Greece

The Greeks will go to the polls on Sunday to decide for themselves if they wish to remain in the Eurozone and in order to do so, they have to accept the terms that the "troika" offered. Opinions are split and personally I feel if austerity works, it would have worked years ago. There is no point in proposing more austerity measures knowing well that Greece has an impossible task to repay their debts. Its equivalent to a creditor loaning more of their money to you while you are still in debt yet the creditor EXPECTS to be paid back somehow someday. Refusing to accept their money is futile as they INSIST that this is the only way out (and more austerity measures). I guess this is seriously flawed in a way as a country technically will never run out of money and the worse case scenario would be for Greece to print the drachma which they have been using before joining the Euro. Greece can also "sell"/"loan" their country's assets and use them as collateral in any negotiations.

The media can be used to instil fear in investors as daily headlines would always be something like:

As investors ourselves, we should always learn to ignore the short-term market noise and remain convicted to our portfolios. It is always through panic that the most profits can be made if one is calm and collected. Balls of steel sometimes might help too.

Back to Greece -

Exiting the euro wouldn't be a big deal as how many people portray it to be as Greece's GDP accounts only 3% for the whole of Europe. Reverting back to the drachma would be a short-term pain but long-term gain for Greece as this would enable them to get out of this misery since it started in
2011. Austerity has failed and major change is needed however the uncertainty of exiting the euro can be too much for the Greeks to take. The Syriza government have also failed to impress their creditors with their amateurish negotiation skills and regardless the outcome of Sunday's referendum, I wouldn't expect them to stay in power for much longer. Exiting the euro will cause chaos is utter nonsense, just look at how Poland, Denmark and even Turkey are faring now - none of them are deemed as insolvent nor in a recession. Greece will do just fine with their devalued drachma for a start.

To conclude, I feel the biggest loser would be Germany regardless the outcome and if "Grexit" really were to happen, the euro will be higher than where it was  hence Germany's exports will be deemed as more expensive and we all know what that does to export driven countries when their goods become more expensive. Germany and probably the rest of Europe would of course prefer Greece to remain so that the risk of "hyperinflation" is low.

Random

We know that the world has changed drastically to where it is today and will continue to do so in future. What kind of investment ideas can we generate and profit from then?

Population growth will increase at a rate not seen before - The United Nations forecast that by 2050, the global population will reach 9.6bn from the current 7bn now. (that's a lot of sexual tension going on!). When global population grows, food consumption will increase and hence we might face a serious shortage of food and water. In fact, I read an article by Jim Rogers recently claiming that he is bullish on agriculture in the long term and he mentioned that the best job to be in by then, would be a farmer! Basically its a demand supply theory as typically nobody wants to farm now as we do not see an immediate need nor the financial reward to do so. We all want to be bankers/lawyers/doctors - jobs that gives us more financial support. How many people that we know of are actually growing crops and profiting from it now? None I would say and hence this creates a supply demand imbalance and it will play out in the long run when the world needs more food and water. Pretty interesting I would say - to consider farming as a career. A solution to this could be the use of more sophisticated  technology to increase productivity whereby we could do "double or triple cropping" which some parts of China and India are currently practicing.

Clean renewable energy will be the key energy source - this is not new as we are already exploring solar/wind/water whatever elements that can be harnessed will be converted to energy. In fact, I like the Tesla idea of a battery to supply the energy needed in our everyday lives. We might not be sure of how this will play out but recent developments have so far been positive and we are a step closer to reducing our reliance on crude oil and coal. With China and the United States starting to look into cleaner energy sources, OPEC and crude oil could soon be a thing of the past.

Artificial Intelligence - the rise of the machines to facilitate and aid in our daily lives could soon be a norm in the future. Companies that are dealing with AI could soon experience a boom in their products/technology/sector as machines have proved to be more reliable and could outperform humans both physically and intellectually. Low skilled workers could soon be replaced with robots and many will be left unemployed creating social unrest. As scary as that sounds, it could soon be a reality within the next 5-10 years.

The rise of Africa - Africa remains the world's largest untapped market and it is still in its infancy phase of urbanization. Infrastructure, energy, food and water as well as education are lacking in this continent. With its large land area and an abundance of natural resources, Africa has no reason not to grow as rapidly as China or India. What it lacks is stability to lure foreign investments into their continent. As volatile as it may seem, I am keeping a close watch on major developments in this continent as a whole to look for new investment ideas. Just take a look at how the BRICS have done over the past decade and Africa could be the last emerging market that we have missed.

Recap - Irrational Exuberance - 25th April 2015

Remember this chart a few weeks ago?  http://myalphafund.blogspot.sg/2015/04/irrational-exuberance.html

Here's what is looks like today: a 7.5% fall from its peak...it might be a pullback but if the Shanghai Composite falls further, a bear is near........

An Analogy of Gaming and Investing

We have all played computer games during our free time, every single one of us. The end objective is always the same with gaming - to clear stages and win as an individual/team. I would like to draw an analogy on how investing can be similar to playing a game. No disrespect to the market here but its more for an illustration purpose.

When we embark on a new game, normally your game character/avatar (or whatever you call it) will be just stark naked and without any real "power"/"skill". The same can be said for investing whereby as a novice, you often feel "lost" and lacking in technical/fundamental analysis (that's a skill).

As the game progresses, you will gain experience and level up to boost points to your character's stats. Games now are also MMORPG with players from across the globe and all games have their own "landscape". In the investing world, the "game" is played regardless of language, race, gender, religion or nationality. Your "landscape" is limitless where you can trade in any markets across the globe that has an exchange. As you gain more experience in your investing journey, you'll feel more accomplished and often add new set of skills to your "arsenal".

Games have clans - last I goggled, it means "a group of people with strong common interest". Clans are often powerful as they rule by the law of numbers. If your clan has a "good reputation", you will gain items that are deemed as rare/unique and your clan is your family in the gaming world, often helping you clear objectives and protecting you from other clans.

The term we use for "clans" in the investing world can be your hedge funds, asset management firms, private equity firms - the larger/reputable the firm, the ease of information and more sophisticated tools are used to find good companies to invest in. Of course, the so called better "clans" are your Goldman Sachs, JP Morgan and Morgan Stanley while good private equity firms would be your Blackstone Group, KKR and Carlyle Group. *Enough said about what they can do to global financial markets.

You can also choose which "class"/"type" of character you like to play the game with. Your "classes"/"type" will have different advantages/disadvantages in the game. With investing, we can choose different ways to do it - dividend investing, trading, value investing or growth investing. The different approaches taken by the investor will yield different results and not everyone will be interested in a specific approach. Some like to mix it up a little while others are purely following a strict strategy that yields them returns. Each and everyone of us possesses a different level of risk adversity and no matter what, as long as profits are made - everyone is happy.

All/Most games have an ending/last stage or whatnot whereby you're judged on how well you cleared the stage or how "decked out" your character is. People playing the same game as you will most likely be envious and respect you - some to the point of worshipping.

The difference in the investing world is that - you do not have an end game. We invest for as long as possible, to generate income passively/actively as much as possible. Every decision made will have an impact on how your returns/losses snowballs. There are no fixed rules to "play" this game and anyone can just walk out of it and never to return - (those who got badly scarred by the 2008 GFC).


However, more people are joining this "game" NOW. We are in a secular bull market for close to 6 years now and although this "game" does not state when it will "hang" due to server maintenance, we should be nimble and watch for signs of a change in trend/sentiment. Stay safe and remember to "save your game" (by taking profits)

How Disciplined are you?

Just read an article on how the most successful and profitable people maintain a strict daily routine. That's the reason why algorithms are doing most of the trading now and more beta funds are entering the market. Leaving the trading to the machines seems profitable as they are unaffected by emotions and are rational in their decision making - they are run based on binary codes 0 and 1 and nothing is vague or left to chance. This can also be seen as a form of discipline I guess.

Back to reality where most of us are just humans - basic fear and greed or herd mentality usually takes precedence. How often did you try to buy a stock and tried to catch its bottom? When it's selling at say $1, we queue at $0.995 or even $0.99 just to save that few dollars. Or when it's time to take profit at $1, we tried to sell at $1.05 or $1.10. We all have that same exact experience before and this is extremely common since humans are greedy by nature and are always looking out for the best deal around - be it the Great Singapore Sale or the IT Fair. Of course, we can never time the market and those who proclaim that they can, are delusional and lucky at best.

Discipline

Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions.

It is like a gym routine whereby you basically train the same body part week in week out. Biceps/Triceps on Mondays, Chest on Wednesdays etc...and for those who do gym regularly, you will realise that you are actually building muscle mass. The same can be said for investing/trading - find a successful strategy and implement it, week in week out and soon enough, instead of your muscle mass growing, your bank account/portfolio grows! It is not magic nor by chance, it is discipline. Let's see how long term discipline investing works in the chart below:

Growth of $1 since 1970 - 2013

Investors are often their own worst enemy as the human brain will start to take over and make irrational decisions - sometimes for the better but many a times, its for the worse.

These are some findings which I found online and I have extracted them as follows:


Anchoring is a bias that causes investors to either hold onto an idea longer than they should, place a disproportionate amount of value on the piece on information they receive, or anchor their perception of value to a specific price point. The inability to fully incorporate new information causes investors to hold onto poor investments longer than they should.

Availability Bias is a mental shortcut in which investors use readily available information and media to make investment decisions, rather than a disciplined research process.

 

Familiarity Bias reflects an investor’s tendency to invest in the known. Investors may perceive investments they are knowledgeable about as either less risky or more rewarding, and oftentimes both. Typically the tendency manifests itself in investors concentrating their holdings in their own country (a home country bias) or in the stock of their employer.

 

Herd-Like Behavior reflects the tendency of investors to follow the crowd by chasing the latest investment fad. Driven by greed and fear of missing out, individual investors project past returns into the future and pile in together. The behavior results in investors consistently buying into the most highly valued segments of the market, leading to sub-par results. Herding can also lead to selling at the most inopportune times, making investors their own worst enemy.

 

Hindsight Bias occurs when events that have occurred in the past look predictable and obvious from the present.  Hindsight bias leads investors to overestimate their ability to discern the likelihood of events occurring in the future, causing overconfidence.

 

An Inability to Control Emotions is common. Most individual investors are easily controlled by two emotions:  fear and greed. While everyone would like to “buy low and sell high," very often investors, even very intelligent and well-educated investors, do the exact opposite. They, in effect, “buy high and sell low.” Investors would be wise to heed Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful.” Unfortunately, most investors tend to be fearful at the moment of greatest opportunity and greedy at the time of greatest risk.

 

Loss-Aversion is an investor’s reluctance to realize a loss. Investors who exhibit loss aversion hold onto losing investments in the hope that they will recover. They may even engage in risk-seeking behavior by “doubling down” on a poor investment in hope of recovering losses faster.

Overconfidence is a cognitive bias that causes investors to err in a number of ways, usually with financially damaging results.  Overconfident investors are frequently over-concentrated in a specific asset class, sector, or stock. They often disregard the risk and seek out confirming evidence while ignoring any contradicting evidence. More times than not, this increased risk taking is punished with losses. Overconfidence can also lead to increased trading which may result in excessive taxes and fees.

 

Recency/Vividness Bias reflects a tendency to focus on events that are most recent or easiest to recall because they left a psychological impact.  In investing, the event is typically a recent market correction or recent run-up.  Since the events are recent or vivid, the tendency is for investors to overestimate the likelihood of the event occurring again and position the portfolio either too conservatively or too aggressively.

 

A Status-Quo Bias is inertia, or a lack of decision making. In many cases, this is because investors seek to minimize their regret. By maintaining the status quo, they avoid the mental anguish associated with realizing an adverse outcome after making a decision. For example, a regrettable event would be a market rally after selling out of equities or market correction after investing in equities. Unfortunately, this bias can result in investors maintaining the status quo with investment portfolios that are not suited to meet their goals and objectives.

Conclusion

I have always maintained the view that although the smart people do get a head start in life and their career but the "normal" folks can always make it up by hard work and discipline. The smart people can get an A by studying for 1 hour but most people need to spend at least 3 hours to score an A. The end result is the same but the question is - how willing are you to work hard for it?

"with great discipline, comes great returns"!

Irrational Exuberance

I guess the chart says it all for the Shanghai Composite. Definitely not the time to enter now but rather take profits or prepared to short it once the candles turn bearish.

 

Watch this space...

 

 

Small is Good

Why do people tend to invest in  blue chip companies with huge market capitalization? The reasons might vary - because it is stable? Gives out good dividends? Not as volatile? Too big to fail? Government backed?

Blue Chips

Blue chips, like in poker and other card games, are the most expensive chips. Similarly, blue chip stocks are worth the most and come from larger companies.Blue chip stocks are the most valuable stocks on Wall Street and are usually from companies that are household names, such as AT&T, McDonald's, and Starbucks and tend to be large or mid-cap stocks. Blue chips have a long operating history, steady earnings, and a good reputation. They also have high liquidity, or the ability to trade large amounts of a stock without any problems. Blue chips are considered safe bets, especially if the market is falling. However, some blue chips do not always perform well.


I feel that blue chips are suitable for investors who are planning for retirement/retired or very risk adverse group of people who cannot stand to see volatile and wild swings in their portfolios. Blue chips in today's market are relatively fully or over priced and hence there is no need to even buy into any of them now. They are the best to invest once a bear market comes into play and panicky investors/fund houses are selling them off.

Small Cap Stocks

Personally I do like to pick small cap companies over larger ones as they are in the midst of creating a piece of history and are in the infant stage of their business. Most of these companies are volatile, does not pay a dividend, has low liquidity and earnings are sporadic. However they offer more upside potential than the blue chip companies. These sort of companies are not for the faint hearted and you have to be prepared to lose most/all of your invested capital in the worst case scenario/black swan event.

 

Advantages of Investing in Small Cap Stocks



Over the past 80 years, small cap stocks have outperformed larger cap stocks and this trend looks set to continue as the growth rates of smaller cap companies tend to develop at a much faster rate.

 

 

Huge growth potential - Big corporations like Wal-Mart, Microsoft, Apple Inc, Home Depot, P&G were once small cap companies too. I prefer to uncover diamonds in the rough and see them being polished - foresight is needed and crucial to uncovering the next Microsoft which possesses such potential. The difference in growth is that you're unlikely to see a large cap company with a market cap of $10bn doubling to $20bn within a few years but a company with a $500m market cap to double to $1bn seems possible if the circumstances are right and with prudent management teams in place.

 

Mutual Funds do not invest in them - Mutual funds are not allowed to invest in small cap companies as mutual funds have larger fund sizes to invest hence investing a $50m stake could potentially end up with them buying 20% of the company. This causes imbalance in the markets and increases market manipulation. Therefore as a retail investor, not having mutual funds invested in them could be a blessing in disguise.

 

Lack of Analyst Coverage - Fund houses or banks have analysts to cover large cap companies but smaller cap companies are often neglected as they are deemed as volatile and often unprofitable. However I feel this creates an opportunity as the most undervalued and neglected stocks with high profit margins are often overlooked just because they are smaller in size. (size matters apparently to the big boys). You can buy them at discounts and when your smaller cap stocks grow big enough to garner the attention of the big boys, you'll be laughing all the way to the bank. In investing, it doesn't matter where you start, its the end that matters. Some friends I've spoken to had scoffed at my idea of wanting to buy/watchlist/read up on smaller cap companies but on hindsight now, who's having the last laugh - bitches!

  

 

Risks

As always, I will end with the risks involved as some might be thinking about just going into any smaller cap stocks and buying them like candy. They are cheap for a reason and often riskier than blue chips simply because they require lesser volume to move prices. Those with smaller floats tend to fluctuate 3%-5% in a single day. Unless you can stomach the volatility, you are better off putting your money somewhere else and always risk what you can afford to lose in small cap investing. I wouldn't bet my farm on a single or multiple small cap companies right? At the end of the day, we got to be rational and understand the downside risk in the event of something unexpected. Total annihilation can occur in small cap investing.

 

The issue of finding these type of small cap companies with a compelling growth story is hard work - be prepared to read, research and question irregularities. If you are thinking that it'll be a walk in the park, it isn't. To even find one that is even worth looking at, I have spent and read and dumped more than a few hundred stocks that were really crap. But when you do see one, you know its the one - like how you guys met your wife/girl friend/gay buddy or whatever man. Bottom-line is, hard work is required but the rewards are often very appealing and it can be an addiction to find diamonds in the rough.

 

 

 



Why do most people fail or lose money?

We heard stories of people losing ALL of their savings in the stock market. Or maybe some would have friends and relatives losing money to a point whereby they would just give up on investing. First and foremost, i'm not a stock guru but i would like to point out that for those who lost money or ENTIRE fortunes in the market, it shows a lack of understanding and work done.


For every sport, you need to condition yourself - body and mind. Do you think athletes like Usain Bolt can be the fastest man alive without hard work? Or Christiano Ronaldo/Lionel Messi - multiple Ballon d'or winners without perseverance and skill? I agree that talent plays a part but if you know you aren't talented enough, you can compensate and narrow the gap through hard work.

I'm not talking about how to profit from the market now but rather how proper work and due diligence must be done before you can even start to put your hard earned money into the market. The market is a place whereby it lacks compassion and it doesn't care if you made or lose millions. All it does is to provide a platform for people to grow their nest egg in a manner FD's or certain insurance products cant do. To hear or read in the papers that people can go bankrupt due to the market and blaming it, they should take a cold hard look at themselves. Are they greedy? Are they overleveraging? Are they foolish and lazy to not even read up on what they buy? Or are they buying because their "friend" or broker recommended it?

To make money, you got to know how to lose and how much to lose. This serves as a lesson and never to repeat the mistake. There's a saying - fool me once, shame on you, fool me twice, shame on me.

You can't find someone who is 100% right and has a 100% track record. The beauty of this game is you can also profit if you're 60%-70% right. In school, we strive to get 90%-100% but now, even 60% is sufficient and of course we also try to get our calls right as much as possible. 

Some might say they do not have the time nor energy after work to read up and evaluate companies. Some do not even read the papers or daily news. How does one even expect to get a decent yield on their investments? Investing is a battle of wits, cunning, sweat, tears, hard work and sometimes even blood.

Reading expands your knowledge and widens your perspective. To profit from tips is a degrading form of investment and shows a lack of respect to the market. How many times can a tip save you? Mr. Market is relentless and doesn't sleep, he exploits your weakness and try's to break you down mentally in times of crisis. Are you mentally prepared for this roller coaster ride? Are you prepared to roll up your sleeves and do your homework? If the answer is no, then you should not mess around with Mr. Market and let the professionals handle him.

But as my previous post suggests, most professionals just happened to be more educated but weak mentally. They sell on lows and buy on highs - this is what fear and greed does to you. But that's what NORMAL people do isn't it? To be a decent investor, you got to be ABNORMAL and that's when proper homework done helps. 

During a market crash, good stocks get sold down together with the bad stocks and that's when your skills and years of hard work kicks in - to sift out the good from the bad and buy them at discounts! Not calling for a bear market immediately but rather how will you react when it happens? We all know we are in a secular bull since 2009 and markets aren't built to defy gravity. The time will come so do get your shopping list ready and in the meantime, READ READ AND READ! 

When do you decide to SELL a stock?

We all know that buying a stock is easier than selling a stock - not talking about short selling here. We can choose to buy anytime we want and anything we want - Stocks, CFDs, options, futures, bonds etc. However its the art of selling that requires more skill and finesse. Selling is an art that takes experienced traders/investors years to hone their skill.

Selling too soon and you might miss the upside that comes along with it later and selling at a loss makes you seem like a loser admitting defeat. How often have we held on to shares that went below our stop loss and yet we would be too stubborn to sell thinking that the price will go up again one day/month/year/decade/century. Humans are engineered in a way to block out losses and too stubborn to admit defeat - this happens more to men than women as men tend to have bigger egos and testosterone levels. Its like boxers admitting to a defeat before the real fight started hence I would say men are more emotional when it comes to trading/investing. I wouldn't be surprised if all of you reading this are sitting on some paper losses more than paper gains. Time to reconsider, don't you think? The capital (minus the realised losses) can be put to greater use if you choose your next stock carefully.

I have experienced this dilemma like all investors do - selling only to see it rise higher and faster than you could ever imagined. Hindsight is a bitch! Anyway when do we sell?

Valuation: Price rises above fair value

Valuation, like beauty, lies in the eye of the beholder. Value investors purchase shares they believe are undervalued. If you have purchased a stock, and the share price has subsequently risen above what you believe is fair value, it might be time to sell. As the margin of safety becomes lower, it might be time to consider taking some profits and consider another buying opportunity elsewhere. Alternatively, you can also use a trailing stop loss to ride up the price surge if you still believe that the price will increase further. Remember to look for bubbly/frothy P/E ratios and compare against the industry peers and ensure that your stock is not in bubble territory.

Company Prospects have changed

 

Company prospects change all the time, and for a number of reasons - These could be internal, such as a change in CEO or adverse news. For example, many investors were worried about the impact Steve Jobs's death would have on Apple Inc. They could also be external, such as a threat from a new competitor, or a change in outlook for the industry in which the company operates. If the prospects have changed for one of your holdings, it might be time to re-evaluate. Some companies can also change for the better and as an investor, your job is to evaluate whatever news/changes and weigh the risk and reward accordingly. Again, we can use Apple Inc as an example where during the 90's, the company was going nowhere until the MP3 and iPhone were created and now the company is considered the epitome of human innovation.

Death Cross

If you have a little knowledge on technical analysis, you will know a death cross when you see one. It just means that the shorter term moving average crosses below the longer term moving average. For me, it would be the 50MA crosses below the 200MA on HIGH volume. Some prefer the 50MA below 100MA. Unusually high volume raises a red flag when a death cross appears and it would be prudent to sell before considering buying at a lower price in future. 

 

Better Opportunities

Be flexible enough to sell and put the capital into better quality stocks if the price is right and profit from it. I have a stock which I held for close to a year and right now my returns for that particular stock is..........2%! This is a classic case of not maximising returns and I am looking to liquidate it and put my capital to better use. The rest of my holdings are moving along nicely and hence I wont be selling them anytime soon!

 

Conclusion

 Lastly, selling is really a personal preference and a tiny profit is better than a loss. Freezing up your capital for fear of realising paper losses is not advisable and if your stock has fallen 50% or more, chance are - it will take a HUGE/IMPOSSIBLE task to recoup back the initial outlay - refer to table. The markets are always right and don't be too stubborn! Nobody will care about your money more than you do and have fun selling!

 

Traits of a good Fund Manager

What makes a good Fund Manager? Does good grades and high qualifications like a MFE/CFA/CAIA qualify and determines one to outperform the market? If these were true, Long Term Capital Management (LTCM) would not have gone bust: Read http://en.wikipedia.org/wiki/Long-Term_Capital_Management

LTCM had all the ingredients for success - huge capital inflows, solid backing, Nobel prize winners, scientists, Harvard professors, bankers etc. For more recent cases, just take a look at Lehman Brothers: Read http://en.wikipedia.org/wiki/Lehman_Brothers

Why pay fancy fees to these people and why are they so "special"? Does it make you feel good that when you lose money, you can just say - "Hey, even the professionals are underperforming and if it had been me, I could lose more". Now, this theory is absolutely untrue and since the money is yours to begin with, why put your hard earned savings with all these "professionals"? I can swear with my balls that 80% of professional Fund Managers underperform. You could be better off just putting your money in index ETFs that track the market and ETFs have lower fees.

Now, don't get me wrong here as I believe there ARE some Fund Managers who can outperform the market consistently but how do you know one when you see one?

Track Record

Before choosing a Fund Manager to invest with, research on their track record back dating to as far back as possible. Analyse how his/her fund perform during Bull and Bear markets as this will show how shrewd and whether his/her investing style suits you. The key point to look out for is how their funds perform during times of uncertainty/crisis/turmoil. During bear markets, their funds should typically keep their losses minimal and during bull markets their funds should outperform the market.

Alpha

 

An important measure of a fund manager’s value is the “alpha” that they can add. “Alpha” is the measurement of how much more the fund manager adds to the value of your investment than if you had simply invested in an index fund. An index fund attempts to mirror the market by investing across all shares in the share market index

 

Comparison with Index

 

Index funds charge lower fees as they have much lower research and analysis costs. Also, they are not claiming to outperform the market. Therefore, if you choose to pay the higher fees to get the out performance and higher returns, be sure that the fund manager is not merely a closet index fund, following the markets.

 

 

Eating your own cooking

 

Choose funds whereby the fund manger has their own money in it as this will ensure that he/she will not take excessive risks to generate alpha. Read http://www.investmentnews.com/article/20150122/FREE/150129970/gross-eats-his-own-cooking-at-janus-putting-more-than-700m-in-his

Stock Market Trading Secrets Revealed

Have you ever purchased a stock only to see the price fall after you bought it? You must have thought it was bad luck or bad timing and think that it will be a better day tomorrow or next week or next month or...the unknown forces that manipulate the particular stock?

I always believed there are 3 main groups of traders/investors.

1. Institutions -  Banks/Asset Management Houses/Hedge Funds
2. The Super Rich - High Net Worth Individuals/Groups of Smaller Fund Houses
3. The Retailers - Us! White Collar/Blue Collar Workers

As retail investors, we always are the last to know in every aspect of market news. We are always the suckers stuck high and dry and left to hold when others have sold. Why and how are we always the ones that are burnt/lost/defeated against the markets? Some have paid for courses promising XXX% returns or tried to outwit the markets but few have done so and survived (made $$ I mean).

 

In the 1900's, Richard Wyckoff had identified how a market "operator" works and below are his findings:

 

You can google for those who are keen to know more  

Two Rules 

Rule One: Don't expect the market to behave exactly the same way twice. The market is an artist, not a computer. It has a repertoire of basic behaviour patterns that it subtly modifies, combines and springs unexpectedly on its audience. A trading market is an entity with a mind of its own.

 

Rule Two: Today's market behaviour is significant only when it's compared to what the market did yesterday, last week, last month, even last year. There are no predetermined, never-fail levels where the market always changes. Everything the market does today must be compared to what it did before.

 

Instead of steadfast rules, Wyckoff advocated broad guidelines when analyzing the stock market. Nothing in the stock market is definitive. After all, stock prices are driven by human emotions. We cannot expect the exact same patterns to repeat over time. There will, however, be similar patterns or behaviours that astute chartists can profit from. Chartists should keep the following guidelines in mind and then apply their own judgments to develop a trading strategy.

 

 

 

Four Phases

Before looking at the stock selection process in detail, keep in mind the four phases of price movement: accumulation, markup, distribution and markdown. It is important to understand the price position for the broad market and the individual stock before initiating a trade. Long positions are preferred when the broad market is in a markup stage. Trend followers would buy on the breakout that signals the start of an uptrend. Once the breakout has taken place, chartists can also look to establish long positions during throwbacks, re-accumulation phases or corrections.

 

 

Short positions are preferred when the broader market is in a markdown stage. Aggressive traders would become active when a lower peak forms or thrust pattern forms, which is a failed resistance breakout. This is clearly a top picking exercise with above average risk of failure. Trend followers would be most apt to sell on a support break that signals a clear trend reversal. After the break down, chartists can look to establish short positions during throwbacks, re-distribution phases and corrections

 

 

*Trading is a lot like any other merchandising business, and liquidity is important*

 

 

A. It takes a while for a pro to accumulate a position in advance of a big move – buying too many shares at once would cause the price to rise too quickly.

 

“The preparation of an important move in the market takes a considerable time. A large operator or investor acting singly cannot often, in a single day’s session, buy 25,000 to 100,000 shares of stock without putting the price up too much. Instead, he takes days, weeks or months in which to accumulate his line in one or many stocks.”

 

B. Instead, here’s how he sets it up: first, he’ll “shake out” the little guys by forcing the stock lower in order to get a better price

 

“He prefers to do this while the market is weak, dull, inactive and depressed. To the extent that they are able, he, and the other interests with whom he works, bring about the very conditions which are most favorable for accumulation of stocks at low prices…
“When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers.“

C. Then, he will try to time the top of his planned price rise with some “good news” about the stock he may already know about

 

Remember the saying, “Buy the rumor, sell the news”?
“You have often noticed that a stock will sell at the highest price for many months on the very day when a stock dividend, or some very bullish news, appears in print. This is not mere accident.
The whole move is manufactured. Its purpose is to make money for inside interests — those who are operating in the stock in a large way. And this can only be done by fooling the public, or by inducing the public to fool themselves.”

 

Risk Reward and Stops

The final Wyckoff steps are to calculate reward potential, identify potential risk and set appropriate stops. Wyckoff believed that profit potential should be at least three times the risk. In other words, he would risk 5 dollars for the chance to make 15 or more. Using such a risk-reward ratio, it would be possible to make profits 50% of the time and still make money.

 

*Stop Loss*

In general, Wyckoff thought stops should be placed at obvious danger points. In other words, look for key support or resistance levels that when broken would change the initial assessment. Once a move is underway, chartists should trail their stop-loss to lock in profits. Wyckoff advised against placing stops too tight. Chartists should allow a little wiggle room and exercise judgment when adjusting their stops. Stops should, however, be quite tight once a price objective is reached.

Is the stock market the biggest casino in the world?

Some “investors” buy shares just because their prices have been rising feverishly for a while or because your buddy had relayed a stock tip from his trusted broker friend or analyst report that there will be some movements in this particular stock. I have to admit I have speculated/gambled/betted/whatever the F*** it is in the past when I just started out in the market. We all know this method did not and will not turn up well. Thankfully, I'm on the right track now and all losses (minimal) have been covered! Yay!

 

The Difference

 

Casino games are designed to have a negative expected return. If you play games in a casino, then over time you should be expected to lose money. This is because the casino has set the odds so that you will lose money more often than you will make it. You are a customer paying them to experience risk.

The stock market as a whole should have a positive expected value. If you passively hold onto a broad market index of stocks, you should make money over time. This is why the stock market exists- to give investors a positive return in exchange for taking on risk.This is in contrast to the casinos.

Both are zero sum (someone has to lose for someone else to win). The fact that both of these institutions exist is kind of interesting. The stock market (like insurance) functions because people are, by and large, risk averse. Casinos function because, every now and then, people actually want to pay money (by losing it) so that they can experience risk or the thrill. Like how people are more prone to gamble during the Lunar New Year or special occasions – especially the Chinese (Isnt that why their stock markets are reaching a frothy level not seen before?)

Instead of gambling, you can increase your chances of success by focusing on the business fundamentals of a share. After all, that’s how superinvestors like Warren Buffett and Walter Schloss made their fortunes in their investing careers – they had looked at their investments through the eyes of a business owner.

By thoroughly researching a business and buying only when its intrinsic value is higher than its share price, you tilt the odds of success in your favour. No one can guarantee that an investment will make money. But when the odds are advantageous for you compared to a casino where the odds are always in the house’s favour.

Conclusion

The stock market is here to serve us and not to instruct us. It is not a casino in which we can make a fortune overnight and hence for speculators or gamblers, a trip to the casinos could satisfy their adrenaline rush and lower odds of huge returns. Good luck on that!

 

 

Earnings Season and the US Dollar

When is earnings season?        

Earnings season is the period of time during which a large number of publicly traded companies release their quarterly earning reports. In general, each earnings season begins one or two weeks after the last month of each quarter (December, March, June and September). In other words, look for the majority of public companies to release their earnings in early to mid January, April, July and October. It is important to note that not all companies report during earnings season because the exact date of an earnings release depends on when the given company's quarter ends. As such, it is not uncommon to find companies reporting earnings between earnings seasons.
The unofficial kickoff to earnings season is the release of earnings by Alcoa (NYSE: AA), which is a major aluminum producer and Dow Jones Industrial Average component, as it is one of the first major companies to release earnings after the end of each quarter. It also coincides with an increasing number of earnings reports being released. There is no official end to the earnings season, but it is considered to be over when most major companies have released their quarterly earnings reports, which generally occurs about six weeks after the start of the season.

You can often see a lot of movement in the shares of companies releasing reports as the market reacts to the new data. It is not unheard of to see shares jump 20% or more or to see them fall by this same amount.

The strength of the US Dollar

 



A strong US dollar coupled with low oil prices will probably bring about a set of disappointing 1Q 2015 results as companies dependent on foreign sales make their goods and services more expensive. Purchasing power is diminished and hence I believe we are in for a volatile April - May 2015 period. The VIX has been rather stagnant recently and I am watching if there will be a spike due to volatility next week.

For those who are unfamiliar with the VIX, it moves inversely with the indices. There is no direct vehicle that buys into the VIX however there are some ETFs and ETNs that try to track the VIX. Note that ETFS and ETNs tracking the VIX has a contango issue and hence I would not recommend buying it for the long term. It is more of a trading tool to catch any volatility in the markets.

Interestingly the Fear and Greed Index is showing how investors are complacent now. Anyway just remind yourself to be cautious and tread carefully into the earnings week. Keep out of the market if you do not feel confident as the markets can be unforgiving and brutal.
Like what Warren Buffett said: You don't have to swing at everything — you can wait for your pitch.

Patience is a virtue that not everyone has or appreciate.

A Glimpse into the Future

Imagine having a crystal ball and having a glimpse of the future and how the world will be like in the next century. We can learn from the past through history and live in the present but the future remains an unknown to everyone. Like who could predict that Apple Inc. will revolutionise the whole technology sector and music industry? Who could see the rise of Google Inc. as a behemoth search engine that would be used globally today? And who could even imagine Microsoft helmed by Bill Gates would dominate the world using its Windows software? The list goes on and my point is that the world has changed and will continue to change due to the rapid improvements in human thoughts and aided by technology advances thus enabling us to come out with new ideas to explore unknown frontiers as well as space travel - Elon Musk is doing that now with SpaceX.

 

 

I was reading a book recently by George Friedman and was fascinated by his analysis on what could happen in the next 100 years. The book is as shown below:

 



 

He forecasts:

• By the middle of this century, Poland and Turkey will be major international players
• Russia will be a regional power – after emerging from a second cold war
• Space-based solar power will completely change the global energy dynamic
• The border areas between the US and Mexico are going to be in play again, like 150 years ago
• Shrinking labor pools will cause countries to compete for immigrants rather than fighting to keep them out

It would be absurd now in 2015 to think that Poland and Turkey would be major players in future but like most investors, many are myopic and would scoff at this forecast. However if one will to read into Polish and Turkish economies, there're tremendous growth opportunities there. Its the same as how Myanmar and Vietnam are opening their borders to foreign investments now.

Russia is an interesting topic nowadays due to its sanctions and annexation of Crimea as well as their reliance on their oil exports and falling rouble. But many have failed to note that Russia is a country with an abundance of natural resources and it supplies majority of Europe's oil and gas usage. Link: http://en.wikipedia.org/wiki/Russia_in_the_European_energy_sector
-Sanctions in my view are just a formality to show that someone needs to do something yet it cant be too drastic to create fault lines and start WWIII hence its practically useless as we are more globalised now than before and are more interlinked that we know.

Space based solar power will change how the world views energy as a whole and changing from using coal. crude oil, natural gas to solar power is not impossible as we are constantly looking at cleaner and more efficient ways to utilise energy and prevent pollution that creates global warming and the melting of the polar ice caps that would in turn, create massive natural disasters that could wipe out entire countries.

I'm still in the midst of reading up on the US and Mexico borders and how the world will compete for immigrants issue and will probably finish it by next week hence for anyone who are keen for such genre of books, I would highly recommend this as it will change your perspective and maybe how you see yourself and the world in future.

Before I end my post, just an interesting article I picked up from Bloomberg yesterday and showing the biggest economies in 2030:

Of course, anything can happen and all of these are just forecasts - I wonder if my blog will still be around in 2030.

Golden Rules of Investing

Many investors young and old have their own distinct style of investing as well as different risk appetites. Books are read and blogs are followed - and hell we even have ETFs (Direxion iBillionaire Index ETF) now to track what the billionaires are buying! Ticker - IBLN

The point I'm trying to put across is this - one man's meat can be another man's poison and the market is a zero sum game whereby one's profits when the other loses. For myself, I have made losses as well and trust me, it's only through losses that one will learn and not repeat the same mistake twice. I make it a point that if I incur a loss (touchwood!) for an investment I made, I will get to the root cause of the problem and learn from it. Nobody can consistently outperform the market without proper analysis and hard work. I am still learning everyday and every tool or information I picked up along the way is a useful addition to add to my arsenal. Nobody is too old to learn nor too dumb to teach and hence, I have listed some golden rules of investing which some might find useful.

Golden Rules of Investing

 

 

1. Invest within your circle of competence and slowly read up and expand your investment knowledge.
2. Always set a stop loss (preferably 6% - 8%) of your entry price. Some might argue that since the stock became cheaper, why not average down? For me, if there are no compelling reasons for the sell-off I might buy more at a cheaper price but usually a good stock would not drop by more than 6% - 8% in a single day.
3. Do not follow the herd. - Not asking you to be contrarian here but as retail investors, we always have the last bite of the cherry and the smart money would have already profited from the market. You don't want to be the last one holding the baby.
4. Think long term.  Most investors are myopic and think of only short term gains.
5. Buy low sell high.  Now, this is crap as everyone knows this but how low is low and how high is high? Its all about perception and how we derive the true value of a certain security. Hence as long as you think its low enough for you to take a risk, buy it! And if you think it's high enough, sell it!
6. Investing is about managing risk. - Always know your margin of safety and risk appetite. Once you master the art of risk management, the returns will soon follow.
7. Patience. - Investing in a marathon, not a sprint. Investing is buying a part of a business and you are looking to grow with the company over time and make profits. If you are impatient, try forex or go to a casino.
8. Do not attempt to use leverage. Markets are volatile and unforgiving and only invest in what you can lose.
9. Guts. Stick to your conviction once you have decided to buy a stock. Do not be swayed by short term noise.
10. Set a target price. Nothing goes up forever and know when to exit. Do not let greed overcome you as every asset has it price and once it becomes expensive, you can be sure the market will price it in accordingly - soon enough.

 

 

Keep calm and continue investing!

 

 

The overheated Chinese market II - Article from Bloomberg

Shanghai Traders Make Trillion-Yuan Stock Bet Backed by Debt

Shanghai traders now have more than 1 trillion yuan ($161 billion) of borrowed cash riding on the world’s highest-flying stock market.

The outstanding balance of margin debt on the Shanghai Stock Exchange surpassed the trillion-yuan mark for the first time on Wednesday, a nearly fourfold jump from just 12 months ago. The city’s benchmark index has surged 86 percent during that time, more than any of the world’s major stock gauges.

While the extra buying power that comes from leverage has fueled the Shanghai Composite Index’s rally, it’s also sending equity volatility to five-year highs and may accelerate losses if a market reversal forces traders to sell. Margin debt has increased even after regulators suspended three of the nation’s biggest brokers from adding new accounts in January and said securities firms shouldn’t lend to investors with less than 500,000 yuan.

“It’s like a two-edged sword,” said Wu Kan, a money manager at Dragon Life Insurance Co. in Shanghai, which oversees about $3.3 billion. “When the market starts a correction or falls, it will increase the magnitude of declines.”

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt. The Shanghai Composite rose 0.4 percent at the close on Thursday.

Bubble Concern

Chinese investors have been piling into the stock market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. Traders have opened 2.8 million new stock accounts in just the past two weeks, almost on par with Chicago’s entire population.

The outstanding balance of the margin debt on China’s smaller exchange in Shenzhen was 502.5 billion yuan on April 1. That puts the combined figure for China’s two main bourses at the equivalent of about $242 billion. In the U.S., which has a stock market almost four times the size of China’s, margin debt on the New York Stock Exchange was about $465 billion at the end of February.

For BNP Paribas SA economist Richard Iley, the surge in Chinese margin purchases is among signs of a bubble fueled by individual investors. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

“Leverage cannot rise forever,” Iley wrote in a report last month. “The more the stock of margin debt climbs, the greater the risk of a disorderly unwinding of leveraged positions once net redemptions begin to accelerate.”

Shanghai Composite Flirts With 4,000 as Hong Kong Equities Surge

China’s Shanghai Composite Index briefly surpassed 4,000 for the first time since 2008, extending the world’s biggest stock-market rally as investors bet authorities will increase monetary stimulus to bolster economic growth.

The benchmark equity gauge surged to as high as 4,000.22 before paring gains to close 0.8 percent higher at 3,994.81. The index has doubled since January 2014 as traders borrowed a record amount of money to buy shares, new investors opened stock accounts at an unprecedented pace and government officials endorsed the rally. A gauge of Chinese shares in Hong Kong jumped 5.8 percent for the steepest gain since December 2011.

China’s central bank has cut interest rates twice since November and analysts predict authorities will ease policy further to keep economic growth above their 7 percent target. The nation’s individual investors, who account for about 80 percent of equity trading, may view the 4,000 milestone as a signal to boost holdings, according to Shenwan Hongyuan Group Co., the nation’s second-largest brokerage by market value.

“Breaching the 4,000 level can be read by retail investors as a bullish signal,” said Gerry Alfonso, a director at the international business department of Shenwan Hongyuan in Shanghai.

While the market’s rapid ascent has fueled concerns of a bubble, Shenwan Hongyuan estimates the Shanghai index may rise to 4,500 as individuals shift more of their assets into equities. The gauge is still well below its all-time high of 6,092.06 in October 2007.

Mobius Outlook

The Hang Seng China Enterprises Index in Hong Kong rallied 5.8 percent at the close, while the Hang Seng Index advanced 3.8 percent to the highest level since May 2008.

Industrial and financial shares led gains in both Hong Kong and Shanghai. Citic Securities Co. and China Railway Group Ltd. both surged more than 4 percent. Gome Electrical Appliances Holding Ltd. jumped 35 percent in Hong Kong after Citigroup Inc. recommended the stock over its mainland rival Suning Commerce Group Co. because of cheaper valuations.

Net purchases of Hong Kong shares through the Shanghai exchange link surpassed the daily record within the initial half hour of trading Wednesday, before filling the 10.5 billion yuan quota for the first time.

China’s stocks may fall 20 percent as shares have risen too fast, Mark Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group, told reporters in Hong Kong.

Relative Value

The Shanghai Composite is valued at 15.3 times estimated earnings for the next 12 months, compared with the five-year average of 10.2, according to data compiled by Bloomberg. In the technology industry, the best-performing part of the market this year, shares are trading at an average 220 times reported profits, the most expensive level among global peers.

A big retreat is unlikely unless authorities take steps to cool the market, said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co., which oversees the equivalent of $322 million.

The Shanghai index slumped 7.7 percent on Jan. 19 after the China Securities Regulatory Commission suspended three of the nation’s biggest brokerages from adding new margin trading accounts and said securities firms shouldn’t lend to investors with less than 500,000 yuan ($80,594).

The gauge has since rebounded 28 percent as the central bank governor and the CSRC endorsed the flow of funds into shares. China needs strong support from the equity market as the economy faces relatively large pressures this year, the official Xinhua News Agency reported on Tuesday.

Booms and Busts

Valuations have climbed too high, Vincent Chan, the head of China research at Credit Suisse Group AG, said in an April 2 phone interview. He sees a correction that will take the Shanghai gauge back down to 2,800 by the end of the year, amounting to a drop of about 30 percent. Losses may accelerate as margin traders liquidate their positions, he said.

The outstanding balance of margin debt on the Shanghai Stock Exchange surpassed 1 trillion yuan for the first time this month, a nearly fourfold jump from just 12 months ago, while investors opened a record number of new trading accounts in the week ended March 27.

China’s stock market has a long history of booms and busts. The Shanghai Composite has recorded more than 50 bull and bear markets, defined as a move of at least 20 percent from a recent peak or trough, since Bloomberg started compiling the data in 1990. The current gain of about 100 percent compares with an average advance of 122 percent during previous rallies.

“It’s the nature of the Chinese bull market that every 7 to 8 years, a few investors get rich quickly,” Earl Yen, the chief investment officer at CSV China Opportunities Ltd. in Shanghai, which oversees more than $200 million, said in a phone interview on Tuesday. “Then the bubble bursts and mass retail investors stay away from the market.”