Short Term Trading vs Investing, What's the Difference?

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Everyone has to go through the 4 Stages of Learning before one will become a Master Investor who acts apparently effortlessly and instaneously in a way that, to the outsider, seems risky - especially when the Master doesn't even seem to pause to think:

1) Unconscious Incompetence

- the state where you DON'T EVEN KNOW WHAT YOU DON'T KNOW

- state of mind so many young drivers are in when they begin to learn to drive. That's why young drivers have more accidents than older, more experienced drivers: they fail (or refuse) to recognize their limited knowledge, skill and experience.

- Worst thing that can happen to a NOVICE Investor when he makes a pile of money on his Very First Investment. His success leads him to believe that he's found the secret of trading or investing and that he really knows what he's doing. So he repeats whatever he did the 1st time - only, much to his own surprise, to lose money hand over fist.

2) Conscious Incompetence

- is the 1st step to Mastering any subject. It's the conscious admission to yourself that you really DON'T KNOW WHAT TO DO, and the Full Acceptance of your own ignorance.

- this may result in feelings of despair or futility or hopelessness - which stops some people from investing entirely.

- But it's the Only Way to realize to Master the subject requires a process of intensive learning.


3) Conscious Competence

- when you're Beginning to have mastery of a subject, but your ACTIONS have Yet to be Automatic.

- Your reactions are far slower than the expert's

- What took Buffett 10 minutes to decide might take you 10 days .... or even 10 months.

- Amazing number of investors believe they can skip this stage of learning entirely by attempting to adopt someone else's unconscious competence: following a Guru or a set of Procedures developed by a successful investor.

- There's NO SHORT-CUT to Unconscious Competence.

4) Unconscious Competence

- the state of a Master, who just does it - and may not even know how, specifically, he does it who appears to make decisions effortlessly, and acts in a ways that might scare us to death.

As Warren Buffett says, "Risk comes from NOT KNOWING What you are doing."

The 4 Stages of Learning.png (248.7 KiB) Viewed 23019 times

The Four Levels of Wisdom:

~~ The man who Knows and Knows he Knows is WISE. FOLLOW Him.

~~~ The man who Knows and Knows NOT he Knows is ASLEEP. WAKE Him.

~~~~ The man who Knows Not and Knows He Knows Not is a STUDENT. TEACH Him.

~~~~~ The man who knows Not he Knows NOT is a FOOL. SHUN Him.


Source: The Winning Investment Habits of Warren Buffett & George Soros

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Be QUICK as to GET ON and be quick to get OFF. The show is NOT Forever.

http://www.masteryourfinance.com/forum/ ... &start=105


Remember that MANAGING RISK is more Critical to Success than managing for higher return, before bull trend ceases.


To paraphrase an old Wall Street saw;

the music is still playing and investors may still want to dance,

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but it's TIME to DANCE CLOSER TO THE EXIT so that when the Party is Over,

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you can be one of the FIRST OUT the Door, NOT the Last.[/size][/b][/color]

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http://www.masteryourfinance.com/forum/ ... 5&start=30

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Do what Buffett does: Buy low-beta stocks
Picking stocks that are less volatile but offer good dividends is one way to improve your returns
Published on Oct 07, 2012, The Straits Times
By Goh Eng Yeow senior correspondent

A recent article in The Economist that sought to explain the phenomenal success enjoyed by legendary investment guru Warren Buffett in his stock picks caught my eye.

What got me - and no doubt every other keen investor - interested was whether Mr Buffett's strategies could be adopted successfully by other investors eager to improve their returns.

A saver earns almost nothing keeping his money in the bank, which offers next-to-nothing interest rates, so we must consider other ways to put our money to work, such as investing in the stock market.

Unfortunately, there is no such thing as a crash-proof stock. Thus, an investor must choose strategies that keep his money safe and earn decent returns without taking unnecessary risks.

Sure, many would regard Mr Buffett as a statistical outlier, whose stock-picking skills are impossible to emulate. However, according to The Economist, a new paper from researchers at New York University and AQR Capital Management seems to have identified the main factors behind Mr Buffett's extraordinary success.

The researchers have found that, for Mr Buffett, one winning formula lies in buying into "low-beta" stocks. For the uninitiated, a stock's beta refers to its sensitivity to market movements.

~~ If a stock moves in tandem with the market, it is assigned a beta of one.

~~~ If it moves more violently than the market (rising by 10 per cent, for example, when the index goes up only 5 per cent), it is viewed as having a High beta, exceeding one in value.

~~~~ Similarly, a stock that moves less violently than the market has a low beta, dropping below one in value..

The Economist said: "Mr Buffett is well-known for buying shares in high-quality companies when they are temporarily down on their luck, such as Coca-Cola in the 1980s after the New Coke debacle or General Electric during the financial crisis in 2008."

If you have been tracking the stock market closely, you will realise that this approach is contrary to the one adopted by many big-time traders and hedge fund managers.

For them, the road to riches lies in picking high-beta counters such as penny stocks, for which double-digit gyrations in percentage terms are commonplace. These traders want to ride the momentum that is causing the prices of such counters to surge without worrying about the underlying business fundamentals of the companies.

Yet, as Mr Buffett has noted, such a strategy could prove to be extremely risky if the momentum fuelling the rally screeches to a halt. "It's only when the tide goes out that you learn who's been swimming naked," he once said.

Those who feel that Mr Buffett's strategy might be suitable for them can check out a stock's beta and other financial information through websites such as Reuters.com. The data is freely available on the Internet.

If you look at the betas of the 30 component stocks of the Straits Times Index (STI), you will find that some of its better performers this year have betas of less than one. These counters are also good dividend paymasters.

For example, ComfortDelGro has a beta of 0.52 and offers a dividend yield of 3.8 per cent. Its share price has risen 19 per cent since January.

StarHub, which has an even lower beta of 0.34 and a dividend yield of 5.4 per cent, has gone up about 28 per cent.

If you feel that local blue chips are now too pricey for your liking, following the STI's 16 per cent run-up this year, you can look further afield.

The appreciation of the Singdollar against major currencies such as the greenback and the euro means you will get more bang for your dollar if you buy into international blue chips.

Further, London and New York have low-beta blue chips that are trading at 10 to 12 times price-to-earnings ratios because they have been neglected by global investors in the wake of the European debt crisis.

For example, "sin" stocks with global brand names such as the shares of cigarette maker British American Tobacco and Dutch brewery giant Heineken trade with low betas of less than one.

Yet, these companies are good dividend paymasters whose business franchises are expanding their footprints aggressively in the developing world.

Then there are household names such as beverage giant Nestle and consumer goods maker Unilever, whose products populate the shelves of supermarkets all across Asia.

Their stocks are also low-beta and they offer a decent dividend payout.

If you can be as patient as Mr Buffett, who reputedly holds stocks for decades, you might find it rewarding to buy into low-beta stocks that are backed by powerful business franchises.

Investing your money this way could be more fruitful than leaving it in the bank.

engyeow@sph.com.sg

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The secrets of Buffett’s success
Beating the market with beta
Sep 29th 2012, The Economist


IF INVESTORS had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.

Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.


Understanding the success of Mr Buffett requires a brief detour into investment theory. Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that move more violently than the market (rising 10%, for instance, when the index increases by 5%) are described as having “high beta”, whereas stocks that move less violently are considered “low beta”. The model suggests that investors demand a higher return for owning more volatile—and thus higher-risk—stocks.

The problem with the model is that, over the long run, reality has turned out to be different. Low-beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the jargon).

But this anomaly may exist only because most investors cannot, or will not, use such a strategy. Pension schemes and mutual funds are constrained from borrowing money. So they take the alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the average mutual-fund portfolio is more volatile than the market.

And the effect of Ignoring Low-Beta stocks is that they become UNDERPRICED.

Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after the New Coke debacle and General Electric during the financial crisis in 2008).

“It’s far better to Buy a Wonderful company at a FAIR PRICE than a fair company at a wonderful price,” he once said. He has also steered largely clear of more volatile sectors, such as technology, where he cannot be sure that a company has a sustainable advantage.

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Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.

Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.

A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.

These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.

* “Buffett’s Alpha”, by Andrea Frazzini, David Kabiller and Lasse Pedersen, August 2012
† “Betting Against Beta”, by Andrea Frazzini and Lasse Pedersen, October 2011


http://www.economist.com/node/21563735

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Reasons that he (Li Ka Shing) is very successful :

1) Timing – he Buys when the markets are Flat because he has a Good Balance Sheet.

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2) Speed – good deals do not stay around for long time. Everybody wants them. So the man who can Make Decisions Quickly, he will get the good deals. And his story is about a series of good deals.


06 04 20 人物 世界华人首富 李嘉诚　(上), 16:40 to 17:07
http://www.youtube.com/watch?v=fKlvF5WUO7A


Li Ka Shing is a well known rags-to-riches story about Asia's richest billionaire but one should note especially the reach of his team of global professionals, their skill at deal-making and the quality of their business partners. Not to mention their speed at effecting transactions, start-ups, or bond offerings.

We note with some experience having operated seamlessly globally for over 20 years with this unique global team spanning 52 countries with over 250,000 employees.

Mr. Li closed an unprofitable U.K. mobile phone operator called Rabbit in 1993. He returned a year later to start Orange Plc, which he sold in 1999 to Mannesman at a $15 billion profit. Few investors think so strategically, or operate at such lightning speed, in our humble opinion.

http://www.presidiopenthouse.com/tycoon ... /ksli.html

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Templeton Maxims
10 Principles for Investment Success

1) Invest for Real Returns

The true objective for any long-term investor is MAXIMUM total real return After Taxes

2) Keep an Open Mind

Never adopt permanently any type of asset or any selection method. Try to stay Flexible, Open minded and Sceptical.

Long-term top results are achieved only changing from popular to UNPOPULAR the types of securities you favour and your methods of selection.

3) Never Follow the Crowd

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If you buy the same securities as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something DIFFERENT FROM THE MAJORITY.

To BUY when others are despondently selling and to SELL when others are greedily buying requires the greatest fortitude and PAYS the GREATEST REWARD.

4) Everything Changes

Bear markets have always been TEMPORARY. And so have bull markets. Share prices usually turn upward from 1 to 12 months before the bottom of the business cycle and vice versa.

If a particular industry or type of security becomes popular with investors, that popularity will always prove TEMPORARY and, when lost, May NOT Return for Many Years.

5) Avoid the Popular

When any method for selecting stocks becomes popular, then switch to unpopular methods. Too many investors can spoil any share selection method or any market timing formula.

6) Learn from your Mistakes

“THIS TIME IS DIFFERENT”

are among the most COSTLY FOUR Words in market history.

7) Buy during Times of Pessimism

Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

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The time of Maximum Pessimism is the best time to Buy, and the time of Maximum optimism is the best time to Sell.[/b][/size]

Hunt for Value and Bargains

Too many investor focus on outlook and trend. Therefore, more profit is made by focusing on value.
In the stock market the Only way to get a Bargain to buy what Most investors are selling.

9) Search Worldwide

To avoid having all your eggs in the Wrong Basket at the Wrong Time, EVERY INVESTOR SHOULD DIVERSIFY.

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If yousearch worldwide, you will find more bargains and better bargains than by studying only one nation. You also gain the safety of diversification.

10) No-one Knows Everything

An investor who has all the answers doesn’t even understand the questions.

http://www.dryassociates.com/images/maxims.pdf

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Peter Lynch, legendary investor said,

to be a MILLIONAIRE,

~~ all you need is $10,000 and

~~~ to invest it in two ‘10-bagger stocks’.

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* 10-bagger stock - stock that goes up 10 times its value.


Multi-bagger stocks
-> do not come from investing in established companies,
------> but they exist in the realm of ‘small companies’.

When you buy an established company, with a wide economic moat, you can make consistent profits of say 15%-25% like Warren Buffett.

However, to make multiple returns on your money, you have to know how to pick the RIGHT ‘Small Capitalization Stocks’ before they become medium, big and eventually, mega capitalization companies.

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It’s the ’getting in early’ part that is critically important.

When the investment legend first recommended Dunkin’ Donuts, analysts on Wall Street snickered, calling his pick a ’quirky investment.’

But the pick was certainly no fluke as Dunkin’ Donuts ended up being a 10-bagger.

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Lynch followed this up with a 28-bagger when he backed the truck up and aggressively started buying Taco Bell before anybody had ever heard of it. Ultimately, Taco Bell common stock blasted to the moon before being acquired.

http://www.silkroadinvestor.com/glp/320 ... g_buy.html
http://www.zimbio.com/Indian+stock+mark ... tocks+2012

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Alvin's observation of the active participation of mature investors in 50s & 60s attending the seminar by Lim & Tan Securities, was also evidenced at the UOBKayHian stock training sessions.

Sharpen your Investment & Trading Decisions and Ride the Market Volatility
by ALVIN on OCTOBER 21, 2012

Today, I was invited by one of the remisiers from Lim & Tan Securities to speak at their event at SGX Auditorium. It was an encouraging sight to see people streaming in on an early Saturday morning, keen to learn about investing. But I cannot fail to notice most of the audience were in their 50s and 60s.

My main objective of the talk was to encourage them to look internally and search for obstacles which are holding them back to create successes in their investment.

Most of us are interested in investing strategies and we would RARELY DO PERSONAL REFLECTION.

We will tend to claim it is the strategies that did not work and there is nothing wrong with us. Therefore, we think it is the strategy that we need to change and not the person applying the strategy that needs to be changed.

It may be true to a certain extent that the strategy is ill-suited to the personality, but there are personalities that will not work with any strategy. To make matter worse, there is lesser resistance to change method and self.

I quoted the example of learning Kung Fu.
- If we were interested in Kung Fu, most of us would want to learn to fight immediately and ignore the foundation.
- We do see in movies where Kung Fu masters went through many years of foundation training such as maintaining horse stance (“ma bu”) for a long period of time.
- We also see them carrying buckets of water up the hill on a daily basis.
- This foundation training build up their mental and physical strength for them to fight effectively.
- The audience agreed with me that Yip Man was a Good Fighter because of his Training and NOT because of his Kung Fu Style, Yong Chun.

Here is the irony, if we attribute poor fighting skills to the person, Why Do We Attribute POOR TRADING RESULTS to the Method?

You would agree with me if I say there is no one superior Kung Fu style.

It is the Training and the Honing of the Skills in one particular style that makes a master.

Likewise in investing, we have many strategies available at our disposal but we often hop from one strategy to another without first working on our foundation.

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The foundation is

=> to Prepare our MINDS to have the mental strength to deal with the stress that the market place on us, and

==> DO the RIGHT THING when it Goes Against Our Positions.

==========> Personal reflection and the understanding of the way we act in the market are necessary as foundation training.

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I think this is what Sun Tzu would say if he was a trader/investor, “if you KNOW Your METHOD and know YOURSELF, you will not be imperiled in a hundred trades.”**


About knowing self, I shared a story about my friend.

~ He told me once he viewed the stock market as a zero-sum game such that someone must lose in order for someone else to gain.

~~ His perception of the market, coupled with his life value of compassion, have hindered him to invest in the market successfully.

~~~ On one hand, he wants to make money, but on the other hand he felt bad when he made money. It is debatable whether the stock market is a zero-sum game.

My personal opinion is that in short term trading, it is a zero-sum game.

However, if one is to invest in companies that grow over time, it is not be a zero-sum game. Hence, he can choose to invest for the long term instead of trading. The latter style would have suit his purpose and values.

During the break, a group came up to me and asked me about STI ETF and Permanent Portfolio. They were not clear about how an ETF worked and it sounded dangerous to them. Most had not heard about the possibility of buying the entire STI and it had actually gained 9% annually for the past 10 years. For those with more questions about STI ETF, you can read more posts from here.

A common question was “when can I buy STI ETF?”

If you know me enough, I will not give you a straight answer. This is because I do not know your investment time-frame and you do not know my investment time-frame. If I tell you how to enter, you may not know how I exit.

To a trader who wants to make profit after a few weeks, STI may have a good buy signal. To an investor who wants to hold for 5 years, STI may be too high.

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Sadly, there will always be people who want to be told when to buy and sell.


As they were mostly retirees, I would not advise them to just invest in STI ETF even though it would be safer than picking stocks on their own. A Permanent Portfolio would be a better option since it has very low volatility and good track records of gains in all known economic conditions. Retirees would be able to sleep well with this portfolio.

But I think I have covered too much topics in an hour’s presentation and it would be better off explaining about STI ETF and Permanent Portfolio in details. I gathered most of the audience were still unsure about the benefits of passive investing and how to go about setting up a portfolio to protect them from buying high and selling low. I will do better next time.

http://www.bigfatpurse.com/2012/10/shar ... olatility/

Note:
** 「知己知彼，百战不殆。」(zhījǐzhībǐ, bǎizhànbùdài)

这几句话就是说：对自己和敌方的情况都有透彻的了解，作战才能长胜不败。

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Below article is extracted from other website:

Your Investment Objectives

You may have financial goals such as a luxury retirement or a second home. It’s your objectives that help you reach those financial goals. Goals are the result, objectives are the path that gets you to your results. Financial goals may be grey areas (i.e. retire comfortably), yet the investment objectives should be as clearly defined as possible.

What Are Your Investment Objectives?

If the first step in this process is describing who you are as an investor, the second step is defining your investment objectives. While your financial goals may be grey, you still need a reasonable starting point in order to reach your end goals.

- Most investors define their investment objectives as “I want my money to grow”, or “I want $3,000 per month for the rest of my life” and leave it at that. There’s more too your investment objectives than that.

- Many investors want principle growth, some investors want investment income, and most investors want a mix of both growth and income. Other investors want XX% investment return over XX years.

- Some investors need to average 8% per year to accomplish their goals. Others only need 5% per year. Some still will need 10% or more to accomplish their lofty goals.

A word of caution here. Labeling your investment objectives as “growth” or “XX% return” can create holes in your investment plan. Small holes can lead to big leaks. While your investment objectives may be grey, your investment plan should be as clear cut as possible.

1) Investing for Growth & Income

In terms of “growth” or “income”, most every investment portfolio is going to have components of both growth and income. It’s hard to avoid in fact. Every “diversified” investment portfolio will have investments which generate CAPITAL GAINS, investment income from Dividends and Interest payments and variations of total return.

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For the overwhelming majority of investors defining the investment objectives as “growth and income” is satisfactory (whether they realize it or not).

2) Investment Rate Of Return

“XX%” rate of return over time can be very misleading. Take for example 10% rate of return over the rest of your life expectancy which is 20 years or more (for example). 10% may be an outrageous investment objective. Yet even if you attained it you may not be keeping pace with goals from your financial plan.

The REAL Rate of Investment return is what matters most to you! What you actually earn after all fees, expenses, taxes and inflationary pressure is taken out is your real rate of investment return.

Most financial advisors will quote investment returns after fees, yet not every financial advisor does. Some financial advisors will “sugar coat” your returns and gloss over the important stuff.

Other financial advisors will overlook the taxes due on your investment income and even capital gains. Worse yet, taxation of retirement plan distributions are oftentimes overlooked as well.

If you average a 10% rate of investment return (which I’d caution never to assume, even in a 100% equity portfolio) over the next 20 years it may look great on the surface. Who wouldn’t want a 10% annualized rate of return right? However inflation has averaged nearly 4.5% per year for over 40 years now.

That 4.5% eats away at your 10% return. Taxes will eat away at the 10% return. Fees and commissions will eat away your 10% return. That leaves you with less than 5.5% in real investment return.

Overly (and devastatingly) simplistic financial calculations don’t take the fees, expenses, taxes and inflationary factors into account. Rather the average investor sees a million dollar portfolio generating $100,000 per year from total return and thinks they’re set for life! This isn’t always the case.

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Worse yet, there are periods in time when inflation will be above 4.5% average per year. What happens in extended stretches of time when inflation is 5.5% or greater for example? Your investment returns shrink to 3.5% or less.

3) When 10% Investment Return Isn’t Good Enough!

The point is not to rain on your parade. The point is there are many factors tied to your investment objectives. While targeting a specific rate of return is interesting in practice, you must regularly evaluate your progress towards your financial goals – carefully benchmarking your progress.


Investing is like flying. You need a pre-flight checklist to get your financial game plan in order. But once the pre-flight checklist is done you power off and hit cruising altitude. Headwinds, storms and jet streams will push you off course once in a while. What’s important is making the necessary corrections to land on target.

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Your investment plan is no different. It must be checked against your financial plan and corrections must be made when necessary.

Straying too far off target can lead to a crash landing.

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I have given up trading as realised that it is just not my cup of tea.

Below is excerpt from blog that pinpoints strategies on how to make money day trading, but at the same time, dispense the following advices:

Take what I have said to heart. Trading is NOT for everyone, so if you are having trouble accepting this information then you might want to consider another profession.

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It would almost certainly be a lot easier on yourself, your family, and your bank account.

However, for those of us who push onward and conquer our demons, the benefits of being a successful day trader are endless. It is, after all, the near-perfect job.

Force yourself to realize there is NO Holy Grail.

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The way to make money in trading is not by having the perfect indicator or automated strategy. No, no, no.

The way to make money in trading lies within your ability to Understand Yourself and become an expert in the market you are trading. There are NO Short Cuts.

http://blog.bigmiketrading.com/2009/06/ ... ading.html

Article shared on Alvin's blog:

Being right with size

And Dennis Ng often mentioned that it would be difficult for traders to earn multiples of their capital because of positioning sizing. At any one time, a trader would probably risk no more than 2% of their trading capital in one trade, and hence, he cannot earn a large profit even though he is right.

Both of them made sense to me and I had the following conclusion – Trading is a job earning a stream of income and it is NOT a way to Grow Wealth (for most people).

When your trading capital becomes too large, you would not be comfortable risking the same percentage of your capital into one position.

For example, risking 2% of $100,000 is $2,000; while risking 2% of $1,000,000 is $20,000. Would your psychology remains stable if you are managing the trade that can possibly lose you $20,000?
Hence, limiting risk would correspondingly limit returns. You should trade if you want to pursue it as a career. But what if you can only trade $1m worth of capital and you have $2m? Where would you put your additional $1m (many would say properties. I would come to that later)?

I hope that at this point we have establish an understanding that I am not trying to recommend people to stop trading, but I want to emphasize it is a career choice and at the end of the day, it is still about Earning an Income.

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You have to agree with me that you will still need an investment portfolio no matter if you trade or not.


http://www.bigfatpurse.com/2012/06/impl ... portfolio/

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In the financial markets,

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the WORSE the Future looks,

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the BETTER it Usually Turns out to be.


Source: The Intelligent Investor by Benjamin Graham

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Excerpt of Alvin's article from his blog:

Speculative play on bad news

by Alvin on November 27, 2012

I rarely share about speculative activities on BigFatPurse because I do not want to encourage readers to speculate and lose money in the process. However, I do have the urge to share some of my speculations in this post. Again, I emphasise the purpose of this post is to share my experiences and not to encourage you to participate.

Crashes and ‘mini crashes’

We know that stock market crashes once in many years and it is very profitable if we can all buy near the lows.

Stock market crashes because of fear and prices become irrational. And because prices are irrational, there is an opportunity to reap good returns when prices return to normalcy. However, it takes a lot of patience to wait for the crash.

Your greed will be challenged when your bullish friends are boasting their returns while you sit on cash.

Is there a way to play ‘mini crashes’ or irrational pricing in stocks?

As I asked myself that question, I saw opportunity in picking stocks that are hit by depressing news. The media does a very good job in instilling and fuel fears in investors to bring down stock prices by proliferating bad news about companies. Of course, these companies deserve to have lower stock prices, but the key is what should the fair price be before it becomes irrational.

I would like to share a few examples now. (For further details & charts of Sony & Olympus, refers to Alvin's blog)

A risky business
Such speculations are very dangerous. It can either make you rich or poor, provided you put up a meaningful stake.

No form of analysis is fool-proof as the uncertainties revolving such companies are just too high.

The central thesis about these trades is that the prices are irrational due to the bad news hitting the companies. It is like the ‘mini-crash’ that I described earlier.

Some companies may NEVER Survive like Lehman Brothers and Bear Sterns.

Bear Sterns.png (210.87 KiB) Viewed 22099 times

[/b]You would have struck Gold with AIG though.

Some of the companies in the news now are Asian Commercial Bank (arrest of the Founder by the Vietnamese Government) and Hewlett Packard (accounting fraud).

Speaking about meaningful stake, I learned that Goldman Sachs entered the same trade into Olympus. In 8 days, they realised a profit of US$1.8 billion even though it was just 18% gain (compared to my 63% gain).

It takes a lot of guts to go for the jugular as Soros said.


Do you have the guts? I do not have such guts as far as I know and I believe most of us do not. This is why investing passively is still the best way for ordinary people.

http://www.bigfatpurse.com/2012/11/spec ... -bad-news/

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The uniquely 'Sorosian' approach to risk-taking

It's from Stan Druckenmiller, the billionaire who ran George Soros's hedge fund for a long time:

“Soros has taught me that when you have a Tremendous Conviction on a trade, you have to Go for the Jugular.

George Soros.png (180.99 KiB) Viewed 22102 times

It takes courage to be a pig. It takes Courage to Ride a Profit with Huge Leverage. [/size]

As far as Soros is concerned, when you're right on something, you can't own enough.”[/b][/color]

http://www.switzer.com.au/the-experts/c ... cro-guys-/

It takes Some Real Guts to make a Big bet that not many others are seeing but that is how you make outsized returns.

http://www.gurufocus.com/news/120811/th ... eal-estate

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Graham warned that you must treat Speculation as Veteran gamblers treat their trips to the Casino.

Just as sensible gamblers take, say $100 down to the casino floor and leave the rest of their money locked in the safe in their hotel room,

Intelligent Investor designates a tiny portion of her total portfolio as a "mad money" account.

For most of us, 10% of our overall wealth is the Maximum permissible amount to put at SPECULATIVE RISK.

trading stocks.png (222.92 KiB) Viewed 21983 times

~~ Never mingle the money in your SPECULATIVE Account with what's in your Investment Accounts

~~~ Never allow your speculative thinking to spill over into your investing activities; and

~~~~ Never put More than 10% of your assets into your mad money account, no matter what happens.


For better or worse, the Gambling Instinct is Part of Human Nature - so it's futile for most people even to try suppressing it.

But you must Confine and Restrain it.

lost money.png (41.06 KiB) Viewed 21983 times

That's the single best way to make sure you will never fool yourself into confusing speculation with investment.


Source: The Intelligent Investor, Revised edition by Benjamin Graham

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It requires
~~~ a Great Deal of BOLDNESS and

~~~~ a Great Deal of CAUTION to make a Great FORTUNE;


and When you have Got it,

====> requires 10 Times as much WIT to KEEP it.

- Nathan Mayer Rothschild