Saturday, 17 July 2010
Friday, 16 July 2010
![[asia+mkt.jpg]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqY9M3BS4qZligSd8WnkSJlvlgdrx-JpK05iRTR2SlloCJAZxHauO-HWuuvxAG_kaeQRzIlvby0zG-BY45Ic2UZjEgN4ZOXH9YDr61gyb8CJPxohaeOlbnjp0o3vyOvjYP_6zSDv37UX05/s640/asia+mkt.jpg)
IMF Upgrades Malaysia’s Growth Forecast
The International Monetary Fund (IMF) has raised its growth projection for Malaysia this year to 6.7% from 4.7% before, and also expects the growth to be 5.3% in 2011, beating Malaysia’s own official forecasts. Malaysia posted a vibrant 10.1% growth in the first quarter from January to March, and the economic activity has been sustained by continued buoyancy in exports and strong private domestic demand. On its outlook for the second half of 2010, IMF said that a stall in the European recovery that spills over to global growth would affect Asia through both trade and financial channels. However, in the event of external demand shocks, the large domestic demand bases in some of the Asian economies that contribute substantially to the region’s growth, such as China, Indonesia and India, could provide a cushion to growth.
Malaysia Daily Bulletin – 12/07/10
Malaysia Daily Bulletin – 12/07/10
AirAsia Ancillary Income To Grow
AirAsia Ancillary Income To Grow
Low-cost carrier AirAsia intends to increase the contribution from ancillary income to a fifth of its total revenue this year, and the airline is on track to meeting its ancillary income target of RM50 per passenger within two years, up from last year’s base of RM29.1. AirAsia’s ancillary portfolio encompasses products and services such as baggage supersize, in-flight food and beverage, merchandising and duty-free, courier, airspace advertising and AirAsia RedTix and these not only contributes to the airline’s bottom line, but it also provides a buffer against rising fuel prices. From January to April this year, AirAsia have achieved ancillary income of RM45 per passenger and its baggage supersize service, a key driver of ancillary income is estimated to contribute RM240m to overall ancillary revenue this year.
12.7.2010
http://www.sharesinv.com/articles/2010/07/12/malaysia-daily-bulletin-104/
Low-cost carrier AirAsia intends to increase the contribution from ancillary income to a fifth of its total revenue this year, and the airline is on track to meeting its ancillary income target of RM50 per passenger within two years, up from last year’s base of RM29.1. AirAsia’s ancillary portfolio encompasses products and services such as baggage supersize, in-flight food and beverage, merchandising and duty-free, courier, airspace advertising and AirAsia RedTix and these not only contributes to the airline’s bottom line, but it also provides a buffer against rising fuel prices. From January to April this year, AirAsia have achieved ancillary income of RM45 per passenger and its baggage supersize service, a key driver of ancillary income is estimated to contribute RM240m to overall ancillary revenue this year.
12.7.2010
http://www.sharesinv.com/articles/2010/07/12/malaysia-daily-bulletin-104/
Thursday, 15 July 2010
How to Not Ruin Your Portfolio
How to Not Ruin Your Portfolio
By Abraham
Jul.15, 2010
Today’s article isn’t really a screen (although I do have one at the end). I want to talk about something that I believe is critically important in light of what’s been happening in the market.
And that’s about managing your risk — using stops, cutting your losses — all of that stuff.
Not a fun topic, but probably one of the most important for right now.
What’s interesting is that nobody ruins their portfolio when the market is going straight up. It’s when the market goes down that people get into real trouble.
But ironically, it’s when the market is going up that a lot of these bad habits are created.
The problem is that even bad decisions are oftentimes rewarded in a bull market. But when the market is going down, there’s no mercy for bad decision makers. Sitting on losses in hopes of them coming back can ruin your portfolio as they grow bigger.
I like using a 10% stop loss rule because it’s kind of a tit for tat. If you lose 10% on a trade, you only need a little bit more than 10% to get that money back (11.1%).
But if you lose 20%, you now need a 25% gain to get that money back.
And it gets worse as it goes down.
If you lose 30%, you now need nearly a 43% return to get back to where you were.
And if you lose 50% — you now need to pull out a 100% return to get back to even. (And if you’re so slick that you can pull a 100% return out of your hat at any time, why did you just get clobbered for a 50% loss?!)
So I think it’s important to keep your losses small.
Why do so many people find it hard to cut their losses short?
I think a lot of people hate taking losses because they fear that if they get out, and the market goes back up, they’re going to miss out on the move.
Like somehow, they’re going to get out and it’s going to go up a million percent without them.
First off, that’s nonsense.
Just give yourself permission to get back in.
If the stock does go back up and a paul smith sale big move ensues, the 10% you gave up won’t really matter.
Of course, you don’t want to get back in the moment it goes a tick above where you got out. Give it some proving room. But if there’s a compelling reason to get back in, do so.
Don’t hang onto losers for fear that they’ll all of a sudden become big winners once you get out. You can always get back in. But every losing trade begins with the investor believing that it was going to be a big winner too – otherwise they wouldn’t have made that trade in the first place.
In stocks, nobody is 100% right. So knowing that – take your losses when a trade is not working out and move on to another higher probability trade.
Plus, it can help you stay focused. By keeping your losses small, you won’t get gun shy on your next trade.
Stock Screen
One of the ways to minimize your downside, in my opinion, is to find stocks outperforming the market.
A simple screen I’ve been running is to look for the top 100 companies that have outperformed the S&P 500 the most.
I add in the Zacks Rank and price and volume constraints (> $5 and > 100,000 shares) to first narrow the universe down. But then I’m looking for the top 100 stocks with the greatest Relative Percentage Price Change over the last 24 weeks.
And you get a lot of interesting companies across all different sectors and industries.
Here are 5 that came through this list for Tuesday, 9/16/08:
http://abraham.ilikehandbag.com/2010/07/15/how-to-not-ruin-your-portfolio/
By Abraham
Jul.15, 2010
Today’s article isn’t really a screen (although I do have one at the end). I want to talk about something that I believe is critically important in light of what’s been happening in the market.
And that’s about managing your risk — using stops, cutting your losses — all of that stuff.
Not a fun topic, but probably one of the most important for right now.
What’s interesting is that nobody ruins their portfolio when the market is going straight up. It’s when the market goes down that people get into real trouble.
But ironically, it’s when the market is going up that a lot of these bad habits are created.
The problem is that even bad decisions are oftentimes rewarded in a bull market. But when the market is going down, there’s no mercy for bad decision makers. Sitting on losses in hopes of them coming back can ruin your portfolio as they grow bigger.
I like using a 10% stop loss rule because it’s kind of a tit for tat. If you lose 10% on a trade, you only need a little bit more than 10% to get that money back (11.1%).
But if you lose 20%, you now need a 25% gain to get that money back.
And it gets worse as it goes down.
If you lose 30%, you now need nearly a 43% return to get back to where you were.
And if you lose 50% — you now need to pull out a 100% return to get back to even. (And if you’re so slick that you can pull a 100% return out of your hat at any time, why did you just get clobbered for a 50% loss?!)
So I think it’s important to keep your losses small.
Why do so many people find it hard to cut their losses short?
I think a lot of people hate taking losses because they fear that if they get out, and the market goes back up, they’re going to miss out on the move.
Like somehow, they’re going to get out and it’s going to go up a million percent without them.
First off, that’s nonsense.
Just give yourself permission to get back in.
If the stock does go back up and a paul smith sale big move ensues, the 10% you gave up won’t really matter.
Of course, you don’t want to get back in the moment it goes a tick above where you got out. Give it some proving room. But if there’s a compelling reason to get back in, do so.
Don’t hang onto losers for fear that they’ll all of a sudden become big winners once you get out. You can always get back in. But every losing trade begins with the investor believing that it was going to be a big winner too – otherwise they wouldn’t have made that trade in the first place.
In stocks, nobody is 100% right. So knowing that – take your losses when a trade is not working out and move on to another higher probability trade.
Plus, it can help you stay focused. By keeping your losses small, you won’t get gun shy on your next trade.
Stock Screen
One of the ways to minimize your downside, in my opinion, is to find stocks outperforming the market.
A simple screen I’ve been running is to look for the top 100 companies that have outperformed the S&P 500 the most.
I add in the Zacks Rank and price and volume constraints (> $5 and > 100,000 shares) to first narrow the universe down. But then I’m looking for the top 100 stocks with the greatest Relative Percentage Price Change over the last 24 weeks.
And you get a lot of interesting companies across all different sectors and industries.
Here are 5 that came through this list for Tuesday, 9/16/08:
http://abraham.ilikehandbag.com/2010/07/15/how-to-not-ruin-your-portfolio/
Investing in the Stock Market for the Individual Investor
Investing in the Stock Market for the Individual Investor
By Abraham
Jul.14, 2010
Foreword
Over the past few years the stock market has made substantial declines. Some short term investors have lost a good bit of money. Many new stock market investors look at this and become very skeptical about getting in now.
If you are considering investing in the stock market it mbt shoe is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.
When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.
People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.
Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market
Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.
By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.
A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor’s decision to buy or sell and led the way to large fluctuations in stock prices.
Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it’s way to all sectors of our society.
What is a Stock?
A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, MBT Shoes Clearance etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.
Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor’s decision to buy or sell and what prices are attractive.
The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.
Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market – Bear Market
Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?
A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.
In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high. Obviously predicting the low and high is impossible. Since most investors are “bullish” they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.
Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight. An investment strategy in this case might be short selling. Short selling is selling a stock that you don’t own. You can make arrangements with your broker to do this. You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped. You will profit from the difference in the two prices. mbt shoes clearance Another strategy for a bear market would be buying defensive stocks. These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.
Brokers
Traditionally investors bought and sold stock through large brokerage houses. They made a phone call to their broker who relayed their order to the exchange floor. These brokers also offered their services as stock advisors to people who knew very little about the market. These people relied on their broker to guide them and paid a hefty price in commissions and fees as a result. The advent of the Internet has led to a new class of brokerage houses. These firms provide on-line accounts where you may log in and buy and sell stocks from anywhere you can get an Internet connection. They usually don’t offer any market advice and only provide order execution. The Internet investor can find some good deals as the members of this new breed of electronic brokerage houses compete for your business!
Blue Chip Stocks
Large well established firms who have demonstrated good profitability and growth, dividend payout, and quality products and services are called blue chip stocks. They are usually the leaders of their industry, have been around for a long time, and are considered to be MBT Shoes Clearance among the safest investments. Blue chip stocks are included in the Dow Jones Industrial Average, an index composed of thirty companies who are leaders in their industry groups. They are very popular among individual and institutional investors. Blue chip stocks attract investors who are interested in consistent dividends and growth as well as stability. They are rarely subject to the price volatility of other stocks and their share prices will normally be higher than other categories of stock. The downside of blue chips is that due to their stability they won’t appreciate as rapidly as compared to smaller up-and-coming stocks.
Penny Stocks
Penny Stocks are very low priced stocks and are very risky. They are usually issued by companies without a long term record of stability or profitability.
The appeal of penny stock is their low price. Though the odds are against it, if the company can get into a growth trend the share price can jump very rapidly. They are usually favored by the speculative investor.
Income Stocks
Income Stocks are stock that normally pay higher than average dividends. They are well established companies like utilities or telephone companies. Income stocks are popular with the investor who wants to own the stock for a long time and collect the dividends and who is not so interested in a gain in share price.
Value Stocks
Sometimes a company’s earnings and growth potential indicate that it’s share price should be higher than it is currently trading at. These stock are said to be Value Stocks. For the most part, the market and investors have ignored them. The investor who buys a value stock hopes that the market will soon realize what a bargain it is and begin to buy. This would drive up the share price.
Defensive Stocks
Defensive Stocks are issued by companies in industries that have demonstrated good performance in bad markets. Food and utility companies are defensive stocks.
Market Timing
One of the most well known market quotes is: “Buy Low – Sell High”. To be consistently successful in the stock market one needs strategy, discipline, knowledge, and tools. We need to understand our strategy and stick with it. This will prevent us from being distracted by emotion, panic, or greed.
One of the most prominent investing strategies used by “investment pros” is Market Timing. This is the attempt to predict future prices from past market performance. Forecasting stock prices has been a problem for as long as people have been trading stocks. The time to buy or sell a stock is based on a number of economic indicators derived from company analysis, stock charts, and various complex mathematical and computer based algorithms.
One example of market timing signals are those available from www.stock4today.com.
Risks
There are numerous risks involved in investing in the stock market. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For instance, you might buy a stock expecting a certain dividend or rate of share price increase. If the company experiences financial problems it may not live up to your dividend or price growth expectations. If the company goes out of business you will probably lose everything you invested in it. Due to the uncertainty of the outcome, you bear a certain amount of risk when you purchase a stock.
Stocks differ in the amount of risks they present. For instance, Internet stocks have demonstrated themselves to be much more risky than utility stocks.
One risk is the stocks reaction to news items about the company. Depending on how the investors interpret the new item, they may be influenced to buy or sell the stock. If enough of these investors begin to buy or sell at the same time it will cause the price to rise or fall.
One effective strategy to cope with risk is diversification. This means spreading out your investments over several stocks in different market sectors. Remember the saying: “Don’t put all your eggs in the same basket”.
As investors we need to find our “Risk Tolerance”. Risk tolerance is our emotional and financial ability to ride out a decline in the market without panicking and selling at a loss. When we define that point we make sure not to extend our investments beyond it.
Benefits
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!
The Internet has make investing in the stock market a possibility for almost everybody. The wealth of online information, articles, and stock quotes gives the average person the same abilities that were once available to only stock brokers. No longer does the investor need to contact a broker for this information or to place orders to buy or sell. We now have almost instant access to our accounts and the ability to place on-line orders in seconds. This new freedom has ushered in new masses of hopeful investors. Still this in not a random process of buying and selling stock. We need a strategy for selecting a suitable stock as well as timing to buy and sell in order to make a profit.
Day Trading
Day Trading is the mbt kisumu shoes attempt to buy and sell stock over a very short period of time. The day trader hopes to cash in on the short term fluctuations in a stock’s price. It would not be unusual for the day trader to buy and sell the same stock in a matter of a few minutes or to buy and sell the same stock several times a day.
Day traders sit in front of computer monitors all day looking for short term movement in a stock. They then attempt to get in on the movement before it reverses. The real day trader does not hold a stock overnight due to the risk of some event or news item triggering the stock to reverse direction. It takes intense concentration to monitor the minute by minute movement of several stocks.
Day trading involves a great deal of risk because of the uncertainty of the market behavior over the short term. The slightest economic or political news can cause a stock to fluctuate wildly and result in unexpected losses.
There are a few people who make respectable gains day trading. The people who probably make the most are the self proclaimed “experts” who sell the books or operate the web sites that cater to the day trader. Because of the profits to be made from sales to people who want to get rich quick, they make it seem as attractive as possible. The truth is that in the long run more people lose than gain by day trading. This does not translate into a very good investment.
http://abraham.ilikehandbag.com/2010/07/14/investing-in-the-stock-market-for-the-individaul-investor-2/
By Abraham
Jul.14, 2010
Foreword
Over the past few years the stock market has made substantial declines. Some short term investors have lost a good bit of money. Many new stock market investors look at this and become very skeptical about getting in now.
If you are considering investing in the stock market it mbt shoe is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.
When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.
People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.
Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market
Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.
By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.
A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor’s decision to buy or sell and led the way to large fluctuations in stock prices.
Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it’s way to all sectors of our society.
What is a Stock?
A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, MBT Shoes Clearance etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.
Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor’s decision to buy or sell and what prices are attractive.
The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.
Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market – Bear Market
Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?
A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.
In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high. Obviously predicting the low and high is impossible. Since most investors are “bullish” they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.
Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight. An investment strategy in this case might be short selling. Short selling is selling a stock that you don’t own. You can make arrangements with your broker to do this. You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped. You will profit from the difference in the two prices. mbt shoes clearance Another strategy for a bear market would be buying defensive stocks. These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.
Brokers
Traditionally investors bought and sold stock through large brokerage houses. They made a phone call to their broker who relayed their order to the exchange floor. These brokers also offered their services as stock advisors to people who knew very little about the market. These people relied on their broker to guide them and paid a hefty price in commissions and fees as a result. The advent of the Internet has led to a new class of brokerage houses. These firms provide on-line accounts where you may log in and buy and sell stocks from anywhere you can get an Internet connection. They usually don’t offer any market advice and only provide order execution. The Internet investor can find some good deals as the members of this new breed of electronic brokerage houses compete for your business!
Blue Chip Stocks
Large well established firms who have demonstrated good profitability and growth, dividend payout, and quality products and services are called blue chip stocks. They are usually the leaders of their industry, have been around for a long time, and are considered to be MBT Shoes Clearance among the safest investments. Blue chip stocks are included in the Dow Jones Industrial Average, an index composed of thirty companies who are leaders in their industry groups. They are very popular among individual and institutional investors. Blue chip stocks attract investors who are interested in consistent dividends and growth as well as stability. They are rarely subject to the price volatility of other stocks and their share prices will normally be higher than other categories of stock. The downside of blue chips is that due to their stability they won’t appreciate as rapidly as compared to smaller up-and-coming stocks.
Penny Stocks
Penny Stocks are very low priced stocks and are very risky. They are usually issued by companies without a long term record of stability or profitability.
The appeal of penny stock is their low price. Though the odds are against it, if the company can get into a growth trend the share price can jump very rapidly. They are usually favored by the speculative investor.
Income Stocks
Income Stocks are stock that normally pay higher than average dividends. They are well established companies like utilities or telephone companies. Income stocks are popular with the investor who wants to own the stock for a long time and collect the dividends and who is not so interested in a gain in share price.
Value Stocks
Sometimes a company’s earnings and growth potential indicate that it’s share price should be higher than it is currently trading at. These stock are said to be Value Stocks. For the most part, the market and investors have ignored them. The investor who buys a value stock hopes that the market will soon realize what a bargain it is and begin to buy. This would drive up the share price.
Defensive Stocks
Defensive Stocks are issued by companies in industries that have demonstrated good performance in bad markets. Food and utility companies are defensive stocks.
Market Timing
One of the most well known market quotes is: “Buy Low – Sell High”. To be consistently successful in the stock market one needs strategy, discipline, knowledge, and tools. We need to understand our strategy and stick with it. This will prevent us from being distracted by emotion, panic, or greed.
One of the most prominent investing strategies used by “investment pros” is Market Timing. This is the attempt to predict future prices from past market performance. Forecasting stock prices has been a problem for as long as people have been trading stocks. The time to buy or sell a stock is based on a number of economic indicators derived from company analysis, stock charts, and various complex mathematical and computer based algorithms.
One example of market timing signals are those available from www.stock4today.com.
Risks
There are numerous risks involved in investing in the stock market. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For instance, you might buy a stock expecting a certain dividend or rate of share price increase. If the company experiences financial problems it may not live up to your dividend or price growth expectations. If the company goes out of business you will probably lose everything you invested in it. Due to the uncertainty of the outcome, you bear a certain amount of risk when you purchase a stock.
Stocks differ in the amount of risks they present. For instance, Internet stocks have demonstrated themselves to be much more risky than utility stocks.
One risk is the stocks reaction to news items about the company. Depending on how the investors interpret the new item, they may be influenced to buy or sell the stock. If enough of these investors begin to buy or sell at the same time it will cause the price to rise or fall.
One effective strategy to cope with risk is diversification. This means spreading out your investments over several stocks in different market sectors. Remember the saying: “Don’t put all your eggs in the same basket”.
As investors we need to find our “Risk Tolerance”. Risk tolerance is our emotional and financial ability to ride out a decline in the market without panicking and selling at a loss. When we define that point we make sure not to extend our investments beyond it.
Benefits
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!
The Internet has make investing in the stock market a possibility for almost everybody. The wealth of online information, articles, and stock quotes gives the average person the same abilities that were once available to only stock brokers. No longer does the investor need to contact a broker for this information or to place orders to buy or sell. We now have almost instant access to our accounts and the ability to place on-line orders in seconds. This new freedom has ushered in new masses of hopeful investors. Still this in not a random process of buying and selling stock. We need a strategy for selecting a suitable stock as well as timing to buy and sell in order to make a profit.
Day Trading
Day Trading is the mbt kisumu shoes attempt to buy and sell stock over a very short period of time. The day trader hopes to cash in on the short term fluctuations in a stock’s price. It would not be unusual for the day trader to buy and sell the same stock in a matter of a few minutes or to buy and sell the same stock several times a day.
Day traders sit in front of computer monitors all day looking for short term movement in a stock. They then attempt to get in on the movement before it reverses. The real day trader does not hold a stock overnight due to the risk of some event or news item triggering the stock to reverse direction. It takes intense concentration to monitor the minute by minute movement of several stocks.
Day trading involves a great deal of risk because of the uncertainty of the market behavior over the short term. The slightest economic or political news can cause a stock to fluctuate wildly and result in unexpected losses.
There are a few people who make respectable gains day trading. The people who probably make the most are the self proclaimed “experts” who sell the books or operate the web sites that cater to the day trader. Because of the profits to be made from sales to people who want to get rich quick, they make it seem as attractive as possible. The truth is that in the long run more people lose than gain by day trading. This does not translate into a very good investment.
http://abraham.ilikehandbag.com/2010/07/14/investing-in-the-stock-market-for-the-individaul-investor-2/
Wednesday, 14 July 2010
Buffett debunked the Efficient Market Hypothesis: The Superinvestors of Graham-and-Doddsville
Paul the octopus proves Buffett was right
GREG HOFFMAN
July 14, 2010 - 12:08PM
The unlikely hero of the recent World Cup of football? Paul the octopus, a common cephalopod living in a tank at a Sea Life Centre in Oberhausen, Germany.
In case you missed Paul’s highly-publicised predictions, he correctly forecast the winner of all seven of Germany’s World Cup games and the winner of the final. Paul became a media sensation, although he wasn't much use in interviews.
The idea that an octopus would even know of the World Cup, let alone be able to forecast its outcome, is of course ridiculous. Paul can tell us nothing useful about football. But our collective fascination with a Nostradamus octopus is reminiscent of a parable told by the world’s greatest investor more than 25 years ago.
In 1984 Warren Buffett penned an article titled The Superinvestors of Graham-and-Doddsville, based on a speech he had given on the occasion of the 50th anniversary of his mentor Ben Graham’s legendary textbook, Security Analysis.
In it, Buffett rejected the then growing (and now entrenched) view in academia that markets are ''efficient'' because ''stock prices reflect everything that is known about a company’s prospects and about the state of the economy.''
Many academics conclude that anyone who beats the market (like Buffett) is simply lucky; an argument to which Buffett presents a devastating rebuttal.
He asks the reader to ''imagine a national coin-flipping contest'' where 225 million Americans wager a dollar and flip a coin each morning. Each makes their call before flipping and the winners double their stake by taking the money from the losers (who drop out).
''After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.''
After 20 days, 215 people would have successfully called their coin flips 20 times in a row and each be sitting on $1m in winnings. He suggests that such people would, by this stage, probably start writing books about their success and ''and tackling skeptical professors with, ‘If it can’t be done, why are there 215 of us?’'' Some might even crawl into a fish tank and start predicting the outcomes of sporting contests.
But, as Buffett points out, exactly the same result would be achieved if 225 million orangutans (or octopi) had engaged in the same activity.
Having set the stage for scepticism with his coin-flipping parable, Buffett makes a pre-emptive strike against it; ''I would argue that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something.''
Buffett says that if you find an unusual concentration of abnormal results in some kind of geographic area (be it successful coin-flipping orangutans or the incidence of cancer, for instance), it calls for further investigation.
''In addition to geographical origins,'' writes Buffett, ''there can be what I call an intellectual origin.'' He then puts his view that an unusually high number of successful ''coin flippers'' in the investment world employ a similar philosophy; value investing.
After cataloguing the track records of various successful investors who he had pre-identified, Buffett sums up there approach thusly; ''...these investors are, mentally, always buying the business, not buying the stock ... all exploit the difference between the market price of a business and its intrinsic value.''
It’s astounding to me that this approach isn’t more widely followed. Think of the five most respected names in the Australian funds management industry (as opposed to the biggest names). I bet that of the names that spring to mind for most people, at least two would have a strong value investing flavour to their approach.
Those names might include Platinum Asset Management, Perpetual, Maple-Brown Abbott and Argo Investments. Other approaches are likely to be top of the pops in any single year but, over the full sharemarket cycle, you’re likely to find a cluster of value investors near the top of the long term performance league table.
It doesn’t take the predictive powers of a German octopus to conclude that the same will prove true by the time we’re through with this current cycle.
Conventional economic theory tells us that people like Kerr Neilson and Warren Buffett are statistical flukes. But, unlike Paul the octopus, their stock selections are based on a pre-defined philosophy. That should tell us something about the efficient market hypothesis (it's flawed) and the type of approach—the intellectual origin—these successful investors employ (it's successful).
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website. For more Intelligent Investor articles click here..
GREG HOFFMAN
July 14, 2010 - 12:08PM
The unlikely hero of the recent World Cup of football? Paul the octopus, a common cephalopod living in a tank at a Sea Life Centre in Oberhausen, Germany.
In case you missed Paul’s highly-publicised predictions, he correctly forecast the winner of all seven of Germany’s World Cup games and the winner of the final. Paul became a media sensation, although he wasn't much use in interviews.
The idea that an octopus would even know of the World Cup, let alone be able to forecast its outcome, is of course ridiculous. Paul can tell us nothing useful about football. But our collective fascination with a Nostradamus octopus is reminiscent of a parable told by the world’s greatest investor more than 25 years ago.
In 1984 Warren Buffett penned an article titled The Superinvestors of Graham-and-Doddsville, based on a speech he had given on the occasion of the 50th anniversary of his mentor Ben Graham’s legendary textbook, Security Analysis.
In it, Buffett rejected the then growing (and now entrenched) view in academia that markets are ''efficient'' because ''stock prices reflect everything that is known about a company’s prospects and about the state of the economy.''
Many academics conclude that anyone who beats the market (like Buffett) is simply lucky; an argument to which Buffett presents a devastating rebuttal.
He asks the reader to ''imagine a national coin-flipping contest'' where 225 million Americans wager a dollar and flip a coin each morning. Each makes their call before flipping and the winners double their stake by taking the money from the losers (who drop out).
''After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.''
After 20 days, 215 people would have successfully called their coin flips 20 times in a row and each be sitting on $1m in winnings. He suggests that such people would, by this stage, probably start writing books about their success and ''and tackling skeptical professors with, ‘If it can’t be done, why are there 215 of us?’'' Some might even crawl into a fish tank and start predicting the outcomes of sporting contests.
But, as Buffett points out, exactly the same result would be achieved if 225 million orangutans (or octopi) had engaged in the same activity.
Having set the stage for scepticism with his coin-flipping parable, Buffett makes a pre-emptive strike against it; ''I would argue that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something.''
Buffett says that if you find an unusual concentration of abnormal results in some kind of geographic area (be it successful coin-flipping orangutans or the incidence of cancer, for instance), it calls for further investigation.
''In addition to geographical origins,'' writes Buffett, ''there can be what I call an intellectual origin.'' He then puts his view that an unusually high number of successful ''coin flippers'' in the investment world employ a similar philosophy; value investing.
After cataloguing the track records of various successful investors who he had pre-identified, Buffett sums up there approach thusly; ''...these investors are, mentally, always buying the business, not buying the stock ... all exploit the difference between the market price of a business and its intrinsic value.''
It’s astounding to me that this approach isn’t more widely followed. Think of the five most respected names in the Australian funds management industry (as opposed to the biggest names). I bet that of the names that spring to mind for most people, at least two would have a strong value investing flavour to their approach.
Those names might include Platinum Asset Management, Perpetual, Maple-Brown Abbott and Argo Investments. Other approaches are likely to be top of the pops in any single year but, over the full sharemarket cycle, you’re likely to find a cluster of value investors near the top of the long term performance league table.
It doesn’t take the predictive powers of a German octopus to conclude that the same will prove true by the time we’re through with this current cycle.
Conventional economic theory tells us that people like Kerr Neilson and Warren Buffett are statistical flukes. But, unlike Paul the octopus, their stock selections are based on a pre-defined philosophy. That should tell us something about the efficient market hypothesis (it's flawed) and the type of approach—the intellectual origin—these successful investors employ (it's successful).
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website. For more Intelligent Investor articles click here..
Singapore GDP expands at record pace
Singapore GDP expands at record pace
July 14, 2010 - 3:28PM
Singapore’s economy expanded at a record 18.1 per cent pace in the first half of the year, spurring the nation’s currency and adding to evidence of Asia’s resilience to the European crisis.
Gross domestic product expanded at a 26 per cent annual pace in the second quarter from the previous three months, after a revised 45.9 per cent gain in January to March, the trade ministry said today. Growth in the first half was the fastest pace since records began in 1975, prompting the government to predict GDP will rise 13 per cent to 15 per cent in 2010.
A year after Singapore exited its worst recession since independence in 1965, tourists are arriving in record numbers, companies have increased hiring and vessels are leaving the city’s ports carrying more cargo. The island’s strengthening economy has added to an Asian rebound that prompted central banks to raise interest rates in recent weeks, even amid concern that Europe’s fiscal woes will slow the global recovery.
''Singapore will be among the fastest-growing countries not just in Asia, but the world, this year,'' said Song Seng-Wun, a regional economist at CIMB Research Pte in Singapore. ''Price pressures are already evident and we expect the central bank to be watching if inflation expectations are raised because of these numbers.''
The nation’s growth has already prompted the central bank to allow the currency to strengthen to temper inflationary pressures. The Singapore dollar is used instead of interest rates to conduct monetary policy.
Currency gains
The island’s currency added 0.4 per cent to S$1.3761 per US dollar, bringing this quarter’s gain to 1.4 per cent. The benchmark Straits Times Index rose for a fifth day, climbing 0.7 per cent and is set for the highest close since April 30.
The cost of insuring Temasek Holdings Pte’s bonds from non- payment using credit-default swaps fell 4 basis points to 43 basis points, the lowest level since June 21, according to Royal Bank of Scotland and CMA prices. Temasek, a state investment company, is often used as a proxy for Singapore sovereign credit risk.
Growth last quarter was more than the median estimate for a 23 per cent increase in a Bloomberg News survey of 12 economists. Singapore’s full-year growth has not exceeded 13 per cent since 1972, when the economy was about a twelfth of last year’s size, according to the statistics department.
Significant momentum
Singapore’s growth suggests ''that the regional recovery retained significant momentum in recent months,'' Brian Jackson, a Hong Kong-based senior emerging markets strategist at Royal Bank of Canada, said in an e-mail after the GDP report. ''We continue to forecast further gradual policy normalization across the region over the rest of the year, including moderate appreciation in the Singapore dollar.''
Policy makers in neighboring Malaysia have raised interest rates three times this year, matching the number of increases by India’s central bank. In Taiwan, Governor Perng Fai-nan moved the key rate 12.5 basis points higher last month and the Bank of Korea unexpectedly increased its benchmark last week.
''With growth likely to remain above trend for the rest of the year, the Monetary Authority of Singapore may be inclined to maintain the policy of gradual appreciation at its October policy meeting,'' Wai Ho Leong, a regional economist at Barclays in Singapore, said in a note after the report. He raised Singapore’s 2010 growth forecast to 14.5 per cent and predicted the currency may climb to S$1.35 per US dollar in one year.
Slot machines
The two casinos run by Genting Singapore and Las Vegas Sands opened in February and April this year after Prime Minister Lee Hsien Loong’s government scrapped a four-decade ban to help double tourism revenue by 2015. The resorts have attracted millions of visitors to their slot machines and baccarat and roulette tables.
The economy grew 19.3 per cent in the second quarter from a year earlier, compared with the median estimate for a 17.3 per cent gain in a Bloomberg News survey.
''Growth in the trade-related sectors was bolstered by healthy global trade flows, while the openings of the integrated resorts and higher visitor arrival numbers contributed to the growth in the tourism-related sectors,'' the trade ministry said in a statement. ''The financial services sector also grew strongly, supported by increased foreign-exchange trading and domestic bank-lending activities.''
Austerity programs
Still, Singapore’s dependence on global trade may mean it’s unlikely to escape the impact of any renewed slowdown. Governments in Europe are embarking on austerity programs to cut budget deficits and households in some of the world’s largest economies are holding back spending, clouding the outlook for the rebound.
''In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist,'' the trade ministry said. ''The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union.''
Signs of a slowdown in the US jobs market have affected consumer confidence, and ''sluggish final demand'' from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia, the ministry said.
Singapore’s non-oil domestic exports will probably gain between 17 per cent and 19 per cent in 2010, from a previous projection of as much as 17 per cent, the trade promotion agency said today. Overseas shipments rose 28.7 per cent in June from a year earlier, after increasing a revised 24.3 per cent the month before, the government said.
Bloomberg
July 14, 2010 - 3:28PM
Singapore’s economy expanded at a record 18.1 per cent pace in the first half of the year, spurring the nation’s currency and adding to evidence of Asia’s resilience to the European crisis.
Gross domestic product expanded at a 26 per cent annual pace in the second quarter from the previous three months, after a revised 45.9 per cent gain in January to March, the trade ministry said today. Growth in the first half was the fastest pace since records began in 1975, prompting the government to predict GDP will rise 13 per cent to 15 per cent in 2010.
A year after Singapore exited its worst recession since independence in 1965, tourists are arriving in record numbers, companies have increased hiring and vessels are leaving the city’s ports carrying more cargo. The island’s strengthening economy has added to an Asian rebound that prompted central banks to raise interest rates in recent weeks, even amid concern that Europe’s fiscal woes will slow the global recovery.
''Singapore will be among the fastest-growing countries not just in Asia, but the world, this year,'' said Song Seng-Wun, a regional economist at CIMB Research Pte in Singapore. ''Price pressures are already evident and we expect the central bank to be watching if inflation expectations are raised because of these numbers.''
The nation’s growth has already prompted the central bank to allow the currency to strengthen to temper inflationary pressures. The Singapore dollar is used instead of interest rates to conduct monetary policy.
Currency gains
The island’s currency added 0.4 per cent to S$1.3761 per US dollar, bringing this quarter’s gain to 1.4 per cent. The benchmark Straits Times Index rose for a fifth day, climbing 0.7 per cent and is set for the highest close since April 30.
The cost of insuring Temasek Holdings Pte’s bonds from non- payment using credit-default swaps fell 4 basis points to 43 basis points, the lowest level since June 21, according to Royal Bank of Scotland and CMA prices. Temasek, a state investment company, is often used as a proxy for Singapore sovereign credit risk.
Growth last quarter was more than the median estimate for a 23 per cent increase in a Bloomberg News survey of 12 economists. Singapore’s full-year growth has not exceeded 13 per cent since 1972, when the economy was about a twelfth of last year’s size, according to the statistics department.
Significant momentum
Singapore’s growth suggests ''that the regional recovery retained significant momentum in recent months,'' Brian Jackson, a Hong Kong-based senior emerging markets strategist at Royal Bank of Canada, said in an e-mail after the GDP report. ''We continue to forecast further gradual policy normalization across the region over the rest of the year, including moderate appreciation in the Singapore dollar.''
Policy makers in neighboring Malaysia have raised interest rates three times this year, matching the number of increases by India’s central bank. In Taiwan, Governor Perng Fai-nan moved the key rate 12.5 basis points higher last month and the Bank of Korea unexpectedly increased its benchmark last week.
''With growth likely to remain above trend for the rest of the year, the Monetary Authority of Singapore may be inclined to maintain the policy of gradual appreciation at its October policy meeting,'' Wai Ho Leong, a regional economist at Barclays in Singapore, said in a note after the report. He raised Singapore’s 2010 growth forecast to 14.5 per cent and predicted the currency may climb to S$1.35 per US dollar in one year.
Slot machines
The two casinos run by Genting Singapore and Las Vegas Sands opened in February and April this year after Prime Minister Lee Hsien Loong’s government scrapped a four-decade ban to help double tourism revenue by 2015. The resorts have attracted millions of visitors to their slot machines and baccarat and roulette tables.
The economy grew 19.3 per cent in the second quarter from a year earlier, compared with the median estimate for a 17.3 per cent gain in a Bloomberg News survey.
''Growth in the trade-related sectors was bolstered by healthy global trade flows, while the openings of the integrated resorts and higher visitor arrival numbers contributed to the growth in the tourism-related sectors,'' the trade ministry said in a statement. ''The financial services sector also grew strongly, supported by increased foreign-exchange trading and domestic bank-lending activities.''
Austerity programs
Still, Singapore’s dependence on global trade may mean it’s unlikely to escape the impact of any renewed slowdown. Governments in Europe are embarking on austerity programs to cut budget deficits and households in some of the world’s largest economies are holding back spending, clouding the outlook for the rebound.
''In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist,'' the trade ministry said. ''The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union.''
Signs of a slowdown in the US jobs market have affected consumer confidence, and ''sluggish final demand'' from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia, the ministry said.
Singapore’s non-oil domestic exports will probably gain between 17 per cent and 19 per cent in 2010, from a previous projection of as much as 17 per cent, the trade promotion agency said today. Overseas shipments rose 28.7 per cent in June from a year earlier, after increasing a revised 24.3 per cent the month before, the government said.
Bloomberg
Most houseowners unaware of impact of interest rate rise
Three-quarters of home owners do not know what impact an interest rate rise would have on them, a survey has indicated.
Published: 12:30PM BST 07 Jul 2010
Around 74pc of people with a mortgage admitted they did not know how a 1 percentage point rise in the Bank of England base rate would affect their monthly outgoings, according to the newly formed Consumer Financial Education Body (CFEB).
More worryingly, 15pc of people do not even know what type of mortgage they have, such as whether it is a fixed-rate deal, which would make them unaffected by an interest rate rise, or whether it is a variable-rate one, meaning their monthly payments would go up.
A further 15pc also do not know when their current mortgage deal comes to an end. The lack of awareness comes despite the fact that 51pc of people with a mortgage expect interest rates to rise during the coming nine months.
Just over half of people said they had no plans to review their mortgage, or would leave doing so until just before their existing deal expired, while 14pc admitted they did not know what they would cut back on if their mortgage repayments rose by £200 a month.
Tony Hobman, chief executive of the CFEB, said: "Interest rates have been at record lows for some while now. Although there is uncertainty about when this will change, it is clear from our research that many people with mortgages haven't thought about what it would mean for their monthly payments, or where they would find the extra money in their household budget if their mortgage rate was to go up.
"Lack of time means many of us often put off reviewing our finances, but it doesn't have to be time consuming to keep on top of your money matters."
The organisation is urging people to stay on top of their mortgage, and is offering help and guidance on how to prepare for when interest rates do rise.
It advises people to look at the Keyfacts document they were given when they took out their mortgage, as this shows what their current interest rate is and when their deal expires.
The CFEB has set up a mortgage calculator so that people can see what impact interest rate rises would have on their monthly repayments, while it also provides impartial mortgage comparison tables to help people find the best deal. Its mortgage toolkit can be found at www.moneymadeclear.org.uk/mortgages
The body was set up in April by the Financial Services Authority to take over responsibility for consumer financial education.
http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7876910/Most-home-owners-unaware-of-impact-of-interest-rate-rise.html
Insightful Discussion on Portfolio Rebalancing, Intrinsic Value and Value Investing
Portfolio Rebalancing
Quote:
Putting thought into your investments is critical, it is also the antithesis of buy and hold. I believe it was Buffet who said that knowledge is your best hedge against risk. My point in the rebalancing comment is that if you have investments at historical highs such as equities in the late 90's and you take some of your capital gains and put those into Reits or physical real estate or some other true diversification from equities, you stand a better chance of protecting those profits from an equity correction. I am talking about long term trends of 5 to 20 years.
Reply:
March 1985 the S&P 500 hit an all time high of 183. It broke 300 two years later. July of 1989 it hit an all time high of 346. It proceeded to regularly make all time highs for about 13 years straight after that. Why would you want to rebalance out of that market? BTW, the mid to late 80s is when Buffett was making big commitments to Coke, among others. He never rebalanced out of those positions and still sits on huge profits today.
Ben Graham (or Buffett) would say the time to sell is when your estimated valuation of the stock is close to it's price. If the company (Coke for example) keeps increasing in value, and price never catches up, the time to sell is "never".
Of course, with Coke, Buffett didn't sell even when price clearly exceeded value around 2000. He freely admits that was a big mistake, partly driven by having his hands tied as a board member.
----
Portfolio Rebalancing
Quote:
Your statements about options are correct, as far as they go. Covered calls are not a good solution in bull markets, but if your of a mind to hold a large stock position come hell or high water, and you find yourself in a sideways to down market, covered calls can be one way to lower your holding costs.
Personally, I am more of a trend following investor who prefers to time my entries and exits using a quantitative trend following model, using options purely as leveraged long plays if at all.
Reply:
Ben would say you never know whether a sideways or down market will continue, or when it will stop. Ben (and Warren) believes you can't predict trends, that it's better to use value as your guide and trust the market will eventually recognize that value.
----
Intrinsic Value and Value Investing
Quote:
I am somewhat sceptical of anyone talking about value stock investing at the current valuations as I feel they are just below all time historical highs and have quite a bit of downside before they can called value stocks in the historical sense.
Reply:
The commonly used term "value stocks" has little to do with value investing. Academics describe value stocks as stocks with low PE or low price to book. That's not even close to true. Buffett paid an above market PE for Coke when he bought it, and with a large price to book.
Value investing simply means every stock has an intrinsic value (IV) separate from it's price. Value investors try to buy stocks trading at a discount to their intrinsic value. Some stocks are bad "value stocks" because they are either over priced, or their IV is difficult to estimate. But at the right price, any stock is a value stock.
And the fact that the market has reached a historical high recently is neither evidence stocks are over-valued or under-valued. Their true value is based on the discounted value of their future stream of earnings. The Dow recently hit a peak it hand't seen for over 5 years. I don't know if at that price the Dow is fairly valued or not, but I am certain it is much more valuable than it was 5 years ago, simply because it's earnings are higher.
As we get farther in TII, more of these concepts will become apparent.
http://archives1.twoplustwo.com/showflat.php?Cat=0&Number=5610779&page=0&fpart=all&vc=1
Quote:
Putting thought into your investments is critical, it is also the antithesis of buy and hold. I believe it was Buffet who said that knowledge is your best hedge against risk. My point in the rebalancing comment is that if you have investments at historical highs such as equities in the late 90's and you take some of your capital gains and put those into Reits or physical real estate or some other true diversification from equities, you stand a better chance of protecting those profits from an equity correction. I am talking about long term trends of 5 to 20 years.
Reply:
March 1985 the S&P 500 hit an all time high of 183. It broke 300 two years later. July of 1989 it hit an all time high of 346. It proceeded to regularly make all time highs for about 13 years straight after that. Why would you want to rebalance out of that market? BTW, the mid to late 80s is when Buffett was making big commitments to Coke, among others. He never rebalanced out of those positions and still sits on huge profits today.
Ben Graham (or Buffett) would say the time to sell is when your estimated valuation of the stock is close to it's price. If the company (Coke for example) keeps increasing in value, and price never catches up, the time to sell is "never".
Of course, with Coke, Buffett didn't sell even when price clearly exceeded value around 2000. He freely admits that was a big mistake, partly driven by having his hands tied as a board member.
----
Portfolio Rebalancing
Quote:
Your statements about options are correct, as far as they go. Covered calls are not a good solution in bull markets, but if your of a mind to hold a large stock position come hell or high water, and you find yourself in a sideways to down market, covered calls can be one way to lower your holding costs.
Personally, I am more of a trend following investor who prefers to time my entries and exits using a quantitative trend following model, using options purely as leveraged long plays if at all.
Reply:
Ben would say you never know whether a sideways or down market will continue, or when it will stop. Ben (and Warren) believes you can't predict trends, that it's better to use value as your guide and trust the market will eventually recognize that value.
----
Intrinsic Value and Value Investing
Quote:
I am somewhat sceptical of anyone talking about value stock investing at the current valuations as I feel they are just below all time historical highs and have quite a bit of downside before they can called value stocks in the historical sense.
Reply:
The commonly used term "value stocks" has little to do with value investing. Academics describe value stocks as stocks with low PE or low price to book. That's not even close to true. Buffett paid an above market PE for Coke when he bought it, and with a large price to book.
Value investing simply means every stock has an intrinsic value (IV) separate from it's price. Value investors try to buy stocks trading at a discount to their intrinsic value. Some stocks are bad "value stocks" because they are either over priced, or their IV is difficult to estimate. But at the right price, any stock is a value stock.
And the fact that the market has reached a historical high recently is neither evidence stocks are over-valued or under-valued. Their true value is based on the discounted value of their future stream of earnings. The Dow recently hit a peak it hand't seen for over 5 years. I don't know if at that price the Dow is fairly valued or not, but I am certain it is much more valuable than it was 5 years ago, simply because it's earnings are higher.
As we get farther in TII, more of these concepts will become apparent.
http://archives1.twoplustwo.com/showflat.php?Cat=0&Number=5610779&page=0&fpart=all&vc=1
Chuck out your CAPM and burst your beta, the truly chic academics are now seeking to explain why value stocks outperform.
The business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective. - Warren Buffett
The Efficient Market Hypothesis (EMH) and Modern Portfolio Theory (MPT) are based on a simple assumption that risk is defined by volatility. According to the theory, investors are risk adverse: they are willing to accept more risk (volatility) for higher payoffs and will accept lower returns for a less volatile investment. The theory is simple and elegant, and can lead further into ingenuous mathematical proofs and equations, which probably has a lot to do with why it has become so widely accepted.
When Markowitz and Sharpe et al needed a definition of risk, they chose to define risk as volatility, the greater the volatility of the portfolio, measured either in terms of standard deviation or beta, the greater the risk.
How did these researchers know that volatility was a good measure of risk? They didn't, nor did they do any research to find out. The observation was made that the share market, which is generally thought to be more risky than cash investments, had the highest volatility. The principle was adopted generally without further evidence that volatility was a good way to measure risk.
Economists find this definition of risk compelling, because it is based on an assumption that makes perfect logical sense, that investors should be risk adverse, and that in today's well informed, sophisticated markets everyone acts perfectly rationally and takes no risk that is not justified by a bounty of evidence in support.
But the question is still there, why this measure of risk rather than securities analysis as espoused by Graham and Dodd, examining the virtues of each company by a good look at their financial strength, earnings, debt, sales success or many other measures that management use?
One doesn't have to get too far in examining the theory to find big gaps in the logic. Investors are very concerned by downside volatility, but how many object when their portfolio moves up? Volatility is a measure that regards upside movement as equally bad as movement to the downside. What about inflation and the terrible toll it extracts on non-growth assets? Finally, speculative stocks which are extremely volatile do not fit into this mold as they certainly do not give superior returns, as a diversified group or otherwise. Right from the start this definition of risk seemed unrealistic.
Unrealistic or not, an entire generation of investors has grown up with the idea that volatility is risk. Services that rate managed funds examine volatility as a central concern, and "risk adjusted" historic returns are frequently a major factor in determining how many stars a manager is given by the rating services.
There are many problems with the whole concept. For starters there actually isn't any permanent correlation between risk (when defined as volatility) and return. High volatility does not give better results, nor does lower volatility give lesser results.
In 1977, over a decade before Markowitz and Sharpe received their Nobel Prizes for their work on portfolio theory, a paper appeared reviewing the research on risk (J. Michael Murphy, "Efficient Markets, Index Funds, Illusion, and Reality", Journal of Portfolio Management (Fall 1977), pp. 5-20.). Some of the conclusions were startling, at least for EMH believers. Murphy cited four studies that found "realised returns appear to be higher than expected low low-risk securities and lower than expected for high-risk securities ... or that the [risk-reward] relationship was far weaker than expected." The author continued on: "Other important studies have concluded that there is not necessarily any stable relationship between risk and return; that there often may be virtually no relationship between return achieved and risk taken; and that high volatility unit trusts were not compensated by greater returns". (Italics original)
Another paper (Haugen and Heins, "Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles," Journal of Financial and Quantitative Analysis (December 1975), pp 775-84) concluded: "The results of our empirical effort do not support the conventional hypothesis that risk - systematic or otherwise - generates a special reward." These papers were published in the mid to late 70s, just as EMH and MPT were really taking off and "revolutionising" the way Wall Street invested money.
The total absence of a correlation between volatility and return for individual stocks is not the only thing that troubles this method and its exponents. Even more fundamental is the failure of volatility measures to remain constant over time. Any options trader will tell you immediately that volatility is not the same from day to day, nor hour to hour or even year to year. Volatility simply does not stay the same for any period of time and varies drastically from one time period to another. Stocks do not have a fixed volatility and hence it is absolutely impossible to use that factor to make meaningful changes to a portfolio unless you know what volatility is going to be; and we are no closer to finding a way to predict volatility than we are to being able to predict the general movement of prices.
Beta, as defined by Sharpe, Lintner and Mossin were shown to have no predictive power. The beta defined for one period differs drastically to that in the next and there is no way of using beta to predict future volatility.
Barr Rosenberg, a well respected researcher proposed a more sophisticated multifactor beta, including a large number of other inputs besides volatility to measure risk. These betas, called "Barr's Bionic Betas" proved as worthless as previous definitions in portfolio construction. Other betas were examined but none proved to have any usefulness at all for anything besides providing work for market statisticians.
The Capital Asset Pricing Model is based entirely on beta. Without a reliable beta you can't have CAPM any more than a value investor can buy stocks without knowing anything about assets or earnings. Somehow all this managed to be ignored until Eugene Fama, one of the original researchers who in 1973 had been right at the centre of the development of the Efficient Market Hypothesis, put out a new paper on risk and return in 1992. (Fama and French, "The Cross-Section of Expected Stock Returns" Journal of Finance 67 (1992), pp 427-465). Fama and French examined 9,500 stocks between 1963 and 1990, concluding that a stock's risk, measured by beta, was not a reliable predictor of performance. Fama stated "beta as the sole variable in explaining returns on stocks ... is dead. ... What we are saying is that over the last 50 years, knowing the volatility of an equity doesn't tell you much about the stock's return."
This was like the Pope announcing that there is no God, anyone who knows what a central role Fama's early 1970s work on EMH and MPT played would appreciate that this was an astounding development. As the Chicago Tribune put it: "Some of its best-known adherents have now become detractors."
If not volatility, then what? "What investors really get paid for is holding dogs." said Fama's coworker French. Their research found that stocks with lower price to earnings ratios and price to book ratios, as well as smaller capitalisation companies provided the highest returns over time. Stocks are more positively related to these measurements than to beta or other similar risk criteria.
Fama's words "beta is dead" reverberated around the world. As one finance professor put is in discussing the Fama and French findings:
Modern finance today resembles a Meso-American religion, one in which the high priest not only sacrifices the followers - but even the church itself. The field has been so indoctrinated and dogmatised that only those who promoted the leading model from the start are allowed to destroy it.
Other measures were developed do adjust returns by volatility to devise "risk adjusted" returns. I might return 40% over a few years but if I do this with sufficiently high volatility then someone who invested in treasury bills would have better risk adjusted returns. Remember that volatility, in its usual definition, is no different for upside or downside movements. If I achieved this with results ranging between +1% and +100% in any given year, but with no down years at all, then on the basis of that track record my strategy was obviously a risky one. Many contrarian and value investors whose track records include very little downside volatility but tend to make a lot of money when markets bounce have very poor "risk adjusted" returns as a result of this thinking.
Beta gives the appearance of a highly sophisticated mathematical formula but in reality it is data mining, looking at history you can find a number of factors that seem to be correlated, but these correlations are more often than not sheer coincidence. This is very bad science. I learned while doing my own studies that it is wrong to confuse correlation with causality, and wrong to just assume that correlations can be extrapolated to the future. Perhaps other researchers in finance and economics should study for a degree in the physical sciences as I did, maybe they don't teach this concept in economics.
Modern Portfolio Theory is based on a number of assumptions. Mathematically you would expect any conclusions to be drawn from the model to be correct as long as the assumptions are correct. In science we develop basic theories and understand basic principles. As long as the fundamental pieces fit, equations can be manipulated to provide new insights. This is why now that quantum mechanics and relativity are fairly well understood a large proportion of scientific discovery is purely mathematical. As long as the theory is correct you can make new discoveries by putting the theory into a mathematical model and giving it all a good shake. Physicists have found hundreds of subatomic particles that were originally predicted and described in complete detail by mathematics.
So what assumptions and fundamentals does Modern Portfolio Theory rely on? There are ten of them which are particular doozies. The following are key concepts around which MPT has been constructed:
There are no transaction costs in buying and selling securities. There is no brokerage, no spread between bidding and asking prices. You pay no taxes of any kind and only "risk" plays a part in determining which securities an investor will buy.
An investor can take any position of any size in any security he wishes. No one can move the market and liquidity is infinite. You can buy a trillion dollars worth of stock in a small speculative mining stock or buy one cent worth of Berkshire Hathaway. Nothing stops you from taking positions of any size in any security.
The investor does not consider taxes when making investment decisions, and is indifferent to receiving dividends or capital gains.
Investors are rational and risk adverse. They are completely aware of all risk entailed in an investment and will take positions based on a determination of risk, demanding a higher return for accepting greater volatility.
Investors, as a group, look at risk-return relationships over the same time horizon. A short term speculator and a long term investor have exactly the same motivations, time horizon and profit target. Regardless of who you are, you will always give an investment the same amount of time to work out and volatility will be your only concern.
Investors, as a group, have similar views on how they measure risk. All investors have the same information and will buy or sell based on an identical assessment of the investment and all expect the same thing from the investment. A seller will be motivated to sell only because another security has a level of volatility corresponding to their desired return. A buyer will make a purchase because this security has a level of risk corresponding to the return that he wants.
Investors seek to control risk only by the diversification of their holdings.
All assets, including human capital, can be bought and sold on the market.
Investors can lend or borrow at the 91-day T-bill rate - the risk-free rate - and can also sell short without restriction.
Politics and investor psychology have no effect on the markets.
In fact transaction costs have a major effect on whether you want to be a long term or short term investor, and taxes have a major impact on what kind of investments make sense. Liquidity is a major factor in keeping most people out of thinly traded issues and the difference between dividends and capital gains very much affects the type of securities an investor will buy.
Investors are not rational, they go for "hot" sectors and markets boom and bust regularly because of speculative excesses. Many people will buy stocks based only on rumour or hunches, the market for thinly traded issues would be wiped out if people really appreciated the true situation of the companies being traded.
Who could argue that a day trader and Warren Buffett would see eye to eye on the outlook of a stock. Does a long term investor buy the same stocks as a trader?
Only the government can borrow at the T-bill rate. No other investor in the world can borrow money at these rates unless they have some special concession. Short selling is illegal or severely restricted in many countries.
Three hundred years of Tulipomania, South Seas bubbles, Real Estate rushes, gold rushes, concept stocks, junk bond busts, dot coms and Asian Crises have shown that politics and psychology have a major effect on markets.
But don't let any of this dissuade you from believing in Modern Portfolio Theory or looking up tables of beta and alpha for various stocks. After all, almost every university throughout the world still teaches MPT to finance and economics students, fund rating services such as Morningstar allocate stars based to a large degree on "risk adjusted" returns, fund managers structure their portfolios based on the Capital Asset Pricing Model, which is a key part of Modern Portfolio Theory, and financial planners do their best to pigeonhole clients into one of five "risk profiles" where all but the most "aggressive" permanently devote large proportions of their portfolio to "low risk" investments such as cash and bonds, even though we do know that taxes and inflation make these classic loser's investments.
MPT is enshrined to the point that it is included in legislation. Risk profiles are an essential part of financial planning, and if I, as a financial planner, were to recommend a portfolio made entirely of stocks, I would probably be sued successfully if the market fell, even if the investor had a very long term outlook. ASIC requires diversification and require us to provide our clients with volumes of data calculated with the Capital Asset Pricing Model. The Diploma of Financial Planning, as well as many similar industry qualifications for those who wish to be advisers or analysts or portfolio managers teaches the Efficient Market Hypothesis and MPT as gospel.
The "prudent man rule", a concept where a fiduciary (professional funds manager) is obliged to invest in "safe" assets is based on a definition of risk that only goes as far as maintaining dollar amounts of a portfolio, even if purchasing power is lost. In our rush to protect funds, we find that a volatility definition of risk is important, and even though inflation and taxes may well destroy an investor's real wealth, as long as dollars are preserved a fiduciary can be said to have acted prudently; hence the popularity of bonds and cash in long term portfolios.
What about those studies that show that nobody in history has outperformed the market by a statistically significant amount?
Supporters of the Efficient Market Hypothesis gleefully point out that by their reckoning no investor in history has ever turned in a statistically significant outperformance of the market averages over a long period of time. Even Warren Buffett who has more or less consistently outperformed since the 1950s is regarded as a statistical freak, the guy that managed to flip heads on two coins one hundred times in a row out of sheer dumb luck.
What is this "statistical significance" and most importantly, what sort of performance does one need to turn in to achieve a statistically significant result?
David Dreman wrote about this in Contrarian Investment Strategies: The Next Generation in a section entitled "The Vanishing Support for EMH", so just how does a person go about proving that they can outperform the market, to the satisfaction of all parties?
The biggest problem with statistical significance is that it is a weak tool when there is very little data available. Statistics was designed for use with large sets of numbers, you want thousands of data points in your survey and simply put most money managers haven't been in the industry long enough to have thousands of quarterly performance figures out just yet!
When you have smaller data sets, you need to be looking for larger differences to be flagged as statistically significant. When you have one million data points you won't need very much of an outperformance to show up on a researcher's screen at the 95% confidence level (generally regarded as the minimum acceptable level of statistical significance), so when someone has clocked up 250,000 years worth of quarterly data it will be blindingly obvious to even the statisticians that his long term average return was pretty good! For most managers that have a career of maybe 30 years, that is only 120 data points. You need to be looking for a very severe outperformance to get good statistical significance with a track record so short.
One of the most important studies upon which the Efficient Market Hypothesis first drew support used a technique by Jensen (one of the important mutual fund investigators). One study showed that using the Jensen technique out of 115 funds only one demonstrated superior performance.
To even show up on the screen, the manager had to have a past performance beating the market by no less than 5.83% annually for 14 years! Books get written about guys that manage to outperform the market by only a couple of percent (ie John Neff, Peter Lynch), so I think it would be fair to say that this test of performance is unrealistic. Only someone in the league of Buffett or Templeton could hope to show up with such a high cutoff, and then you'll just get a few remaining sour grapes claiming that since only two people in history have ever achieved this performance it probably just comes down to dumb luck.
In another study using risk adjustment techniques the researchers showed that at the 95% confidence level it was impossible to tell whether a portfolio that was up 90% over ten years had outperformed one that was down 3%. (!!) They noted that given a reasonable level of annual outperformance and volatility, it takes about 70 years of quarterly data to achieve statistical significance at the 95% level.
Lawrence Summers, later Deputy Secretary of the Treasury of the United States under the Clinton administration estimated that it would require 50,000 years of data to disprove the Efficient Market Hypothesis to the satisfaction of the stalwarts.
Having said all of this...
I take the view that the market is not efficient, indeed there are numerous "anomalies", such as the outperformance of value stocks compared to growth stocks, various autocorrelation studies have established that momentum and regression to the mean are commonly seen, and that small companies do seem to outperform large companies.
The mere existence of Warren Buffett and John Templeton does prove that it is possible to select stocks and earn a higher return than an index fund. On a more practical level though, it is very clear that there aren't many of these people around, and it is also clear that identifying such individuals in advance (when selecting a fund manager to put your money with) is very hard.
Moderate academics acknowledge that there are inefficiencies, "free lunches" as some put them, in market prices. What few people doubt though is that spotting them requires more skill than most people have and that for the most part stocks are efficiently priced most of the time. As one researcher put it, there may be free lunches but you'll starve to death waiting for them.
One hedge fund manager I spoke to the other day had these words to say, "we find that 80% of all stocks are efficiently priced, we look for the 20% that aren't." It is fair to say that the majority of stocks are efficiently priced and that an index fund will thus be a relatively efficient vehicle. Maybe this hedge fund manager can identify the 20%, maybe he can't. The question that we as investors need to think about is whether we feel confident that the managers we invest with (or us, if you DIY) can successfully identify the 20% of incorrectly priced stocks and profit from them. Some can, obviously, but knowing if our strategy will work in advance, given that most active strategies don't, is the million dollar question.
A second question is whether these inefficiencies are really so profitable that they are even worth going for once identified. If your active strategy leads to more frequent realisations of capital gains then the loss of tax efficiency might do more harm than your strategy does good.
While I do encourage readers to study the great investors, I also encourage anyone that does not, after much honest self assessment, feel that they are not quite up to Buffett's standards, to consider an indexed approach instead.
I personally do keep an eye out for free lunches, but in the mean time I am happy enough to leave most of my money invested across a variety of index funds, including in particular value index funds. In the next article, I'll bring you a little closer to the state of the art in Modern Portfolio Theory. Chuck out your CAPM and burst your beta, the truly chic academics are now seeking to explain why value stocks outperform, given that they aren't actually more volatile.
http://www.travismorien.com/FAQ/portfolios/mptcriticism.htm
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