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 %	---	---	---