Mention value investing and the phrase brings up different connotations for different people.
Some investors see value as a style as a dead regime, something stuffy old investors like Warren Buffett (Trades, Portfolio) live by, and their devout following of the strategy has cost them big time as they have missed out on some of the market’s best opportunities.
On the other hand, you have the devout value investors, those who remain fully committed to the strategy initially set out by Benjamin Graham and his partner David Dodd, all those years ago, even though this strategy has generated relatively lackluster returns over the past decade.
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Successful trading is 90% waiting and 10% execution and that’s the exact reason why trading is so challenging. When people think about trading, they imagine a well-dressed Wall Street guy who angrily shouts at his monitors while being on the phone with London, Hong Kong and Tokyo simultaneously to place the next big killer trade which will make him a lot of money. Dead wrong!
In this article, I will show you my approach to trading and explain how you must trade calmly and in a relaxed state of mind if you want to be successful in this business.
I call myself a reversal or early trend trader which means that I look for established and mature trends that show signs of exhaustion. The general trading literature suggests that new traders start with the trend following approach but from my experience I have seen that the reversal approach does make more sense to most traders.
Reversal trading has a bad reputation because people believe that it’s all about trying to predict the next market turn before it happens which couldn’t be further from the truth. Reversal trading is often nothing but early trend following trading as we will see.
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With so many articles dedicated to the debate on value stocks vs growth stocks I think it’s a good time to revisit what Seth Klarman calls ‘Value Pretenders’ in his best-selling book, Margin of Safety.
Here’s an excerpt from that book:
“Value investing” is one of the most overused and inconsistently applied terms in the investment business. A broad range of strategies makes use of value investing as a pseudonym.
Many have little or nothing to do with the philosophy of investing originally espoused by Graham. The misuse of the value label accelerated in the mid-1980s in the wake of increasing publicity given to the long-term successes of true value investors such as Buffett at Berkshire Hathaway, Inc., Michael Price and the late Max L. Heine at Mutual Series Fund, Inc., and William Ruane and Richard Cunniff at the Sequoia Fund, Inc., among others. Their results attracted a great many “value pretenders,” investment chameleons who frequently change strategies in order to attract funds to manage.
These value pretenders are not true value investors, disciplined craftspeople who understand and accept the wisdom of the value approach. Rather they are charlatans who violate the conservative dictates of value investing, using inflated business valuations, overpaying for securities, and failing to achieve a margin of safety for their clients. These investors, despite (or perhaps as a direct result of) their imprudence, are able to achieve good investment results in times of rising markets.
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Before I really knew anything about human behaviour, incentives, and how the markets really work, I was always blown away by the sheer amount of intelligence I would come across in the investment world.
Most of the people I’ve interacted with throughout my career are highly educated at some of the best colleges and universities in the world. Many continued their education by getting advanced degrees or prestigious industry designations. They can speak eloquently, hit you with reams of data, can sell a ketchup popsicle to a person wearing white gloves, and have the utmost confidence in their own abilities.
After a few years of being impressed by the sophistication and above average IQ of the various portfolio managers, strategists, analysts, and marketing people I came into contact with, I finally had a realization – intelligence can only take you so far in this world. I didn’t exactly have an epiphany on the topic, but over time the shine began to wear off.
It became apparent that the smartest person in the room isn’t always right. In fact, most of the time their intelligence works against them because they’ve become so sure of themselves and their investing abilities that they’re unable to change their mind or accept the fact that the markets don’t care what your IQ is.
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Today’s lesson is a virtual treasure trove of wisdom and insight from some of the best trading minds of all time. We are going to go on a journey of discovery and learn a little about some of the best traders ever and dissect some of their famous quotes to see what we can learn and how it applies to our own trading.
The way to learn anything is to learn from the greats, have mentors, teachers, study and read; you must make a concerted effort to absorb as much knowledge from the best in your field as possible, for that is truly the fastest way to success, be it in trading or any other field.
Below, you will find a brief introduction to 10 of the best traders of all time, followed by an inspiring quote from them and how I view that quote and apply it to my own trading principles. Hopefully, after reading today’s lesson you will be able to apply this wisdom to your own trading and start improving your market performance as a result…
George Soros
George Soros gained international notoriety when, in September of 1992, he invested $10 billion on a single currency trade when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion. As a result, he is famously known as the “the man who broke the Bank of England.”
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One of our readers shared the transcript of a roundtable talk among Seth Klarman, David Abrams, and Howard Marks almost 10 years ago. It is a very long read (22 pages) but if you’d like to learn about these great value investors and their investment approaches, it is a great read. I will share some excerpts from each of these investors and share the link at the bottom of this article. Here is how Seth Klarman summarized what Baupost does:
“In terms of investing I would say that there is no exact formula for what we do. We try to use all the value investing principles we know. The world is imperfect. The world doesn’t just dish up net, nets all the time. The world doesn’t dish up stocks trading below cash all the time, doesn’t deliver fine businesses at eight times earnings all the time. So we look very hard for mis-pricings, for information asymmetries. for supply/demand imbalances, and we find ourselves at various times heavily in distress debt or no position in distress debt, significantly involved in equities and uninvolved in equities, very focused on private markets or uninvolved because you can create the same assets cheaper in the public market. So in a nutshell that’s our approach. Very opportunistic. We try to be not siloed the way many people are. We don’t have industry analysts we have generalists who can move quickly from working one day on a drug stock to another day on the distress debt of a bank, and another day even potentially on a mortgage security or real estate investment. That’s not easy but it does provide constant stimulation, a lot of cross-training, which people enjoy, and it also means that our resources will always be deployed in the most interesting areas all the time. So that’s Baupost in a nutshell.”
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Over the course of 15 years working as a performance coach with traders and investors, from day trading shops to hedge funds and investment banks, I’ve enjoyed an unusual front row on the factors that contribute to success and failure in financial markets. During that time, I’ve conducted numerous interviews, directly observed hundreds of traders and administered countless personality tests. That experience has convinced me that much of what we think we know about trading success is just plain wrong. In this article, I tackle three myths of trading success and offer alternate perspectives.
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An oft quoted line from celebrated fund manager Sir John Templeton stated, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Market watchers pondered the veracity of this maxim as markets soared throughout 2017. Now, rattled by some volatility, the question on many investors’ minds has been: Are we end-of-cycle euphoric?
The current bull market for U.S. equities is approaching its ninth year and if sustained until August, will be the longest running bull market in the history of the S&P 500. However, since the beginning of 2018, it appears each week has offered new potential for corrections, or even a wholesale transition to a bear market. Most recently, concerns about the effect of the U.S. Administration’s trade tariffs—and China’s response—sent markets tumbling.
So how can investors tell the difference between a bull correction and the arrival of the bear? In a recent report, Morgan Stanley Research analyzed S&P 500 trends since 1950 to identify recurring patterns in corrections and market shifts and provide investors with some historical signs that change is afoot.
Bull Correction vs. Baby Bear
Market drawdowns happen more often than most investors realize. The report notes that since 1950 there have been more than 100 instances of 5% or more S&P sell-offs, and 32 times in which the drawdown was more than 10%. Over the past century, the likelihood that the S&P is down 5% or 10% at any given point in a year has been 46% and 29%, respectively.
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Fibonacci Trendline Strategy: 5 Steps To Trade
I am going to share with you a simple Fibonacci Retracement Trading Strategy that uses this trading tool along with trend lines to find accurate trading entries for great profits.
There are multiple ways to trade using the Fibonacci Retracement Tool, but I have found that one of the best ways to trade the Fibonacci is by using it with trend lines.
The Fibonacci Retracement tool was developed by Leonardo Pisano who was born around 1175 AD in Italy was known to be “one of the greatest European mathematicians of the middle ages.”
He developed a simple series of numbers that created ratios describing the natural proportions of things in the universe.
And these numbers have been used by traders now for many years!
With this strategy, you will learn everything you need to know to start trading with the Fibonacci Retracement tool. You’re going to find out the Fibonacci meaning, Fibonacci algorithm, Fibonacci biography, the Fibonacci formula for market trading, Fibonacci series algorithm, the Fibonacci sequence in nature, along with many other useful facts about this great tool!
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If you question how ‘boring’ can be beautiful, you have been following the wrong investment strategy.
Too many people have the misconception that investing is glamorous. The reality is that glamour is the last thing you will find in the stock market, most especially if you plan on being successful.
Hedge fund guru, George Soros sums it up brilliantly: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Sure, we have all heard of a stock market success story or two. You probably have an acquaintance who made a decent return from investing in a tech stock that tripled in price before selling. Maybe even someone who inadvertently timed the 2008-09 crash correctly. In most cases, these successes are short-lived and can be attributed to pure luck. Although these ‘successful investing’ stories make for good dinner-party conversation, they are by far the exception among prosperous independent investors.
The fact is investors who produce the flashiest returns, time and time again, usually do so in the most unglamorous manner. A great example is Warren Buffett, who built an empire investing in so-called ‘boring’ stocks.
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