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Great Reply from Warren Buffett

  
Analysis, Education
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This week is the annual shareholder meeting for Berkshire Hathaway, the gigantic conglomerate run by billionaire Warren Buffett.

 Buffett has a way of explaining complicated finance topics so that they’re fun and understandable.

Carleton English of Belus Capital Advisors points us to this gem of a quote from 2008 where he takes a jab at private equity.

Someone had asked the Oracle of Omaha why people sell their companies to him instead of private equity firms.  This is the type of question that you might hear later this week.  Here’s Buffett’s response:

“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.” (more…)

Gorman & Kennedy, Visual Guide to Elliott Wave Trading-Book Review

  
  Education
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First, what Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy (Bloomberg/Wiley, 2013) is not. It is not an Elliott wave primer. The authors direct the reader who knows nothing about wave patterns to the classic presentation by Frost and Prechter, available free online.

Instead, this visual guide shows how to actually use Elliott waves in trading, both as a stand-alone tool and, more perfunctorily, in combination with technical indicators. It also includes two chapters on incorporating Elliott waves into options trading strategies

Many of the Elliott waves the author illustrate (and naturally the illustrations are abundant) are of the “real world” vs. the “textbook” variety. That is, they are tricky to decipher even in hindsight. This difficulty has led many critics to claim that Elliott wave theory is useless in real time. In fact, the authors admit that “under the Elliott wave model, there is usually more than one valid wave count at any particular time” and that “sometimes these wave counts point in opposite directions.” (p. 195) (more…)

Improve your Trading Skill

  
  Education
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Would you believe that a 14th century priest, and his concepts, can help make you a better trader?  Well, English logician and Franciscan friar William of Ockham really can make you a better trader.

Ockham developed the concept commonly referred to as Occam’s Razor.  Simply put, this principle favors the simple over the complex, when there is a choice to be made, or a path to be followed.

How can this apply to trading? A few different ways.

First, if you are a system trader, perhaps your approach has too many rules, too many parameters, or too much optimizing.  While every parameter you add might make your system better historically, the more parameters you have, the less prone the system is to work going forward.  Simpler concepts and simple rules tend to be based on fundamental market principles – ones that aren’t as likely to change.

Second, if you are a discretionary trader, you might trade off of news reports from CNBC, Bloomberg and multiple other sources.  Multiple news sources might give you more data, but does it really give you more knowledge?  You might find that with multiple, conflicting pieces of information, you actually can’t trade at all – rather, you are a victim of “analysis paralysis.”

Third, maybe your trading office looks like the control room for the Space Shuttle. If you try to trade off all of the information shown on all the screens, you might just find yourself overwhelmed.  It is better to stick to a few monitors of information, and know that information very well.  The best traders don’t need a dozen monitors to trade well – usually 1 or 2 monitors is plenty.

Many new traders tend to think that that more complicated they make trading, the easier it will be to “solve” the markets.  Instead, they should be listening to William of Ockham, and making things simpler.  Simple, done correctly, can lead to more profits, and stand the test of time better than complicated approaches.

Rogoff Sees Sovereign Defaults

  
Economy, Education
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rogoff01

Feb. 24 (Bloomberg) — Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.

Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

Click here to read more

Gorman & Kennedy, Visual Guide to Elliott Wave Trading-Book Review

  
  Education
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First, what Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy (Bloomberg/Wiley, 2013) is not. It is not an Elliott wave primer. The authors direct the reader who knows nothing about wave patterns to the classic presentation by Frost and Prechter, available free online.

Instead, this visual guide shows how to actually use Elliott waves in trading, both as a stand-alone tool and, more perfunctorily, in combination with technical indicators. It also includes two chapters on incorporating Elliott waves into options trading strategies

Many of the Elliott waves the author illustrate (and naturally the illustrations are abundant) are of the “real world” vs. the “textbook” variety. That is, they are tricky to decipher even in hindsight. This difficulty has led many critics to claim that Elliott wave theory is useless in real time. In fact, the authors admit that “under the Elliott wave model, there is usually more than one valid wave count at any particular time” and that “sometimes these wave counts point in opposite directions.” (p. 195)

For the trader in doubt (who is not pursuing an option strategy that can profit under more than one scenario), Gorman and Kennedy provide visual cues—usually familiar patterns such as channels and wedges, sometimes Fibonacci levels—that help the trader make sense of the waves. The chapter titles in Part II (“Trading Examples”) point to some of these cues: “How Zigzags and Flats Set Up a Trade for the Next Impulse Wave,” “How a Triangle Positions You for the Next Move,” “Riding Wave C in a Zigzag,” and “Using Ending Diagonals to Trade Swift and Sharp Reversals.” (more…)

Citigroup ceo wants to thank you for the $45 billion bailout

  
Analysis, Economy, Education
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March 4 (Bloomberg) — Citigroup Inc. Chief Executive Officer Vikram Pandit plans to tell U.S. taxpayers he’s grateful for the $45 billion bailout that helped stave off a deposit run at the bank in 2008, a person close to the company said.

Pandit, scheduled to appear in Washington today before a panel overseeing the bank-bailout program, will acknowledge that the infusion stabilized Citigroup, said the person, who requested anonymity because the planned testimony isn’t public. Pandit will thank the government for providing the money, the person said

Can A Trader be a do-gooder?

  
  Education
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It occurs to me that the only way in which a trader can become more than a completely selfish, self-enriching, narcissistic person is to trade well enough so that you can manage other people’s money and thus saving these investors from crooks and charlatans (provided you are convinced you are not a crook and charlatan yourself).

Other traders have advanced other arguments in favor of trading. But I am not convinced by them.

They say that we provide liquidity to other long-term investors who may need to liquidate their investments. But then, this applies only to mean-reversal strategies. Momentum strategies take away liquidity from the market, and in some cases exacerbating price bubbles. Certainly not something your grandma would approve.

Others argue that momentum strategies help disseminate information about companies through quick price movements. But can’t we just watch Blue Channels? Do we really need some devious insiders to convey that information to the rest of us through price movements?

No, I think that independent trading should serve only one purpose (besides short-term self-sustenance): as training and preparation to become a fund manager. Once you graduated from independent trading, you then enter into the grand contest among all fund managers to see who can best serve and protect investors’ assets, (and be rewarded according to your standing in this contest.)

I know, this is the idealistic way to look at things. Serving and protecting seem to be what policemen should be doing, not traders. But as in quantitative trading, I think it helps one becomes more successful in one’s activities by having a simple guiding principle or model. And it doesn’t hurt that in this case, the principle would also be conscience-nourishing!

Marc Faber's 2010 Investment Outlook: Bullish Sentiment Too High For His Liking

  
Analysis, Education
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Always the contrarian, Marc Faber’s investing advice for 2010 is this — listen to the experts, and then do the opposite. Faber, the editor of The Gloom Boom & Doom Report, wrote in his most recent January newsletter that he was bullish on U.S. stocks.

Nothing lasts forever, though.

He’s changed his mind after participating in this week’s Barron’s round-table discussion. “Everybody was looking for further gains in stocks,” he tells Henry in this clip. That opinion is also reflected by Bloomberg’s latest investor survey, which registered its highest level of bullish sentiment since the survey began in 2007.

That overwhelming consensus worries Faber. He now thinks a correction in U.S. stocks could come much sooner than most predict. Momentum players who are driving the market could “pull the trigger relatively quickly,” he says. He also observes that the charts of stocks favored by momentum investors, like Google, RIM, Apple and Amazon, look to be flattening out.

Overall, 2010 will not be one for the record books, as 2009 was. He’s looking at a more normal 5%-10% rate of return for global investors.

Mr.Warren Buffett :Buy and Hold -Failed

  
Analysis, Economy, Education
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From the wires today:

“OMAHA, Neb. (AP) — Warren Buffett’s company reported a 40 percent drop in second-quarter profit Friday because the improvement at Berkshire Hathaway Inc.’s operating companies couldn’t overcome $1.4 billion in paper losses on derivative contracts. Berkshire’s strong performances from its railroad, insurance and manufacturing businesses was overshadowed by the plummeting value of the Omaha company’s derivatives — many of which are tied to the value of four major stock markets.”

From Buffett himself in 2002:

“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

From Bloomberg recently:

“Buffett’s well known for his criticism of derivatives. Yet Berkshire in recent years has become a big player, with some $60 billion in derivatives contracts. Under any new derivatives regulation, Berkshire would be likely to have to produce collateral for new derivatives contracts it writes. This would limit the attractiveness of new derivatives deals for Buffett, who has boasted that Berkshire rarely does a deal that calls for it to produce collateral. But that’s not why Buffett has been pushing back against the financial reform bill in the Senate. Instead, Buffett says he’s concerned that the legislation would impose collateral requirements on existing contracts — which he says would be illegal. Sen. Ben Nelson, D-Neb., made the same case this week as he defected from the Democrats backing the financial reform bill. Whatever his logic, pushing back on derivatives reform has the interesting side effect of aligning Buffett, with his sterling reputation, with the widely derided Wall Street banks.”

Buy and hold? Buying strong businesses? Derivatives are weapons of mass destruction? Bailouts of many of the components of BRKA? Does anyone have the cajones to criticize Buffett? There has to be at least one emasculated weenie out there who will come on here and tell me that I can’t criticize America’s wealthiest just because he is rich. Right?

The Buffett myth is just that — a myth. If not for the fall 2008 bailouts, he would be on the senior circuit revising history along with Greenspan. Why my stark view on this lovely sunny morning in beautiful Southern California? Cause no matter how many books populate Amazon, all preaching about how you can become the next Buffett, they are all disingenuous fairy tales.

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