Investment Strategies 01 (Nov 08 - May 10)

[helios]

Isn't it true that we follow a couple stocks and execute range trading??

Sometimes, big positions; other times, small positions ... ...

[winston]

1) Is it really tough to get a consistent decent +ve return every year?
2) How many people you've known have actually done it (including yourselves)?

Quite difficult to answer your question:-

1) You are assuming that people keep good records over the years. I dont

2) You are assuming that they know their net worth every year, to be able to calculate their return. I dont.

3) In addition, people may not only be speculating on Equities only. Over the past 25 years years, I have speculated on various instruments eg. Equities, Properties, Mutual Funds, Bonds, Futures, Options, Currencies, Commodities, Physical Gold, Warrants, Short-Selling, ETFs, Inverse ETFs, IPOs, Placements etc.

4) Intuitively, there are years that I made some money and there are years that I was down substantially. There was also about two to three years that I was completely out of the stock-market ie. after the AFC rebound.

5) In the earlier years, I dont have alot of capital but was taking high risks. In the later years, preservation of capital became more important.

6) I dont think my friends also keep good records and even if they kept good records, I dont think they would be sharing their entire story with me

So coming back to your question. Yes, it's very difficult trying to make money year in year out consistently. But there's really no alternative as Inflation would eat away your savings. Does not mean that you have to be fully invested every year though...

At the same time, there's also no need to limit oneself to the share-market only. One can also speculate on other instruments. One can also try to build a business...

[helios]

2) You are assuming that they know their net worth every year, to be able to calculate their return. I dont.

At the same time, there's also no need to limit oneself to the share-market only. One can also speculate on other instruments. One can also try to build a business...

W,

These are very inspiring statements ...

Why didn't you calculate your net worth??

[winston]

Why didn't you calculate your net worth??

I do know the ball park figures though. Also, something like properties of jewelleries, you cant really put a value to them. The Bid / Ask spread is just too wide..

I'm also too lazy to update records. It's just a mean to keep score. Just like golf, I dont like to keep scores. I just try my best on every stroke..

[Musicwhiz]

Thanks Winston, that's a pretty good answer to my difficult question. I guess the record-keeping part is the most important, otherwise there's nothing to even measure in the first place!

I guess if one really did proper record keeping, it should include ALL classes of investments and not just equities. For me, I've been tracking my realized gains/losses since I started investing, as well as my net worth since as early as late-2005. So in a way I know I've been moving forward, though not as fast as I would wish. The financial crisis threw a big spanner in the works.....and caused me to lose nearly 50% of my net worth over 1.5 years. The recent recovery enabled a sharp rebound and now my net worth is at its highest point since I started keeping records. Of course, this is also helped by the declining HDB loan I have year after year.

I am hoping to keep up my record keeping for at least 10 years (till 2015) to review if I have consistently managed to make money over time, and if it exceeds inflation. I will try my best to studiously update my blog on my progress, and will start to include net worth instead of purely equities portfolio.

Cheers!

[kennynah]

Ok, back to a very serious question - for those veterans out there who have been in the market for 10-20 years, my question is: Is it really tough to get a consistent decent +ve return every year?

keeping a record/journal of our trades is important for serious investors/traders...we must learn from our mistakes and reinforce our successes, and such recordings help us achieve this...

yes...it is certainly tough to consistently attain +ve returns every year... the fact that every investment consists of risks portends very possible losses... and losses will happen...

some adopt a macro strategy to mitigate such risks... for example, as winston stated, money can be put into equities, properties, commodities, etc....in such as way as to prevent single point of failure and increase chances of profits...

there are some who stick just to equities or commodities, but employ a concoction of derivative instruments, such futures and options to establish positions that again mitigate risks to increase probability of profiting.. one of our forummers, BorderCollie, is well known to use this strategy...

if one simply go Long or Short equities, then this is really an elementary approach to investing...recall, that with a simple Long or Short, there's only a ~33% of profiting...conversely, leaving ~67% of losing money...and what do you think will likely happen over time?? of cos, lose money lah....

[winston]

One Investing Strategy... Eight Decades of Double-Digit Returns Dr. Scott Brown

It's called "risk arbitrage."

If that sounds a little vague, the premise is really quite straightforward. The most common strategy is to simply track "credible rumors" of corporate takeover announcements before the fact, buy shares of the target companies and wait for the news to hit the mainstream wires.

On announcement day, the shares of takeover targets jump by an average of 38% in just hours.

Hence, many amateur takeover traders buy into too many rumors - as many as fifty a year or more, thus spreading their capital too thin. There are better ways to do it...

Post-Announcement Profit-Taking

The simplest strategy is to wait for the actual announcement and buy in after the fact.

Buffett learned this alternative strategy from his mentor Benjamin Graham - one that he told his shareholders had generated well over 20% per year in unleveraged returns between 1926 and 1988. In fact, it racked up 53% for Buffett in 1988 alone.

So Warren Buffett has made a killing by only participating after the actual takeover has been publicly announced. What Buffett has shown is that you don't have to buy into rumors of a takeover to make a huge profit.

Many investors wished they'd bought Cadbury before the masses heard the announcement in order to bag maximum gains. They're still sitting on the sidelines unaware of the after-the-fact profits that Buffett seeks. And this is just one of many takeover announcements on Wall Street all the time.

Let me emphasize that risk arbitrage is really looking at Wall Street as a very profitable Peyton Place...

Hitch a Ride on Wall Street's Takeover Wagon

Corporate merger and acquisition divisions spend millions researching profitable takeover candidates.

And at the moment, there's an enormous amount of money sitting on the sidelines. In fact...

Private equity funds alone have at least $1 trillion in ammunition.

Corporate America holds a wad of $700 billion looking for a new home.
And because everybody on Wall Street knows who's looking at whom, this creates "credible rumors" of takeovers. So another route to notching up stellar returns without even glancing at a company's income statement or balance sheet is to put your ear to the rumor mill and buy in before an offer is tendered.

When a company announces a takeover offer, it's saying that its top financial analysts have looked at every aspect of the deal and given it a green light. This puts the millions of takeover research dollars spent annually by corporate America in your hands.

Source: Investment U

[bluechipstamp]

Joel Greenblat (author of "The Little Book That Beats the Market") was doing risk arbitrage in his previous career, and advised against it in his other book ("You Can Be a Stock Market Genius") on special situation investing. He shared some of his risk arbitrage investments that went seriously wrong in that book.

Unlike Buffett's earlier days, there's now an army out there looking for risk arbitrage opportunities, resulting in a very efficient market. It's likely that the spread will be too thin to compensate for the risk taken.

[winston]

One of the Greatest Tools Available to You as an Investor
By Dan Ferris, editor, Extreme Value

Red sky at night, sailors delight,
Red sky at morning, sailors take warning.

The old sailor's rhyme is quaint, but true.

If you see red sky in the west as the sun sets, a storm is moving away from you. If the eastern sky is red as the sun rises, look out – trouble is coming your way.

The rhyme holds true as a weather forecasting tool because of the way storms move through the atmosphere. That's what the red sky is: moisture and particles in the atmosphere, a possible storm system in the distance.

A version of the rhyme has been around for thousands of years. The biblical version appears in the book of Matthew. Jesus is criticizing the Pharisees and says, "O ye hypocrites, ye can discern the face of the sky; but can ye not discern the signs of the times?"

Investors are like that sometimes, too. They're wrapped up in predicting the next bull or bear market. They don't ask whether stocks – which are just pieces of a business after all – are priced for an adequate return or not. (It's "not" these days.) Like the Pharisees in the book of Matthew, investors try to discern the face of the sky, but can't discern the signs of the times.

I want to give you a tool, a way of looking at the overall market that will hopefully supplant the ubiquitous bad habit of trying to predict whether it'll go up or down in the next few days, weeks, or months.

I've found what I believe is the best way to establish a rational expectation about stock valuations over the next five to 10 years. If you stick with this tool and forget about predicting the market's ups and downs, you'll do much better than the traders likely to get whipsawed badly in the next few years.

You'll find the tool below, in my version of a graph created by Kevin Tuttle of Tuttle Asset Management. I found the original graph in a presentation by my friend Vitaliy Katsenelson of Denver-based Investment Management Associates. Vitaliy wrote a good book called Active Value Investing.

The chart doesn't show you bull and bear markets... It shows you all the bull markets and sideways markets from 1900 to 2006. (Nevermind the bear market of 1929-1932. It's the exception to the historical rule.)

So forget about bear markets. And forget about bull markets for several years. The only rational expectation for the next several years is a sideways market, just like the ones you can plainly see between every bull market on the chart.

On the bottom of the chart, you'll find changes in the price-to-earnings ratio of the market. Notice how the valuations fall over the life of a sideways market. Take a look at any one of the sideways markets on the top chart and match it up with the P/E ratio chart at the bottom. You'll see stocks starting out expensive and ending up cheap.

Stocks usually start going sideways at or above 20 times earnings. Sideways markets usually finish with stocks at or below 10 times earnings. The 100-year average P/E ratio of the S&P 500 is 16, about in the middle of the sideways market's general range. Right now, there's little doubt about what's happening. The entire U.S. market is trading at 29 times earnings. We're nowhere near the end of this sideways market.

So if you must obsess about the market, now you know how to do it. Forget about momentum. It'll kill you in a sideways market. You'll always be selling when you should be buying and vice versa. Focus on the overall market's valuation, not its direction. That'll give you an advantage over the momentum crowd.

Stocks have been going sideways since 2000. Back then, stocks reached their most expensive valuation ever, up around 40 times earnings. I believe there's a good chance you'll see the overall stock market get cheaper than anytime in history before the current sideways market comes to an end.

Markets tend to swing like a pendulum. When they swing too far in one direction, they swing about that far the other way. The pendulum never swung as high in the bull market direction as it did back in 2000. It ought to correct about that far in the opposite direction.

So maybe we'll see stocks down around five or six times earnings in five or 10 years. Perhaps the Dow Jones Industrials will yield somewhere around 8%-10%. Again, I'm not trying to make specific predictions. I'm not predicting a crash. I'm simply stating there is a load of evidence that bull markets start when stocks offer great values. Markets go down or sideways when they do not.

This means you should be extremely picky about buying only the highest-quality businesses at reasonable prices. I've written about some of my favorite ones, like ExxonMobil and Procter & Gamble

, several times in these pages. You're going to make far more money in these stocks than buying an S&P 500 fund on a "momentum play" and hoping some fool will pay you a higher price for it.

An era of "sideways" is upon us. When the pendulum swings back to great values, it will be time to buy as much stock as you can afford. And above is the tool to use to know it's here.

Source: Daily Wealth

[winston]

Yes, this is not too different from looking at lines on a chart, the length of mini-skirts, the color of clothes, the number of parrots saying the same thing on CNBC etc..

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The Skyscraper Curse By Tom Dyson

The "skyscraper curse" has struck again...

Every time a country builds the world's tallest building, it seems their stock market crashes soon afterward.

It happened in America before the Great Depression. Architects unveiled two awesome new skyscrapers – the Chrysler Building and the Empire State Building – just as the worst bear market in America's history was getting started.

There was another bear market in the 1970s. The stock market lost 75% of its purchasing power in a decade. The completion of the Sears Tower in 1973 marked a two-year, 45% decline in the Dow.

In 1997, Malaysia's Petronas Towers took the title of the world's tallest building from the Sears Tower. The same year, the Malaysian stock market fell 50%.

Most recently, the curse struck Dubai. The Burj Dubai became the world's largest building last year. Now Dubai is close to bankruptcy, and its stock market has crashed.

Famous speculator Victor Niederhoffer says mankind has a tendency to build high before a fall. He devotes a chapter to this tendency in his second book, Practical Speculation.

One example Niederhoffer cites is the Nasdaq's MarketSite tower, which featured the world's largest video display on its facade. The building was completed in December 1999, three months before the Nasdaq composite crashed 70%.

Enron is another example he uses. Enron was halfway into construction on a $200 million, 40-story skyscraper, with an eight-story trading floor when the company collapsed into bankruptcy in 2002.

The book's advice is, don't just look at "tallest in the world" when trying to guess where the skyscraper curse could strike next. You should also pay attention whenever you see the tallest in the nation, the state, or the city. These buildings could attract the curse.

Also, skyscrapers make a lot more sense in Hong Kong than they do in Omaha. So watch out for "conspicuously tall buildings" where population density or land values don't justify them.

So where will the curse strike next?

Dubai is still in play. The Burj Dubai isn't yet complete. The official completion day is sometime in 2010. So there could be more trouble to come for Dubai...

There's a gargantuan skyscraper going up in Shanghai right now. The Shanghai Tower will be the world's second-largest building when it's complete in 2014.

South Korea's stock market could be in danger. The Koreans are building the world's tallest twin skyscrapers, the Incheon Towers, scheduled for completion in 2012. And the country will also get a building that's going to be taller than the Shanghai Tower. It's scheduled for 2015.

But my favorite candidate for an attack of the Skyscraper Curse is Saudi Arabia...

The Saudis are building a complex called the Abraj Al-Bait Towers in Mecca. It'll be the largest building in the world in terms of floor space and the tallest building in Saudi Arabia. The complex will include a prayer room with capacity for 10,000 people and a seven-star hotel.

( What's a 7 star hotel ? or even a 6 star ? )

The project is scheduled for completion in 2010. If the curse strikes, you should expect a stock market collapse in Saudi Arabia to follow shortly thereafter.

Source: Daily Wealth