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Stock market

When to sell stocks

When to sell a stock

The purpose of this post is to give you a simple exit strategy to maximize trading profit when selling shares of stocks.

I personally have ridden stocks down. They are long painful rides. Some stocks go down a little each day, others collapse and never come back. You can wait years for your share price to recover and it never does. This is where the idea of opportunity cost of holding equity out weights the benefit.

Holding a stock that goes down a fraction every day – it is like being in a relationship where your girlfriend nags and is on you a lot. She gains a few pounds and the next thing you know it is she is shopping in Targets wearing pajamas and flip flops. You know you should get out but you invested so much into it and you do not want to cut your losses.

Holding a stock that crashes is like – holding an equity position that has betrayed me. It is like a girlfriend who is two-timing. You just cannot believe it, everything was going fine and boom one day you find out the real value of your relationship. It is like catching your girlfriend in a restaurant with another man on your birthday. But still, in the back of your mind, you want to make it work. You cling on to your commitment even if the reality is telling you something else.

If you see holding shares of stocks like relationships – as a guy maybe you can think more clearly and less emotionally about it. Me personally I have married stocks I knew were wrong because of emotions. It is like marrying your girlfriend you have spent years with, not because you love her but because it was the least you could do for her. Read my lips, if a stock is not rocking your world, get out before it is a long-term underperforming asset.

What would be really useful to know is when to get out of stock, an exit strategy. Almost better than knowing how to buy stocks is knowing when selling stocks. If you know when to exit, you can make money in any market.

What you need is a rule of thumb stock exit strategy so you leap with your head and not with your heart when it comes to trading stocks.

I use moving averages to tell me when to get out.

Two exit strategies for selling stocks

Choose one of these to make cut losses or lock in profits.

  1. Sell a stock when the stock price breaks the 12 months moving average. Some people wait a month to see if it really has broken down, others sell the moment it breaks down. Some people put in stops others use mental stops.
  2. Sell a stock when it falls off the selection list you used to pick it. This means if you were using a value method to choose stocks and it is no longer on the list as a top equity pick, sell it.
Quantitative valuation selection is more an entrance strategy than an exit strategy. Buy on value and sell on technicals.

I prefer selling my position when a stock has broken the moving average. The reason is stock move on and off the valuation top picks very often. Even if transaction costs are low to minimal, I do not have the time. There is an opportunity cost on my time so I prefer not to be a high-frequency trader, but to plant seeds and check back from time to time.

I guess my question is if this investment idea is so simple, why do so few investors use it? Even professional fund managers ignore this. Remember the simple reveals itself after the complex has been exhausted. I personally find moving averages even more power as an exit strategy then selection criteria. The reason is in choosing a stock using technical analysis there are too many choices. Differentiating between one graph from another is hard when they all look good. It is like choosing a girlfriend based on her looks alone. You need to find out more, or screen the ones that have a reasonable level of compatibility. Moving averages for me are most valuable when timing market and exit strategies on individual stocks.

I buy more on valuations and sell on technical. This is because sometimes, the price runs wild away from true valuations, and this can last for many months or years and you do not want to miss this ride if you are already in. Rules are made to be broken but this is a primary way I trade stocks.

Other considerations when selling shares

Selling in lots to reduce risks. If you have made a profit and have a large position, some people like to sell in lots. A percentage of their share at a time. Even though the transaction cost is more it is like reverse dollar-cost averaging. It mitigates some risk. I personally do not sell shares in pieces. I am either in or out.

One big mistake of selling a stock is to get back in after you sell it. It is like a relationship if you left it chances were there was a good reason and you should not go running back to your girlfriend unless she really is the one and only for the long-term.

Each purchase should be evaluated anew. The only reason to rebuild a position in a company is if it is on the top of your valuation screens and other signals are green. That does not leap back in when some things turn better. Only choose the best of the best. Transaction cost is nothing these days with discount online trading.

I personally do not like to sell stocks at open. I do not have empirical evidence for this, but seem not to get the best execution price on open. I wait until late morning trading. I do not always work, but for me, I seem to get a better execution price.

Sell stops and limits – Use if you want, but in the long-run stock strategy counts more than trading tactics.

Set your own sale price – I am not a day trader. But one thing in life I have noticed is people that wait get what they want. If I feel the stock is not collapsing I often but in a selling price a bit higher than the open. This way, because I am greedy, I know during the day it will trade in a range and will tick off a better sell price.

In conclusion, the best way to make money trading in the stock market is to have a solid strategy for purchasing and selling. If you have a better method for exiting or timing shares of stock, let me know. I prefer a simple approach that for me has been time tested.

Categories
Stock market

How to invest in stocks

How to invest 10,000 dollars

If I had $10,000 of cash sitting on the sidelines and I could afford some risk, I would invest in the stock market. As much as trading shares have been dragged through the mud lately, it is still a great way to make money. It is not as good as direct ownership in your own venture but it is good for disposable income to build your empire and be financially free.

Stocks are a good investment because:

  • Perfectly liquid
  • Little start-up capital needed
  • Easily leveraged to exponentially increase returns or losses
  • Wide range of investment information easily available, public and free
  • Thin spreads and low transaction costs as it is an active competitive market
  • You are not speculating but as a long-term investor participating in the growth of the economy
  • Wide choice and easy diversification
  • Stock trading really is just fun. I do not even thinks is the money as much as the intellectual challenge. You are the captain of your own ship and many people trade from home or on the beach.

My system for investing I write about ad nauseum, often repeating the same things but it works for me and I prefer a simple primer for trading shares than too much noise.  I do not do anything too exotic but it does allow my capital and assets to work for me.

My strategy for investing is like my theory on love. I always wanted nothing too complex and heavy, nor superficial, just someone who makes my heart skip a beat when she come into the room.

It is as follows:

How I Invest in the stock market

  1. Market timing – Use the 12 month moving average on the market as a whole (a broad stock index) to determine if you should invest or not. Market timing does work. This is a statistically proven fact. You significantly amplify your returns. If you want to know how read some more of my posts, I talk about how to market time a lot.
  2. Value investing – Use good quant shop data to narrow the universe of stocks. quantitative investing is will give you the edge that the pros have. This is the center piece for my strategy. You must base your initial screen on science, not day trading hype. This is my biggest point. If you do nothing else right build your foundation on picks from a quantitative model.
  3. Intangible worth – From this universe of stocks, drill-down and select stocks that you personally would buy products from or other feel-good criteria like management team. All investment decisions are management picks.

You can use your own selection criteria, such as low debt to equity ratio and good investment ratios, like P/S (price to sales) or PEG (price to earnings growth), in addition, but hopefully the quantitative investing screen should do that for you. Therefore, your focus in the last test is to focus on intangible value. This is where your value-added comes in and can not be reduced down to some empirical rigid system. Maybe it can but I do not know anything that really measures the intangibles like, do I personally buy the products or management competence.

My dream stock pick based on management – For example, if IKEA was a private company and I could buy the stock I would. I have a very positive experience with the company including corresponding with the President in Sweden. But as with Wriggles Spearmint gum (Warren Buffet’s favorite fantasy pick) the best-run company’s are often privately held and for a reason.

Stock picking tools

Once you determine if you should even be in the market using a stock market prediction analysis with the 12 months moving average, then you need to look at quantitative picks.

I use a lot of the tools on MSN money as they are free. Here is MSN’s free quantitative tool for picking winners.

Use the best quantitative top stocks like this MSN quant shop. Select from the top 10 or to 50.

Me, I only like cream. I do not want watery milk. Narrow your universe with the best of the best and then start your work.

Do a reality check on stocks with trend analysis like Stan Weinstein recommends.

The best thing you can do is research management. Are they a bunch of old guys collecting their money or are they dynamic and risk-taking innovators?

But also consider how the numbers look.

Use Online resources not to listen to rumors but to look at the financial results

Look at the balance sheet on a quarterly basis. Look at the cash flow and how are they investing their cash. Do they stock pile cash because they have no ideas of their own and just hope to purchase some company or is their organization dynamic from the inside and they know how to make use of their own assets?

Unsystematic risk – Strategies to make your stock picks safer

These are really basic ideas and many people forget them or roll their eyes but diversification and dollar-cost averaging really do help.

There’s nothing modern about it. – Harry Markowitz on modern portfolio theory as it is all based on mathematical models.

You do not need to get into market neutral investing etc to make this work. If you are a stock trader at least consider these two ideas.

Diversification – For diversification you need a minimum of 5 stocks and more optimally 16 but as many as 32. If you own more you start to get the same return as the index and might as well just buy and index fund, and spend your time pursuing hobbies than trading shares. I personally like to be on the low number of this range even if it is not enough to diversify away all the ‘unsystematic risk’, or risk inherent in the company. I believe if you choose the right one than you do not need to hold 32 stocks in your portfolio. I often only have 5.

If I own too many stocks I lose focus and cannot stay on top of them as well. Pick the right stocks not a lot.

I only see one move ahead, but it is always the right one – Jose Raul Capablanca – World Chess Champion

Dollar-cost Averaging – If the market is giving you unsure signals you can do sector analysis. Sectors that have nice technical trends, will give you more confidence in a flat market. On the other hand, another way to invest in a flat market is dollar-cost average in. Buy one stock a month until fully invested. Therefore, if the market tanks your investments are at various costs. Everyone wants to put all their money on the table at once, all $10,000 dollars, but I would not even do that at Vegas.

Therefore to invest $10,000 dollars take your time. I tend to buy lots of 100. I know it is very unscientific but I am in the habit since odd-lot purchases in the old days did not get the optimal price.

In conclusion, I challenge anyone to add or subtract from this system. That is trying to poke holes in it. I do not say this out of pride, but rather greed. I am always striving to improve.

My most important tip for investing is let scientists, physicist and mathematicians do the stock-picking for you with their quantitative models, and you do the high-level intangible selection and good fundamental portfolio strategies. Once you feel good about this and make returns over time, try leverage and spike your returns. This way even if you only invest 10,000 dollars you can still get returns like greedy wall street investment banks.

Categories
Stock market

Why stock trading systems fail

Why trading systems stop working and how to invest to win

A few of my friends were day traders in the heady days before 2007. They would be at home trading stocks all day in their schedule C defined the home office. This was often to their wife’s irritation. Or these day traders would at least be online checking quotes at their day job making, with their figure close to the anti-boss key on their keyboard, that would minimize the charts and graphs in a second as she approached.

They were making much more money in the market than their 3% annual increase and a pat on the back could ever do for them.  All of these traders now are clinging to their brick and mortar cubical jobs now.

Trading systems often work for a while. You fall in love with them, chat with your friends about the trade details, like two pregnant women at the hairdresser. Then one day they stop working and you lose money. They cheat and betray you. You are emotionally married to the system so you cannot believe it is failing. You lose more money and eventually you realize the truth it is not working. You want to give up on trading (relationships) altogether. But hope wins over experience and you find yourself back in the saddle again. The purpose of this post is to look at why systems fail, some examples of famous stock trading strategies that stopped working and what the alternative is.

Here are three possible reasons they stop giving you an above-average ROI:

  • Information becomes too perfect – The information becomes too widespread and the information becomes perfect and the system goes back to normal economic profits.
  • Systems do not work, – but they are rather perchance ‘winning streaks’, which like empires, have their end.
  • Markets evolve -The world of money and trading changes and as the world develops so systems need to evolve or go the way of the dinosaurs. This is similar to chess. The masters of the 19th century would be no match for the champions of today. The game is the same but the approach is different. This is significant as the market like chess always involves other people. It is not a closed system but socially interactive. Like in chess, it is not just what white does but what black does too.
  • Exogenous variable changes -Some major variable outside the systems calculated equations start to exert a strong influence on the world of money and markets creates a shift. Previously it had no influence on the system or did not exist. Similar to the above point but more cataclysmic like a global political event or an unexpected shift in technology. A metaphoric, monetary asteroid hitting the planet and the cosmic dust cloud changes the environment.
New York Stock Exchange -Wall Street. If you want to beat the street choose your stock trading system carefully.

Four examples of trading systems that stopped working

Turtle traders – Richard Dennis knows as the ‘prince of the pits’ had a bet with a friend that he could train people to trade and get rich. He won. His team of turtles made 124 million dollars. He subsequently started Turtle trading training. When I was a stock broker, a friend of mine was trying to talk me into doing the course for like 10,000 dollars. I am glad I did not. Why? The trading system stopped working.

It worked in the 1980s and up to 1996. Then it stopped. Some people have made a derivative of this system and still use it today but the core system of using stops and exits and tends does not work. This is a case study in itself.

Reason profits stopped: I think technology changed and people started to trade with software. It changed the equation.

Dogs of the Dow – A basic value or contrary play. Dow stocks have stood the test of time and often are down but not out. If you identify the top ten dividend-yielding stock (a sign of value as the price is down in relation to the dividend payout) then you will get better than average returns in a safe way. You can also do this for the top five. Find the second-lowest price stock (The lowest price might be low for a reason and stands a chance of slipping off the Dow list, and that is not good for anyone) of the top ten dividend-yielding stocks will give you than the even better return on your investment.

Hold these chosen dogs for a year and this will give you a good return on investment. Use leverage even better. This investment strategy worked even in bear years. I think the world is no longer centered on GM type stocks. Therefore, Markets change and your strategy have to.

Then it stopped working and the losses canceled out gains. It is still conservative but not the best way to invest.

Reason profits stopped: Markets changed and GM type stocks are no longer the nexus of the universe, which the world revolved around.

Motley fools portfolio system – They had a system and it worked for a while then stopped or did not stand up to the rigorous of testing in the long-term. They made money-making their name, and not accumulating capital. They are still a good provider of information.

Reason profits stopped: I think this system never really worked in the first place and they made more money on selling financial information, maybe not.

Brokerage firms analyst picks – When I use to work at Merrill Lynch we had focus stocks. These did well for a while. They were the analyst’s top picks. But only if you bought and sold the second and I mean the second, with no transaction costs a stock was added or subtracted to the list.

The reason you could not make as much: Needs to work in ideal conditions and hold the whole portfolio with special pre-news prices on the trade.

How to build your own stock trading systems that work

Therefore, systems stop working or never really worked in the first place. Build your house on stone and not sand.

This is why I recommend finding a quantitative investment firm that has long-term results like 20 years plus, rather than a simple model. Investment information that is back tested and uses academic or scientific rigorous of testing. I do not care about brand name investment houses.

To develop your system read a lot of investing books for ideas and use a quantitative investment screen.

These can be free or paid for a nominal charge. Not some high-priced firm or system that does well over selected years. But give ROI information over the range it does well and under some ideal situation. But real honest science. Not some guy hoping to make money on selling his system. If some guy does this, ask yourself why are they not spending time making millions in the stock market and not selling you something for $149 a pop.

Me, I do not claim to be a Wizard of Wall Street nor do I sell anything. I am just conveying my experiences over the years of investing. And I have done well and now do not need a job. I will continue to develop my trading methods and one of these days maybe publish my results and let the facts stand for themselves. But before looking to me, I more encourage developing your own system for stock trading.

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Stock market

Why stock trading?

Why do I invest my time trading stocks?

I play the stock market because it is fun. This post is the only motivation you will ever need to start trading stocks. Why? because it is a real story of why I do not need to work.

I have always loved the concept of money and markets. I earned a Masters in Economics as I love the idea of economics as social science and focused on the history of economic thought. However, I also have made a lot of money in stocks over the years. I lost a lot at the beginning and even today make stupid mistakes. However, overall when other investors, even institutional investors are worrying, I sleep at night. I do not worry about the crisis or the gyrations in the market. Why I have perfected a system that works for me and because I am not a materialist.

I am not greedy (too much so). I live in Krakow, Poland and live a very modest life with my family.  I do not need money to impress people or show up or to fill some void in my life as I believe life as a purpose besides here and now.  I believe that time, not money is most valuable. I pursue money because it is like a game for me. It is like chess. Other people watch sports (I do somethings too of course), I play the market and read economics.

Warren Buffet lives a very modest life (the same house he was married in 1959) and says the only difference between you and me is – I get in the morning to invest because I love it not because I have to. I think he always had that philosophy. He is not one of my personal idols, but I am impressed by his work ethic and is charitable giving.

So alas, I do not need a job. I am an entrepreneur and trade stocks and have not had to work for about seven years, other than teaching and consulting, I do from time to time for fun.

So I trade stocks because it is a bit of an intellectual rush, and makes me money.

The trading genius who did not care about money – I remember reading about a particular genius who never needed to work because whenever he needed the money he just spent a little time investing and when he made enough he would go back to his intellectual endeavors.  I was partially inspired by that and thought if he can do it why can not I? I often joke to my wife that when we need more money, do I have her permission to turn up the dials on my money-making machine.

I highly recommend if you have any passion for markets and economics and money as an intellectual curiosity, to study and play the market. It is like I have said, it is clean, honest fun the most you can have with your clothes on.

Beautiful old photo of Wall Street from the Gilded Age

Why trade stocks?

Andrew Lo and Craig MacKinlay were two professors in the 1980s who disproved the Efficient Market theory. The efficient market theory states, market players have perfect information and to make anything more than normal economic profits was not possible, at least in the long-run. The conclusion is you cannot beat the market. If the Efficient Market theory was true there is no reason to do anything but to buy the Vanguard 500 index fund and spend your time watching TV after work.

Professors Lo and MacKinlay argued the stock market is not a random walk down wall street. In fact, they published a book in 1989 called A Non-Random Walk Down Wall Street. The subsequently backed it up with technical patterns that they found made money more often than not. They studied markets in the 1960s, 70s, 80s, and 90s and gave examples, of stock trading patterns that make money. They talked about the head and shoulders and triangle tops and bottoms. These patterns consistently made more.

The major take away is you can make money in stocks. You can get rich fast and you can make more money than your day job. Even with a crazy market, you can make money.

Of course, it is impossible to predict a price of 100% of the time. Even with some quantitative analysis of stock prices, the best you can do is increase your probability of making a profit.

What is the basis of making greater than normal profits in the stock market?

Markets love tends – Not only are trends real but they work. I would add one more thing, there is safety in numbers and time. The more people that are participating in trading in a market or individual stock, the more the stock or market trends in a logical way. Let me give you an example. If there is a stock with only two people trading, then a trend or pattern is harder to find. In fact, there will be no trend. However, with ten people trading there might be some eradicate trend. With ten thousand people trading, you will find a pattern.

Patterns are caused by herd moments. People are pack animals and move and live in herds. We live together and move together. We have leaders and followers and trendsetters. Think about society and how it operates.

There is nothing wrong with this. Each of us is leaders and followers in different ways and walks of life. I am a leader in my family, my business, but a follower when it comes to politics. I do not vote for myself. Humans are social and we act in groups with predictable behaviors. When a classical music concert is over the audience claps and then starts to leave. Rituals, patterns, and groups movements are everywhere. The stock market is about human groups reacting to market data. Everyone reacts different but there is usually a general trend which can be seen and used.

If you want to get started trading read a few books

There are scores of books and software programs to help you trade stocks. I am a big fan of Stan Weinstein because he is simple and honest in his approach and from his classic book you can build a trading strategy of your own. If you read his book Stan Weinstein Secrets For Profiting in Bull and Bear Markets, you have a jump on 90% of the guys out there. It is simple and old and even a bit outdated but it is a classic and you can use it as a conceptual framework for developing your own trading system.

Most of the other books out there give you people’s personal strategy for trading. I do not think they are powerful as Stan’s book. But I am open to rebuttals on this point.

For example, Ed Downs wrote a Book 7 chart patterns that consistently make money.

I do not give this book a strong recommendation. It is too short and not enough meat, but nice graphs. It is more of a sales book for omnitrader software. The good point is it does drive home a good point. a point that I believe in. That is the market is predictable. But I will use this book as an example of what is one the proverbial shelf, even if a mediocre one.

The main takeaways from his trading book:

  1. Support and Resistance – breaks cause tend shifts – I basically agree.
  2. Trend Line reversal – breaks cause are buy and sell signals. – I use the 12-month moving average and this is not hocus pocus, it works.
  3. Saucer formation – Smooth transitions that cause buyers to enter. – I look more to the above two points as saucers are often hard to spot and never as they draw them in the book. Even with software there they are hard to find. But some people spend time finding these and do profit.
  4. Fibonacci retracements – Markets adjust in 1/8 this usually at 38%, 50% and 68% – I personally do not use this as it is too much for me but there is some support for this theory.
  5. Price gaps – Found at the beginning, middle and end of price movements. The most significant is the end and the beginning. I think the beginning is the most telling. My opinion is it has mixed agreement with technicians.
  6. Volume climax and trend – Large volumes confirm price movements. My take is it depends, I know Stan is big on this, but I have not used this confirmation vote with as good success.
  7. Consolidations – Each consolidation period will be followed by a movement of equal distance from the last consolidation. – My take is this might be true but, more trading talk. Yes, there are consolidation points but the exact length of the next movement is more speculation.

However, even though I discount most of the above points as I am not a day trader or short term trader, even if you were armed with basic information like this you could do reasonably well if you studied these patterns.

So read a few books and read them critically and objectively.

What charts do I use?

I use the 12 months moving average on the market as a whole. When there is not a clear pattern, then I look at industry patterns or just do the best I can with quantitative value analysis. The current market is really a hard one.

  • If you play around with tend lines like simple moving average (SMA) or the exponential moving average (EMA), you will see that the longer the time frame the more clear the line. In my experience the 12 month moving average is optimal. Longer than that and you will not be as sensitive to the underlying price. Shorter than that and you will have too many false starts and stops for my system.
  • Buy and hold does not work. Just look at a trend on any market. Use the EMA and or the SMA. I have always preferred the SMA but lately I have been playing more with the EMA. You will see if you bought and hold you would have missed every major swing in the market and you would have lost money. For example, from March 2003 to December 2007 you’ll see a very steady upward trend in the 12 month moving average. This trend held despite the peak and valleys in 2006.

Technical analysis is not the only way to trade stocks but it is a start

  • You can make money trading stocks.
  • I prefer simple technical systems over the long-term. I would rather be the world expert or master on one or two technical trading tools than try to learn everyone.
  • Combine trend analysis with quantitative value screens and your own research and feel about a company.
  • Once you have a system you have been trading for a few years, some leverage with LEAPs (long-term equity options which have less time decay) or options or margin will amplify your returns.

This is the way you beat the market. Nothing is guaranteed, however, I believe you can get greater than normal returns. Some people prefer to trade currency or in other markets, I prefer stocks as in doing so I participate in the overall growth of the economy, it is not zero-sum.  In conclusion, I love trading stocks because it is fun and makes my money work for me, so I do not have to go to work.

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Stock market

Wall Street 2 – money never sleeps speech – script

Wall Street  – the money never sleeps speech

I saw Wall Street 2 this weekend. Although the reviews were mediocre I liked it. One of the best scenes was when Gordon Gecko was giving a lecture to some students about greed. What he did in about three minutes was, this ex-Wall Street insider, described the cause of the financial crisis almost poetically.  Why the economy is in a mess. It was a bit dramatic but it was one of the best explanations for the financial crisis in summary form.

Gordon Gecko shakes his head and says:

You are all pretty much screwed. You do not know it yet, but you are the ninja generation. No income, no job, no assets. You’ve got a lot to look forward to.

Someone reminded me the other day that I once said, greed is good. Well it appears greed is not only good, it is legal. We are all drinking the same cool-aid.

But it is greed that makes my bartender buy three houses, he cannot afford with no money down. And it is greed that makes your parents refinance their 200,000 dollar mortgage for 250,000 dollars. Now they take that extra 50,000 dollars and go to the shopping mall so they can buy a new plasma TV, cell phones, computers and an SUV. And hey, why not a second home while we are at it.

Gee Wiz, we all know the prices of houses in America always go up. Right?

It is greed that makes the government of this country cut the interest rates to 1% after 9/11 so we can all go shopping again.

They got all these fancy names for trillions of dollars for credit, CMO, CDO, SIV, ABS. You know I honestly think there are only 75 people in the world that knows what they are.

But I will tell you what they are, they are WMDs. Weapons of mass destruction.

When I was away, it seemed that greed, got greedier. With a little bit of envy mixed in.
Hedge fund managers came home with 50 to 100 million bucks a year.

So Mr. Banker, he looks around and says.
My life looks pretty boring.

So he starts leveraging his interest up to 40%, 50% to 100%. With your money not his.
Yours. Because he could.
You are supposed to be borrowing not them.

And the beauty of the deal is no one is responsible.

Because everyone is drinking the same cool-aid.

Last year ladies and gentlemen, 40% of all corporate profits came from the financial services industry.
Not production, not anything remotely to do with the needs of the American public.
The truth is we are all part of it now.
Banks, consumers they are moving the money around in circles.
We take a buck, we shoot it full of steroids and we call it leverage. I call it steroid banking.
Now I have been considered a pretty smart guy when it comes to finance.
Maybe I was in prison too long, but sometimes it is the only place to stay sane, looking out from the bars and say, hey is everyone out there nuts?
It is clear as a bell to those who pay attention. The mother of all evil is speculation. Leverage debt. The bottom line is, it is borrowing to the hilt.
And I hate to tell you this, but it is a bankrupt business model.
It will not work. It is septicemic, malignant and its global. Like cancer, it is a disease. And we got to fight back. How we going to do that?
How we are going to leverage that disease, back in our favor?
I will tell you, three words….

I did not have the script nor did I record this film.  I did the best I could do from memory so maybe a few words are off but here it is. I recommend you see the film and do not listen to the reviews. It is pretty good if you like the stock market, trading, and economics. It is directed by Oliver Stone and stars Micheal Douglas and produced by 20th century Fox.  I give full credit of course to the Wall Street the money never sleep quotes to these people. It is their intellectual capital. I am sure someday they will release the full script for Wall street the money never sleeps, but for now, you can just see the movie it is better than just reading about it.

Did the film portray Wall Street right? I use to work down there and if anything he was too kind. People are so lost in their lifestyles that they are out of touch with real life.  It is good to strive and work and even earn money, but ‘what good is it if a man gains the world and loses his soul in the process’?

Stone is a very controversial director but in this case, I basically agree. The banks got free easy money from the Federal reserve and gave it to people who never should have gotten it. When the banks got in trouble, the government bailed them out. No one is responsible for such speculation and the tax payers must pay for the next 20 years.

Oh one more thing, just remember, money never sleeps.

Categories
Stock market

Stock chart – not to trade

One Stock Chart pattern to avoid

The purpose of this post is to tell you about one technical trading pattern I avoid putting my hard-earned capital towards. What do you like to do in your free time? One of my free time activities is to look at stock chart patterns.  I call this hobby ‘graphs for laughs’. I believe if you become familiar with a number of basic patterns you will have the ability to pick stocks better. It is all about pattern recognition.

I am not longer a big believer in looking at every technical pattern iteration like they are a sign or has a meaning. Rather I am looking more broadly for a trend in relation to a moving average. Then I subsequently confirm if my prediction, based on my reading of the tea leaves, I mean stock trading charts, was correct.

Instead of learning every trading pattern from the “cup and saucer” to “Fibonacci retracements”, I would rather become a specialist at simply looking at the stock price trend in relation to the moving average. That is being good at recognizing patterns of basic technical analysis,  the subtle over the exotic.

This is one trading pattern I avoid. I do not know what other technical traders call it or what they recommend. However, in my experience, it is not to be traded. I call it the snake.

This is a stock that has moved up rather rapidly.  It does not matter the time frame. It could have been for many months or even a few weeks. However, once it makes the initial move, the curve flattens out.

The reason this technical pattern tricks people is:

  • The moving average is usually still be increasing.
  • The price has not broken down below the trend line.
  • The fundamentals are usually good.
  • It comes up as a ‘buy’ on many quantitative screens.
I do not trade this stock chart pattern

But still every time I have traded this stock I have not had a good experience.

The reason this technical pattern does not perform well is it has moved too far from the moving average trend line

What is happening is it has made a positive move because of some valuation, and then it hits resistance above the moving average. This is because many of the traders want out. Traders take profits and it hits a plateau. All these guys need to exit before it as any potential to move up again. In simpler terms the moving average needs to catch up to the price, it is overbought. These equities often move to highs above the moving average line, and then come back closer with a correction.

This stock will come upon stock screens as a recommended buy. This is why I have seen it so many times.  This is because the software to pick stocks will see price momentum as positive, and the fact that it is trading above moving average. However, many stock trading software (not all) have a hard time recognizing patterns like a human.

The stock chart in relation to the moving average it moved too far from the moving average then flattens out

Now people can argue, Bollinger bands etc would tell you this anyway. But like I said at the start, I know simple moving averages work. I try not to get too complicated with every type of technical indicator or exotic pattern. This is because the marginal benefit of using complicated investment tools or examining the granularity of a pattern is small. Time could be better used studying something else.

My conclusion is if you want to make money in stocks by trading stocks on technical patterns, it is best to avoid this pattern.

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Stock market

How to make money in a flat stock market

Make money in a flat market

One of the most frustrating things is a flat stock market. It is like being in a relationship with someone who you can not make up their mind. They give you mixed signals, hope, then ignore you. This is what it feels to be an investor out there swinging away in a flat market. You feel like you are pretty wise and are making all the right choices, but the relationship is not going anywhere. How do you invest in a flat market?

There are times that the market will be in a seven-year uptrend, and all boats are going up in this rising tide and we are all smoking cigars rolled in one-hundred-dollar bills and congratulating ourselves on being masters of the universe. On the other hand, there will be times when equities are in an 18-month downward trend or at least behaving badly enough to be out of the market or short. In the case of the latter, you are should be out of the market and drinking lemonade and spending time with your kids.

However, what can you do if the market is not trending in a clear pattern up or down, that is a flat market. If for example, you are using moving average or some technical indicator to and there are no clear signals, this seems to frustrate people. The index will dance around the moving average and give many false starts to an upward or downward trend. What to do, what do to?

Two or Three false starts in a year qualify as a flat equity market and you need to start looking at sectors rather than markets.

Flat market investing

  • The market-neutral option – In all markets, some people are market neutral and it is only a matter of shifting your asset allocation and positions. It is the ultimate form of diversification. However, I personally am not doing this right now. In theory, I am a market-neutral investor, but in practice, I am a market timer. That is I look at the trend and determine if I am in or out.
  • The finding only quality stocks option – I like to use quantitative investing screens. Even if the market tanks your holdings will probability not go down as much. Therefore, in a flat market if you find some good picks you will profit as there is always stock out there somewhere that is a winner. The problem is we do not have perfect information. If we did we would all be millionaires by the end of the year.
  • The Stan Weinstein solution –  His idea for investing is easy. You need to stop looking at the market as a whole and start doing sector analysis. Individual sectors or even countries have indexes just like the S&P. These sectors have a mind of their own some are only slightly correlated with the market. Stan Weinstein always recommended identifying sectors (or countries) that are in stage breaking out or in stage two. If you have a good stock in a good sector it will usually outperform a great stock in a poor sector.  From this universe of stocks choose the best. If it is so simple why do so few people do this? I do not know. Stan Weinstein often wrote about his, how investors would be trading stock tips over their chicken Kyiv dinners but would not do something basic like trend analysis.

My personal investing mistake – I personally skipped trend analysis on sectors in this flat market recently. It was a mistake. I bought a stock  PWRD that by all calculations should have been a winner. I think it still will do well. But the problem was the group  (Chinese software stocks) was out of favor and trending down. In a bull market, this would not have mattered as much, but in current market conditions, it does matter. Now I own this stock for the long-term.  If you have a flat stock market you have to be more aware of what other equities are doing in the group are doing. This is because groups move in tandem.

What some stock traders do that I do not – On the other side of the spectrum, there are traders and people using sophisticated software to analysis every gyration of the market, like it means something. Every pattern is like a sign from above. However, in my experience, it is a very hard way to live. It is better you analysis the general trend, whether it be the index or the sector in the case of a flat market and screen quantitatively then use your own wits to pick the stocks.

Life is too short to be spent in front of a computer screen looking at graphs and numbers, even though there is a certain strange exhilaration from living this way. The main thing is to remember your idea is to have fun at life and investing is more a tool. If you want to study investment theory as an end in itself, this can be interesting, but I do not believe in playing the market for the fun of it. For fun, I play chess, for making money I invest based on probability.

Therefore, from the above choice above I in practice use market analysis, quantitative screens, and picking based on companies that I like. However, in reality, whenever I have added sector analysis, especially in a flat market or an uneven economic recovery, I have made the most money.

Why does my theory about flat market investing not always match my practice? Because I am only human and I sometimes behave like a person in a relationship (I am very happily married) who stays in a relationship even though I know it is all wrong. This is the only way I can explain my and other people’s irrational investing behavior.

A recession or depression or lackluster growth for the aggregate economy is a hardship for many. But for you personally, it does not have to be, but rather an opportunity to make money in stocks. It is nothing more change. Let me know if you have had any investment experience investing in a sideways moving equities market.

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Stock market

Quantitative investing – an investment management strategy

How and why quantitative investing can help the individual investor

Do you want to make money from the stock market? I do. How do I do this? I am a big fan of narrowing the universe of stocks to choose from before you start to make your own investment decisions. My rationale is there are too much information and choice. By the time you can analysis the bulwark of the equities at a given point in time, the situation has changed. There are too many potential investments to consider. Even if your brain is a supercomputer, if you analysis stocks at any meaningful depth, you are behind the times.

Still not convinced? Consider this metaphor. I guess my first question to you,  is can you beat a computer Chess program of reasonable strength?  If you can, at a  2700 level, then you do not need quantitative investing. I play chess at an expert level and I can not. I am certainly not going to learn the same lessons with investing. Think about this metaphor and what this means. It means with computers, you can leverage other people’s knowledge. You do not have to reinvent the wheel. This is my first recommendation. Use other people’s knowledge. However, not just any research, as every guy out there has a new letter. Use quantitative objective, testable scientific research.

Stock Screener vs. a Quantitative shop

The question is how do you quantitatively narrow your selection of stocks and what objective determinate criteria do you use to find a universe of stocks, so you can subsequently make subjective choices on your own?  Let us see how I approach this.

People often log in to their favorite financial website, such as Yahoo finance and run a stock screener. A filter based on selection criteria like PE or PS. Perhaps they read about the most important ratios in a book or article and want to apply this to a screen. They narrow the universe this way or at least a reality check on stock buys they are considering. This is not the way to pick stocks. Why? Because these ratios are like single musicians in the orchestra. Only together with all the other ratios do they explain the whole and you can get the sense of the music.

Therefore, stock screeners are not the way to go.

The alternative to stock screeners is quantitative shops. These are academic researchers who consider all the value and fundamental data in unison. Then package their results in a useable form.  They consider the whole picture and have created a selection criterion that works as seen by the past results and long-term backtesting. It is a scientific approach to investing.  Of course everything could change but over the long-term, however, if they have done their job correctly then the stocks they pick will outperform, and by a significant margin.

Many but not all institutional investors use this, these guys know how to make money. Almost no individual investors use this approach because they are not aware of it. It is rarely written about. Everyone in the mass media writes about investing news and mutual funds or techniques of trading. However, how often do you have specific advice about quantitative investing in a useable form?

Why are quantitative shops better than using a mutual fund?

Because Mutual funds are managed often by young guys trying to prove themselves based on conventional methods. Maybe they have a CFA degree and ten years of experience as a junior fun manager, but this does not mean I would trust my hard-earned dollars with them. It is just a resume.

Some do well for a while but in the long run, many (most) underperform the market. When I was a stockbroker I would always see the hot fund of the month being pushed. They would show some five-year return that allowed this fund (often a sector fund) to outperform the market. But everyone knows like Heraclius wrote ‘all is flux and fire’. Past performance means nothing unless it is ten years plus. Further, the discipline for selecting the equities need to be consistent. What if the manager tries something new. Then the past will have little bearing on the future as there are a different set of a variable. Or what if like the fund manager leaves or has personal problems.

Even the mutual funds themselves have a human element, what if the Fund gets too big like Fidelity’s Magellan fund in the 1990s and it was like trying to navigate a battleship in a small canal. Its popularity changed the fund. Therefore, funds like stocks are not in my opinion dependable.

Many people diversify their funds, but basically they will approach the index over the long term as they are holding so many investments. Some fund is good and I like them. But I still prefer individual stocks based on my own criteria with the help of quantitative investment information, not some hotshot Wall Street fund manager. If I lose or make money I want it to be my fault or not.

Use a quantitative investment shop to pick stocks

You can narrow the universe to stock that has a significant chance of outperforming the market. It is clear and tested with backtesting. Of course, it is all probability and nothing, repeat nothing is guaranteed. But if you can use a quantitive shop you should be better than the blok who does not.

I do not recommend giving your money to a quantitative equity management firm, but rather do it yourself. I believe this for various reason.

What about technical trading and software? Use this, but first narrow your universe to undervalued stocks so if your technical elves are wrong, you will not be in bad shape for a longer-term.

Why is a few percentage points important in investing?

It is not the few percentage point advantage that you get, but rather the constancy. quantitive shops tend to produce selections that year to year, in bull and bear markets outperform with positive results. This means the market is down but the top selections are still up. Do not take my word for it, look at a few of these like valuengine.com . They also have information on potential shorts in a bear market.

Again why is this constancy factor important? Because if you are an investor it is nice. But if you are a stock trader and want to make high profits and get rich the only way to do with, besides being lucky or very patient, is leverage. If you have a system that yields 10% a year, but every year, and leverage this 10 to 1 then you will be doubling your money every year.

I am not recommending you buy stock options or use margin. I am just saying consider the theory of this. I personally use leverage, but I have worked with these ideas for many years.

When quantitative research firms fail investors

Results shown on the quantitive investing page are aggregate results and if you buy and sell like a computer, exactly when the equity has been added or subtracted to the list. If you buy stocks from the list, you will get different results. However, the theory is still valid and you in all probability will outperform the market and do it with consistency. But I have lost money using quantitative picks by trying to be too much of a maverick investor and not systematic.

Also if you are using research that is not in a usable digestible form, rather it is just thrown at you than, it is no good either.

I recommend two quantitative research tools

  • valuengine.com – Developed at Yale and marketing privately. Relatively cheap.
  • MSN top ten picks – Free but no frills. If you are a small investor try paper trades with this at first. Also, try to leverage scenarios with paper trades.

Where is the human element in investing

There is a lot. Quantitive shops and moving averages just narrow the exogenous and endogenous variable to a managed level. Once you have your universe narrowed, then go to work. Pick stocks based on things like do you like the company and what they do etc.

Remember investing is work not play. I have always said trading stocks is the most fun you can have with your clothes on, but this is about your money. Earn money first and have fun latter. Have fun playing tennis or whatever you like (me I like chess, languages, traveling through Eastern Europe). However, when it comes to your hard-earned money, be wise and objective. This is why I back up my investment choices with quantitative investing research.

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Stock market

Why people lose money in stock market

People lose money in the stock market for two reason

The reason why people lose money in the stock market is twofold. Either they are unlucky, as the stock market is still a combination of skill and luck, or they do not have a disciplined approach to investing. It is that simple.

You can make all the right decision and still lose money. You can make all the wrong decisions and make money in the stock market or in life. This is the way it is. Life is an interaction between knowledge and probability. Many people who have made money in the stock market are lucky, not skilled. Skill comes into play when you have a system and perfect it.

Wall Street sign – Find out why people lose and make money on Wall Street.

Prevent losses with systematic trading

If you want decrease your chance or losing money in the long-run, in the stock market, here is the way.  I would recommend researching the best trading systems. Search high and low until you find one or two that is convincing and backed up by real scientifically tested methods, not some cheesy sales pitch. Once you find a system, your mission is to build on it. It could be a simple investment approach like buying the S&P 500 index and holding it. With this, you will get about 10%, in good times.  This is a trading system.

Compare the simple index model above with the approach most people take, that is buying and selling equities based on hunches or tips or a few hours of research. These people may do well, but it is like the player in Vegas that does well in the short-term. In the long-run, the odds are against the investor for earning greater than normal returns.

Your objective in buying and selling equities is to change the stock market financial game from backgammon to chess. That reduces the probability to investment strategy.

How to earn greater than average returns in the stock market

  • Choose the best trading system – Compare various systematic approaches to investing over the long-term. Find one that achieves a significantly greater return. I like valuengine.com and MSN money top ten picks. These are tested and backtested to give you a better return than most of the high paid wizards of Wall Street with fancy degrees. Why reinvent the wheel?
  • Do live trades or use paper trades to get used to the system – Once you feel comfortable with trading with the system you chose, try to add a little finesse or your own creativity. It could even be with paper trades at first. I once saw on an IQ test a proverb question. ‘If it is not broken do not fix it’. The question was what could happen if you try to fix something that is not broken. My people would say you would take something that is working and break it. I disagree. If you try to fix something that is not broken you could improve it. And on the IQ test that was the correct answer. Therefore, try to build off a tried and tested system to break new ground an improve it.
  • Use your own intelligence to invest creatively – To improve a tested trading system, maybe add leverage or one more layer of technical analysis.  Narrow the universe of stocks to a reasonable level. Then analysis what could improve on this. This is the point where you should trust yourself. That is, once you have a winning team of stocks then you can try to create a new strategies book working with winners.

How losing in the stock market is like having a bad work team

Here is a metaphor I think everyone can relate to. Every manager in business knows, that if they have a winning team of workers under them, almost no matter what they do, it is hard to not reach your target goals. The department is really on autopilot. On the other hand, if you have a team of people who are lazy or do not know what they are doing, no matter what you do, the team does not reach its planned matrices. And so it is with stock market investing, start off with the right team of winning stocks. Base this universe of equities on other people’s work and research. This is not a thing more than the division of labor. Let the technical people crunch the numbers and you be the high level, decision maker.

If people followed these rules I think they would not be asking themselves why I lose money in the stock market. Although I initially said it was luck or not being systematic, in the long-run luck can be controlled with a disciple approach to investing.

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Stock market

Why investing in the stock market is fun

I have invested since I was a teen and made a lot of money. However, the return on investment is only one reason I bought and sold stocks. I think I have done this mostly because it is good to clean fun. Yes investing in the stock market is fun.

Reasons the stock market is fun

There are huge psychological rewards from investing:

  • You feel like an owner when you buy common stock – If you are buying and selling the great companies of the world you feel as if you are participating in something great. For example, you could put your equity capital towards some biotech company bent on improving humanity. Or you could invest in your favorite computer company like Apple. You feel as though you are an owner. I like buying Disney from time to time as I always have had a good time in their parks. Whatever the reason you purchase a stock, you are an owner. In fact, if you have a lot of money you can accumulate a reasonable amount of ownership capital if it is a small or micro-cap stock and have an influence in the company.
  • It is fun to be a winner when you make money in the stock market – The stock market is a positive-sum game, that means there are more winners than losers in the long run. When you purchase a stock and you make a profit you feel smart. In fact often times I make more on one good trade in a month than I do in my day job.
  • It s fun to talk to others about your investments – Talking about the stock market is like talking about a hobby. It is a way like-minded people communicate. I have a few friends where we exchange ideas about investing. I love reading books on investing.
  • You use your brain and intelligence in a very high-level way when investing – Investing is an art more than a science, however, to be a good investor I think you need to use all parts of your brain. Each person brain is different and has a different style of analysis. There are no experts on life. Many times people with fancy degrees do not have as good returns as a clever person who has a sense of financial markets. This is real-life problem solving and it is another reason why investing is in the stock market is fun.
  • Investing is more Nobel and enjoyable than consumption – Warren Buffet may be the richest man on earth but he is not hyper consumptive. In fact, he loves simply the act of investing. He says day to day he lives a modest life and still lives in the same house he was married in 1959. He shops at Wal-Mart and likes to play bridge on the Internet.  However, the difference between himself and many people is not the lifestyle but rather he enjoys investing more than consuming.  This was the idea behind the Puritan work model. Work hard with pleasure and consume little.

I can not think of a better way to spend leisure time than invest in stocks. It is productive, uplifting educational and relaxing (at times). You not only accumulate investment information with experience, but you accrue wisdom. The stock market teaches you about life. You learn to balance risk-taking with moderation and temperance. This is why stock market investing in fun for me.