Categories of investing books
·
Written for novices
by professional writers, who may never make a buck in the market. It is fine as
long as the target audience is beginners. This book explains some basic
concepts and use links to explain them in detail. My target audience is not for
beginners as there are many books for them.
You will not find good English in this
book, but tons of good investing advices. If you want to study science, read
books from Newton. If you want to learn investment ‘theories’, read the books
and papers from professors and some are Nobel-Prize winners. However, most have
something in common: They did not make money from investing in stocks. All
theories are just theories.
·
Written by Buffett’s followers concentrating on
value investing (Chapter 2-3 and Section VII).
·
Written by O’Neal’s followers concentrating on
trends via charts (Section IV and Chapter 114-116).
·
Written by predictors who had correct
predictions. However, check how many right corrections they have since the
right one. Usually none! It is usually their one-trick pony. This book’s chart
has detected the last two market crashes correctly.
·
Written by ‘successful’ investors. However, most
lost their fortunes with many examples in this book. This book shows you how to
protect your investment.
·
Written by true gurus; I’m not one of them but I
learn from them. Most do not review their secrets in detail or are too busy to
make money instead of writing books. Wait for their books when they retire.
·
Written on one theme such as ROE. Most work at
least one time. Even if they work, it is a waste of my time to read the entire
book describing all the data and his personal experience. I outline what works
here. When there are too many followers, their technique most likely does not
work.
·
Written to demonstrate their theme with selected
examples of great returns. However, the great returns are not real profits from
the authors but potential profits if you follow the theme.
·
Written by novelists describing his or her
personal experiences and containing limited useful information. This book
contains pointers in every chapter.
If you place the paperback of this book next to your PC for
handy reference, then I would fulfill my objective in writing this book. Amazon
offers free or low-cost Kindle version of the paperback. It will be useful for
future upgrades from me (not a promise).
This book tries
to combine the best of the value investing (Buffett’s approach) and growth
investing (O’Neal approach). They both work with the right tools, knowledge and
disciplines if the market is favorable to their style of investing.
Most investing strategies work, but not all the time. Some popular subscription
services publish their recent performances with dividends included and compare
them to the market indexes that do not include dividends.
If they do not beat the market recently, most likely they will not in
next month. However, when they have been down for half a year or so, most
likely they will work again. My guess is that the calculated reward / risk of
their stocks have been increased due to losing stock prices and / or the
current market conditions have been changed to fit their investing approach
again.
Bubbles
How bubbles are
formed
Bubbles have existed throughout our
history. Bubbles occur due to the excessive valuation driven up by the big
institution investors (fund managers, pension managers, hedge fund manager,
etc.). Asset valuations are then driven even higher by the retail investors. As
of 3/2014, the market bubble is caused by the government stimulus by the
injection of capital into the excessive money supply and subsidies. The first investors riding the wave make good money and the
last ones buying at the peak will suffer most.
From our recent history, we have the
2000 internet bubble, and then the 2007 (2008 for some) housing bubble. The
chapter Spotting Big Market Plunges (Chapter 50) illustrates it was easy to
detect the last two plunges. Read the chapter AGAIN and digest it. It could
save you more than 30% of your portfolio in the next plunge.
Today all the mentioned bubbles could
be caused by pumping too much money into the economy by the government (Chapter 51: A Non-Correlation of the Market and the Economy). However, the government
cannot keep on injecting money into the economy and ask our children to pay our
debts forever. When the injections stop, the market will drop fast and deep. As
of 3/2014, the new Fed chair woman most likely will not raise interest rate.
USD
As of 1/2014, the gold price has been
down from its height of 1,850. It will most likely remain in the range between
1,200 and 1,900 until the USD appreciates and / or the global economies
improve. The USD is doing quite well recently (actually at its highest level
since 2008). It could be the other countries (EU and Japan) are doing worse
than us and /or our shale energy is very promising, which will be clearer in
two years whether it is just another mirage.
Bond
The bond bubble will burst when the
interest rate rises. It will as the interest rate should be bottomed by now –
it can’t go negative I guess. I prefer to buy contra ETFs against 20-year
Treasury bonds (TBF). Besides bonds, farm products and the farm land have
reached high price levels. The student loan is getting its status as a bubble
soon.
Stocks
There are several bubble stocks but
they are few enough to move the entire market. From my technical indicators,
the market is peaking and overbought as of 4/2014. Play defense with stop loss
orders. So far I cannot find a potential trigger if the interest rate remains
low.
What
to act
Unless you ask me nicely to borrow my
time machine which is still under development, you cannot pin point when the
bubble will burst. Your timing to act
depends on your risk tolerance, your knowledge (a commodity trader can afford
to take more risk on commodities for example), your greed, and your past
experience that could give you false security.
Today, we have the housing bubble, the
gold bubble, the market bubble, the second housing bubble, the debt bubble, the
bond bubble, the second market bubble, etc. It seems we can never get out the
bubble cycle.
Since the world is economically
connected better than before. When the USA sneezes, it affects our trading
partners such as European countries, China and Japan, and also their partners
such as the resource-rich countries in S. America, Australia, Russia, Canada
and Africa.
For me, it is safer not to make the
last buck as the reward / risk ratio is too low except on deeply-valued stocks.
A good sleep would improve your health
and that is worth all the gold in the world.
The power of market timing
This table is
similar to the table on “A Tale of Two Plunges” (Chapter 49).
The difference
in the dates from my previous table is due to be the first of the month to get
the monthly data instead of daily data from Yahoo!Finance.
Detecting
market plunges detects the exit point and reentry points from 2000 to 9-2013 as
follows.
Table:
Vital Dates
|
Market Plunge
|
Peak
|
Bottom
|
Indicator
Exit
|
Indicator
Reenter
|
|
2000
|
08/28/00
|
09/20/02
|
10/01/00
|
06/01/03
|
|
2007
|
10/12/07
|
03/06/09
|
02/01/08
|
09/01/09
|
|
|
|
|
08/01/11
|
11/01/11
|
As of 04/2014, my chart (from
Yahoo!Finance) still indicates to invest fully in the market. Run the simple
chart once a month. When it indicates a potential market plunge is closer, run
the chart once a week.
It is based
on stock prices so it may not identify the peaks and bottoms precisely, but so
far it has never failed to avoid big losses and ensure big gains. Hope it will
give us enough time to act in the next market plunge as the last two.
Unbelievable
return with market timing
Calculate how
much you made if you followed the above exit points and reenter points from
2000 to today. I bet you would make a good fortune.
To test the
effect of market timing, I calculated the return of S&P 500 with and
compare it to the return of S&P 500 without market timing from 1-2000 to 9-2013.
There are
many assumptions to make the calculations easier. In general, dividends are not
considered. The return with market timing should be substantially better if we
buy a contra ETF during exits and sell it during reentry.
I was shocked
by the incredible return by using simple market timing and the chart tells us
to exit and reenter the market only 3 times from 2000 to 2013.
Summary info:
|
S&P
500
1-2000
to 9-2013
|
With
Market Timing
|
Without Market Timing
|
|
Better
|
500%
|
|
|
Gain
|
1,000
|
167
|
|
Gain %
|
68%
|
11%
|
|
Annualized
gained
|
5%
|
1%
|
|
Days
|
4,959
|
4,959
|
Calculations:
|
S
& P 500
|
With Market Timing
|
Without Market Timing
|
|
1-2000
|
1,4691
|
1,4691
|
|
Exit 10/01/00
|
1,0412
|
1,041
|
|
Enter 06/01/03
|
1,041
|
9644
|
|
Exit 02/01/08
|
1,4893
|
1,3794
|
|
Enter
09/01/09
|
1489
|
1,0205
|
|
Exit 08/01/11
|
1,888
|
1,293
|
|
Enter
11/01/11
|
1,888
|
1,251
|
|
09/03/13
|
2,469
|
1.638
|
|
|
|
|
|
Gained
|
2,469 – 1,469=1,000
|
1,638-1,469=167
|
|
Gain %
|
1000/1469 = 68%
|
167/1469 = 11%
|
|
Annualized
gained
|
68% * 365/4959=5%
|
11%*365/4959=1%
|
|
Better
|
(1,000-167)/167 = 500%
|
|
Portfolio
with Market Timing:
1
Both starts with S&P 500 of 1,469 on 1-3-2000.
1
10/01/00. The
market timing portfolio exits the market and remains same value of 1,041 until 6/1/00.
2
02/01/08.
The market timing portfolio exits the market and remains same
value of 1,489 until 9/1/09.
1,489
is calculated as follows:
1,041 * (1 + Rate) = 1,041 * (1 +
1,379-964)/964) = 1,489
where S&P 500 is 964 on 6/1/00 and
1,379 on 2/1/08.
The other calculations are based on S&P 500 is 1,020 on
9/1/9, 1,293 on 8/1/11, 1,251 on 11/1/11 and 1,636 on 9/3/13.
Portfolio without Market Timing:
1
Both starts with S&P 500 of 1,469 on 1-3-2000. We could use the 9/3/13
S&P 500 value, but it will not account on some compounded interest
consideration.
4
S&P 500 is 964 in 6/1/00 and 1,379 on 2/1/08.
5
02/01/08. The portfolio value is calculated to be 1,020 as follows:
1,379 * (1 + Rate) = 1,379 * (1 + (1020-1379)/1379)
= 1,020
where S&P 500 is 1,379 on 2/1/08 and
1,020 on 9/1/09.
The other calculations are based on S&P 500 is 1,293 on
8/1/11, 1,251 on 11/1/11 and 1,636 on 9/3/13.
I cannot
believe the shocking return with market timing. I checked my calculation and
there was nothing wrong but do not hold me on this. Ignoring the compound rate
of return should be minor. If you have time, send me your e-mail address to
pow_tony@yahoo.com, so I can send you the spreadsheet to check out any error.
Even if I made
a mistake somehow and got 100% instead of 500%, it still doubles the return
without market timing! Ask any fund manager what it means to his or her fund
performance and his / her career.
It will
detect the next market plunges, but it may not give us ample of time to react
as the last two. It will not detect the precise bottoms and peaks as they
depend on the stock price of an ETF representing the market. It may not work as
effectively if there are too many followers.
The stock
prices of SPY are obtained from Yahoo!Finance. The entry and exit points are
obtained from my simple chart from Yahoo!Finance described in Chapter 4-6 and are
subject to my interpretation.
Afterthoughts
·
Many including myself do not believe a market
plunge is coming as of 1/2014. However, we have to be careful with the
following analysis. Run the simple chart described in Chapter 6 to spot any
indication of a market plunge at least once a month.
o Among
my top-performing screens for the last 3 months, many top-performed screens are
from the peak stage (defined by me) than other stages in a market cycle.
o
The typical market cycle is about 4 years. We
have about 6 years since 2007.
o
The stock market has not reached the bubble
stage yet. It will if it continues to rise at this pace in 2013.
·
On 6/20/2013, the market lost more than 2% in a
day due to the Fed indicating no more easy money. The bond yield jumped. The
Fed has been dumping about 1 trillion a year. When the money stops, the market
would crash and the 2% loss seems to be a canary. Hopefully the current
correction would be less than 10% [Update: only 6%]. Wall Street depends on the
government handouts and the government is running out of tools to fix the
economy.
I expect the interest rate will rise gradually.
·
Some REITs
are inversely affected by the rising interest rate.
·
As of 1/2014, the market
still keeps on climbing up despite our poor economy. I wrote:
* About half of the total trades are driven by computers which can change their minds anytime and they could sell at the same time.
* The higher we climb, the steeper the cliff we will fall from.
Need to take action according to your individual risk tolerance. It is hard to convince the lottery winners not to buy lottery tickets. I had a hard time to tell my friends to exit in the beginning of 2000 when they made many times their regular incomes for 'working' 15 minutes a day.
·
Will the market go even
higher as of 1/2014? We have to compare the risk / reward ratio. If the risk is
too high, we may want to take some chips off the table.
·
I was accused of selling the secrets of
detecting market plunges for less than $10. My reply:
There are 4 groups of investors.
1. Institutional investors. They vary in performances. In short,
hedge funds as a group do not beat the market in the last 5 years.
2.
Mutual funds. Most cannot do
market timing from their own regulations and as a group they do not beat the
market after expenses.
3.
Most retail investors who
are always on the wrong side of the market via fears and greed.
4. While investors from #1 to #3 are losers, there must be some
winners beating the market as a trade is a zero-sum game.
In theory, we cannot beat the mutual fund managers who have better resources. However, we can use market timing to our advantage.
In theory, we cannot beat the mutual fund managers who have better resources. However, we can use market timing to our advantage.
Links
I do not
agree with the professor most of the time and this time I do.
·
An article
on “Why the author is shorting the market in mid 2013”.
Conventional wisdoms that work
·
You need to know both
value investing and the basic technical analysis (described in this book) to be
successful in today’s market.
·
Market timing could
avoid more than 30% of the loss from a market crash. From 2000 to 2013, the
simple chart (provided free from many web sites) advises when to exit/reenter
the market only 3 times.
·
Buy in fears and sell
in greed instead of the other way round.
·
An inflated sector
will return to the average value.
·
Act to opposite to
the herd only if you have good arguments that the herd is wrong.
·
You may be lucky to
win big in one or two bets. The long-term success depends on knowledge, hard
work and tools – not luck.
·
You can never learn
investing in colleges. Follow the books written by traders and investing gurus.
Paper testing your strategy. Continue learning with real money (do not bet the
entire farm at least initially) and there is no substitution with real trading.
·
Be conservative and
diversified. The turtles are always the winners in the long run.
Afterthoughts
http://ebmyth.blogspot.com/2013/11/more-on-highlights.html
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