanations for why we had a financial panic last year.  So, I ended the book in a little bit of a muddle because I’m not really clear what the new paradigm will be.

There are a lot of people trying to take insights from physics and other studies of adaptive systems in biology and elsewhere.  Maybe they’re going to get a great model at some point, but they are not there yet.  So, we’re in a situation where the old theory, despite all its flaws, might stick it out for a while yet.

A lot of people commented on the correlation between the USD with equities today (including us), but ultimately, the inverse correlation is still holding now that we have an equities reversal.  The USD is heavily driven by interest rates, and earlier this week, we wrote that we expected interest rates to be the next shock to this rally.  It looks like that’s what happened today.  Long term Treasuries have been sold all week…maybe by Japan…who knows.  But the 30 year went from 4.194% to 4.439% since Monday (much of it this morning), which is a large move.  This not only spooks existing USD shorts, but warns of eventual Fed tightening, which the Fed itself has been indirectly hinting at as well recently. 

 

It’s a bit ironic that the appearance of a stronger US economy (in the form of an improving employment situation) spikes interest rates higher, which in turn brings down equities.  A healthy equities bull market can shrug off a Fed rate hike after a day or two, but now, market participants are speculating about the mere possibility of the eventual tightening.  This is probably one reason why it takes a lot to start a new bull market–because the various forms of accomodation (including low rates and fiscal stimulus) have to be removed strategically and can easily cause pullbacks in the stock market, even if the overall economy is improving.  The central planners have proven less than adept at inflection points before, so caution is warranted here.  And, as we wrote this morning, liquidity and credit outside the banks (in the general economy) remains poor.

 

Much as a large trader will dynamically sample supply and demand at support or resistance with large orders to see if other traders will bite, the Fed, in various ways (yesterday’s tri party repo and speeches by “dissenting” Fed personnel this week), is attempting to judge the markets’ reaction to removing accomodation.  Better to do this at highs than lows.  The signal so far is that it’s a bit soon, and hopefully (for the bulls anyway), the Fed will back off a bit.

 

Bottom line:  with the USD at strong resistance and long term Treasuries extremely oversold, there’s a decent possibility of an equities comeback early next week prior to the 10 Year auction on Wednesday.  However, we’re not as opptomistic about material new highs as we were earlier in the week.  Action near the close today will be important. 

Jim Rogers is one of the most respected investors in the world. I had a chance to chat with him the other morning to get more details about some of his recent comments in the media …

Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.

Damien: Speaking of other assets, as an outsider living abroad, what is your opinion on US Equities?

Jim: This is one of the few times in my life I have not had shorts anywhere in the world. I have also not had a lot of longs in the stock market because I’ve chosen longs in commodities and currencies. I have kept away from shorts because there is a gigantic amount of money being printed and it has to go somewhere. I thought some of it would end up in the stock market, and it has.

How much higher can the equity markets go? I don’t know. There are a lot of problems in the economy, but I don’t know when those problems will cause a downdraft in the stock market. All we’ve done is paper over the problem, so I expect we’ll have to deal with those issues in the future. Printing and spending money we don’t have simply prolongs the problems and makes them worse in the long run.

If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn’t get better, they will print even more money!

Damien: Jim, thank you for taking the time to share your outlook and opinions. I greatly appreciate it.

Jim: You are very welcome. Your site is very impressive. I look forward to staying in touch.