Action speaks louder than words.
Archives of “January 3, 2019” day
rssTraders Psychological TEST
Paul Farrell observes that 95% of traders don’t make it. 80% of all day traders lose money. One study found active investors turn over their portfolios excessively (258% annually) but made less than 12% on their money. Passive buy-and-hold investors with only 2% portfolio turnover had significantly better returns.
And, most day traders suffer negative health consequences from their hyper active market moves.
To find out what your trading instincts mean — to grade your own Traders Psychological Profile — answer the following questions Yes or N:
Traders Psychological Profile
Y N You’ve tried more than one new investment strategy this year
Y N Feel you’re buying and selling funds at the wrong time
Y N Rarely open up to anybody for feedback about your losses
Y N Subscribe to two or more newsletters, feel overwhelmed
Y N Can count on one hand all the good laughs this week
Y N Have a lingering resentment about someone or something
Y N You love cable news, but need more time to trade
Y N Rarely break a sweat when exercising the past few weeks
Y N Wonder whether you bet too much on recent investments
Y N Need more than three caffeine and alcohol drinks a day
Y N Feel “something” keeps you from making more money
Y N Frequently don’t trust your instincts or your strategy
Y N You’ve had a major family or personal loss recently
Y N Believe losses are caused by the market manipulators
Y N You’re overweight and snack often on comfort food
Y N Fear your future trades may fail due to a losing streak
Y N Diet and sleep are disturbed by worries about money
Y N Your retirement portfolio’s not growing fast enough
Y N No vacation in a year, and lack an active social life
Y N Nothing (or everything) interferes with making money
Add up the number of Yes answers. Farrell notes that if your total number of “yes” answers is six or more, then day trading is too stressful and risky for you.
The alternative to active trading is intelligent asset allocation. At the very least, he advises that you segregate your “untouchable” retirement money . . .
This is why America is great… taking advantage of every opportunity as they present themselves…
Traders need good filters
Physics To Help Deal With Market Risks
Misako Takayasu, a Tokyo Institute of Technology associate professor, spoke with The Nikkei about how “big data” will be used in the future to help market players manage risks based on principles of physics.
Excerpts from the interview follow.
Q: How do you use big data in your research?
A: Big data has allowed us to record human behavior and analyze it mathematically. Broader economic or social phenomena can be observed more clearly (in this way), like particles in physics.
As more and more trading data is accumulated, it is becoming increasingly possible to analyze and predict fluctuations using methods common in physics. The exponential growth of computer calculation speeds has also helped the process.
Q: What can you deduct from market data using these tools?
A: Data on ticks — the smallest increment of movement in the price of a security — can be used to gauge investor sentiment and how volatility is triggered. Market swings cannot be explained by a simple random-walk theory.
Markets become more stable when the number of contrarian investors increases. Conversely, they become unstable when more and more investors follow a market trend.
If market-followers dominate a market as it continues to climb, it will crash in the end. We may be able to explain the dynamics of a bubble with big data.
Q: What are the possible applications of big data in the market? (more…)
Index Investing Unmasked: 96% Of Stocks Are Garbage
Warren Buffett released his annual letter over the weekend, in which he praised Jack Bogle as his “hero” for promoting index investing. The irony is that investors would have been better off buying Berkshire shares. Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%. The real question is why Buffett just doesn’t tout his own stock rather than promote index investing. He tries to explain himself:
“Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no fun having owners who are disappointed with their purchases – nor one too low.”
Buffett is doing something every skilled salesman does: managing expectations. Buffett’s own performance is compared against the S&P 500, and what better way to win that game than by putting a floor under the Berkshire price with the promise of share buybacks and then putting a ceiling on the stock by promoting index investing? The real secret is Buffett is talking his book by not talking it: Rather than tell investors to buy Berkshire at any price, he tells people to invest passively through an index, which leads to the very market inefficiencies that he profits from.
The great appeal of index investing is its low fees, but like buying a cheap pair of shoes that falls apart after 6 months, investors will find that index investing is the most expensive thing they ever did. Vanguard promotes its rock bottom expense ratios, but what is not published is market impact costs that are incurred when the fund rebalances. Since these rebalances are often announced ahead of time, they are extremely vulnerable to front running. Christophe Bernard, PhD Senior Scientist at Winton Capital Management, estimates that front running costs index investors 0.20% per year. That’s 4 times the official expense ratio of Vanguard’s S&P 500 ETF.
In his latest research, finance professor Hendrik Bessembinder discovered that 58% of stocks don’t even outperform a Treasury bill. This study was based on 26,000 stocks from 1926 to 2015. Just 4% of stocks accounted for all of the $31.8 trillion in gains during this period. That means 96% of stocks were complete garbage. Even worse, shares of unprofitable companies outperform their profitable counterparts, which is why you have a marketplace that is dominated by Twitters and Teslas.
Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks whose price gains are solely a result of underperforming fund managers grasping for quarterly bonuses and retail investors juicing up their portfolios in a doomed attempt to catch up on their retirement targets.
While mom and pop buy a Vanguard index with their $500,000 and get front run all day by proprietary traders, the capitalist televangelist Warren Buffett will continue to actively trade billions while preaching the miracle of buy and hold investing.
Chart of the Day
Balance Sheet and Bikini
” Balance Sheets are like a bikinis: What they reveal is suggestive, but what they conceal is vital.”
Paul Tudor Jones quotes
“Don’t be a hero. Don’t have an ego.”
“Don’t ever average losers.”
“Decrease your trading volume when you are trading poorly.”
“I’m always thinking about losing money as opposed to making money.”
Difference between successful and unsuccessful Trader
“A trader who has a good chance of success has the following attributes: (1) is properly capitalized; (2) treats trading like a business; (3) has a low tolerance of risk; (4) trades only when the market provides an opportunity; (5) can control emotions; (6) has a trading plan; (7) has a risk management plan; (8.) is incredibly disciplined; (9) is focused; and (10) has backtested his trading methodology.”
“A trader who has a good chance of failure has any of the following attributes: (1) is undercapitalized; (2) lacks discipline; (3) overtrades; (4) does not understand the markets; (5) rushes into trades; (6) chases the market; (7) is afraid of missing a move; (8.) is stubborn and marries a position or idea; (9) misinterprets news; (10) is always looking for home runs; (11) lets losers get too big; (12) takes winners prematurely; (13) takes trading too lightly; (14) takes large risks; and (15) has little control of his emotions.”