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Defining Risk

  
  Education
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Defining Risk“Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The “sure thing” boat never gets far from shore.”
Dale Carnegie (1888 – 1955)

In 1998 Economics Professor and Nobel Prize winner Paul Samuelson (1915 – ) noted that:

“Many people now believe that if they simply hold stocks long enough they will not, lose money for statistics have shown that since 1926 the U.S. equity market has not suffered a loss in any given 15 year.” (more…)

An Interview with a Modern Day Nicolas Darvas

  
Education, Video
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Don’t Miss to Watch 3 VIDEO’s

Who is Dan Zanger?

Dan Zanger is the modern day version of Nicolas Darvas.

His mother Elaine loved the stock market and Dan would often watch the business channel with her. One day in 1978 Dan saw a stock explode across the ticker tape at the bottom of the screen hitting $1. He made his first purchase and sold the stock a few weeks later at over $3. From that sale on, he was hooked on the action of the market tape, usually carrying a quotetrek with him to stay up on stock prices on his  jobs  in Beverly Hills as an independent contractor building swimming pools. (more…)

Weatherall, The Physics of Wall Street-Book Review

  
  Education
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The Physics of WALL STREETJames Owen Weatherall’s The Physics of Wall Street: A Brief History of Predicting the Unpredictable (Houghton Mifflin Harcourt, 2013) is an engrossing book. Even though I was familiar with many of the stories the author recounts, at no point was I tempted to skip a page. Coming from me, that’s high praise indeed.

In the first chapter Weatherall takes the reader on a journey from sixteenth- and seventeenth-century attempts at a systematic theory of probability (Cardano, de Méré, Pascal, and Fermat) through Bachelier’s 1900 dissertation, A Theory of Speculation. Bachelier is credited with having come up with the random walk model/efficient market hypothesis. Like many quants, he was ahead of his time. “In a just world, Bachelier would be to finance what Newton is to physics. But Bachelier’s life was a shambles, in large part because academia couldn’t countenance so original a thinker.” (p. 27)

It wasn’t until Maury Osborne’s 1959 paper entitled “Brownian Motion in the Stock Market,” similar in both topic (predicting stock prices) and solution to Bachelier’s thesis, that people began to understand that physics could make a substantial contribution to finance. By then, as Osborne said, “Physicists essentially could do no wrong.” (p. 28) Scientists were in demand in industry, research facilities, and government. Pre-The Graduate, think nylon and the Manhattan Project.

Osborne found that stock prices don’t follow a normal distribution as Bachelier had suggested; rather, the rate of return on a stock (the “average percentage by which the price changes each instant”) is normally distributed. “Since price and rate of return are related by a logarithm, Osborne’s model implies that prices should be log-normally distributed.”  (more…)

Investment Wisdom

  
  Education
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  • There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.
  • One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
  • Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
  • The only way to be more certain it’s true is to search harder for proof that it is false.
  • Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
  • When rewards are near, the brain hates to wait.
  • The market isn’t always right, but it’s right more often than it is wrong.
  • Often, when we are asked to judge how likely things are, we instead judge how alike they are.
  • Most of what seem to be patterns in stock prices are just random variations.
  • In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.

Top 10 Lessons from the Lehman Collapse

  
  Education
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Sunday is the five year anniversary of the bankruptcy of Lehman.  So what have we learnt?

1 – Bank executives lie…

…they also got paid huge amounts, weren’t as smart as they thought they were and those that ended up at the top tended to be deeply flawed individuals…

On Sept 10 in a conference call with investors, days before Lehman collapsed, Dick Fuld clearly stated to his shareholders that “no new capital was needed” and that “real estate and investments were properly valued”. Yet only five days later, Lehman filed for bankruptcy.

 

At a congressional Committee just a few weeks later, Dick Fuld was defiant. He stood by his “no new capital was needed” statement: “no sir, we did not mislead investors”. And he added that “we (made) disclosures that we believed were accurate”. If no new capital was needed why did Lehman go bust five days later? And if he didn’t know the financial position of Lehman what was he doing as CEO?

As part of the Congressional Committee hearings, Dick Fuld was allowed to make a presentation before he was questioned. These are his exact words as to the cause of Lehman’s demise:

“Naked short sellers targeted financial institutions and spread rumours and false information. The impact of this market manipulation became self-fulfilling as short sellers drove down the stock prices of financial firms. The ratings agencies lowered their ratings because lower stock prices made it harder to raise capital and (it) reduced financial flexibility. The downgrades in turn caused lenders and counter parties to reduce credit lines and then demand more collateral which increased liquidity pressures. At Lehman Bros the crisis in confidence that permeated the markets lead to an extraordinary run on the bank. In the end despite all of our efforts we were overwhelmed.” (more…)

The 3 Laws that Govern Stock Prices

  
  Education
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Contrary to popular belief by the majority of the general population and even investors and traders stocks are not tied to their fundamental values or even the companies that sold the shares to raise capital. Stock prices are tied to simply what the current buyer and seller in the market is willing to exchange ownership for. That is what determines price, nothing else. So the big question is what are the rules that govern the change in a stocks price?

The laws of economics governs price movement in the market. There are three laws articulated by legendary trader and market pioneer Richard Wyckoff that captures what causes current price reality and what changes it.

The Law of Supply and Demand

The excess of demand (buyers) over supply (sellers) causes a stock’s price to go up. The excess of supply over demand causes a stock’s price to go down.

The price is determined by the law of supply and demand.

The price moves up and down to balance the supply and demand to the equilibrium.

“The stock is only worth the other people are willing to pay for it”— (more…)

Seven surprising things you may not know about Warren Buffett

  
  Education
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Here are seven interesting things I learned about Warren Buffett from The Snowball, and some ideas on how they can help your investing:

1. Buffett set goals young. (He really started, really young)

Buffet began obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.

  • His dad was a stockbroker. This gave him an early view of the markets
  • At ten he was chalking stock prices at a local broker’s office
  • The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
  • His favourite childhood book was One Thousand Ways to Make $1,000
  • At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
  • He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)

The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.

2. Buffett bought his first stock when he was 12-years old

Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.

Buffet was already learning how to hold shares through a slump

He paid $114.75 dollars for three shares, and watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back. After he sold, the stock rose to $202 a share.

Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.

I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning real-world lessons on holding shares through a slump and selling too soon.

You’ll only discover whether you have the stomach to invest through a bear market or whether you’ll be sucked up by the next property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.

3. Buffet lied, shoplifted, and played truant as a kid

This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:

“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.

“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.

It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.

Buffett’s history also makes me proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.

Discovering Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.

4. Buffett is a businessman first, investor second (more…)

25 Must-Read Quotes From Buffett's Letter to Shareholders

  
  Education
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Warren Buffett released his annual letter (PDF file, Adobe Acrobat required) to Berkshire Hathaway (NYSE: BRK-B  ) on Saturday. If you have the time, it’s worth reading the whole thing. If not, here are 25 important quotes.

On value: “The logic is simple: If you are going to be a netbuyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”

On market moves: “Here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.”

On foreclosures: “A largely unnoted fact: Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.”

On share buybacks: “The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.”

On predicting turnarounds: “Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong.” (more…)

Word of Wisdom from :Technical Analysis of Stock Trends by Robert Edwards and John Magee.

  
  Education
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No stock trader should be without Technical Analysis of Stock Trends by Robert Edwards and John Magee.  Originally penned in 1948 and revised numerous times over the years, it is a classic.  What Edwards and Magee wrote 60+ years ago is today still the same as it ever was.

In a chapter entitled “Stick To Your Guns” we find the following words of wisdom for those traders who seek the oftentimes elusive peace of mind of the disciplined few.

It has often been pointed out that any of several different plans of operation, if followed consistently over a number of years, would have produced consistently a net gain on market operations.   The fact is, however, that many traders, having not set up a basic strategy and having no sound philosophy of what the market is doing and why, are at the mercy of every panic, boom, rumor, tip, in fact, of every wind that blows.  And since the market, by its very nature, is a meeting place of conflicting and competing forces, they are constantly torn by worry, uncertainty, and doubt.  As a result, they often drop their good holdings for a loss on a sudden dip or shakeout; they can be scared out of their short commitments by a wave of optimistic news; they spend their days picking up gossip, passing on rumors, trying to confirm their beliefs or alleviate their fears; and they spend their nights weighing and balancing, checking and questioning, in a welter of bright hopes and dark fears.

Furthermore, a trader of this type is in continual danger of getting caught in a situation that may be truly ruinous.  Since he has no fixed guides or danger points to tell him when a commitment has gone bad and it is time to get out with a small loss, he is prone to let stocks run entirely past the red light, hoping that the adverse move will soon be over, and there will be a ‘chance to get out even,’ a chance that often never comes.  And, even should stocks be moving in the right direction and showing him a profit, he is not in a much happier position, since he has no guide as to the point at which to take profits.  The result is he is likely to get out too soon and lose most of his possible gain, or overstay the market and lose part of the expected profits. (more…)

DAY TRADING LESSONS

  
  Education
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daytradinglessons-update

  • Trading is a continuous learning process

  • Don’t trade without a plan. Be as prepared as possible. Don’t try to be right
  • Emotion is a much bigger influence in stock prices than any other factor
  • The market reacts more to sentiment than facts. Herd mentality rules
  • Sell into strength and buy into weakness
  • Market always rewards minority, not the crowd. The trick to figure out if the mass perception is wrong and WHEN it will be proved to be wrong.
  • Technical setups and money management are more important than fundamental catalysts when trading
  • Always ask: What beliefs are you acting upon? What is the basis for those beliefs? Why do you have those beliefs now? Would those beliefs be different if your recent gain/loss record had been reversed? Can you clearly enumerate what could happen that would cause you to change your mind?”
  • Extreme emotions cause extreme pain. I’ve learned how not to get overly bullish or bearish
  • Be mindful of higher trading volume on down days prior to a future catalyst as bad news can and often does leaks out
  • Take responsibility for your own trading
  • Cut your losses, let your winners run, and this is more easily said than done
  • If you can’t focus, you can’t trade. Be in the zone or stay sidelined
  • Buy below value and well below value if possible
  • Being flexible can be fruitful
  • Let the market come to me and don’t force trades
  • It is never “different” this time
  • Just more……….very soon ,Till then just read these and learn something new.
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