Merry Christmas

For me, the whole Christmas season can be summed up in one word: Hope.  Most of us possess hopes for our family members and loved ones, hopes for ourselves, and even hopes for total strangers.  We hope that family members and loved ones will be spared major difficulty, and spared the struggles of poor health.  We hope our own lives will have meaning and success.  We hope the plight of those less fortunate than ourselves might be made easier, and that the oppressed will find the freedom of self determination.

The birth of Jesus raised many hopes, as well.  For centuries, the prophets foretold the coming of the one who would change our entire world.  At last, at his birth, could those hopes actually become reality?  Too quickly, the events of his life passed, and we were then left with the hope of his coming, again.  The world was changed, but not in the way that most would have expected, nor in the way many had hoped.

Christmas, for me, is always a reminder that hope is not something we have, but something we do.  By that I mean we would not be celebrating in the true spirit of Christmas if all we did was to sit around hoping for change.  Hope inspires courage.  We need to get involved, to do the things that bring hope and joy to others, and invite others to do the same.  That is what Jesus did, and that is just what so many others do.  I am never disappointed.  Every year during this season I hear stories like the disabled person raising $600,000.00 for charity, or little children who raise $6.00.  I see Salvation Army kettles jammed with cash.  I see families reconciled, at least for the moment, and people who go out of their way to help out total strangers.

While it is a holiday, it is the holiday we spend wanting to do things for other people.  It gives me hope that people are capable of doing the right things.  It gives me hope we can do anything by working together.   It gives me hope in a better tomorrow.  It always reminds me to do my part.  Personally, I also believe it is what Jesus, whose birthday we celebrate, would have hoped we would do.  May God bless all those who bring the gift of hope to others, through their acts of kindness, and through their acts of courage.

Merry Christmas!!

Giving and Health

Click Here To Play The Video

Not a whole lot new here, but it is something to think about - not just during the Christmas season, but the rest of the year, as well.  Remember, how much we give is less important than simply giving.  The video also points out we cannot feel good, and feel poorly at the same time.  A great attitude literally pays dividends in our daily lives as well as when it comes to investing.  

Santa Claus Rally

Click To Enlarge

The Story
Many people think charts are just lines drawn to make a picture.  Ask any nurse, or doctor and they will tell you there is a story behind every chart.  The reason we graph the data is to illustrate trends and to highlight relationships.  Few of us have the ability to look at the data and visualize the relationships in our head.  Yet, it is not the trends and relationships themselves, which we are looking for, but the story they tell us.

Golden Year
The chart above is a great example.  It is a chart of the price of gold during the last year, or so.  Each price candle represents one week's worth of price data.  The lines along the bottom of the chart represent the volume of transactions for each corresponding week.  It is immediately obvious the price of gold has done very well over the past year, as it starts from the bottom left and rises to the upper right. Then, the price drops considerably in September as it begins to form an interesting triangle pattern.

Uncertainty
The story behind a triangle, such as this, applies very much to the type of market we currently find ourselves in.  Triangles develop in times of uncertainty.  The drop in September came as problems in Europe became more of a worry than the inflation story which had dominated up to that point.  Then, when it seemed the deleveraging was overdone, it was time to accumulate gold, again.  One day, Europe was going to collapse, and the next it wasn't.  One day, the Chinese economy was going to crash, and the next day it wasn't.  One day we were going to see the U.S. market decouple from the world economy, and the next it wasn't.  Whatever the causes, there has been no shortage of uncertainty of late.

Going Down?
Normally at this time, we see a rally going into the end of the year, hence the name Santa Claus rally.  It may still be too early to tell, but if next week starts below the bottom trend line of the triangle I drew on the chart above, I would say we can forget about any rally, this year.  This chart is a chart of gold prices, but this pattern is also showing up in the charts of many of the large equity markets.  One interesting thing about this chart is we can use this pattern of uncertainty to predict how much affect it will have.  I drew a blue line at the widest point.  I then took a line of the same length and extended it down from the apex of the triangle.  What that tells us is, if the price of gold continues to move down past the bottom line of the triangle, we are probably headed back to the low for the year - a point which is about 20 percent lower.

Historical Rhymes
Think of the price of gold going higher until the period of greatest uncertainty which caused those who were feeling too over leveraged (think hedge funds, and fund managers) to start selling gold to raise cash, only to start accumulating gold, again.  Based on the conflicting news, they would change their minds a few more times before deciding the need for cash was too great.  It is as if the bubble in July and August never happened, and the price has now started lower after climbing higher for a period of years.  Those holding gold have already tipped their hand as to how much selling they will need to do.

Probable Outcome
It does not mean the price of gold, and markets in general, will drop 20 percent in a straight line, but it does begin to look like the fund managers have given up on Santa's arrival this year.

Are you hoping for the Santa Claus rally?

Stop Losses

Hard Stop Losses
I like Stop Losses, I just don't normally use them - Hard Stop Losses, that is.  A Hard Stop Loss specifies that we want to sell when the price drops to, or below, the Stop Price we have entered.  This is so we can specify the selling price in advance, which means we don't have to sit and watch in case the price drops below that point.

Stop Loss, or Target?
While it sounds good in principle, my experience is Hard Stop's don't work so well.  The main reason being, if the market maker for the equity I own sees the opportunity to make a large commission by tripping my Stop Loss, that is usually just what happens.  In today's world, I don't know exactly how the orders are matched, but it has been my experience that the person responsible could usually make it to my stop to collect the commission, only for the price to continue higher from there.  I suspect it is even easier to do in today's electronic markets.  If the Stop Loss is too far away from the current price, they won't even allow it.  If it is fairly tight, or close to the price I want, then getting to that price is doable.

Exit Point
Don't get me wrong, though - I am one to say never enter a position without having an exit point.  If I am unable to watch the market during the day, then I wait until the end of the day to put in the sell order, if necessary.  If I am in doubt as to how far the market might move against me, I just sell, anyway.

Trailing Stops
I don't use Hard Stops and I don't use Trailing Stops.  These are Stops that trail the price by a given amount, or percentage.  Instead, I use trend-lines and technical analysis to determine my exit point.  When the price is trending, we can usually draw a channel within which the price will vary.  As long as the price stays within the channel, I continue to hold.  Once the price violates the channel, and breaks the trend, it is time to sell.  Once the new trend establishes itself, I take a new position.

Stop and Pause
Rarely is it a good thing to exit a trend and switch to the new one at the same time.  I learned a long time ago from sailing that when the wind begins to shift it will oscillate back and forth a few times before filling in from the predominate side.  The markets are similar.  You don't know which side the strong hands and the weaker hands are taking at first.  We want to do what the big guys are doing because that gives us the greatest probability of success.  Getting it wrong can get expensive.

Getting stopped out at the lowest price for the day is never a fun thing.  Instead, I use limit orders which specify the least I will accept when it is time to exit.  Do you use Stop Losses?

Berman's Call - Consumer Credit

Click Here To Play Video

The major question remains - will the spending we saw during Black Friday and Cyber Monday account for the bulk of consumer spending over the Christmas season?  In this video, Larry Berman talks about the enormous growth in consumer credit relative to the increase in the U.S. population.  Since the 1960's the average annual population increase has been roughly one percent.  The average increase in consumer credit has been eight times that - much faster than the rise in incomes.

Consumer credit is now declining.  While the great recession, and unemployment are big reasons for the decline, much of it can also be explained by demographics.  The average U.S. baby boomer owes a lot of money and is now at the age where they need a whole lot less stuff.  Their children have grown up, and they are past their peak spending years as they start to position for retirement (whatever form that takes).

Combine that with the need for governments and financial institutions to deleverage, and one has to wonder what the next catalyst to growth will be.  We have a huge Gen-Y gang just around the corner, but they are probably a decade away from filling the large, expensive shoes of the baby boomers.  I keep hearing about all that money on corporate balance sheets, but don't forget, the U.S. consumer accounts for about 70 percent of their economy.

What is your vote?  Are we going to see a big golden fourth quarter in retail in North America this year?

November Portfolio Update

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November began with a classic triangle pattern.  All of the major North American markets made the pattern, but the S&P 500 illustrates it best.  It is a perfect example with volume decreasing close to the breakout point when the market finally dropped.  I got caught in the whipsaw back and forth before giving up.  From there, the drop was quick enough that I failed to find a good entry point.  

Click To Enlarge

Materials and Technology stocks are seasonally strong this time of year.  I expect to be long in them for at least a little year-end rally.    

The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 

Eleven month return for TSX @ November 30, 2011 = -9.04 percent
Eleven month return for Basic Timing Model using XIU = -0.98 percent
Eleven month return for Advanced Timing Model (my returns) = -2.95 percent
Money for charity = $411.27


What is your plan?

Bill Strazzullo - Year End 2011

Click Here To Play The Video (Two Parts)

BNN interviews Bill Strazzullo from Bell Curve Trading.

He thinks high unemployment and excess production capacity is holding back the U.S. economy.  Add Europe to the mix and he is fairly cautious (despite a great October in the markets).  He feels any good news is already factored into the markets with "little upside and a lot of downside".  He sees the stimulus-fueled recovery as a bear market correction, not a new bull market.  The high correlation in major markets leads him to think we are trading on fear.  He correctly called the 10 - 15 percent correction we saw in the markets this summer.  Now, he sees us at the upper end of a range - time to be cautious.

Personally, I see the markets lining up for a bit of a possible short-term year-end rally.  Other than that, I could not agree more.

Market Timing Myths

Not For Everyone
Another of the myths about market timing is, if market timing actually worked, then everybody would be doing it.  If you are familiar with my blog, then you know the main reason this is not true.  Personal investors do little to influence market direction.  It is the mega-sized orders of the large fund managers that determines the direction of the markets.  It is the very size of their positions that prevent them from jumping in and out of the markets.  It takes a period of days and weeks to either establish, or eliminate their market positions.  For them, market timing is not a viable option.

One Size Fits All?
So, if it doesn't work for the professionals, then it can't work for the little guys, right?  That is like saying the route I choose in a dinghy has to be the same as that of the captain of an aircraft carrier.  As for me, I would not attempt to cross the ocean in a dinghy, just as I would not try to pilot an aircraft carrier down the local river.  While the purpose of the boat determines its size and dimensions, the size and dimensions of the boat also limit how it can be used.  That is not to say professionals do not use charts to help them make portfolio decisions.  Fund managers use every tool in the shed, including technical analysis.   

How Popular?
If it works best for personal investors, then why don't more of them use it?  One reason is financial institutions want people to think they are unable to manage their own portfolios. If people believe they are unable to do it for themselves, then they have little choice but to hire a professional.  Yet, I am willing to bet practically every nurse on the planet can read a chart, so, why not a stock chart?   

References
Another reason people won't time the market is because is doesn't work for them.  While that may seem like a perfectly good reason, we have to wonder why it doesn't work.  It actually is not because timing the market does not work, it is because most people are, well, people.  Given to emotion, most people buy high, and sell low - just the opposite of what they should be doing.  As a result they label timing the market as being too hard, even impossible.  Their inability makes it clear to them that market timing, simply, does not work.

Denial
Yet another reason everyone does not try to time the market is because of something called denial.  Not a lot of people want to believe that group behaviour is, in some way, predictable.  We see ourselves as acting independently of those around us.  After all, we have a mind of our own.  How dare anyone suggest our decisions are similar to that of many others despite the fact their situation may be similar to our own.  Denial is far more than just a river in Egypt.

Either/Or
I have never understood why, but there is another whole segment of investors who believe technical analysis precludes any sort of fundamental analysis.  One taints the other.  I say, why work with only one hand, when we are perfectly capable of using two?  The result of using one technique should complement the use of the other, not contradict it.

Bottom Line
We can see there are all sorts of reasons why everyone will not embrace technical analysis and market timing.  The belief that everyone needs to is yet another example of the misinformation surrounding the real issues.

Convinced?  Should market timing be expected to work for everyone?  

Investing Expenses & Returns

The Border Crossing
I once heard the story of a man who worked as a border crossing guard.  During the time he worked there, he would often see one man, in particular, riding a bicycle across the border.  The interesting thing about his bicycle was he always carried a box of sand on the handlebars.  Needless to say, the guards felt compelled to, usually, check by sifting through the sand to make sure there was nothing there.  Finding nothing, they would wave the man through, and let him cross.  Week after week, the same man could be seen riding his bicycle across the border.  Each time they sifted through the sand in the box, they found nothing.  Obviously, the guards found this behaviour suspicious, but were never able to find anything illegal.

Sand, or ...?
Many years went by, and finally, the border guard retired from his job.  From time to time, he would remember the man on the bicycle and wonder what it had all been about.  One day, to his surprise, he ran into the man on the street, who himself was now much older.  He stopped to chat for a moment, and the subject of the man's frequent border crossings came up.  He mentioned that in all those years, they never found anything other than sand, so what was he doing with all those boxes of sand?  The man smiled and said, "It wasn't sand I was taking across the border, it was bicycles!"

Market Returns
It makes me smile when I listen to people who think financial institutions make their money in the stock markets, and that personal investors can't.  While there is a component which is made up from investment returns, don't be fooled into thinking that is how the professionals make the real money.  Financial institutions make their returns from fees and service charges (in good times and in bad).  Historically, the stock market has done something around a nine percent average annual return.  Very few managers have consistently beat the markets over a long period of time.  Ask your financial advisor what return to expect on your investments and they will say five, or six percent.

Do The Math
Are we really expected to think returns of five, or six percent account for the lion's share of financial institutions earnings?  Have you ever wondered why so few people know about Exchange Traded Funds, and everybody (almost) knows about Mutual Funds?  Might the difference in service charges and loading fees, and management expenses, and commissions explain some of the discrepancy?  I'll let you do the math.

Expenses
The easiest way for personal investors to increase returns is to decrease expenses.  Obviously, that would not be in the industry's best interest.  I find it interesting how returns receive so much attention, while so little interest is given to explaining expenses. 

Could it be that our bicycle riding friend also worked for the financial services industry?  It seems they both know how to distract others from seeing what really matters.

Do you still own mutual funds?  

Tax Loss Selling Approaches

Click Here To Play The Video

I am watching for the effect of tax loss selling this year.  Since the markets have been down since May, it will likely have more of an effect than last year when the markets were strongly higher.  It could significantly dampen any year end rally as it has the effect of depressing prices during the month of December.

Dale also talks about reasons other than tax loss selling for removing stocks from our portfolios.  I sell if the stock breaks the upward trend, especially after it has met my price target.  My price target is based on the earnings per share times the price/earnings ratio that is consistent with the rate the company is growing.  Of course, downward revisions in the earnings estimates could also be a reason for selling.  

What do you use for a sell strategy?  You do have one, right?

Trading vs. Buy and Hold

Same, But Different
Everyone is entitled to their opinion.  I am posting this because I am of an almost entirely different opinion than a blog I recently read.  I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.

Volatility
The first assertion is the discount brokerage business has changed the way the investing game is played.  According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager.  Lower fees and more information,  they say, is bad because it causes people to trade too much.  I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees!  If anything, I would say the volume of trading, on average, has decreased since the Great Recession.

Competition
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?!  Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology.  This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.

Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend.  The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market.  Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index.  These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge!  Have you ever noticed they collect their fees even if you and I lose money?  If I say, "Bank", what do you think of?  I think of fees and service charges!

Theory
Next they assert the efficient market theory has been disproved.  I agree.  This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price.  Three things - nice theory, but it is not about what people think, but what they actually DO.  Have you ever paid too much for something, knowing that is exactly what you were doing?  (Ever just had to buy that present for your child, no matter what the cost?)  Second, are we to believe that prices are never manipulated?  Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well.  If the market is so efficient, then how did so many professionals get taken by Sino Forest?  Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero.  The fact the theory has been disproved supports the case for trading, rather than refutes it.

For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's.  Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now.  Think deleveraging, and demographics.  If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.

As I said at the beginning, everybody is entitled to their opinion.  What's yours?

Berman's (Recession) Call On BNN

Click Here

This video is a couple of weeks old, but the forecast is for 2012.  Based on the Economic Cycle Research Institute (ECRI) Weekly Leading Index, we (the U.S., specifically) are tipping back into recession.  The indicator has never been this low without a recession following.  For more on the indicator, please refer to this post by Doug Short regarding the ECRI.  Larry also thinks what we are about to experience has much to do with current demographics, as do I.  Think deleveraging!  (Funny, but in looking at the spelling of that word I noticed it has the word aging in it - demographics, aging, ...?).

Myself, I believe the markets can stay irrational longer than I can stay solvent, so I time my investments using charts to tell me what the market IS doing rather than what it is GOING to do.  Also, my horizon has decreased significantly over the past year, so I will not be investing in anything with the expectation of being in the market for more than weeks, rather than months.  

What would you say the odds are of us going back into a recession?

Portfolio Update

Click To Enlarge

Excessive volatility has made it very difficult to establish any real trend in the markets.  I was wrong in betting against the materials sector in advance of its period of seasonal strength which normally starts in the middle of November.


The end of October begins the period of seasonal strength for the major stock markets. Materials, Information Technologies, and Agriculture tend to outperform other sectors between now and the end of the year.  All three have already rallied from their summer lows. Still, I am wary of the affect of politics and tax-loss selling on these markets as the end of the year approaches.     


The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 


Ten month return for TSX @ October 31, 2011 = -8.68 percent
Ten month return for Basic Timing Model using XIU = -0.98 percent
Ten month return for Advanced Timing Model (my returns) = -1.45 percent
Money for charity = $411.27 


Are you expecting a year-end rally?

Attitude

Character Traits
First, I want to correct a mistake I made in my first post about traits.  I called these traits I am describing, personality traits.  Wrong.  They are not personality traits, but rather, character traits.  As a means of making the distinction between the two, think of many personality types sharing the same character traits.  Every person has the capability of being courageous, or disciplined, even though we may find it hard at times.  Which leads me to what I think of as the most important trait of all, for personal investors.  Attitude.  Yes, I know we all have attitude, but few of us cultivate it enough, or master it.

Money
Take our attitude about money, for instance.  If we fail to have an abundance of money in our possession, then we have either given most of it away, or we have a poor attitude about money.  In any aspect of our life, if we think we can, or if we think we can't; we are correct.  What do you tell yourself about money?  Or, is it really you?  I can still hear my mother reminding me that money doesn't grow on trees.  How many times did I hear my parents say, "Just when we started to get ahead of our bills..."

Beliefs
I can teach people how to invest money in the stock markets, but their success has more to do with their attitude than it does about what they know.  Do we see the stock market as a zero sum game, where our winning means somebody else has to lose?  Do we know there is an abundance of wealth in this world, or do we see it as being limited to only a few lucky individuals?  Do we think making money has to be difficult, and time consuming, or do we see making money as an exchange of value?  In every case, what we believe makes us right!

Focus
Even if we manage to amass a significant amount of money, it will soon disappear if we have the wrong attitude.  Studies have shown that lottery winners and their money are soon parted when they have a poor attitude regarding money.  That is why I find it important to designate a portion of what I make to charity.  I am grateful for the opportunity to do so.  One of the best things about gratitude is it forces us to think about what we are grateful for, as opposed to the things we don't want, and don't like.  I also get to share the fruits of my success with others less fortunate - others who may not have the capital to invest, or a good strategy for doing so.

Do's & Don'ts
To be honest, attitude is something I struggle with in writing this blog.  We are all being manipulated by the humongous advertising budgets of the financial services industry.  Most people believe nobody can time the markets because the "experts" don't want us to think otherwise.  They will promote the ideas of any academic or "expert" who says so.  Even though we can achieve a better return from Exchange Traded Funds (ETF's), their solution is to invest in Mutual Funds.  Guess why?!?  In the face of all of the misinformation designed to mislead and confuse, I find it very difficult to ignore the things that people should not be doing and focus, instead, on only those things we should be doing.  (See, more proof that their plan works!)

Positive Thinking
Fear begets fear, just as love has the power to change everything in our lives.  We can choose one, or the other.  No person can be fearful and loving at the same time.  We can go from one to the other in a hurry, but we cannot hold onto both emotions at the same time.  Fear is the enemy in investing as surely as it is the enemy in life.  Positive things are always, always, the result of thinking about and believing in positive things.  Mother Teresa was known to have said she would never attend an anti-war rally.  However, she would be happy to be invited to a peace rally!

Positive Results
The change in attitude is sometimes really very subtle, as in the previous example.  To believe we can achieve one result while thinking about a different one, is impossible.  I admit, it is one of the things I could  be better at.  Not only do I believe it would make me a better personal investor, I believe it would also make me an even better person.

Do you have the attitude for success?

Personal Investors and Discipline

When, Not Could
I remember practicing wind sprints for track and field in high school.  I noticed a guy around my own age hanging around the track as I practised.  I  would get into the starting blocks, in the ready position, then set, and Go!  Over and over, again.  The bus would get me to school 45 minutes early, so I had lots of time to change and practise before classes started.  On this particular day, the person watching me didn't seem to have anything better to do, so he just hung around watching me.  I didn't even say anything to him, I was just trying to concentrate and visualize for my next race.  After quite a while our eyes met, and he said, "You know, I could be just as good as you if I practised like you do."  I had no doubt, as I was less gifted at sprinting than my brother.  For all I knew the only difference between my success and my bystanders lack of it, was the discipline I applied in training most mornings.

Not Just A Game
We need to do what we know, and not just know what to do.  There is a big difference between the two.  When it comes to learning about investing I encourage people to paper trade.  This lets them learn the mechanics of entering a position, tracking it, and then, later, selling it.  No matter how long we paper trade, it will never completely prepare us for the real thing.  When there is serious money involved, dealing with the emotions that come up becomes the real key to success.

Buy High; Sell Lower?
Everyone knows we need to buy low and sell higher, but people who lack the proper discipline usually end up buying high and selling lower.  Without a proper plan people end up wanting to buy after the trend is well established, and sell when the pain gets bad - usually at a bottom.  In fact, that is what causes the bottom - when those wanting out have done so, the price can begin to rise, again. 

Self Protection
The problem is compounded when people buy and sell on impulse.  Rumours and opinions generate greed or panic.  Fear is contagious - when a run starts in the market, it will often overshoot the bounds dictated even by logic.  In fact, there is a saying that the markets can stay irrational longer than we have the ability to stay solvent.  There are definitely times when fundamentals, and even times when the technical indicators defy logic.  These are times when we cannot rely on emotions, let alone logic.  We need a tried and true methodology that will protect us from ourselves, but we also need the discipline to stick to that proven strategy.

Self Deception
This past fall, I simply could not get myself to believe the government stimulus in the U.S. economy would drive the stock markets as high as it did.  I kept waiting for them to fall.  Instead, I needed to follow my own methodology and take advantage of one of the best market rallies ever.  These are the times when proper discipline saves us from getting it all wrong by falling victim to the deception of our incorrect impulses.

Less Emotion, Not Emotionless
That is not to say we should not be passionate about what we do and how we do it.  It does mean managing our emotions so they do not blind us, preventing us from seeing what is really going on.  Good strategies keep us on track doing what we know works.  One of the most important factors that gives great investors an edge is their ability to be disciplined in executing proper strategies.  I believe there is only one other thing more important than this, and I will blog about it next time.

Do you consider yourself to be a disciplined investor.  If not, why not?

Personal Investors Are Self-Confident

No Doubt
I went back and forth as to whether I should label this particular trait as self-confidence, or self-reliance.  In either case this trait has to do with one's ability to prevent self-doubt from inhibiting good decisions.

Why Sell?
I wish I had a nickel for every story I have heard regarding the person who sees their broker about taking a profit, or minimizing a loss, only to get talked out of it.  The person then sees the broker as responsible for the problems they are having.  Perhaps there are almost as many instances when the broker had talked us out of doing something foolish.  We minimize those situations, so they don't readily come to mind.  I don't have any research on the subject, but I would be willing to bet that for most of the times we get talked out of doing something by the broker, we end up regretting it.  The reason for this is simple.  Despite our misgivings, there are more reasons for the broker to have us hold the position then there are for them having us exit it.  Unfortunately, few of those reasons favour us, and our success.

Homework, Not Ratings
Which brings me to the subject of stock picks.  The best Personal Investors use the ideas from others to do their own research..  I never buy a stock based on ratings, recommendations, or rumours, yet people are inclined to do so too much of the time.  I only buy a stock when my homework tells me the stock, on a historical basis, is on sale, and the momentum favours doing so.  Also, any investment we make needs to be consistent with our risk tolerance.

How Much Is Too Much?
I never rely on those incredibly dumb surveys used to assess investor risk tolerance.  If anything, for our own protection, we want those surveys to show us as being on the very conservative side.  This limits the amount of risk any broker might exercise on our behalf.  Regardless, I decide how much money I am prepared to lose on an annual, monthly, weekly, and daily basis.  When any of those amounts are exceeded, I exit and wait for evidence of more favourable conditions.  I talked about the best method I know to reenter the markets in a previous post Stock Market Bottoms.

Confident Choices
We need to understand that we have nobody else to blame for the state of our investments when they are under performing, or just plain losing money.  We can blame greedy bankers, untrustworthy brokers, bad timing, and any number of other things.  Instead, we need to do a little bit of homework.  That will tell us how, when, and what to buy, not what others want us to.  Our picks need to be consistent with our tolerance for risk.  Any time our losses exceed our tolerance, I believe it is best to exit, and not wait for others to tell us to do so.

Knowing how, knowing when, knowing what, allows us to have confidence in the composition and performance of our own portfolio.

How confident are you in your portfolio?

Personal Investors As Risk Averse

Investing, Not Gambling
It may seem odd  that I would see the best investors as being risk averse.  After all, no risk, no reward, right?  But this isn't gambling, this is investing.  The odds are stacked against the gambler - eventually the house always wins.  I invest only when I believe the odds are in my favour.  I see people putting their money into penny stocks, or wanting in on the next hot thing, or Initial Public Offering  (IPO).  I ask myself, why? Now, I'm not saying there is no money to be made in these areas, I'm just saying for most Personal Investors the odds are against it.  Very few people have the necessary skills.  These are also areas that manipulators work to their advantage.  People get fooled, believing their loss would be small while their return could be almost infinite.

Loss vs. Gain
Personally, I am less interested in how much I can make as I am in how much I can lose.  The bottom line is, any loss is significant.  I believe the best Personal Investors have a low pain tolerance for loss.  That is one of the reasons I now believe it makes no sense to buy anything with only the hope that, one day, it will be worth more than what I paid for it.  Such is the thinking behind Buy and Hold - buy now, hold until it is worth more than what we paid, even if it means suffering major losses.

Lesson Learned
But, what if the markets go down before going up?  It happened to me - once. Leaving the company I had worked at for many years, I took the proceeds of what was to be my pension and invested that money in the stock market.  In the following six months, or so, the market dropped by more than 25 percent.  I sought advice, which went from, no need to worry, to, too late to sell!  In my case, I was lucky.  It only took a little more than a year for the market to get back to even.  Knowing what I do today, I would have made more than a seven percent rate of return during that same period of time.

Capital Gains or Capital Losses?
When the Tax Free Savings Accounts (TFSA) were first introduced, some advisors were saying not to hold equities in such accounts since we can never claim the losses as a tax deduction.  My reaction to that was, if we are losing money in our TFSA, then we are doing it wrong!  I would rather avoid the taxes on my capital gains than on my losses, as long as I keep my losses small. 

First Rule Of Investing
Warren Buffett has said the first rule of investing is to not lose money.  After the experience of mine with my pension proceeds, I looked for methods of limiting my losses.  I could buy and hold and just wait it out and hope I lived long enough, or I could develop an exit strategy which would leave me with most of my money to buy at a better price.  People will point to the cost of commissions and fees and taxes and say it isn't worth it.  But, why wouldn't I pay a couple of commissions to end up with several percent more in my account?  Seems like a reasonable trade off to me!

Win or Lose?
The successful personal investors, I know, aren't easily fooled by the promise of huge returns.  They know their success lies in the ability to limit their losses by minimizing risks.  Doing so let's even the smaller gains accumulate and compound while others are praying for a chance to get back to even.

How is your risk tolerance? 

Personal Investors As Quick Learners

The Speed Of Learning
Much has been written about the traits of a good trader/investor.  In this post I am referring to the Personal Investor.  Speed is the single largest advantage the Personal Investor has over the Institutional Investor.  By that, I do not mean speed of execution of trades, but the ability to get in, or to get out of a position in the market.  It takes institutional managers weeks to completely execute a position.  The average Personal Investor could take as little as a day.  For that reason, I believe one of the key traits of a Personal Investor is that of being a quick learner.

Need To Know Basis
Quick learners have the ability to take in a large amount of data, process it quickly, no matter how conflicting and varied, and come to a definite decision.  The mistake too many people make is to want to develop an expertise in a particular area.  The only certainty in this world is that the rate of change is increasing.  The commitment of time and effort to become an expert slows people's ability to adapt to new changes.  We have all heard the expression that a person with only a hammer sees everything as a nail.  The person who can learn the most the quickest, is the type of person who will be the most successful in today's world - and not just when it comes to investing!

True Colours
Not only must Personal Investors have a knack for learning quickly, they have to be able to do it under pressure.  Panic is the enemy of good investing practices.  We cannot say we are a quick learner unless we can do so under pressure.  You see, the thing I have learned is we can only say we have a given trait if we are able to apply it when the chips are down.  This is a good way of distinguishing between innate, as opposed to learned behaviours.  No matter what, when push comes to shove, that is when our true character shows itself.

Non-Linear Thinking
Being a quick learner may be helpful in various situations, but it is necessary in order to be a successful Personal Investor.  The mistake too many make is to get caught up in the trap of linear thinking.  We see it every cycle - people pile in at the end of the trend, and bail out at the wrong time.  Why?  Often it is because they think the future is an extension of the past.  The successful investor needs to be able to recognize the winds of real change.

Critical Success Factors
This also means recognizing the few critical success factors that determine success or failure.  I loved the story in Blink! where Malcolm Gladwell talked about the hospital that was trying to quickly diagnose emergency patients with real heart problems.  The doctors could not believe a brief questionnaire could be developed to distinguish between real heart issues and others.  There are so many factors involved, how can they be reduced to a set of only a few key questions?  In fact, that is just what they were able to do.  Investing is the same.  We are led to believe that we have to understand cash flow, accounting, industry trends, inventory management, micro economics, macro economics, financial ratios, to name a few. 

Up or Down?
Nothing is further from the truth.  We need to be able to assess if, historically, the stocks of a company are on sale, and if they are in an uptrend, or a down trend.  Add a sell strategy to the mix, and that is all we really need to know.  Learning to do so is quick, and means we don't have to be an expert in analyzing balance sheets, evaluating industries and projecting trends.

Quick, Simple
I believe the best Personal Investors learn quickly, are not victims of linear thinking, and understand that success is determined by a smaller number of critical factors.  Everything else is, in reality, just more noise and confusion.

How do you rate in your ability as a quick learner?

Traits

The Question

Before I traded my corporate cubicle for a home office, I had to do some research.  The primary question I was attempting to answer was, am I the  kind of person who would be successful at being self-employed?  For instance, it made no sense to me to take a person who loves to be around other people and expect them to enjoy driving a truck by themselves on long hauls, days and weeks at a time.  How suited was I for self-employment?

Personality
Everything I had learned to that point suggested there were, basically, four personality types, and three motivational styles.  Most people seem to be motivated through an affiliation with other people they like and enjoy.  Next are those who derive the most self-satisfaction from achieving and accomplishing.  The other two personality types can more, or less, be seen as people who have a strong need to be recognized within their sphere(s) of influence.

Simplistic?
The problem with categorizing people is that it is a simplistic approach, at best.  It is impossible to say people are this, or that, without exception, and without giving consideration to the melding of various traits - sometimes depending on the circumstances involved.  In my own case, my research was so overwhelmingly in favour of making the change, I only regretted not asking the question much earlier.

Purpose
My spiritual beliefs suggest that we are a unique combination of interests, talents, skills, abilities, and purpose.  Yes, I believe that we all have a purpose - one which is directly related to our interests, abilities, and the circumstances in which we find ourselves.

Who Is In The Driver's Seat?
For all these same reasons, I also have to ask, should people actively manage their own investment portfolio?

First, let me ask a different question.  Should most people learn to drive a car?  Most would say, why not?  There are good drivers, and not so good drivers.  There are different reasons for wanting the ability to drive oneself, and others.  There are some that should never drive, and others who are unable to.  For those who can't, would you suggest they get a ride with an unsafe driver, or in an unsafe car?  If they don't know about driving, or cars, how are they going to tell the safe ones from the not-so-safe ones?  We can provide alternatives for them by making public transit available, and through the use of taxis, but the need for education remains.

Not being a driver is no reason for not being educated about what constitutes good driving and what the characteristics of a safe vehicle are.  A failure to make good decisions is to put one's life in jeopardy.  As a different example, I don't want to be the one to fix the roof of my house, but I need to be educated about when it is time to do so.  If we don't have any interest or desire in who or what we invest in, then we had better find someone we can absolutely trust with our very survival!

Success Traits
For the rest of us, I am going to write a couple of future posts identifying what I feel are the traits that make people successful in the stock markets.  There has been much written on the topic, but most seem to confuse personality traits with skills.  I want to concentrate on the few personality traits which I think make for success.  Like the classifications used for personality types and motivational styles, I'm not sure anyone is the perfect fit.  The real key is to employ our strengths, and to identify weaknesses and their potential for causing us to lose money.  With that awareness, we can play to our strengths and begin to mitigate the possibility of loss.

What is your opinion?  What are the traits you feel would lead to success in the stock markets?     

Portfolio Update

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September lived up to it's reputation, again, this year as being the worst for returns.  I have seen a tiny increase in my portfolio, but am largely out of the market.  I am happily observing the machinations of the markets from the safety of sitting on cash.  None of the usual seasonality has kicked in, at this point, but I have little interest in taking much of a long position before Greece defaults.

The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average.

Nine month return for TSX @ September 30, 2011 = -13.36 percent
Nine month return for Basic Timing Model using XIU = -0.98 percent
Nine month return for Advanced Timing Model (my returns) = 2.97 percent
Money for charity = $411.27

Does anyone think we are going much lower from here?  It's okay to say so, either way.  Like most of the expert advisors, nobody is going to hold you to it.

Stock Market Bottoms

Dot Com Aftermath

To the left is a chart of the end of the dot com collapse.  Although these are charts of the S&P 500 index, many, many technology companies either met their demise, or were left a fraction of their former selves.  As witnessed by this chart, they took the broader markets and the economy down with them.  The downward trend was broken, and the markets then charged upwards and onwards in 2003.

Financial Crisis

2008 was a bad year for the U.S. economy, and global markets, as seen by this chart of the S&P 500 index. Interwoven with the weekly price candles are three moving averages. The blue line is the 8-week, or 40-day moving average, the red is the 20-week, or 100-day moving average, and the green is the 40-week, or 200-day moving average. The bottom came in March of 2009, and, once more, the markets were headed higher.

Now

Presently, we are teetering on the brink of a double-dip recession, with the fate of the Euro zone in the balance.

I invite you to study the first two charts very closely to see if you can identify something that would uniquely indicate a bottom in the market.  Once you have done that, take a look at the current chart to the left.  Do you see that same indication in the third chart after 2009, also?

The answer would be yes.  It occurs when the 50-day moving average crosses the 200-day moving average from below, and the trend in the price candles is rising.  (I  have to add the last part about the rising price candles as the 50-day did cross the 200-day for a three week period in April of  2002, and that, clearly, was not a bottom).  We also saw it, again, in October of 2010.

Here we have two major bottoms in the past decade, or so.  It has been my contention that once the price candles drop through the 200-day moving average, we should stop out of our long positions until the market has bottomed.  Yet we are told there is no telling when to get back into the market, or that we are likely to get in at the wrong time and out at a worse time.

Whether the bottom is the reversal from bear market to bull market, or if it is the bottom of a correction, the likes of which we experienced in 2010, it is a reliable and tradable indicator.  Now you know what to look for before putting new money at risk in these volatile markets.

Are you convinced?

Analyst Recommendations

Click Here To Play Video

As I have said previously, I never use analyst ratings or recommendations to determine if I should buy or sell a stock.  Neither do the guests in this video.  I have also said their function is a marketing function rather than an investing one - Terry Shaunessy agrees.

I enjoyed Victor Adair's comment regarding analysts having a tendency to stay with an idea past it's "best before date".  There are two additional reasons for this not mentioned by Victor.  First, the analyst's universe of stocks is usually too small, so a good idea seems to stay that way relative to a smaller number of stocks.  Second, they rarely suggest selling a stock.

I would have to agree with Terry that analysts probably don't usually have any skin in the game.  Based on their own recommendations I doubt they would be very successful taking their own advice!

I determine what to buy and sell based on Price/Earnings analysis (which does include the consensus analyst's annual earnings numbers), and I determine when to buy and sell using basic technical analysis.

For more, also see:
http://watch.bnn.ca/#clip538906
http://watch.bnn.ca/#clip538908
http://watch.bnn.ca/#clip538912

Do you use analyst ratings and recommendations?

My Recent Trade



Click To Enlarge

Context
This post attempts to answer the question, can the technical indicators be used to time the market?  The Elliott Wave Theory tells us what the overall fractal patterns followed by the markets look like.  The fact that it is some sort of fractal means we can verify where in the pattern we are, by looking at it in the context of the shorter time frame and the longer time frame.  We can view the indicators in that context. One dip, or one rise in the market does not a trend make.  When we see a series of higher highs and higher lows, we have an uptrend.  When we see a series of lower highs and lower lows, we have a downtrend.  That means we can't know the top until, at least, we see another lower high, and we can't know the bottom until we see another higher low.  Rather than try to explain what I mean, let's look at the trade I made at the end of July.

Going Down
First, the RSI indicator at the top of the chart peaked out at the beginning of July as evidenced by the lower high two weeks later.  So did the price candles, the MACD in the section below that and the stochastics in the section below that.  I should have bought (the inverse fund) when the price crossed the green dotted line which represents the midpoint of the Keltner Channel from above.  Instead, I waited for the price to drop below the blue line which represents the 40-day moving average (circled in orange).  By this time any conceivable uptrend had been clearly broken.  Even without any knowledge of the Elliott waves, it would be clear to most people the market was headed lower.

How Far?
At that point in time I had no target price.  I knew fair value based on the historical average annual earnings was  850.  The Point and Figure chart (also found on StockCharts.com) indicated a bottom at 1140.  The Fibonacci ratios associated with the Elliott Wave would suggest a bottom around 1190.  There is nothing in the indicators, initially,  that suggest how much down-side to expect.  On August 9 we had a big bounce, then another drop  on August 10.  I was happy with my gains at that point and exited my position.

Too Early
Had I played the downturn at the beginning of July, I would have been on the right track, but the lower high near the end of July would likely have been sufficient to cause me to start to lose money, even though the longer trend was still down.  I make it a policy to exit such a position when I start losing money.  If the trend resumes in my favour, there is nothing to say I can't take the position again, perhaps even at a better price!

Momentum
The reason I believe we can rely on these indicators is because this "toing" and "froing" in the market is caused by momentum.  The momentum is caused, not by events that happen, but by people's perception of the events that happen.  These optimistic and pessimistic moods take a while to develop and then, to run their course.  Generally, it is not the value of the indicators themselves which I rely on, but the trend in the indicators.  The indicators have since taken a positive shorter trend, but I don't trust it as long as the moving averages are inverted with the 40-day beneath the 200-day and prices lower still.

Comments?

The TSX Example

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Market Opportunities
Before posting my last trade, I decided I would illustrate the typical opportunities the market creates.  These charts of the Toronto Stock Exchange show a period of one year chosen at random.  The charts are courtesy of StockCharts.com.  In addition to great, flexible charting, there is also a ton of learning resources regarding technical analysis and various indicators and overlays at that website.  I am not going to get into detail about the indicators shown here, I am only looking at the trend illustrated by them.

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The Charts
The green lines illustrate an uptrend; the red downtrends.  Both charts are of the period December 7, 2007 to December 7, 2008 (one year chosen at random).  In the section which shows the price candles, the first line indicates weekly, or daily.  The indicators used are the same on both charts.  The moving averages are adjusted for the time period.  For instance, the 200-day moving average for the daily chart becomes the 40-week moving average (40 weeks being the same as 200 week days).

Same, But Different
Overall, the time period shown represents less than one complete trade per month (one buy, one sell) on average.  The trend lines are, for the most part, the same between the two charts.  There are a couple of divergences, however.  If we look at the end of April, the indicators on the daily chart show a break in the uptrend, while the weekly indicators do not.  Also, in October, it is arguable as to whether, or not, all of the indicators reflected a trend change.

Disclaimer
This is the point where I am required to point out that I am not a certified market analyst, so what I am about to say describes what I do, and should not necessarily be taken as advice as to what you should do in your portfolio.  Any time we try to take an approach which is new to us, I recommend trading on paper without risking real money until we are more comfortable over a longer period of time.  How much of  your portfolio to put into any particular methodology is an important decision with which you should involve the advice of your professional advisor.  Every portfolio should be unique to the owner's situation (including risk tolerance) and experience. 

Taking Profits
When all of the indicators are in agreement, then we have a trend we can trade.  I know a lot of people will point to the fact that anyone can look at the historical charts and see where they could have executed a trade.  I am not suggesting we would have bought into the market right at the bottom, or gone short at the top.  What I am suggesting is when we have a long position, and the indicators look like they are beginning to top out, why not take at least some profits, by selling?  Normally at that point, the market begins to go sideways, and most of the gains have been made.  After we have taken our profits, we watch for all, and I mean all of the indicators to begin to show a new trend as the old trend-lines are broken. 

Price/Earnings Ratio
An additional method for assessing the upper boundaries of a trend is to value the companies we hold, either individually, or those held within Exchange Traded Funds (ETFs).  By using historical values for earnings and price, we can determine when stocks are on sale and when they are selling at a premium.  Next time I will talk about a previous trade of mine.  One of the reasons for believing the market would correct, was the Price Earnings ratio for the market as a whole.  At the peak of the market earlier this year, the S&P 500 market index attained a value in excess of 1,360.   The average inflation adjusted annual earnings for the market as a whole was $53.50.  The resulting Price/Earnings ratio was over 25.  The average all time ratio for that market is 15.9!  While we can't use that ratio to tell us when to buy and when to sell, it is useful in telling us when we are paying too much!  By the way, the S&P 500 would be trading at 850 for it to be at the average P/E ratio of 15.9.  It is currently around 1,200.

Next time I will discuss my previous trade in July/August where I anticipated the correction in the S$P 500.

Questions?

Investing Time Horizon

The Process
The purpose of this post is to express my belief that markets go through a repeating process which results in the achievement of new highs and lows.  While this process does not exactly replicate itself, I do believe it falls within certain parameters.  Allow me to explain why this is important.  For those who think the markets act in some random fashion, what I am about to say will be of little consequence.  Such people are better served averaging into the markets over long periods of time.

The Neatness In Theory
Elisabeth Kubler-Ross popularized the notion that people experience different emotions when confronted with the fact they are about to die.  To her, it seemed there were a number of stages that people would experience, sequentially, one after the other.  While this was a convenient method for studying the process of dying, not everyone agrees those stages are so neatly ordered and labelled.  Few identify the end of one stage with the beginning of another.  Not everyone experiences every stage.  Still, I think most people, today, recognize this as a process, rather than a single event.

Pattern?
For many people to believe the markets follow some sort of pattern, requires that we identify a particular sequence of events that would indicate what was about to happen next.  Few would look to the occurrence of a combination of events, some or all of which would suggest what is to follow.  Surely, for a pattern to exist, at least one event could be identified that we could rely on as a signal of a top in the market, or as a signal of a bottom in the market.  Otherwise, how can we call it a pattern?

Asymmetry
I love to use the example of a toy that was popular when I was a child, called the Spirograph.  Using it, we can produce intricate symmetrical designs by repeating certain simple processes over, and over again.  Instead of following the exact process each time, if we introduced a slight variation of the size or shape of the inside disc, or the outside ring, as we went along, a pattern would emerge, but it would no longer be symmetrical.  In other words, it would not be the same each time.

Fractals
The most interesting thing, to me, is these variations of a theme (in the markets, and in nature), when combined, create a larger version of the smaller design.  These are known as fractals.  Breaking a fractal apart creates a smaller approximation of the larger one, not just a piece of it.  Fractals are abundant in nature: crystals, flowers, lightning and land formations, to name a few.  It is my belief that fractals represent the way things grow.  Markets are a reflection of how society grows economically, technically, and financially.

The Buying & Selling Process
If we believe the markets are an expression of the process of growth in society, and not just some random series of events, then there are a couple of important distinctions we can make.  First, successfully investing in, or trading stocks requires that we follow a process.  Buying at random, without any intention of selling, is an event. Buying with the intention of later selling at a higher price, becomes a process.  Buying at random with the intent of later selling at a higher price is purely speculation.   

Scalability
Second, an investing methodology should be scalable.  Due to the underlying nature of markets, we can use the same processes when day-trading as we can when investing for years at a time.  The difference is in how we aggregate the data.  We can look at charts of minute by minute ticks, or we can choose charts of monthly price data.  We can look at the change in fundamentals on a quarterly basis, or over periods of years.  In either case, the process remains, basically, the same.

Bottom Line
This is our edge.  In order to outperform most other participants in the markets, I am suggesting we need a process, one which is scalable to the time frame that suits our interests, and needs.  If we only want average returns, or worse, then little, or no action is required on our part.  People who don't know these things to be true will tell you it can't be done.  Don't rely on their saying so, just because they don't know how, or are unable to.

Do you know of a scalable process with which above-average stock market returns are possible?