Investment Strategies 01 (Nov 08 - May 10)

[winston]

Why the Best Investing Approach Is Not Always the Best Trading Technique by Alexander Green

At the Investment U Conference in San Diego last week, I gave a talk called, "The Secret of the World's Greatest Investors."

What is that secret? I'll give you three hints:

~ Lord Rothschild said, "The time to buy is when there's blood running in the streets." He added that the way he got rich was he "always sold too soon."

~ John Templeton, the man who almost single-handedly pioneered the field of global investing, said the best bargains can only be found "at the point of maximum pessimism."

~ Warren Buffett, the world's most successful investor, says, "You want to be very fearful when others are greedy and very greedy when others are fearful."

In other words, the great investors have a contrarian spirit. They draw their own conclusions, not caring about the consensus.


The Difference Between An Investor and a Trader

For example, many investors scoffed at Warren Buffett ten years ago when he warned of dangerously overvalued tech stocks. They said he didn't understand the technology revolution, the so-called New Era. They laughed that he was missing the boat.

Buffett just smiled, noting in Berkshire Hathaway's annual report that, "We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement."

Oh, and by the way, that ship he missed... it turned out to be The Titanic.

Contrarians know that fear and greed cause people to push prices too high or too low. So the key is to look at market fluctuations as your friend rather than your enemy. You want to profit from folly, not participate in it.

But there's something else important to note here...

True investors think long-term. They often hold their stocks for years. Indeed, Buffett says his favorite holding period is "forever."

When you have this long-term perspective, you can sit comfortably when things are going against you.

But a trader is in the game for short-term profits. He doesn't want to wait years for profits. He wants to generate them quickly.

For this reason, he should not use a contrarian approach. Here's why ...

If You Want Short-Term Trading Success, Remember This...

Some analysts make a big deal of investing against "the consensus." But the average investor - who is following the major market trend - is actually right most of the time. It is only when the stock market goes to extreme highs or lows that the consensus opinion is wrong.

So if you want to be a good short-term trader, buy the best companies that are moving up (always using a trailing stop, of course), or short troubled companies that are breaking down (always using a buy stop, of course).

I know some analysts, for example, who have been resolutely bearish on the market not just for years, but for decades. They relish the fact that they're outsiders and that they get to call equity investors "chumps, patsies and fools."

They relish this point of view even when they have egg on their faces. That's because they're really more interested in being contrarian than in being right.

That's not the way to make money.

A smart trader invests with the trend, always strictly limiting his risk with trailing stops. A smart investor goes with the trend sometimes and against it only when the market is experiencing extremes in both valuation and sentiment.

As Warren Buffett famously said, "You're right not because you agree with the crowd or disagree with the crowd, but because your facts and reasoning are right."


Source: Investment U

[winston]

Financial Chaos: Why You Need to Own Stocks By Tom Dyson

Here's a prediction...

Cost of living soars. There's surplus capacity in almost every industry and major corrections are likely. Currencies and bonds lose their purchasing power as governments inflate money supplies. People are hopelessly in debt... 10 times the normal levels. Millions go bankrupt... as do the businesses that extend credit without collateral.

Pretty dire, huh?

Sir John Templeton made these predictions on June 15, 2005. Templeton was one of the top investment legends of the 20th Century, equal in stature to men like J.P. Morgan and Cornelius Vanderbilt from the 19th Century. He built a billion-dollar fortune playing the stock market and selling mutual-fund investments to the public.

He put these predictions in a memo he wrote from his home in the Bahamas. In short, Templeton believed the peak of prosperity was behind us, dangers were more numerous and larger than at any time in the last 90 years, and countries around the world would experience financial chaos for many years.

The memo was lost and never published. Templeton died in 2008. The note resurfaced a few days ago...

You can read a full version of the lost memo, with some introductory notes by the first journalist to find it, here.

In hindsight, Templeton was right on target in his assessment of the world. The question is, how much more "financial chaos" is there still to come?

My DailyWealth coeditor Steve Sjuggerud thinks we've seen the worst already and the recession is behind us.
Templeton says it'll last "many years." My personal observations lead me to agree with Templeton. The main reason is, thanks to the government's huge bailout, none of the excesses Templeton was so worried about have been resolved.

Take the homebuilding industry, for instance. Of all the industries that had overcapacity, the homebuilding industry was one of the worst. It built over 1.5 million new houses per year between 1998 and 2006. In 2005, it built over 2 million new houses. New home sales are currently running around 300,000 a year. In other words, there's almost seven times more capacity than the industry needs.

Yet, so far, not a single major homebuilder has gone bankrupt. The government recently bailed them all out with a massive raft of tax breaks and subsidies. And thanks to the huge stock market rally, they've been able to recapitalize themselves by selling more shares to the public. (You can read more about this in my colleague Frank Curzio's recent Growth Stock Wire essay here.)

Templeton's memo predicted this kind of absurd government support, too. "Voters are likely to enact rescue subsidies," he wrote, "which transfer the debts to governments."

So where does Templeton suggest you put your money to protect it from this financial chaos... Gold? Cash? Bonds?

Nope. Templeton likes stocks. Particularly, he likes businesses with perpetually wide profit margins and operations all around the world:

"Not yet have I found any better method to prosper during the future financial chaos which is likely to last many years," he says, "than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits.

Earning power is likely to continue to be valuable, especially if diversified among many nations." In other words, if you're worried about continuing financial chaos, you should buy stock in Johnson & Johnson, Coca-Cola, Procter & Gamble, Intel, Altria, Philip Morris International, ExxonMobil, and Pepsi...

The beauty of this approach is, if Templeton is wrong and Steve is right, and the worst of our economic troubles are behind us, these stocks will still perform well. You win either way.


Source: Daily Wealth

[winston]

JP MORGAN: STAY BULLISH AND DON’T WORRY ABOUT INFLATION OR DEFLATION

JP Morgan is one of the few banks that has done a superb job in connecting the dots of the Fed’s liquidity induced operations leading to reflation and then ultimately leading to recovery.

In their latest strategy notes they remain very bullish (as they were well before the rally began) and fear neither inflation nor deflation:

How to play it? Remain in the risk trade as inflation remains low. Equities should continue to perform well on the back of stronger than expected profits. Inflows are also starting to support higher asset prices.

* Fixed Income –– Stay short duration in the UK, but long in local EM debt.

* Equities –– Solid economic activity data, rising earnings forecasts and stronger inflows into funds point to a continuation of the rally.

* Credit –– Overweight high-spread versus low-spread sectors.

* FX –– CAD and CHF are our favourite longs.

* Commodities –– Strong manufacturing growth and restocking should support base metal prices in H1.

http://pragcap.com/jp-morgan-stay-bulli ... -deflation

[winston]

7 RULES ON IDENTIFYING INVESTMENT OPPORTUNITIES

Investors need to have rules. Without structure and order you are destined to fail. I always say you should invest or trade like a robot – without emotion and always adherent to your rules. I’ve attached some excellent rules on identifying investment opportunities by the always insightful Howard Marks at Oaktree Capital Management. For more details from myself on investing rules please see here and here:


* No group or sector in the investment world enjoys as its birthright the promise of consistent high returns.

There is no asset class that will do well simply because of what it is. An example of this is real estate. People said, “You should buy real estate because it’s a hedge against inflation,” and “You should buy real estate because they’re not making any more.” But done at the wrong time, real estate investing didn’t work.


* What matters most is not what you invest in, but when and at what price.

There is no such thing as a good or bad investment idea per se. For example, the selection of good companies is certainly not enough to assure good results — see Xerox, Avon, Merck and the rest of the “nifty fifty” in 1974.

Any investment can be good or bad depending on when it’s made and what price is paid. It’s been said that “any bond can be triple-A at a price. “There is no security that is so good that it can’t be overpriced, or so bad that it can’t be underpriced.


* The discipline which is most important in investing is not accounting or economics, but psychology.

The key is who likes the investment now and who doesn’t. Future prices changes will be determined by whether it comes to be liked by more people or fewer people in the future.Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.

The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up. Watch which asset classes they’re holding conferences for and how many people are attending. Sold-out conferences are a danger sign. You want to participate in auctions where there are only one or two buyers, not hundreds or thousands.You want to buy things either before they’ve been discovered or after there’s been a shake-out.


* The bottom line is that it is best to act as a contrarian.

An investment that “everyone” knows to be undervalued is an oxymoron. If everyone knows it’s undervalued, why haven’t they bought it and driven up its price? And if they have bought, how can the price still be low?

Yogi Berra said, “nobody goes to that restaurant; it’s too popular.” The equally oxy-moronic investment version is “Everybody likes that security because it’s so cheap.”


* Book the bet that no one else will.

If everyone likes the favorite in a football game and wants to bet on it, the point spread will grow so wide that the team — as good as it is — is unlikely to be able to cover the spread. Take the other side of the bet — on the underdog. Likewise, if everyone is too scared of junk bonds to buy them, it will become possible for you to buy them at a yield spread which not only overcompensates for the actual credit risk, but sets the stage for their being the best performing fixed income sector in the world.

That was the case in late 1990. The bottom line is that one must try to be on the other side of the question from everyone else. If everyone likes it, sell; if no one likes it, buy.


* As Warren Buffet said, “the less care with which others conduct their affairs, the more care with which you should conduct yours.” When others are afraid, you needn’t be; when others are unafraid, you’d better be.

It is usually said that the market runs on fear and greed. I feel at any given point in time it runs on fear UorU greed.As 1991 began, everyone was petrified of high yield bonds. Only the very best bonds could be issued, and thus buyers at that time didn’t have to do any credit analysis — the market did it for them. Its collective fear caused high standards to be imposed. But when investors are unafraid, they’ll buy anything. Thus the intelligent investor’s workload is much increased.


* Gresham’s Law says “bad money drives out good.” When paper money appeared, gold disappeared. It works in investing too: bad investors drive out good.

When undemanding investors appear, they’ll buy anything. Underwriting standards fall, and it gets hard for demanding investors to find opportunities offering the return and risk balance they require, so they’re forced to the sidelines. Demanding investors must be willing to be inactive at times.

Source: Oaktree Capital Management

http://pragcap.com/rules-on-identifying ... ortunities

[winston]

Data mining doesn't work because, although it's good for finding correlations (when "Event A" happens, a market moves a certain way), it's lousy for determining causality (the market moves a certain way because "Event A" happens). Data mining is just a fancy term for finding random coincidences in the market.

Alex Green, a long-time colleague and the Oxford Club's investment director, puts it this way:

"Even if stocks have rallied every second Thursday in May for the past 50 years, it doesn't mean they will rally this year on the second Thursday in May. Data-miners regularly turn up meaningless correlations and claim they have discovered how to divine the stock market. If history could determine what the stock market is going to do next, the world's richest investors would be historians, data processors, and librarians. And that's not the case."

Source: ETR

[BlackCat]

Interesting blog. This guy is a trend follower, TA only, aims to trade long term positions (eg: pyramiding up, following a trend for months if possible), what we call 'position trading' here... Does not follow CANSLIM exactly, but occasionally looks at the IBD100.

Whats drew me is his acknowledgment of the uncertainty and the emotions involved in trading following events as they occur. I think we can all relate to this...

http://www.chartsandcoffee.com/

Some interesting posts:
Setting trailing stop loss: http://www.chartsandcoffee.com/2010/04/the-itch-to-cash-in-when-do-you-sell-a-stock/
Trend following and pyramiding:
http://www.chartsandcoffee.com/2010/03/catching-a-wave/
http://www.chartsandcoffee.com/2010/03/a-bullish-selloff/
http://www.chartsandcoffee.com/2010/04/trend-traders-rejoice/
IBD100: http://www.chartsandcoffee.com/2010/03/ ... ng-themes/
Themes for the current bull market: http://www.chartsandcoffee.com/2010/03/investing-themes-identifying-primary-trends-and-secondary-trends/

[winston]

TOL:-

I'm still using my 70% Strategic and 30% Tactical Allocation approach.

1) For the 70% Strategic part, I think that the correct Asset Class for the current situation is Cash. This is because Equities, Commodities and Properties, have all gone up a lot and I dont want to be chasing them now. Bonds are a bit dangerous as I dont want to be caught off-guard when Interest Rates spike up suddenly.

2) For the 30% Tactical part, I have been Swing Trading on companies that I expect to report better than expected earnings.

3) I dont think it's a "Buy & Hold" market unless you have the tail-winds behind you on that particular counter eg. AAPL

4) I dont think it's time to aggresively short the overall market. The catalysts eg. Goldman Sachs and Greece, may not be strong enough to bring down the market. It may be ok to short individual stocks that has a strong catalyst for a down draft eg. bad earnings.

5) I dont really "Scalp" nowadays as I'm not too good at it. I also dont want to "Position Trade" either as I dont want to have a long exposure of one to three months. So the only option left for me is to "Swing Trade" once in a while.

6) This wait could be as long as 1.5 to 2 years, just like the period after the Asian Financial Crisis. After the "V" rebound in prices, the market went no where for 2 years while Earnings try to catch up with Valuation.

7) However, I think that the explosion could happen within the next few months and will be triggered by some unexpected event. Some risks around include Iran, Goldman Sachs, John Paulson, European Contagion, Spike in Interest Rates, Spike in USD, Collapse of Commodities ( maybe from the new commodity anti-speculation bill ), Mutual Fund Redemptions, Hedge Fund Redemptions and worse than expected earnings due to the new Health Care bill.

[kennynah]

thanks for sharing...

2 questions:
a) why are not speculating in currency or it's derivatives?
b) why do you have the notion that commodities will not spike higher?

[winston]

1) I dont think I have an edge on Currencies so I dont speculate in them. I have some SIN, USD, HKD, AUD and EUR.

2) The price of Commodities have gone up a lot due to Speculation rather than real demand.

The governments around the world are now looking for ways to control speculation eg. US Commodity Anti-Speculation bill etc.

[kennynah]

thanks for your thoughts...

you say you have EUR...are you saying you believe EUR, against your base RMB currency, will do well in the next 3 months?

what do you think will happen to commodities if and when chinese upward revaluate RMB?