Categories
Stock market

Stan Weinstein – the Trend is Your Friend

Stan Weinstein wrote the book How to Make Money in a Bull or Bear Market.  It is a classic. Maybe people may discount it or say it’s outdated or there are more advanced techniques for making money, but in my mind, it is one of the best books on investing in the stock market.

Stan Weinstein is a teacher of stock technical analysis for the everyday investor. You do not need a Ph.D. in mathematics from MIT nor do you need to work at an investment bank with supercomputers behind you, to use and understand technical analysis by employing a simple moving average layered over a stock price. The power of his techniques is just that, in its unpretentious easy to use the system.

  • Stan Weinstein’s system – The trend is your friend.   Build into the price of any stock is expectations, insider information, the knowledge that is not perfectly distributed to the public. Stan Weinstein says to use this to help determine turning points. He looks first at the market as a whole, then the sectors, then the individual stock at using a 50 or 200-day simple moving average.
Initially this stock has false starts then falls into a nice pattern. Wait for the pattern to be clear.

The logic embedded in trend analysis is, stock prices move more on expectations that spread through the investor community, than current earnings. That is why you see companies that have no earnings or little earnings trading at multiples of their true valuations. Expectations are a social phenomenon. If you want to make money in stocks you have to understand that point. If stocks are a social activity, then trend analysis is relevant. People are social beings that in aggregate operate in trends.

Investing as a social science

Stan Weinstein wants to know, where are investors going? Where is the heard moving, what is the direction and pattern of the movers behind the market, rather, than lose yourself in equations or complex analysis? Even though is a figure from the past, in investing history his underlying premise is correct. People, not numbers make stocks move. The crowd does the heavy lifting to move the stock like a rock, one way or another, and once it is rolling, it has momentum, it keeps moving until the crowd starts pushing the other way. This is where he looks for turning points with cross overs between the stock price and the moving average.

Economic model assumptions

Economics and investing in the stock market is a social science, not physics or math, or computer science like some people try to equate it to be. Some assumptions of investing and economic models are in aggregate:

  1. People are rational (Debatable but in aggregate yes).
  2. People are motivated by economic incentives (In aggregate a strong motivator)
  3. People have perfect information ( This is a weak assumption)
  4. Optimal descriptions are made at the margin (Yes, marginal cost equals marginal revenue at the price point)

If you meditate on these assumptions you find weaknesses in each. The weakest being perfect information. Despite the computer age, information about companies is transmitted and reached the market gradually as there are laws and restrictions about insider trading. Further, the market is so large and complex not every investor is can possible look at the relevant variables, and variables do change in weight. Because information is not perfect in the market the small investor as a chance to outplay professional investors. This is particularly true on smaller local companies that trade on the market, that are off the big investor’s radar or threshold criteria.

Therefore, if stocks are a social activity then you can profit by looking at places that information is imperfect in society. This is done by looking at the trend at an early stage of take-off, when others are buying but not to the full extent.

Buy in stage 2 or 3 depending on your risk preference. Never ever buy a stock trading below its moving average.

Investments and other social actives follow a trend

That being said any type of investment big or small, stocks, metals, real estate follows the basic principle of trend analysis as does other social trends like music videos or fashion. Like Pareto principle (invoked more in contrarian analysis) stocks move in trends because people move this way. It is a group mentality. The real trick with a moving average is, you try to use it as a predictive indicator of expectations rather than just an observation ex-post.

Stan Weinstein looks at the trend as the summum bonum which trumps fundamental analysis, contrarian analysis, or intricate technical models. If the market price is the ultimate weighing machine, then expectations are the ultimate predictor, an expectation based on past history. The way you buy and sell stocks on expectations,  look at people and society. Therefore, my point is Stan Weinstein is a social investor more than a technical.

How does Stan Weinstein’s system stand up to quantitative analysis?

Contrary to a few websites that publish anecdotal evidence or fictitious evidence, I have not seen any rigorous academic studies that show results either way that would prove his system or any moving average system definitely deviates from the average.

Based on my personal experience it using a moving average system has worked to be personally. It has worked for me as a way to put parameters around my picks that I base on other determinate criteria. I look at the stock’s 50-day moving average and 200-day moving again after I have looked at other factors.

People get emotionally attached to stocks. It is like a relationship, they know they should leave. With an MA  exit strategy, you stay objective. I wish dating was that easy.

What about computer trading?

Metaphorically, supercomputers have not yet solved the game of chess. Chess is an infinitely more limited game than investing as the market has social variables and exogenous variables that might not ever be calculated.  Chess does not have exogenous variables unless you factor in the psychology of the players. Therefore, there is no need to be intimidated by computerized training in the stock market, nor expects with math degrees. The market is largely a social experience, rather than an equation to be solved.

That being said, Stan Weinstein’s analysis is to look at the social trend by using charting. You might say would it not be easy to have a supercomputer using a moving average system like Stan Weinstein. Yes, and that is why I do not use it as my only criteria to by and sell stocks. On the other hand, I think people do use it moving averages daily to trade stocks and commodities with success including with computers.

What about the experts

Only 10% of mutual fund managers earn a higher return than the average market index for two consecutive years. If you go out further it becomes less. That means high paid professionals do not beat the average index constantly. These are professionals that have supercomputers behind them. I have worked in investment houses packed with CFAs and experts and I do not know any that really use an SMA, I do not know why.

To further illustrate that point, if the market could beat systematically then why has not a big bank exploited that and made infinitesimally high profits constantly on their investing side? In fact, the opposite is seen. That does not mean you can not beat the market. I believe you can. My message does not be intimidated by super computerizes or MIT graduate whiz kids, as evidence sheds light on the truth.

If you want to examine this debate at an academic level, please see this paper:

Simple Technical Trading Rules and the Stochastic Properties of Stock Returns
Authors: William Brock, Blake Le Baron, Josef Lakonishok
The Journal of Finance December 1992

However, until I see papers with academic rigor or models that prove or disprove Stan Weinstein’s system either way, or if someone can show me a good real study, I think the jury is not out yet.

Stay away from stocks that do not give a clear signal. It is like a date that gives you mixed signals, you are asking for trouble in the long-run.

I believe you can beat the market, at least long enough to make your money and get out. New studies are coming out are saying a small minority of people (not computers) can beat the market. It is not a random walk as people do not walk in random patterns. It is based on crowd behavior and expectations.

What Stan Weinstein’s system does is give you an edge used in conjunction with other systems.

It gives you the ability to pick your stocks and have a system of your own while doing a sanity check. This is how I use Stan Weinstein’s moving average system. I know I should use Bollinger bands EMA and more complex technical indicators, but the simple moving average works for me. Perhaps Stan Weinstein was right, I should look at all these factors. However, I use simply the 1-year moving average, a broader indicator of the index as a whole.  Then I choose stocks I fancy for my own reasons and glance at the 200 days SMA.  I know he would not approve and even writes about this in his book, however, for me its a system that works.

On a personal note, Stan Weinstein is retired down in Hollywood, Florida, and a very personal and friendly guy.  His book is entertaining.  He is a man I respect both in terms of stock market investment theory and character.

Categories
Stock market

Predicting the stock market

Techniques for Predicting the Stock Market

You can not predict the stock market.  You can not ever predict the stock market or the price movement of individual stocks.  Unless you have insider information, there is no way to predict the stock market.  How do I know this? I am a smart guy, high IQ, good schools anyway you want to define it, further, I have been playing the stock market since I was 15.  I have a good understanding of the way the market works.

Why some people make money in the Stock Market

Some people make money in the stock market not by predicting the market but by luck, Other people use leverage to amplify returns.
Buffet used leverage.  In the most basic sense, he leveraged a 10 percent return to make it a 100% return(not exactly but basically).  He did it with most insurance companies and investment assets in a conservative way.  It takes money to make money.  But many times he is wrong in predicting the stock market.  He makes money with leverage.  Other people are lucky.  Even though the Stock market is not a zero-sum game, generally for every winner there is a loser.  Many people invest some are bound to be lucky for the long term and then say “I am a genius”.

How to make money in the Stock Market

Stock market prediction in this post I outline a simple way to predict the stock market.   It is not even a prediction method more a ‘get in’ or ‘get out’ strategy.  Use this combined with choosing companies that are making money now, and are solid and you think with your own judgment will make money in the future and is growing and you will make money in the stock market, even if you can not predict the stock market.

A stock market predictor that does not fail

Stock market predictor

How would you like a stock market predictor that does not rely on emotions, experts or expensive computer programs? Nothing in the world is perfect but it does pretty well if you look at it over the last 100 years.   Above is a chart of the 1 year moving average against the S&P index for the last 15 years.  It can identify the buy and sell points.

Why the 1 year, for a Stock Market predictor

In the past, I tried to predict the market with the 200-day moving average. This is conventional wisdom, but it gave too many false turning points.  I use the one year because although you may not be the first in or first out, you will miss the majority of the up and downturn.

Wall Streeters who can not predict the market

There are so many arrogant idiots on wall street who get paid millions (overpaid) and yet do not understand the basic idea that ‘all boats rise and sink with the tide’.  Look at the chart above.  You can participate in every major rise in the stock market and get out before ever major fall in the stock market.  It is the easiest way for a stock market prediction. Buy when the 365 day is going up and sell when the market crosses below.  After that, you can talk about value.

Stock market prediction

The market will go up.  Why? Expectations have factored in so much bad news and fear in 2008 that with a little bit of good news, the market will respond.  But I personally would not get in until I see a better trend in the moving average.  There might be a January effect and a government honeymoon effect, but I watch the market trend as a whole with moving averages.

Stock market prediction – How I predict the stock market

I look at the 365 day moving average on the S&P, as seen in the stock market chart above. With this, you might not be the very first to jump in or leave but you will catch most of the up tend and cut your losses.  Does it work? Yes.  Try it for yourself.  If you did this, you would not be in the market for the last year to year and a half.  Wow.  So if you want to predict the stock market use the 365-day moving average.

Stock Market prediction – individual stocks

After you predict the stock market as a whole “All boats go up in a rising tide”. Then you can choose your stocks based on value, and be one of the countless others that say, I am looking for value over the next two to three years on individual stocks.   Remember, ‘all boats go up in a rising tide’ and the long-term.  So to look for value on individual stocks does not make any sense if the opportunity cost is high as the market moving average is trending down. Read my lips, first, look at the stock market prediction as a whole using moving average.

Categories
Stock market

How to Make Money in Stocks

Many books will tell you how to make money in stocks as well as every expert on the internet.

How to make money in stocks

The purpose of this page is:

  • To explain to you two rules so about how to make money in stocks. So you can get rich and not lose money.

How to make money in stocks| two rules

  • Never ever even think about buying a stock if the 200-day moving an average of the market is down.
  • Do not listen to the news or experts, buy company’s that are making money and you think are good. Do not buy companies that are the next Microsoft or Google. No one can predict these except the lucky, and the rest will lose their money.

How to make money in Stocks |rule one

Look at that 200 day average of the market. You can use yahoo or MSN or any chart. The trend is your friend. Make sure the market as a whole is going up. I use the S&P 500 when it is trading above the 200-day moving average I buy. When it is not. I am not in the market. Make sure the 200-day moving average is going up. It is that simple. If you did this, you would not have lost any money in 2008.

That is it. If you made that rule, you would not be in the stock market today in December 2008. In fact, you would not have had any money in stocks in 2008. You would have got out of the stock market in 2007.

Never, ever buy stocks if the market as a whole is going down. It is better to be in cash. Why do the geniuses managing money not know this? I do not even recommend bonds. You need to be in cash or near cash. That is it.

How to make money in Stocks | Rule two

Do not buy companies that are not making money. Buy companies that are making money now. Today. Not on expectations in three years. And if you want to make money in stocks, buy stocks that you like. Do not listen to the analysts, Warren Buffet, or anyone else. How to make money in stocks? Listen to yourself.

I knew a 100-year-old rich investor when I was a stockbroker. He said his secret was “do not buy companies that go out of business”. I would say yes and do not buy companies that are not making money today. This is how to make money in stocks.

How to make money in Stocks | Follow rule one and two

It is so simple. If you want to make money in stocks, follow the rules one and two. If you have any questions or comments, write to me. I know what I am talking about. You do not need computer models, experts, CNN news, or analysts. I have lost lots of money over my thirty years of investing in stocks because I did not follow rule one or rule two. I am writing this so you will know from now on how to make money in stocks.

Categories
Stock market

Does Stan Weinstein System Work

Yes, his system does work. How does Stan Weinstein’s system work compared to the index? I do not know as I have never measured it.

What is Weinstein’s system in a nutshell?

The trend is your friend

  1. Look at the market as a whole compared to the 200-day moving average. – All boats go up in a rising tide.
  2. Look at the sectors which are doing the best using the 200-day moving average.
  3. Find the stocks with the nicest charts and an upward moving average, as well as the price above the trend line.
  4. When it breaks the trend, sell the stock. The pattern or direction is defined as the 200-day simple moving average.

In the old days Stan used charts, not you can go to any financial website like money.msn.com or Yahoo Finance and find a trend line.

You never ever want to buy or own a stock trading above the moving average, no matter how tempting or juicy the story it. The reason is the “tape tells all.” In other words, expectations and rumors on the street are already factored into the price trend line.

Is Stan Weinstein rich?

Yes is retired living happily in Hollywood, Florida.

Is his system of stock trading full proof? No way. However, he has some excellent runs.

How do I use his system to make money in stocks?

I am not a Stan Weinstein purist. I look only at the market as a whole using his system. But if you had done this, you would have been out of the market like I was in the fall of 2007. For me, I would say Stan Weinstein’s system works well.

I use the 12 months moving average on the S&P 500 index. If market conditions are right, then I am in the market and invest.

I screen stocks that are 8, 9, or 10 on the StockScouter rating system on MSN. It’s free and based on a quantitative method. They rate stocks from 1 to 10. I do not know why people do not use these as a guide to reduce potential buys and sells. There are other quantitative shops out there like valuengine.com, but why pay when you do not have to? Use a free quantitative system and Stan Weinstein’s system. Everything you need to make money is on MSN. Remember the economist John Maynard Keynes made a fortune in currency trading simply reading the financial paper. Something having less information is better as eventually, financial news becomes white noise.

From there, I look at the stocks I like, which is with a high-profit margin and low debt, also looking at the forward P/E ratio. Once I buy the stock, I hold until it crosses the moving average.

I also sometimes invest in companies I like, I shop at and believe in. But even with these, I check the moving average. Stan would say this is OK, you can do this, but eventually, you will yield to the logic of his system and see that it is all built into the moving average.

What if the market going down?

You can make money in a bull or bear market; you make money with shorts or puts. I do not do this. I use asset allocation and dollar-cost averaging to hedge my investments. That is, I always have something in cash and shift the distribution based on how optimistic I feel.

I never put all my money in at once. I allocate it piece by piece in case I am wrong about the market. Even with a small sum of money, I do this. Below the chart is historic and outdated but look at the trend and how it fits perfectly into the model.

I recommend Stan Weinstein’s book and ask me if you have any questions.

Categories
Stock market

Chess and the Stock Market

Learning chess can make you excel in the stock market, maybe.

What chess can teach you about the stock market

I love the game, play competitively, but can it make you rich in the stock market?

Chess and me

I am not a chess professional; however, I play and coach chess at a high level. I can beat most players, but not all. I live in Eastern Europe (now Florida), the land of chess masters. To overcome the best, I would have to study books on chess, and this time, I now use to study economics as I am getting a Ph.D. However, chess has taught me a lot over the years, including some lessons about the stock market and investing.

  • The essential thing chess has taught me is to ‘think before I move’. Just because something looks good, consider all the other options and possibilities in the short and long run. It seems so simple, but most people buy stocks on emotion or on a trading system they have studied. Both can be wrong.

The stock market and me

I have been a professional and personal investor for most of my life, buying my first stock at about 16 with the money I made working the night shift at Howard Johnson’s restaurant. I made and lost 100k in today’s dollars. I also worked with brand name Wall Street firms starting at age 21. Therefore, I had an early start trading stocks, and I came from an investment family.

Later I changed to more boring investment accounting positions. My lifelong performance was good, but in recent years my performance has been excellent. I was out of the market in the fall of 2007, for example. How can many investment experts say this? I have learned a lot and to some extent, mastered investing like chess to a degree. Even in a down market, it is a good source of income for me.

Chess and the stock market

I have seen a proportional increase in my chess rating and my stock performance. Is this a coincidence? At this juncture, I teach economics as a day job as I invest and write my language learning programs, which is considered more play than work. I think few people think they have this option to unplug from corporate America as I did, so read on. I believe chess teaches you to think and think objectively.

If you ever want to increase your cognitive powers, play chess. After even a couple of years of play, see how your thinking has changed, and you can then take that brainpower to the bank. The irony is a few chess players I know are active investors. Instead, they are more about the game.

How chess and investing are different

Chess is a zero-sum game. When someone wins, someone loses while investing is a positive-sum game. That is the main difference. Besides that, the same rules apply. Psychology strategy, defense, risk, analysis.

Chess, stock market and ego

The best chess players put their egos aside and are humble. They do not compare their rankings or walk around with a sense of entitlement. The best players do not dress for success nor care about titles or what school they went to or initials behind their name. They merely are playing a game, and there will always be someone better than you and someone worse. Investing, uh, I mean chess is not about comparing yourself to anyone or anything. It is about the play.

Chess, stock market and objectivity

I have seen many chess players marry a particular idea or line of defense. Investors similarly become too emotional (again ego) to admit they have made a mistake and ride stocks all the way down or keep talking about ‘value investing’ when, at that moment, value investing is not where it is at (opportunity cost).

Chess, stock market and strategy

The best players do not make dashing moves; this was done in the gallant 19th century, but not today. Players have learned that setting up the right system before they make any moves are best. Intuition and brave moves are only good once your base is solid.

Chess, stock market and noise

Players do not listen to the advice around them during play. Also, do not listen to the news or experts while playing the market. Really.

  • Take away #1; let go of your ego and see it all logically from a cost-benefit decision, including opportunity cost.

Chess, stock market and position and value

The position is more important than value. Yes, a piece only has a relative value, not an absolute. The value of a piece is based on position. A pawn at the end of the board is better than a Rook that is cornered. So do not believe companies and insurance companies that talk about their book value in relation to their stock price, for example, and say they are undervalued. Why? Many stocks trade undervalued for a long time, and there is a huge opportunity cost for holding this. So remember the value of a stock or a chess piece is not absolute but depends on many factors. Keynes said, ‘in the long run we are all dead’, so if you while you are waiting for a company to return to book value, why not invest in a winning position as the long run maybe years.

Read a book from the masters of old to be a good stock market investor or chess player

Do not tell people you read these books and do not talk general things like ‘I look for value in the market’; there are such ridiculous statements. Read books from the masters of old and practice on your own before you play or invest (chessboard or paper trades). Be again be quiet and silent about it, or your ego will grow and hurt your chances of winning.

  • Take away #2 Strategy more critical than tactics

The stock market is computers Vs. computers in an open game

What about AI and computers, is this not like chess, a force that can not be beaten?

AI is effective against human players in chess because it is a closed system, and deep lines can be calculated faster than humans. These computers are not programmed but most significantly learn while playing. To start, they were given only the rules and taught themselves.

 When AIs play each other, it becomes a different game. The stock market is not a closed system and infinitely more complex than chess, and in essence, computer systems are playing each other and cannot predict variables that arise outside their system such geopolitical events or natural disasters. We can not even predict the weather three days in advance.

Therefore, the best econometric models or computerized trading systems are imprecise. These models try to correlate variables. Computer models and action that is taken based on these models become part of the equation; hence, the accuracy becomes flawed. This is why the problem is systemic, and the logic is circular.

Better than worry about AI and the market, remember, the stock market is not a closed system like chess. It is open with more variables, including exogenous shocks. Better than worry about AI and the market, remember, the stock market is not a closed system like chess. It is open with more variables, including exogenous shocks.

Humans rely on their models and data, but still at this time make individual decisions which can beat the market. Therefore, metaphorically, we can learn from the game of chess as we observe AI behavior and strategies.

Chess is not just what white does but what black does. It is dynamic.

Investing in the market with chess concepts

My lesson from investing and playing chess is this. Although tactics in chess to checkmate someone fast get notoriety at lower levels, real masters take their time and build positional strategies.

Metaphorically in the stock market, you need to consider strategies like dollar-cost averaging and which sectors are trending over individual tactical plays. Your time should be invested in more global thinking. Place your research on macro trends over individual stock picks. Then from there, you can choose individual stocks.

Are you surprised? No great insights? If you look closely, there are. The best take away here is to be a good chess player or stock market investor you need to be very humble and say, ‘I do not know anything.’ Only then can you can learn not only how not to lose money while investing even in bear markets but make money in a bear market. With some lessons from the game of chess, you can be a great stock market investor.