Archives of “fundamental analysis” tag

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A Look at 9 Quotes from George Soros

  
Education, Life
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1. Perceptions affect prices and prices affect perceptions

I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.
For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.
As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.

2. On Reflexivity

Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.

Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way. (more…)

Some Market Humor

  
Education, Humour, Life
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Analyst recommendations: –
Strong Buy – Buy
Buy – Hold
Hold – Sell
Sell – It’s too late.

Back–testing: – the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.

Charting: – “join-the-dots” for adults.

Computerized system testing: – torturing the data until it confesses. See: back-testing

Cycle analysis: – a method of analysis that allows losing trades to be organised into regular patterns.

Derivatives: – securities that are identified by acronyms – CHIPS, COBRAS, LEAPS, PERQS, STEERS, TRIPS, ZEPOS – all of these things are derivatives. Unfortunately, little else is known about them.

Daytrading: – an activity that takes place in between meaningful periods of employment.

Eurodollars: – U.S. Dollars, of course.

False Break: – an actual break of a trendline that triggers a losing trade. False breaks confirm the usefulness of trendline analysis. Only those breaks that are false cause problems, and those breaks don’t count, because they are false.

Float (initial public offering): – stock that is offered to you because other people have turned it down. The guiding principle in relation to floats is as follows: “never participate in a float that you are able to participate in.”

Fundamental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.

“Fundamentally sound”: – the condition in which an economy finds itself immediately after a stock market collapse.

In-house analyst: – an employee of a broking house who dresses mutton up as lamb and advertises it on special.

Institutional investor: – someone who dumps a stock big-time, a day or two after you’ve bought it, for no apparent reason.

Live feed: – a technology that enables the instant incorporation of bad ticks into a charting program.

Market report: – a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.

Money-management: – the art of hiding trading losses from a spouse.

Over-bought: – a market is considered to be in an over-bought condition when everyone else appears to have bought it, but you haven’t.

Position trade: – a short-term trade that is in deficit, and will be closed out as soon as it breaks even, however long that takes.

Price/Earnings Ratio: – a ratio that indicates whether the price of a stock is attractive in relation to last year’s earnings. A low number indicates a bargain. However a low number can also indicate a lemon. If a company starts going down the tube, its stock price will appear very attractive in relation to last year’s earnings. The P/E Ratio is a versatile indicator.

Seasonal analysis: – the assumption that other people who trade Heating Oil Futures know nothing about winter.

Stochastics: – a technical indicator so-named because the name sounds technical.

Stop-loss: – the trader’s equivalent of a condom. It’s something you know you should have used after it’s too late.

Support: – a line drawn on a chart, the breaking of which is deemed extremely significant, even if the only people trading the stock at the time are two of three ladies at the tennis club.

Support/Resistance: – supposed allies that flee at the first sign of trouble.

Tankan Index: – a closely watched figure, that measures the extent to which the Japanese economy is tanking.

Technical analysis: – subjective analysis of the markets dressed up in a lab coat.

Technical indicator: – a transformation of a price series that contains less information than the series itself. Different technical indicators throw away information in different ways.

They: – the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, “they ran the market to my stop and then turned it around.”

Trading floor: – the traditional venue for the negotiation of securities, now made redundant by screen trading. Trading floors that remain open serve a valuable purpose as colorful backdrops to market reports on television.

Trading genius: – a reckless spirit in a bull market.

Trendline analysis: – a form of analysis that works best on a computer screen, where lines can be erased and re-drawn without trace.

Zero-sum game: – a game in which the players slug it out and the broker wins.

Traders Can Control Only 2 Things

  
  Education
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If you understand that you can only control two things in the stock market, the rest is easy. This understanding simplifies decision-making processes and lightens worry…

Your Cash

You can control the cash you have, whether it’s on-hand or in investments.

Entry & Exit Points or Your Stops

You can control where you get in a stock or where you get out of a stock. You can control where you get in a certain stock at a certain price or where you get out of a stock if it’s falling below.

As a stock is climbing higher and higher, it’s a profit point. It’s a point where you get out.

These are the only two things you can control: your cash and your stops. It makes things easy, doesn’t it?

We can’t control the wave of the market as individual investors. We are not the operators; the operators can control much more. We don’t have billons of dollars to put into one stop to make it move.

Of course you can control where your position is on spreads, but where are you getting in and where are you getting out? Your cash and your stops are in your control.

If you focus and remember the two things you can control, the worry will subside…

Art Huprich’s Market Truisms and Axioms

  
  Education
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Raymond James’ P. Arthur Huprich published a terrific list of rules at year’s end. Other than commandment #1, they are in no particular order:

• Commandment #1: “Thou Shall Not Trade Against the Trend.”

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

• Sell when you can, not when you have to.

• Bulls make money, bears make money, and “pigs” get slaughtered.

• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

• Understanding mass psychology is just as important as understanding fundamentals and economics.

• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

• Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

• When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

• As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

• Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

• Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

• Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

• Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

• Wishful thinking can be detrimental to your financial wealth.

• Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

• Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

• Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

• Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

The table below depicts the percentage gain necessary to get back even, after a certain percentage loss. (more…)

The best investors (and traders) are modest

  
  Education
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Let’s face it you suck at investing. Your advisor sucks at investing too.  You have all seen where monkeys picking stocks or throwing darts at a list can do better than many if not all advisors.

But Quartz is out with their annual analysis of just how bad you suck at this game.  If you had picked the best stock to buy every day you could have turned $1000 into $179 billion by mid December. That is a 17.9 billion percent return.

Did you even get a 1 billion percent return? How about 1 million percent? 1000%? 100%? If you did not hit a 100% return then you did not get even 4/10 millionths of what was out there. Translation: You suck at stock picking. People like Jack Bogle will use this type of data to tell you that you are wasting your time even trying and that you should just index your portfolio.

Coincidentally he runs a few dollars in an index fund. I find it more interesting when some manager makes a killing and convinces themselves that they are geniuses. No one in this game is a genius. 100% return sucks remember? (more…)

Have a plan for every trade and ask yourself

  
  Education
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  • What is my criteria for entering this position? – Ideally this has been tested or proven over time.
  • How much I’m I willing to risk in order to be right? – This will help you determine the appropriate position size, and let you be comfortable if you need to take a loss. 
  • When will I take profits? – Yes you can let your profits run, but there’s nothing worse that letting a nice winning position turn around into a loser. Fixed exits can be very effective and depending on the strategy, and it might be more effective to take profits at times.
  • How will I determine when the conditions for entering a trade have changed? – Regardless of whether you use technical or fundamental analysis, it’s important to know when your reasons for entering a trade are no longer valid.
  • What is my time horizon? – How long do you expect a trade to last? This can give you a basis for closing a position if the move that you expected doesn’t occur. This will also help ensure that trading capital isn’t tied up when it can be used on better opportunities.

10 Market Insights from Mark Douglas

  
  Education
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They say that you cannot teach a man anything. You can only help him to find it within himself. “Trading In the Zone” by Mark Douglass is one of those rare books, which has played the role of an eye opener for many seasoned traders. It is a favorite read – not because it shares some hidden algorithms or tells a riveting story, not because it reveals some secret market formula or it analyzes the irrational exuberance of the crowd; but because it deals with the only hurdle that stays between a trader and his profit – his psychology.

Here are 10 of my favorite quotes from the book:

1. The four trading fears

95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears

2. The proverbial empathy gap

You may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn’t automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can’t assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it.

3. The market doesn’t generate happy or painful information

From the markets perspective, it’s all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.

4. The flaws of fundamental analysis

Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct. (more…)

The Crowd Speaks Technical Analysis

  
  Education
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Nice write-upcrowd on the benefits of adding some technical analysis to a rational, fundamental worldview by Anthony Bolton, the recently retired manager of the top-performing Fidelity Special Situations fund. A few excerpts (emphasis mine):

 My contention is that if you are trying to predict the mass action of thousands of investors, most of whom are investing on a rational or logical basis, you won’t be able to do this by taking the same logical approach as everyone else. (more…)

Atkeson & Houghton, Win By Not Losing-Book Review

  
  Education
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 Nicholas Atkeson and Andrew Houghton, founding partners of Delta Investment Management, have written what, in the words of the lengthy subtitle, is a disciplined approach to building and protecting your wealth in the stock market by managing your risk. Win By Not Losing (McGraw-Hill, 2013) is a mix of stories about some not-so-famous investors (in fact, a few are identified simply by their first names) and an introduction to tactical investing.

The authors contend that “stock prices are influenced by oddities in human behavior that often cause security pricing to be predictable.” (p. 120) They support their contention by sharing some of their observations from the trading floor of an investment bank. Earnings momentum, for instance, can be both predictable and profitable: “the cycle of exceeding analysts’ estimates is often predictable in light of the pressures on analysts to be overly conservative.” (p. 121) And one study found that “over the 60 trading days after an earnings announcement, a long position in stocks with unexpected earnings in the highest decile, combined with a short position in stocks in the lowest decile, yields an annualized ‘abnormal’ return of about 25 percent before transaction costs.” (p. 122) (more…)

10 Market Insights from Mark Douglas

  
  Education
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1. The four trading fears

95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears

2. The proverbial empathy gap

You may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn’t automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can’t assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it.

3. The market doesn’t generate happy or painful information

From the markets perspective, it’s all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.

4. The flaws of fundamental analysis

Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.

5. A good trader is a confident trader (more…)

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