Common traits of successful investors

I have came across an interesting an article on the net and decided to share it here. 

The techniques and the characteristics of the most successful investors are diverse, and there's not a guaranteed formula of success. Nonetheless, by following a similar path taken by successful investors, it can help to improve investment returns. Below are some of the key similarities between these successful investing strategies.

Measure your Results and Document your Decisions

As you make buy/sell transactions, document why you are making them. It should be your goal to make the best decision based on currently available information. You cannot predict the future, and you can prove this to yourself by documenting your forecasts. When unforeseen events occur (and they will!), you can go back and review your reasons for making the transaction. This will help you in deciding what you next move should be (buy, sell, or hold).

Remove Emotion from the Investing Decision

The market does not care what you think about a specific stock. In fact, since another party is always on the other end of your stock trade, there is another person that has the opposite view of you about the future prospects of that particular stock. When an investor buys a stock, it is part of human nature to immediately start paying more attention to the current price of the stock. Undeniably it is painful to purchase a stock, and watch it drop 10% over the next few days. Undeniably the investor feels a surge of confidence and pride when a stock happens to rise 10% a few days after the purchase. But these emotional ups and downs can be very detrimental to long term investing success. How can you prepare yourself to not be emotional?  First and foremost, be prepared for the ups and downs that you will likely encounter.  Before your purchase, imagine that the stock price drops right after your purchase. What will your plan of action be? For example, will you sell after a certain percentage decrease, or stick with the stock? Anticipation of possible future events will help you deal with these events when they become a reality.

In addition, if you have documented your reasons for originally making the transaction, you can review these reasons when the unexpected happens. This will help you evaluate your choices going forward.

Spend Time Doing Research

If you are not able or willing to commit to spending time each week on your investments, then you should not bother with individual stocks. In the case of stocks, halfway understanding what you are doing is much worse than not understanding at all (and therefore buying mutual funds).  You should be able to explain in detail to another person why you have chosen a particular stock for an investment. Try this out on your friends, by verbally explaining your rational. You may be surprised at the ‘irrational’ description that you provide!

Evaluate and Re-Evaluate every Opportunity the Same Way

Regardless of your investing strategy (Value, Growth, Buffett, CANSLIM, etc.), a consistent evaluation of each stock is required. By taking the time to evaluate each company, you allow yourself the opportunity to compare and contrast them. With so much information about a particular stock available for free on the internet you can easily perform this evaluation. The specific metrics that you use (price to earnings, price to sales, debt level, sales growth, etc.) can vary for each investor, but for one investor, the same metrics should be used on all stocks being considered.

Once an investment is made, your work is far from over! You must keep track of the events (earnings reports, mostly) that affect your investment. At least once per quarter, you should review each investment and see if your original reasons for buying are still valid. If they are not, then you should sell the stock.

 Long Term View

Investors should ignore the fluctuations of the market.  Today, it’s quite simple to get quotes, news and other financial information from the internet. While this readily available information is definably helpful, the investor needs to watch out and not get caught up in the day-to-day market fluctuations. The financial press, like the general news media, sometimes over-hype stories, since it is in their interest to grab the readers and viewers attention. The market offers you the opportunity to sell at a particular price. You do not have to take advantage of this offer.

If a company continues to grow in earnings and sales, while debt remains stable or declining, you can ignore the day-to-day, month-to-month, and even year-to-year price gyrations that will be experienced

Taken from http://www.checklistinvestor.com/common.html

The wisdom of half positions

I have came across an interesting article in seeking alpha and decided to post it here to share with everyone and also for future reference.

1) Say you bought a stock and it rapidly rallies but yet not to the point where you think it is at fair value.
What to do? Sell half of the position, and wait. If the price falls, buy back the position. If it rallies further, sell the rest.

2) Say you want to buy a stock, but it is plunging. You have done your homework - the balance sheet is strong enough to self finance the company and it is currently valued at a huge discount, what to do? Buy half of a full position, and wait. If the company rallies sharply, sell the position. If it continues to fall, wait until it stabilizes, confirm the fundamental and buy up a full position.

3) Say you like a stock, but it has rallied past the buy point. What to do? Buy half. If the stock comes back to the buy point, buy a full position,. If  it rallies further, sell the position.

The real benefit of doing half is the psychology of the situation. Many investors suffer from fear, greed and regret. When the stock price moves in favor of profits, be glad of those profits. When the stock price moves against profits, reanalyze and either a) go flat, recgonize your mistake, and being grateful that it was small, or  b) increase the bet to full position, and be grateful that you didn't put a full position.

Scaling in and scaling out gives freedom to investors, and removing many of the psychological burdens that they bear. It dosent mean there won't be losses. There will always be losses but they will be easier to bear, with no panic that leads to selling off at the lows, or buying at the highs.

In short, money management is essential to successful investing or trading and this is precisely why I am currently putting more focus in this area.

Read the full article at  http://seekingalpha.com/article/131980-the-wisdom-of-half-positions .

Sentiment gauge (Google)

Following are the indicators I used to gauge the investors sentiment on Google and will be likely to review them every 2 weeks.

1. Put/Call Open Interest Ratio

This is the ratio of total put open interest to total call open interest among options with less than 3 months until expiration. Currently the level is quite high thus it indicates pessimism.


2. Short Interest

















The short interest has been decreasing consistently over the past few months which indicates optimism


3. Buy/Sell/Hold

BUY/SELL/HOLD RATINGS
FOR GOOG

Strong Buy	16
Buy	3
Hold	1
Sell	0
Strong Sell	0

Based on the above, it seems analysts are quite optimistic on Google so the question becomes , is there enough sideline buying demand to support the stock , or is it top heavy.



After reviewing the 3 indicators, I noticed they are sometimes contradicting each another therefore I think  this is only at best used to derive a rough gauge of the investor sentiment. I don't think I will put much emphasize on these.

All the above images are retrieved from http://www.schaeffersresearch.com

Is the recent market rally sustainable

The recent market rally has let many people wondering if the economy is recovering? 

According to an article I read online , it mentioned  two out of four conditions need to be met for an economic recover to begin and for the moment , only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging.

i) House prices need to stabilize
ii) Banks must start lending again
iii) Consumers must start spending again
iv) Rest of the world must pick up

Reasons why I think economy has not bottomed out yet.

1) Inventories of house for sale remain high and house prices continue to tumble. The Case-Shiller Home Price Index dropped in January by 19% from a year ago, following an 18.6% year-to-year decline in December.

2) Job losses have been accelerating in recent months

3) Unexpected drop in retail sales as reported on 14 April 2009

4) GM/Crysler bankruptcy repercussions have not even hit yet

5) Standard & Poor’s reports there was a record high in the first quarter for the number of companies cutting dividends (367) and a record low for the number raising them (83)

6) Lot of speculation about which corner of the economy is likely to implode next and start to write the next chapter in the current financial crisis. Credit card debt and commercial real estate are two of the most frequently cited potential culprits

Based on the above, I will still play the momentum game by trading short term and also take more precautions in risk management (i.e not taking excessively large positions and profit take when opportunity arises) or cut loss when my stop loss is hit.

The above info are consolidated from the website http://seekingalpha.com 

2 indicators to measure investor sentiment

There are 2 indicators which are often used to gauge the market sentiment . They are put/call ratios and VIX. Both are calculated based on US equities and Index options.

In most cases these indicators are used as contrarian tools: when market participants are most bullish, the likelihood of a downside reversal is greatest; when investors become overly bearish, a market rally may
be on the horizon.

PCR Ratio
Put/call ratios provide us with an excellent window into what investors are doing. When speculation in calls gets too excessive, the put/call ratio will be low. When investors are bearish and speculation in puts gets excessive, the put/call ratio will be high.

It might be more accurate to use equity-only put/call ratio as professional money mangers might use index options to hedge portfolio of stocks.

VIX
VIX is a measure of the level of implied volatility - not historical or statistical volatility - of a wide range of options based on the S&P 500

When the VIX (which is related to the S&P500) is under 20, there is excessive complacency, and over 30 is excessive fear.  But just as the Nasdaq is more volatile than the S&P500, the VXN is also more volatile, so anything under 25 is excessive complacency, and over 35 is excessive fear which usually happens when we are close to a bottom.

The importance of these 2 indicators cant be discounted as non economic factors are increasingly becoming important elements and they are best used in conjunction with other indicators. I might consider to use this as one of the factor to determine my entry/exit point (i.e wont buy if its overly bullish) but this might contradict with momentum style so I guess an optimal balance in mixing the strategy can only be achieved through real time experiment.

Free tools to gauge the sentiment can be found at schaeffersresearch.com .

8 habits to adopt be a good trader

If you need 8 habits to have in order to be a good trader. They are:

1. Be Proactive

2. Begin with the end in mind

3. Passion and Commitment

4. Patience

5. Discipline

6. Confidence

7. Control Risk

8. Continue to Improve

If you need to see the article detailing the above, here it is at Phileo’s.

Stock Pick (Google) Summary

This will be a page where i will be modifying weekly to update several values like stop trail, relative ratios, ATR as discussed in previous post.

Google as of  10/04/2009
Stock Price  : US$372.5

Quantity bought: 17 shares
Price Paid : US$370.69
Total Cost  (inclusive brokerage) : ?
Brokerage Fee : ?
1R(Downside) = US$762(? of equity)

Highest Price since I entered the trade : US$374.35
ATR(50 day) : 14.956
Stop Trail : 374.35 - (3*14.956) = 329.482

Fundamental relative valuation as of 10/04/2009

	Stock	Industry	Stock's 5Yr Average*
Price/Earnings	28.0	24.6	67.1
Price/Book	4.2	5.5	10.5
Price/Sales	6.7	5.0	13.6
Price/Cash Flow	18.7	22.0	21.7
Dividend Yield %	---	---	---

Stock Pick - Google

Fundamentals
- I will sell Google when its fundamentals has deteriorated like decline in cash flow and also when, I am no longer optimistic on its growth. I will compare the quarterly result against the previous quarters and also the annual result too .. Will probably come up with a list similar to the one I did for entry to decide again. (This will be an exception whereby I will sell off the stock without adhering to my below stop trail set),

- I will also sell Google if its relative valuation like (P/E , P/S) has ballooned excessively.

Momentum

1. Relative Strength
Weaker 3, 6 and 12 month relative strength.. Anything below 50 will be considered weak

2. On Balance Volume
OBV is downward sloping

3. ADX
Anything between 13 and 14 will indicate a weak trend

4. Moving Averages
When Occurrences of fast moving averages go below the slow moving average.

5. Trend
- Parabolic move is fully developed (three or more success trend lines)
- Stock price is near vertical

I will asses the above factors weekly and if there's a need, I  will consider to sell  the stock even when the current price is higher than my pre defined stop loss trail.





Reproduced with permission from http://melynn-lynch.blogspot.com

3 factor model (Momentum)

I don't really know much on this area yet so if anyone happened to come across this blog, please feel free to comment on it or contribute.

As of now, following are the indicators which I used to check the stock's momentum .

1. Relative Strength 
Relative strength, or RS, measures how a stock has performed compared to the overall market over a specified time frame. This info is only easily accessible for US markets.

Six-month relative strength >= 75.
Three-month relative strength >= 65.

For example, a 6 -month relative strength of 75 means that a stock has outperformed 75% of all stocks, in terms of price performance, over the past 6 months.

2. On Balance Volume
OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming. (Byinvestopedia)

If the OBV is moving in the same direction as the existing trend, it is a signal that the strength of the trend remains. When the OBV starts to move against the trend, it is a signal that the existing trend is weakening and may reverse. 

3. ADX
Analysis of ADX is a method of evaluating trend and can help traders to choose the strongest trends and also how to let profits run when the trend is strong.  (By investopedia)

 A low ADX value (generally less than 20) can indicate a non-trending market with low volumes; a cross above 20, on the other hand, may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend. This indicator can also be used to identify non-trending markets or a deterioration of an ongoing trend. Although market direction is important in its calculation, the ADX is not a directional indicator.

4. Moving Averages
Occurrences of fast moving averages crossing over the slow moving average is a bullish signal while the vice versa is a bearish.Current moving average I'm using is 14,25 and 200

Pitfalls of Momentum Trading 
Here they are: 

Jumping into a position too soon, before a momentum move is confirmed. Closing the position too late, after saturation has been reached. Failing to keep eyes on the screen, missing changing trends, reversals or signs of news that take the market by surprise. Keeping a position open overnight. Stocks are particularly susceptible to external factors occurring after the close of that day's trading - these factors could cause radically different prices and patterns the next day. Failing to act quickly to close a bad position, thereby riding the momentum train the wrong way down the tracks. Based on the above, i personally think momentum has to be done in moderation cos I never want to be the last one holding on to it therefore for my future trades, I will try not hold on to it based on greed (Not willing to profit early) or fear (Not willing to cut loss).

3 factor model (Fundamentals)

My entry/sell point is currently based on the following 3 factors Fundamental, Momentum and Volatility. I will be doing trial and error to adjust the weightage of each factors but for a start, I will allocate more weight to fundamentals.

For fundamentals, it will be categorized into 2 section, valuation and operating history.  For operating history, I will use both quantitative and qualititave analysis to assess the company's management, financial health, profitability and cash flow.

For valuation, I will use p/cf , p/b, p/e, p/s and compared them against other similar industry competitors or the company's own 5 year historical average. One thing to take note is that companies with low ratios might be value traps and it may take years for the market to find this value and the stock can stay priced at these undervalued levels for extended periods, resulting in opportunity cost incurred as capital will be tied up on the stock.

Therefore to mitigate the risk of value investing, I will add a momentum filter to improve returns by avoiding the problem of waiting for the market to recognize the undervaluation. This will be discussed in the next section.

Not too sure if the above has already been mentioned before in my previous posts but the most significant change which I am making to my current system is to use relative valuation instead of absolute.

Melynn - Philosophy on investing part 6

I have been looking at my past trades stretching back to the first very trade I have made since year 2007 which was the bull period. Back then, I always thought I am good stock picker whereby nearly all stocks I bought were multi baggers earning me 20-30 % return in a few months leading me to have an illusion that everything is within my control. During that period, I also tend to think stocks will move as per my expectation, ie picking stocks which is fundamentally sound and buying them no matter how over valued they seem to be by coming up with an estimated price near the present as a support. Therefore whenever I have made a decision, I will find evidence to support it rather than finding ways to refute it. This might sound counter intuitive as the norm will be buying stocks based on evidence instead..

Eventually, when stocks started to plunge a few basis point everyday, I will still see it as a form of correction and cost average it as I believe the value will revert back to the mean eventually. I was apparently suffering from gambler's fallacy where I thought a stock will recover after a few days of consecutive big plunge when in fact, it wont. All these are said on hindsight but i hope I can improve my investment by acknowledging my mistakes soon and correct them.

Nevertheless, i never doubt value investing despite not practicing it firmly. I hope to improve this method by mixing momentum and value together to avoid from incurring opportunity cost by holding on undervalued securities that languish a long time before recovering. Instead of bottoming fishing where a price can always go lower than my estimated price, why not wait for the price to raise a bit (momentum) before entering? Ideally, I would want to pick the highest momentum stocks with the cheapest valuation.. Possible? Downside is that by adopting this strategy, I will inevitably follow the fool game so an important thing is to exit when the expectation is different from the reality on a large scale.This is easier say than done and its something which I have yet to figure out

Firm fundamental investors will buy/hold a stock in an indefinite period and assumption is that large emphasis is placed on the stock fundamentals and not the price volatility but thinking from another perspective, a prolonged plunge in stock price will affect the fundamentals too isn't it.

I will share more thoughts on Soros reflexivity philosophy in the next post which I happened to come across a few days back. Also note that each of my posts might be jumbled up or not related to one another as I am just trying to pen down whatever thoughts that came across my mind so I will like to apologize in advance if it causes any confusion. 



Reproduced with permission from http://melynn-lynch.blogspot.com 

Philosophy on Investing part 4

I have been looking at my past trades stretching back to the first very trade I have made since year 2007 which was the bull period. Back then, I always thought I am good stock picker whereby nearly all stocks I bought are multi baggers earning me 20-30 % return in a few months which leads me to have an illusion that everything is within my control. During that time, I also tend to perceive stocks will move as per my expectation, ie picking stocks which is fundamentally sound and buying them no matter how over valued they seem to be by coming up with a estimated price near the present as a support. Therefore whenever I have made a decision, I will find evidence to support it rather than finding ways to refute it. This might sound counter intuitive as the norm will be buying stocks based on evidence instead..

Eventually, when stocks tend to plunge a few basis point everyday, I will take it as a form of correction and cost average it as I believe that the value will revert back to the mean eventually. I was apparently suffering from gambler's fallacy then whereby I thought a stock will recover after a few days of consecutive big plunge when in fact, it's not. All these are said on hindsight but i hope I can improve my investment by acknowledging my mistakes soon and correct them.

Nevertheless, i never doubt value investing even though i am not a firm practitioner. I hope to improve this method where I can mix momentum and value together to avoid from incurring opportunity cost by holding on undervalued securities that languish a long time before recovering. Instead of bottoming fishing where a price can always go lower than my estimated price, why not wait for the price to raise a bit (momentum) before entering? Ideally, I would want to pick the highest momentum stocks with the cheapest valuation.. Possible? Downside is that by adopting this strategy, I will inevitably follow the fool game so an important thing is to exit when the expectation is different from the reality on a large scale.This is easier say than done and its something which I have yet to figure out


Firm fundamental investors will buy/hold a stock in an indefinite period and assumption is that large emphasis is placed on the stock fundamentals and not the price where it is perceived as noise but thinking from another perspective, a prolonged plunge in stock price will affect the fundamentals too isn't it.


I will share more thoughts on Soros reflexivity philosophy in the next post which I happened to come across a few days back. Also note that there might not be a link between my each of my posts as I am just trying to pen down whatever thoughts that came across my mind so I will like to apologize in advance if it cause any confusion. 

Investment Diary

From today onwards, I will try to pen down all my trades made to experiment my system. This can help me think through my thoughts more systematically and improve on it.. All the trades made will be used with real money to ensure the accuracy of the system as it takes my own emotions into consideration unlike paper trade whereby I can trade any amount I wish to and not losing anything.. My first trade is made based on purely technical factor..

1. Stock Bought

Keppel Corp (Listed in Singapore market)

2 Reason for buying this 
Strong volume, good intra day trend and high possibility of breaking the resistance. Purely technical..

3. Estimated holding period
1day .. Just trying out my system therefore does not want to risk too much by holding it overnight... 

4. Entry Point
Purely technical again... Bought at point where volume increased and the resistance seems to be breaking..  Experimenting whether entry point is critical...  Price paid : $5.49

5. Selling Point
Set at a tight stop loss at 5% which is $5.2

6. How much was the stock sold
Sold at 5.71 at the end of day.. Deducting commissions(193.26), earned a profit of $906.74

Food for thoughts

1. What if the stock plunge 20% intra day ? Will I hold on to it and wait for it to rebound? Will I have sufficient money to pay the contra sum..
I will definitely sell it even if it plunges 20% as one important factor in determining the success of a system is to adhering to it.

2. Astronomical commission incurred.. 
Is it worth to buy and sell within a day when a commission of nearly $200 is incurred. Its like 20% of the profit. The stock has grown approx 4% from my purchase....

3. How do I determine my position..
Defining the maximum amount I can lose. Probability of the stock going down more than 10% is low for the day in my opinion as the market is very bullish. Hence my purchase has unlimited upside and limited downside. The position is determined using the amount i can lose multiply by 10.

Summary
Although I made a profit from this trade but I'm fully aware that this is due to luck.. All the above aspects need to be improved to have a more defined system to increase my probability of buying a good stock and also overcome possible emotions (i.e greed,fear) ..... 

Following are the immediate tasks which I need to undertake to improve my system

1. Need to come up with a more elaborate method to derive the position size
2. Need to determine the selling point..
3. Defining time horizion.. Intra day is definitely not suitable for me.

Philosophy on Investing part 3

The aggressive search of a holy grail for a perfect strategy to enter the market has been everyone's dream but is it really as important as position sizing(money management) and defining the selling point where one will not be entrapped in his own emotions(greed, fear)?

My first part in my journey to create my own system will begin with entry point... Under entry point, following are the questions I need to go through.... 

1) Stock fundamentals

a) Analyze the company's 5 year annual result and come up with a basic analysis like the one I earlier posted for Tat Hong...        

b) Come up with an estimated price using DCF model and relative models like (P/E, P/B, P/S). Only used as a guideline as the estimates are derived using past info therefore might not be very accurate..   

c) Analyze the company's latest quarterly posted result

d) Possibility of the stock price getting doubled. Like improving results current price at a huge discount..     

e)  Market Capitalization..

2) Technicals
a) Determine the volatility using  indicator like ADR.
b) Using moving average to determine the buying point.. Might conflict with fundamental as I will probably be buying "higher"     
c) Volume analysis
d) Analyze the trend and momentum

3) Big Picture
a) Macro econ indicator
b) Current market sentiment (Bullish or Bearish)

4) How much should I buy? How can this be determined? Any way to derive this figure based on fundamentals..

5) Always think "how much will I lose" by taking this position instead of "how much can I win"

6) Should I cost average when price plunges drastically?

7) Determine the amount I would risk.

The only way which I can think of now to blend this 2 technique is to design a sort of point system.. Assuming, I'm a mid term investor(holding period < 1 year) and have more confidence in fundamental than technical. I can start by weighing my system more towards fundamental (70%) than technical (30%) and only buy the stock when the total points exceed certain predefined benchmark. This is just an idea. I am still unsure how can I go about doing this.. Will explore more on this option and improve on it...