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Ferri, The Power of Passive Investing

  
  Education
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He cites several studies and some of his own tests that demonstrate the futility of seeking alpha. Among the findings, a single actively managed fund has a 42% chance of beating a comparable index fund over the course of a single year, a success rate that drops to 12% over 25 years. The statistics get much worse as you add more active funds. If you own ten funds, you have a 27% chance of beating an all index fund portfolio over one year and a mere 1% chance over 25 years.

Ferri’s own work analyzed the returns of actively managed funds within a generic asset class over five years. He found that a portfolio of five randomly selected active funds had only a 16% chance of beating an index fund, that only 5% of them won by 0.5% or more, and that 63% of them lost by 0.5% or more. When the portfolio was expanded to ten active funds, the numbers were much worse. Only 8% were winning portfolios, 1% of them won by 0.5% or more, and 70% lost by 0.5% or more. Ferri then massaged his model to see whether the numbers could be significantly improved; they couldn’t. As he summarized the results, “Active fund investors have strong headwinds against them. The probability of selecting a winning fund is low; the average payout for those winning funds does not compensate them enough for the shortfall from being wrong; the addition of several active funds in a portfolio reduces the probability of success; and the longer that portfolio is held, the odds drop even more. That’s a lot of headwind!” (p. 92) (more…)

Trading Strategy for Nifty Future -12th April ‘10

  
Analysis, Education
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Always protect your confidence. Find an investing/trading philosophy that you are comfortable with and one that fits your personality. Once you have discovered this, work hard, study it, and try to perfect it. My best advice to gain more trading confidence is to make decisions, evaluate if your ideas are working, and constantly make adjustments until you can replicate a successful and disciplined trading methodology.

Laxman Rekha at 5566.

As I had already mentioned 3 Consecutive close above 5309 level will take to 5566 level.

-Zig Zag will continue ,but it will try to kiss 5566 very soon.

Always remembers trading will give u money ,Not levels.

Today ,Just have a eye on 5378 level.Decisive crossover above this level will take to 5405-5431.

-So think to buy above 5478 level.

Suppose not crosses High of Friday ( 5388 ) and breaks 5358 with volumes then ?

-Watch panic upto 5340-5334 ,5310 level.

-5290 & 5277 are crucial support levels.

-Not Today ,Any day /time it breaks these two levels then watch allround panic in mkt.

I will update more to our Subscribers

Updated at 8:22/12th April/Baroda/India

Trading Wisdom

  
  Education
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Often I think we overcomplicate trading.  All this talk of risk management, money management, entries, exits etc ad nauseum can leave us not being able to see the wood for the trees.

It’s obvious that you need to cut your losses.  If you let them run or get out of control your aren’t going to be in the business for long. 

But there is another very good and often forgotten reason why you should not let your losses run that William O’Neill highlights:

O’Neill “letting your losses run is the most serious mistake made by almost all investors” simply because “if you don’t sell to cut your losses when you get into trouble, you can easily lose the confidence you’ll need to make buy and sell decisions in the future.”

But if you learn to do this then you stand some chance of doing this:

“Take your losses quickly and your profits slowly” because “your objective is not just to be right but to make big money when you are right.”

The first quote is another great one to heed.  If we do and combine it with the second well…… we might just be able to make the big money once in a while.

Steven Seagal teaches trading

  
  Education
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I have just watched Steven Seagal in ‘Out For a Kill’. Don’t ask me why; please just accept that some actions cannot be explained. The movie reviews say it is a terrible film with poor direction, a bad script and even worse acting, and the reviews are right on all counts. However, Mr Seagal does impart some sage trading wisdom when when he quotes an ancient Chinese proverb on the subject of revenge:

‘Before you set out on revenge, you first dig two graves’.

Quantitative Strategies for Achieving Alpha by Richard Tortoriello -Book Review

  
  Education
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In this book Richard Tortoriello sets out find empirical drivers for stock market returns. This is a new book published last month. The author tests 1200 strategies on stock above 500 million valuation to determine the major fundamental and market based drivers for future stock market returns.After such analysis he presents strategies that consistently outperform the market.

The author tests 7 basic categories of stocks factors:
  1. Profitability
  2. Valuation
  3. Cash flow
  4. Growth
  5. Capital allocation
  6. Price momentum
  7. Red Flags ( risk factors)
 
Detailed quantitative tests  for each of the factors are presented in the book. As the author works for S&P, he has access to the best database on stocks and he presents his findings for multiple factors within each of the above seven categories. The testing shows that the top single factor strategy for achieving excess return is price momentum calculated using 28/16 relative strength. The best strategy using two combined factor for excess return is price momentum plus nearness 52 week high. 
 
This book unlike other quant books is easy to understand and well presented. The biggest advantage of this book is it will give you building blocks to build your trading strategy around things that empirically work in the market. Knowing what works and why it works can help you build better trading models.
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