Month: February 2013

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

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

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.