12 Market Wisdoms from Gerald Loeb

1. The most important single factor in shaping security markets is public psychology.

2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.

3. Accepting losses is the most important single investment device to insure safety of capital.

4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.

5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.

6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations. . . prices and trends are really the best and simplest “indicators” you can find.

7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.

8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-

9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.

11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence…….The market is better at predicting the news than the news is at predicting the market

12. You don’t need analysts in a bull market, and you don’t want them in a bear market

Mark Cuban On Story Stocks

Different catalysts matter for the different time frames. In short-term perspective, price momentum is the most powerful catalyst. Short-term could sometimes be a couple years in the market. Here are a few wise words, written in 2004, by someone who has been on both sides of the table – as a shareholder and company owner:

For years, a company’s price can have less to do with a company’s real prospects than with the excitement it and its supporters are able to generate among investors. That lesson was reinforced as I saw the Gandalf experience repeated with many different stocks over the next 10 years. Brokers and bankers market and sell stocks. Unless demand can be manufactured, the
stock will decline.

If the value of a stock is what people will pay for it, then Broadcast.com was fairly valued. We were able to work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers.

Jump over to read the whole story. It is well worth it.

Source: BlogMaverick

Let’s Talk About Hedging

There are two ways to learn in life – through your own mistakes and through other people’s mistakes. The former is usually more effective. Nothing beats self-discovery but you better be willing to learn from other people’s experience too. The latter improves the odds of survival and accelerates your learning curve. It makes sense. We don’t need to invent the hot water every decade.

Over the weekend, Howard Lindzon shared his frustration with hedging. Go read it. Howard is a market veteran, who has been through any market you could imagine; meaning his intuition and lessons count for something.

Here is my perspective on hedging.

In bull markets, hedging your long high-beta equity positions by shorting the indexes is rarely a good idea. Bull-markets are low-correlation “markets of stocks”, where sector rotation could keep the indexes afloat while industries are correcting under the surface. While energy and tech are lagging, consumer discretionary and finance could lead. When the latter take a break and consolidate, the former take the lead. In bull markets, indexes could trade sideways or continue climbing slowly while individual high-beta stock correct, one by one. Shorting the indexes via put options does not deliver proper protection.

As the saying goes, in bull markets, you need to be long or on the sidelines; in bear markets, you need to be short or on the sidelines.

There is time for everything.

When volatility and correlation start to rise, when momentum stocks as a group begin to underperform, all of a sudden shorting indexes becomes a good way to hedge.

The Best Performers Of the Past Decade Are Never the Best Performers Of the Next Decade

Circuit City was the best performing stock of the 80s. It is bankrupt today. Best Buy drank their milkshake in the 1990s. Amazon killed them in the 2000s.

$DELL won the 90s. It is likely going private at 75% below its highest point.

Green Mountain Coffee ($GMCR) and Monster Beverage ($MNST) – formerly Hansen Natural, were the best performers of the 2000s. The former is trading 60% below its all-time high, the latter is about 40% below all-time high.

And yet, some of the best performers of the 2000s, have done incredibly well since 2010.

In the first decade of the new century, Panera Bread ($PNRA) gained 1600%, Middleby Corp. ($MIDD) gained 1700%, Sirona Dental Systems ($SIRO) gained 2600%. They haven’t done too poorly since 2010:

midd pnra siro

Sooner or later, all trends end – some more abruptly than others. This is not to say that momentum does not work as an equity selection system. It just does not work all the time. The rule of thumb is that the best performers of the past 6 months to 3 years, tend to outperform in the next 6 months to 3 years. Anything beyond that, usually leads to mean reversion.

Why some stocks experience much deeper mean-reversion and others consolidate mostly through time?

The stock market is a forward-looking mechanism that discounts pro-actively, often 6 to 18 months into the future. Price momentum usually leads earnings and sales growth in the first phase of any long-term stock market trend. Then, if fundamentals don’t catch up, there’s a mean-reversion.

The market is not stupid. It makes an assumption, sometimes based only on a good story, other times based on real fundamentals; it discounts that assumption pro-actively, but in the same time it is expecting positive feedback in terms of actual earnings and sales growth. If the latter don’t come, a correction follows. If earnings and sales growth numbers confirm and exceed market expectations, the trend continues.

Most stocks don’t manage to live up to market expectations about them. This is why market history is full of thousand of examples of stocks that made 200-300% return in a year or two that then gave back most of it. There are very few stocks that manage to keep up with market expectations in the long run.

In the Future, Half of the People Will Be Self-Employed

No matter how much cheap money Bernanke throws into the system, he won’t be able to make a dent in the unemployment picture. He can’t. The problem is not in the lack of jobs, but in the lack of skills that are in demand. The problem is not cyclical. It is structural and a mere side effect of a secular technological trend that will only accelerate. Companies will need less and less full-time employees as almost everything could be outsourced – website design and building, support, branding, accounting, financing, recruiting, even sales …it is happening.

The only thing you will need is to come up with the idea (and you could borrow even that) and more importantly have the guts and persistance to execute your plan. 10 years from now, there will be a lot of companies that consist of only 2-3 people…that should not discourage you. You just have to learn the right  skills to fit in the new picture.

The market has already been discounting the structural changes in the job place for awhile. Specialized outsourcing and temp-staffing agencies were among the hottest investments in 2012, in both public and private markets. Most of them are enjoying strong 2013 too. The world will always need good market-makers or “match-makers”.

staffing agencies