“Become more humble as the market goes your way.” – Bernard Baruch
Lately, it feels like every time I time I log into check my investment accounts the market values are higher than the previous time I looked. The stock market continues to hit all-time high after all-time high. I have to admit, it feels pretty good when things are going your way in the markets and it seems like everything you touch turns to gold.
This is easy. Everything I buy just keeps going up.
It would be nice to assume that my intelligence has risen along with my skills as an investor, but I have to admit that’s not really what’s going on here. We just happen to be in the midst of a strong bull market. So I have to remind myself. Seeing your investments rise is no way to validate your level of intelligence. In fact, it can be extremely dangerous to your wealth when the music stops playing.
Who needs an insurance policy when all of my risky investments have been rising for years?
Researchers have found that the brain activity of a person who is making money on their investments is indistinguishable from a person who is high on cocaine or morphine. The brain of a cocaine addict who is expecting a fix and people who are expecting to make a profitable financial gamble are virtually the same. The danger in allowing a bull market to increase your confidence as an investor is that it can lead you to take unnecessary or avoidable mistakes to continue to get that high.
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Even with a time machine, a lot of people wouldn’t want to own the best-performing stocks.
Monster Beverage (NASDAQ: MNST) was the best-performing stock from 1995 to 2015. It increased 105,000%, turning $10,000 into more than $10 million.
But this isn’t a retrospective about how you should wish you owned Monster stock. It’s almost the opposite.
The truth is that Monster has been a gut-wrenching nightmare to own over the last 20 years. It traded below its previous all-time high on 94% of days during that period. On average, its stock was 26% below its high of the previous two years. It suffered four separate drops of 50% or more. It lost more than two-thirds of its value twice, and more than three-quarters once.
That’s how the stock market works.
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The MACD is a momentum and trend-following indicator that is based on the information of moving averages and, thus, ideal to act as an additional momentum tool and momentum filter for your trading. In this article, we will explain what the MACD does, how it helps you analyze price and how to use it in your own trading.
First, let’s take a look at the individual components of the MACD indicator:
MACD Line: The MACD line is the heart of the indicator and it’s the difference between the 12-period EMA and the 26 period EMA. This means that the MACD line is basically a complete moving average crossover system in just one line.
Signal Line: The Signal line is the 9-period EMA of MACD Line
MACD Histogram: MACD Line – Signal Line
In this article, we focus on the MACD and the signal line in particular. The histogram is derived from the other two components of the MACD and, thus, don’t add as much explanatory value to overall MACD trading.
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To be a profitable trader you must overcome these ten things:
- You must beat the market benchmark you are competing against or you might was well just buy and hold that index.
- You must beat your emotions by following a trading plan.
- You must beat your ego by taking losses early when you are proven wrong.
- You must beat your greed by managing your position sizing to limit your risk exposure.
- You must beat your fears by letting a winning trade run when there is no reason to exit.
- You must beat your desire to predict the future by reacting to what price action is actually happening.
- You must beat the trader on the other side of your trade.
- You have to make enough money to beat your commission costs.
- You must not let the market beat you up with too many losses and make you quit.
- You must beat the naysayers who think active profitable trading is impossible.
The original post is authored by Steve at newtraderu.com and is available here.
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The pressure to outperform all the time leads stock pickers to constantly seek mean reversion trades
Over a three-year time period, stock prices tend to mean revert. This has spawned numerous investment approaches that try to squeeze capital gains out of those reversions. Classic deep value investing, as popularised by Benjamin Graham at Columbia Business School, taught that you would succeed by buying 50-cent dollars and selling them when and if they reverted to the mean. The “Dogs of the Dow” strategy of buying the 10 highest-yielding Dow stocks was born out of mean reversion.
Over long time periods, common stock performance falls on a bell curve like the one listed below. Half the stocks outperform and half underperform. Among the poorest performers, some go to 0%, and 5% of common stocks do so poorly that they can ruin a concentrated stock portfolio. (1)
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Forbes Magazine, Dec. 19, 1994
At the typical stock-fund office, phalanxes of computer screens glow like the control room of a nuclear reactor. The portfolio manager is an intense young MBA. He can recite earnings estimates by rote for each of the 100 stocks in his billion-dollar fund. He’s a high-pressure guy, the atmosphere is electric with excitement, and the phones are always ringing. All this costs money, but the managers have to justify themselves. What are they for if not to trade in and out of stocks?
Yet all this striving does nothing for most fund investors. Although the industry has its good years, over long periods of time the average U.S. stock fund does worse than a market index. No wonder: Typical annual expenses run to 1.3% of assets.
George Mairs, 66, does things differently. Mairs & Power, Inc., founded by Mairs’ father in 1931, has nine employees and runs a total of $300 millon out of the old First National Bank Building in St. Paul, Minn. Nearly all that money is in separate accounts. Mairs & Power Growth Fund has $41 million in assets; a balanced mutual fund, Mairs & Power Income Fund, runs $13 million.
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Some excerpts from my annual review to subscribers. Hope you will find it useful
Sources of outperformance
Superior performance versus the indices can usually be broken down into three buckets
- Informational edge – An investor can outperform the market by having access to superior information such ground level data, ongoing inputs from management etc.
- Analytical edge – This edge comes from having the same information, but analyzing it in a superior fashion via multiple mental models
- Behavioral edge – This edge comes from being rational and long term oriented.
I personally think our edge can come mainly from the behavioral and analytical factors. The Indian markets had some level of informational edge, but this edge is slowly reducing with wider availability of information and increasing levels of transparency.
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Housing & Urban Development Corp Ltd, popularly known as “HUDCO” that recently celebrated its 47th anniversary on 25th April 2017 and enjoying “Mini Ratna” status among PSUs is breaking the ice after a gap of 5 years (since April 2012) with a maiden IPO from a PSU. This wholly owned GoI Company is engaged in urban and rural housing as well as infrastructure project financing and has a track record of profit generation and dividend distribution since inception. It enjoys AAA rating for its debt plans from rating agencies like CARE, ICRA and IND Ra to have low cost debts.. Its housing finance loan is classified as social housing, residential real estate and retail finance (branded as Hudco Niwas). Under social housing Hudco is financing economically weaker sections/ lower income groups of the society.
For urban infrastructure finance, Hudco distributes loans relating to water supply, roads and transport (including railways and ports), power, SEZs, gas pipelines, oil terminals, telecom network, market complex, shopping centres, hotels, office buildings, sewerage, drainage, solid waste management etc.
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Derivatives or Futures and Options are leveraged instruments to trade in the stock market. There are broadly 3 groups of people who use derivatives-
- Short term traders for making quick buck– most of them want to make a quick buck. Leveraged trading means, you can potentially make 100% returns from a 10% movement in the stock. 100% returns from a 10% move looks lucrative! The only issue is you can lose bigger amount if stock moves in opposite direction
- Long term stock investors for hedging portfolio- these category of people may use derivatives for long term hedging of their portfolio or making some extra return on their stock holdings. They mainly use options. And, the idea is to hedge the portfolio, and not make great returns from short term trading
- Long term investors who buy special long term options with a long term view- These include big investors including Warren Buffett and many others buying warrants, convertible debentures, long term calls etc.
Majority of people who trade in derivatives come in the first category. More than 95% of traders lose money. Mostly these are young people who get job in corporate companies, open a new demat account and want to make some quick money. They are replaced by new traders (as new graduates complete college and get job). The cycle repeats.
Here is an interview of Nithin Kamath where he mentions –
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Santa knocks on all our doors not once, but four times a year. During his off-season, he reliably shows up bearing profitable gifts on February 14th, May 15th, August 14th and November 14th. These are the deadlines for 13-F filings with the SEC.
The “13-F” is a quarterly disclosure required of all individuals and entities who have $100 million or more invested in US equity markets. The 13-F is due within 45 days of quarter-end and lists the updated stock positions of the managers. These filings are publicly available at no charge to anyone. Websites like Dataroma make it a breeze to track the picks of various value investors. There is such a thing as a free lunch.
Non-believers will complain that buying these picks after a multi-month delay simply can’t work because markets are too efficient. Well… not so fast. A 2008 study by Professors Gerald Martin and John Puthenpurackal entitled, Imitation is the Sincerest Form of Flattery, cloned Berkshire Hathaway’s equity portfolio between 1976 and 2006 by investing in the positions with a substantial delay. Their cloned portfolio always bought (or sold) on the last trading day of the month that it was publicly disclosed that Buffett had bought a new stock or lightened up on an existing one.
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