How to think


by Janice Dorn, M.D., Ph.D.

What the mind of man can conceive and believe, it can achieve…Napoleon Hill

The major reason traders fail or succeed is HOW they think, not WHAT they think. It’s a psychological game of ping-pong that you play with yourself every day. It’s also a game of chess that you play with unknown numbers of faceless

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people who are waiting to take your money.If you want to achieve success as a trader, you have to study hard and model great traders. Imitation is a powerful form of learning, so learn to model mastery until you become your own master.

Perhaps the greatest contribution to the concept of modeling masters comes from books by Napoleon Hill– “Think and Grow Rich” and “The Law of Success.” Here are some examples from Hill of success secrets that should be a good start to putting you on the path to trading success:

Adopt a definite purpose: Everyone who is successful in life has at least one major purpose. If yours is to become a great trader, then focus on this and go after it with dogged determination. Legendary trader Paul Tudor Jones says the secret to his success is that he works harder than anyone else. That’s a simple and profound concept!

Write a detailed plan that describes how you will fulfill your purpose: This is your trading plan, a work in progress and your success roadmap. Make notes of everything you are doing, thinking and feeling in the markets and constantly study them. Never be satisfied, rather upgrade and improve based on what you have learned about yourself.

Surround yourself with people that support you unconditionally: Get rid of all energy vampires. Do not allow yourself to be brought into the realm of mediocrity by those who would like to see you fail or delight in telling you that you are not good enough to succeed. The opposite of love is indifference, so just say “Next!” and detoxify your relationships.

Persevere with continuous discipline: Learn to trade. Don’t stand around waiting for someone to throw you a fish; learn to fish so you can provide meals for a lifetime. Never stop studying and learn five new things every day.

Understand that fear is false evidence appearing real: Fear paralyzes, distorts, causes inflammation of the body and kills. Caution and awareness of how much money you can lose are good, but fear destroys your ability to think clearly and robs you of authenticity. Replace fear with faith in you and your purpose.

In all aspects of your life, including trading, practice radical honesty: The greatest lies are the lies we tell ourselves and these spill over into lies we tell others until there is a great gushing wall of lies that begins to close in and suffocate us. Tell yourself and others the truth about your trading and don’t be afraid to reach out for help.

Take great care of your brain and body: Trading is stressful and sedentary, so remember to move around and exercise to a sweat regularly. Eat clean, healthy food and practice moderation in all things. Self respect begins with honoring your body and mind.

Remain in gratitude and humility for any gifts you receive from the markets and life.

Patience, persistence and perspiration make an unbeatable combination for success…Napoleon Hill

Janice Dorn, M.D., Ph.D.


No representation in Congress

Laments my friend, David Kotok:

Taxation Without Representation
January 21, 2013, Inauguration Day

“Taxation without representation” says the text under the Washington, DC license plate of President Obama’s inaugural limo.  Citizens of DC argue they are not represented when the Congress decides on their taxes.   One has to ask how well the rest of us are represented.  We will get to that with some detail in a moment.

First a short report.  We had the opportunity over the weekend to do an interview with Vincenzo Sciarretta. Vince is an experienced Italian journalist and business writer. He is also the coauthor, with me, of a book titled Invest in Europe Now. Vince and I wrote this book years ago when the outlook for Europe was upbeat. Our book was originally a success … until Greece blew up and everything else we wrote about collapsed.  Readers are advised not to buy the book; it is out of date.  If you want one, email me with your address and I will give it to you, free.

Invest in Europe Now

Vince and I discussed the political situation in Italy and the outlook f

Book received with thanks.

Book received with thanks.

or its budget, debt-to-GDP ratio, taxation levels, and weakening economy. We compared the Italian situation with the outlook for the US – its budget crisis, bumbling political figures, rising taxation, and weak but positive, economic recovery. Vince and I laughed over what might happen in both countries if we swapped political leaders.  Imagine Biden or Boehner swapped for Berlusconi or McConnell exchanged for Monti.  Oh, well, enough silliness.

As far as Italy is concerned, we think there is continued political risk that will evidence itself over time as Italian politics “advance” into the post-Monti phase. Remember, Italy is the third-largest debtor in the world. We in the US are the largest.  Japan is second. Italy’s debt-to-GDP ratio approaches 130 percent of GDP. Japan’s is much higher.  The US is at about 100 percent if gross federal debt is counted.  Of course, much of our federal debt is held by our central bank and our so-called trust funds.  My colleague Bob Eisenbeis and I have both written about the Social Security Trust Fund and what a sham it is.

Italian government debt is denominated in euros and held in portfolios worldwide.  The European Central Bank (ECB) essentially guarantees the short-term financing of governments like Italy. Therefore, in the short-term funding markets, sovereign debt is able to “roll.” In the longer-term funding markets, the outcome is unclear.

A serious “little” problem in Europe involves the recapitalization of the banks in Cyprus.  By itself, Cyprus is an economic speck.  Its banks are not.  The Cypriot banking system is 4 times the size of Cyprus’ economy because the country is a banking haven.  And the banks are tied to Greece.  Watch this one closely since funding in any eurozone banking system is linked to all the rest of the zone.

Let’s segue to America, where we are about to launch the 2016 presidential campaign and the 2014 congressional election contests.  Actually, the antagonists started well before President Obama was officially sworn in for a second term, yesterday morning at 11:55.  The debt-limit amount, sequestration deadline and overall fiscal fight are the next theatrical acts to be taken up by the gladiators.  The Democrats would like to attack and re-attack the Republicans, in hopes of grabbing a majority in the House in 2014.  If President Obama can get a majority in both legislative chambers, he can bypass the Senate filibuster rule with a budget reconciliation bill and pass it with simple majorities in both Senate and House.  Political consultant Norm Ornstein calls that prospective bill “the mother of all legislation.”  I shudder to think how much pork would be in it.

The Republicans are reeling from their stupidity in the last campaign.  They should be.  Run candidates who claim that a rape doesn’t impregnate a woman and what do you expect?  That is a surefire way to lose a Senate contest and to weaken a presidential nominee.  Republicans succeeded in losing seats in both chambers of our national legislature.  If they continue to allow themselves to be painted as obstructionists, they will lose again.  The country wants reasoned explanations and honest debate, not arrogance.  Pay attention, Mr. Cantor; arrogance doesn’t win elections.

House Leader Boehner and Majority Leader Cantor indicated they are prepared to extend the debt limit by 3 months in order to give the Senate time to pass a budget.  They want to force the Senate to make big spending cuts.  It is not likely. The Senate hasn’t passed a budget resolution since 2009 even though it is required under current by law.  To paraphrase Albert Einstein, insanity is doing the same thing over and over and expecting a different outcome. Our leaders demonstrate Einsteinian insanity.  Thus, we expect the politics of confrontation to dominate 2013.

So what did the last Congress and the first Obama administration leave us to ponder?  Lots.  We face a weakening economy because of the actions of both of them.

Cumberland has recently reduced our expected growth rate for the US economy. We believe higher taxation will have a negative impact on the wealthy, on personal trusts, on Sub-S corporation independent businesses, etc. Those higher taxation rates will take a few tenths out of the GDP growth rate.  The new tax structure can only restrict the speed at which the US economy grows its way out of the financial-crisis-induced recession. There are now combined state and federal, marginal tax brackets that exceed 50 percent in states like New York, New Jersey, and California.

What is worse is that the political leadership of the US imposed a two-percent payroll tax hike. They did it by means of this farcical charade of the “restoration” of the Social Security Trust Fund (SSTF). My colleague Bob Eisenbeis has articulately described how the SSTF is an entity that receives cash and hands it over to the Treasury. The fund then receives an “IOU” from the Treasury. The assets of this trust fund are thus claims on the US Treasury. It would be different if the trust fund actually consisted of investments in infrastructure bonds, corporate bonds, municipal bonds, mortgage-backed securities, or other assets that were secured by, or were interests in, some productive investment. The SSTF does not do that. All it does is act as a conduit of cash to the US Treasury.

Anyway, we are saddled with a two-percent payroll tax hike in the US. It will impose a permanent $125 billion cost on the working poor and working lower middle class. It taxes everybody who earns $113,700.00 or less. This is not a tax on the wealthy; this is a tax on the workers of the country. When you impose such a tax suddenly rather than gradually, and permanently, you reduce the growth rate of the economy.  This tax increase will take about a half point out of the GDP growth rate.

We think the combined tax bill with all its impacts reduces US 2013 growth by about ¾ of 1 percent.  That means the first half of 2013 is likely to see a growth rate close to one percent. The second half might be a little less weak. The growth rate for the entire year will be somewhere between 1 and 2 percent.

This is not a robust economic recovery. Such a growth rate is not likely to raise the number of employed at a rapid pace. Therefore, the job-creation statistics for 2013 are likely to continue to be tepid. The result of the low rate of job creation will be to keep the unemployment rate higher than is desirable. It is likely to stay way above the Federal Reserve’s 6.5 percent target for the entire year of 2013. That means the Fed will probably extend its period of stimulus well into 2014. We expect the Fed to be in some form of QE for the entire year.

If we are right, those who are worried about an immediate rise in interest rates are likely to be wrong. There is a lot of time in front of us before we reach stabilizing levels in the US. We do have a gradual recovery. It will accelerate slowly in the US. It has received a setback because of our poor political leadership – a “double whammy” – and the imposition of the “tax barbell” on both the working people of America and the affluent.

The risk and the fear is that the tax structure is so onerous that we may have triggered a recurrence of the 1937 recession that came on the heels of the Great Depression. Will this 2013 political fumble result in the modern-day equivalent?  Time will tell. The culprits who delivered it to us are both Democrats and Republicans. They include the President and Vice President of the US, the Senators and members of the House of Representatives of both parties, their leaders, and their rank and file members. They are responsible for economic weakness if it unfolds. They have devolved into a hyper political system of governance that sets an impoverished example for the world. They continue to dig in ever deeper, attacking each other in the most partisan, negative ways.

Let me conclude with a list of pork that was composed by John Mauldin, In John’s recent Special Report, he gave examples of the top pork elements that found their way into the so-called Taxpayer Relief Act. That is the law that hiked the payroll tax on working Americans by $125 billion, and that law has over $60 billion in identified pork.  Beneficiaries range from sports-car racers to Hollywood film makers.  Below is an excerpt from John Mauldin’s list.

According to the Congressional Joint Committee on Taxation, the cost of these additional tax breaks will cost US taxpayers more than $63 billion just in 2013 alone. Here are the main pork beneficiaries:

Pork Barrel #1: Tax Breaks for Offshore Loans. Section 322 of the bill provides an “Extension of the Active Financing Exception to Subpart F.” “Active financing” is a fancy phrase that allows manufacturers and banks to defer taxes when they engage in special types of financial transactions. In short, it rewards firms to loan money to foreigners instead of American companies.

For example, the active-financing exception permits big banks like Morgan Stanley to avoid the 35% corporate tax rate on interest income from money lent overseas. Multinational companies with financing arms, such as Ford and General Electric, will benefit from this exception to lower their tax bills.

The exception is worth a mountain of money to a handful of corporations. It even has its own lobbying coalition – the Active Finance Working Group – which serves as a prime example of how important the 20 or so companies that benefit from the exception consider it.

Pork Barrel #2: Tax Breaks for Offshore Jobs. The fiscal-cliff deal gives huge tax breaks to American companies that sell their products through overseas affiliates.

Called a “pass-through” exemption, this loophole allows American companies to set up a new corporation in a tax haven, like the Cayman Islands, and to sell that new offshore company its valuable patents owned by the US parent company.

The royalties on overseas licensing of that patent that are earned would then be subject to no taxes.

Pork Barrel #3: Luxury Condos for Wall Street. Section 328 of the bill extends tax-exempt financing for the “Liberty Zone,” the area around the former World Trade Center, for another year. This tax break is supposed to help fund reconstruction after 9/11, but some have found that the bonds have mostly helped finance new luxury apartments, not to mention the construction of Goldman Sachs’ new headquarters.

Pork Barrel #4: Boxcars of Free Railroad Money. Section 306 of the fiscal-cliff bill gives a juicy tax credit to railroad companies to provide maintenance on their own lines. This credit costs about $165 million per year and will survive another year.

Pork Barrel #5: Thank you, Hollywood. The fiscal-cliff bill renews “special expensing rules for certain film and television” productions. Movies and television studios can deduct up to $15 million of their costs if more than three-fourths of a project’s production takes place in the United States. The incentive will cost an estimated $266 million in 2013.

Pork Barrel #6: Tax Breaks for Hedge funds and Private Equity. The mainstream media characterized Mitt Romney as an evil, job-killing private-equity pirate and loudly criticized the favorable tax treatment -called “carried interest” – that he enjoyed on his Bain Capital profits.

The bottom line is that hedge fund and private-equity moguls will continue to be taxed relatively lightly after the new fiscal cliff legislation.

The profits from investing other people’s money – AKA carried interest – will continue to be taxed as long-term capital gains for hedge fund and private-equity managers.

Pork Barrel #7: The Answer, My Friend, Is Blowing in the Wind. It is no secret that the Obama White House is very friendly toward the green-energy industry, so it should not surprise you to learn that there is a big tax credit for the wind power industry. The fiscal-cliff deal gives wind producers a 2.2-cent tax credit for every kilowatt hour they generate in their first 10 years of operation. In broad terms, this credit is worth about $1 million for every large wind turbine.

Those are just the most egregious pork recipients, but the list is a lot longer and includes:

• Mine rescue team training credit (Sec. 45N)

• Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e))

• Election to expense mine safety equipment (Sec. 179E)

• Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and

• American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified)

John Mauldin concludes, and I agree, “These giveaways of taxpayer money make my blood boil, as they should for you too. We’re at the endgame of the government’s wasteful spending, and they have yet to address it. Washington’s debts are going to explode and crush our government; they’re also going to distort the free markets for years to come.  I see nothing wrong with most of these projects and support them. Who isn’t for mine safety? And expensing of development costs makes sense. I am all for fixing railroad lines. But why on taxpayer money?

Thank you, John.

Dear readers, we are about to start the next round of musical chairs in Washington.  It will be ugly.  We have no reason to believe or expect otherwise.  There will be eleventh-hour negotiations and political brinksmanship aplenty.  That’s how it is, whether we like it or not.

The only predictable policy is that of the Federal Reserve.  The Fed has told us what they are going to do, and the economy is weak enough that we can believe them for a while.  Very low interest rates are with us for some time to come.  That is true worldwide.  That is bullish for asset prices, including financial assets, real assets, collectible assets, property assets, and precious assets.  Persistent cheap money in all major countries means rising asset values.

We remain fully invested.

David R. Kotok, Chairman and Chief Investment Officer

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Good Manners

Sharing a Note on my Facebook:
On good Manners
by BaronneAna Wang on Tuesday, 15 January 2013 at 22:20 ·

Wikipedia :

In sociology, manners are the unenforced standards of conduct which demonstrate that a person is proper, caring, non-grouchy, polite, and refined. They are like laws in that they codify or set a standard for human behavior, but they are unlike laws in that there is no formal system for punishing transgressions, the main informal “punishment” being social disapproval. They are a kind of norm. What is considered “mannerly” is highly susceptible to change with time, geographical location, social stratum, occasion, and other factors. That manners matter is evidenced by the fact that large books have been written on the subject, advice columns frequently deal with questions of mannerly behavior, and that schools have existed for the sole purpose of teaching manners. A lady is a term frequently used for a woman who follows proper manners; the term gentleman is used as a male counterpart; though these terms are also often used for members of a particular social class.


Social graces are skills used to interact politely in social situations. They include manners, etiquette (the specific accepted rules within a culture for the application of universal manners), deportment and fashion. These skills were once taught to young women at a finishing school or charm school. The focus of social graces has changed over the last century, recently with an emphasis on business etiquette and international protocol.


The Golden Rule or ethic of reciprocity is a maxim, ethical code, or morality that essentially states either of the following:

  • (Positive form of Golden Rule): One should treat others as one would like others to treat oneself.
  • (Negative form of Golden Rule): One should not treat others in ways that one would not like to be treated.



It is sad that nowadays we witness among some of  the young in particular  who seem to lack good social graces especially on the Internet as they feel they can express whatever comes to mind without fear or with recklessness hiding behind a faceless profile.


Time for a  moot case!?

No Holds Bar?

To Tax Barbell, so commented my friend David Kotok:

A Tax Barbell
January 10, 2013


Washington has handed an economy now struggling to get back on its feet a barbell instead of a helping hand—a tax barbell.  With much hoopla and political posturing, the United States’ political leadership raised the income taxation on the “rich,” as the White House likes to call them.  But without a word, the White House and the Congress also raised income taxation on the working poor and lower middle class.  That is the effect of the payroll tax (2%) hike.


We believe the impact of this tax increase will be a lower economic growth rate for the US than would have been possible if no income tax rate and no payroll tax rate changes had occurred.  How much slower is subject to debate, but nothing in the so-called Taxpayer Relief Act affords an iota of relief to anyone who works.


Let’s focus on the lower end of the income scale, the working population with incomes in five figures.  In our view these taxpayers were hit hard.  Since most of their incomes are spent on non-discretionary consumption, they will likely invade savings or lower their savings rates in order to sustain themselves.  Collectively, they have been hit with a $120 billion annual tax hike.  That is nearly $1000 for every working person in America.


An analogous situation might be a spike in the price of gasoline.  Let’s use that to demonstrate the impact of the payroll tax.


Suppose the price of gasoline jumped from $3.50 per gallon to $4.50 in one day and stayed at $4.50 for an entire year.  How would we react as Americans? We would see the price at the pump as a continuous reminder of the change in our circumstances.  We would witness the nightly news reporting this change.  We would be livid with politicians, clamoring for them to act.  Those are the same politicians who were silent a few days ago.


The essence of the question is Americans’ behavioral response to a change in economic circumstances.  Are we going to see it 2013?  The macro numbers would say the answer is yes.  Roughly, a penny per gallon change in the gasoline price equates to about $1.2 billion in consumption expenditures per year for American consumers. If we have just imposed a two percent tax on the earned income of most Americans, we have essentially imposed the equivalent of a gasoline price hike of $1 per gallon.


What this taxation change means is that the growth rate of the US economic recovery will be slowed measurably.  There are models which incorporate the economic growth rate, the population change, and the labor force participation rate. Put them to work, and the result of this barbell taxation is to extend the period needed before the US economy will reduce the unemployment rate to the Fed’s target of 6½%.


In other words, President Obama’s noisy attack on the rich also silently punched out the working poor.  But Obama did not do it alone.  The Democrats and the Republicans in the House and the Senate were complicit.  How many did we hear or see defending the working population whose incomes are $100,000 a year or less?


Robust recovery is now less likely in the near future. That is especially true because of the abject failure of the White House and Congress to extend, or make permanent, the 2% reduction in the payroll tax.


Cumberland continues to expect a slow, gradually recovering economy. That will continue for a number of years. Interest rates will remain low, although they may be volatile, as we can see in the bond market’s response to the Federal Reserve minutes. That structure is bullish for the US stock market. Bond portfolios can use hedging techniques to mitigate some of the volatility in interest rates.


Also note the Labor Department estimates of about 460,000 folks counted as employed because the states are paying subsidy to keep the jobs rather than have the person seek unemployment benefits (source: Bloomberg, January 10).  The effect is to distort the reported unemployment rate downward because those folks remain “employed”.  We are not opposing the policy.  We are just noting that the Fed’s target of a 6 ½% unemployment rate may need to be examined for these changed circumstances which are not in the historical data.  This revelation is additional support for our view that the period of low interest rates and ongoing Fed QE policy is longer than markets currently expect.


We are scheduled to appear on Bloomberg TV with Trish Regan for the whole hour on Tuesday, January 15 from the 3 to 4 PM (EST).  We hope to discuss this reduction of growth due to taxation and what it means for the extended period of low interest rates.


David R. Kotok, Chairman and Chief Investment Officer


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BarroMetrics Views: The Taxpayer Relief Act

Cross ref from Ray Barros website:

BarroMetrics Views:  The Taxpayer Relief Act

I was going to post the AUDUSD entry journal notes today. But this came analysis came in from Dave Kotok. It’s so good, I have reproduced it here. By the way, while I agree with his comments on the Act, I should not be taken to agree with his analysis of the US economy.


“OMB head Jeff Zients complains that the CBO analysis is not realistic. In OMB’s view, we were not really going to go over the ‘cliff.’ Zients points out that the ‘Act’ actually reduces the deficit $737 billion. This savings is achieved by making a ‘current policy’ assumption as the baseline. What is that? Current policy, according to a variety of footnotes, assumes the Bush tax cuts, the AMT patch and business tax provisions would be extended, that the Medicare physician cut will not take effect and that sequestration would not be put into place. Of course, this approach dramatically widens the deficit. From this higher baseline the ‘Act’ shaves down the deficit modestly. The largest component of these ‘savings’ is due to the higher tax rates to be paid by the above-450,000 (joint-filing) set, the higher capital gains taxes (20% now; up from 15%) and higher estate taxes.”  – Natalie Cohen, Wells Fargo

Thank you, Natalie.  You speak the truth.

Cumberland has obtained a private copy of a Senate staffer briefing memo.  It includes the CBO scoring.  It is the type of document that was employed in this debate.  It is 16 pages long. Rest assured that few if any of the Senators or Congressman read the entire bill.  The briefing memo is posted on our website, ”, in the Special Reports section.  The title is “12/31/12 Summary of final deal Tax Document.”  It is enough to make one sick.  Email me if your software cannot open it and I will send it to you. Here is a link: “

Now let me be blunt.  This “Taxpayer Relief Act” is a bunch of _ _ _ _!  No one got relief except the pork-receiving, politically connected “special interests.”  As for the rest of us, in fact, this is one of the largest tax hikes in American history.

In our firm of 28 people, everybody’s taxes went UP.  Mine did, as I expected.  My top rate is now 39.6%, and 3.8% is added to taxes on my investment income, except for my tax-free Munis.  My long-term cap gains rate is 23.8%.  So be it.  The taxes on the higher incomes in our sub-S incorporated firm are enough money to hire several new people.  If business growth is good enough, we will hire them anyway, but the government policy has carved no exception for small business.

I only wish my government didn’t squander the money.  But they do.  And they lied to me.  Nothing new here, either.

Now to the “meat” of the Congressional failure.  The 2% payroll-tax hike (because the previous reduction was not extended) hits every working person.  140 million Americans pay this on their EARNED INCOME.
Sadly, the pork in the legislation remained.  Moviemakers and auto racers and many others kept their special tax breaks.  The system remains sick.  Hollywood yes, but my $60,000-a-year employee has a $1200 permanent annual tax hike taken directly from her paycheck.

Shame on the politicians who govern us.

Markets celebrated, as one would expect.  The uncertainty premium is impossible to measure, but it is there.  Estimates are crude, but they show it is high.  It peaked a few days ago and when there were reports of an impasse to the House vote.  Now, it is shrinking.  So markets are rising after the law is passed and the new rules are known.  And the brackets are permanent.  The estate tax is permanent.  The AMT fix is permanent.

We now have two legs of a three-legged stool:  (1) Monetary policy is predictable for several years, and there will clearly continue to be a low interest rate worldwide for both short- and long-term debt.  Global total sovereign debt issuance will actually shrink for the first time in many years.  (2) US tax rates are predictable.  Cap gains rates, income tax levels, and estate tax thresholds are set.  It is hard to see them changing over the next two years.  The Republican majority in the new House will not allow it.  (3) America’s debt and deficit levels remain to be hammered out in tough negotiations with the new Congress and re-inaugurated White House.

These politics will not be fun to watch.  In fact, the 2014 mid-term congressional races have already begun, and the antagonists are barely sworn in.  That is our system and this is the way we do it, whether we like it or not.

Meanwhile, global stock markets are headed higher.  We have written about the whys and wherefores repeatedly.  Now we can add that the risk of a fiscal cliff-induced recession is eliminated.  That is a bullish development.

We will stick with our slow-growth, gradually accelerating recovery forecast for the United States.  We like the housing sector recovery and the energy sector growth.  We remain fully invested in our ETF accounts.

And we like tax-free Munis.  The tax-equivalent-yield computation makes them even more compelling after the so-called “Taxpayer Relief Act” has become the law of the land.

David R. Kotok, Chairman and Chief Investment Officer
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