Wednesday, February 8, 2012
Thursday, March 6, 2008
Monday, January 7, 2008
If you want to make money from investing/trading, it is helpful if you understand your competition, that is the people trying to make money off you. You might not identify them as competition, but rest assured you are competing with several vested interest groups in the market, so its worthwhile trying to understand how they think. Consider the following:
1. Taking a position: Small investors can place orders in the market without influencing it to any significant extent. For institutions, the only way they can get sufficient stock is to seek primary placements, or to manipulate the stock price. They will do this by placing stock on the market to create the perception that the price is weakening whilst at the same time buying with smaller volumes. They are more likely to do this on weak trading days as the strategy will be more likely to succeed. The same strategy holds true when they are dumping the stock. They place support under the stock, encouraging smaller investors to place orders in front of them, and they will sell into those orders. It need not mean that the stock will not go higher, its just that they need to be more conservative in their price expectations because of the volume of stock they need to unload.
2. Timing of trades: Institutions need volume so they tend to trade the stocks with higher trading volumes. If the pickings get a little slim in the majors they need to engage in price manipulation to get the volumes they need. The best time for them to enter the market is on opening, and to some extent on closing. Most people make investment decisions in the morning, so this is the best time for institutions to pick up the stock they want.
3. Origin of funds: You need to consider the type of investor holding your stock. If you are holding stock with a significant proportion of foreign investors, then you need to consider that the interests of those investors is different from yours. Foreigners are concerned about forex changes and the factors that influence forex rates. eg. You might hold a copper producer through a period of economic weakness because whilst you might anticipate the copper price to fall, you are expecting your home currency to fall as well, and if you are impressed by higher output, you might be optimistic. But for foreign investors, things are not stable for them. They are not benefiting from a home currency weakness, rather they are exposed to an odd 15% fall in the currency, so given the risks attached with not knowing the future, they will abandon the stock until the home currency consolidates. In these circumstances you are advised to watch your home currency. You might think the stock represents great buying, but it will likely languish until those foreign investors return.
4. Term of investment: You need to decide how long you are going to invest for. For some of you, that might depend on how long your competitors are investing for. Investors invest for anywhere between 3 minutes and 5 years, so its worthwhile considering what your opponents are doing. The critical factor here is the prepensity of investors to sell. To determine that you need to know why they bought. Here are the possibilities:
a. The stock was oversold - so traders have entered the market - expect them to dump the stock within 3 days
b. The stock recently had an issue - expect the pundits who took up the stock for a stag (windfall) profit to dump the stock at the first opportunity. The threat is even greater if an underwriter was forced to take up the stock.
c. The stock has a capital raising due - A stock issue can rise or fall with an issue due. If its a good project, there will be institutional support, but its mostly manipulation, as no one has a vested interest in the short term of the stck, they just want the money. Thats not to say you shouldn't invest, just know when to buy & sell. Dont be too willing to buy into a story that will deliver in 1-2 years - markets have short memories.
5. Distribution of shareholders: Clearly if 40% of the stock is held by management then that is less likely to find its way into the market, and might also discount the possibility of a takeover. Just 10% equity can stop predators from gaining 100% ownership, however 50% for control is more readily achieved. Perhaps the most important shareholders are directors, so take an interest when they are buying stock. Mind you I think directors can manipulate. I dont see anything stopping them from holding their equity whilst at the same time selling short their entire holding. I bet too that this scam is not regulated by governments. They really have no interest in catching executives doing the wrong thing unless it hurts votes.
6. Risk premiums - You need to consider that some investors (particularly in the blue chip stocks where they have a more generous collateral margin allowance) are trading on margin. If there is a rise in interest rates, they need to sweat the impacts in terms of higher interest cost, as well as leveraged exposure to something tha might not rise in the short term. They need to think short term to recoup their interest expense, so you need to think the same way. This is particularly true now that we are in a climate of rising interest rates (inflation). The big factor will be the underwinding of the carry trade as investors adjust their perception of risk. The implication is a higher risk premium attached to the cost of capital.
7. Strategic interest - You need to be aware that some investors have their own strategic interests or context. You might think you have bought into a winning stock, but if its going down on you, maybe you dont have all the facts, or just maybe some major shareholder has determined that they can make more money elsewhere. Maybe they got it wrong. In mining equities, alot of companie end up with non-strategic stakes in small companies by virtue of having backdoor listed assets in the company, or offloaded projects for equity. Expect these investments to be offloaded gradually over time if a significant investor cannot be found for a special sale.
Tuesday, December 25, 2007
I often see comments that say that 80-85% of traders dont make money. I think there are a multitude of reasons why this is the case. I will mention some here:
1. Lack of experience: This is where a trader does not have the experience to make good decisions. There is little one can do to avoid a lack of experience, other than to face it head on by reading books. You can always retreat to what you know, the markets you know, but of course its not bad to have setbacks, as long as you commit yourself to overcoming them, and have a strategy to do so.
2. Poor organisation: This is where a trader does not have the resources at his fingertips to solve problems. Common organisational errors include failing to
3. Poor planning: This is where traders dont anticipate the positive or negative consequences of their trading actions.
4. Poor discipline: Alot of traders have alot of difficulty sticking to their trading plan. They may or may not identify a list of things they have to do during the day, but they dont stick to it. They are distracted, demotivated, or otherwise not focused on their business.
5. Poor psychology: This is where a trader continues to make the same mistakes despite identifying the cause of the problem through a process of logic. There are several issues that arise related to trading psychology:
a. Self righteous: The trader needs to be right, so they turn a blind eye when the market turns against them. They dont even need to mount arguments, they are just hoping the market turns.
b. Self indulgence: There is a tendency to be undisciplined with trading. This is particularly the case in times of significant profits or loss, so you become loose with your investment decisions, or you take larger positions.
c. Making emotional decisions: Emotional decisions are motived not by rational arguments, but rather by fear or greed. The timing of these decisions is often very telling.
It goes without saying that trading suits only people with very healthy psychology. The reason is that traders actions in any instance have a great deal of bearing on how they feel about themselves. There is a tendency to place all the value of their actions on their trading results, as opposed to all the research they have done. One of the difficulties is that traders efforts are poorly correlated with their efforts. Success can be a fluke, and losses might happen despite some insightful thinking. eg. You anticipate a move in copper prices. It happens, but you fail to take profits because you were not paying attention or you anticpated a greater move.
I guess one of the appealing reasons for becoming a trader is the idea of living a flexible life. Just to give you an idea, here are some of the benefits and obstacles. Starting with the benefits:
1. Flexible residence: Trading potentially gives you the flexibility to live anywhere where there is a reliable internet connection. I have traded from Japan, Australia, the Philippines, and also whilst travelling through countries such as Vietnam, Singapore, Malaysia. There are of course issues to deal with, eg. setting up accommodation, finding new friends, getting your communications connected, dealing with visas. Some of the better places are the Philippines (you can renew visas for a year without leaving), Japan (90days, but just jump to Korea for the weekend cheaply), Indonesia, Thailand, etc. If you are interested in Japan I recommend buying a foreclosed property there. I bought one several years ago. See my foreclosed website http://foreclosured.blogspot.com. Japan is without a doubt the most interesting place to work. I also recommend joining Tokyo Traders. They have great parties in Roppongi (Tokyo).
2. Flexible working hours: Depending on where you are living, and the markets you want to trade, you can have the flexibility of trading in any time zone you want to, thus allowing you to decide when you work.
3. Lower cost: If you are successful you can live a low cost, alternative lifestyle. For a year, before I went to Japan, I lived for a year in a 1br beachfront apartment in Port Macquarie, NSW, on the east coast of Australia. This is an idyllic location, that allowed me to walk along the beach twice a day. I was a walk from town, paid just $500/mth for the apartment, needed only get a 6mth lease, allowing me to leave at will after 6mths. It suited me because it was a tourist centre for backpackers and it was close to good mountain biking and whitewater canoeing locations.
4. No commuting: If you are disciplined about your trading, you dont need to commute to an office, that saves you $30-50/week, and the queues for public transport, or road congestion in peak hour traffic.
But there are also some negatives for traders:
1. Perceptions: Most traders loose money, so a great many people (girls) think you are an uneducated, bumb with no prospects. Not strictly correct, I was an educated one! :) There is a perception that you have the ethics of Gordon Geko, that you will go broke 2-3 times in a lifetime, that you will end up in bankruptcy court or prison.
2. Discipline: Working from home alone makes it difficult to make yourself accountable. You need to treat trading like a business. The best way of doing that of course is to structure the enterprise like it is a business. Why not develop a partnership. You increase the corporate's equity, you share tax (loss) deductions, you get your accountability (other partners whom are not happy you loosing money), you get trading and drinking buddies, you have the flexibility of specialising and watching different markets, you have 3rd party measures of success. You could rent a 5br beachside house with trading partners, and when you get sick of one location, you move on to the next location. I'm sorry I learned this too late. Better still, treating your business as a corporation makes it easier for you to seek outside investors. The most profitable traders are those that manage other people's money.
3. Stress: Trading financial instruments can cause alot of stress and frustration. You need to have a logical set of procedures for dealing with both positive and negative contingencies, and the corporate structure should help you achieve that.
Mining Stock Fundamentals - Buy this report!
Japan Foreclosed Property 2008 - Buy this report!