Thanks, guys, I’ve read some of those or things similar, and others look interesting.
But how have these lines of thought concretely altered the way you invest? And what have been the results?
Neil
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I recall Mike’s post but I did not join that discussion. When someone recommends a book the first thing I do is read the “Most helpful critical review” in Amazon’s book review section. I added two comments to that review (as Individual Investor):
Overly ambitious and poorly argued
http://www.amazon.com/gp/customer-reviews/R1TZAA5857MZY8/ref…
By 2007, when the book was written, the idea of the unstable sand pile and complexity were attracting a lot if attention and they were being used to grind axes which is what this reviewer accuses Eric Beinhocker of. BTW I’ve seen multiple cases of authors, both the right and on the left, doing good research and then jumping to a conclusion that favors their ideology.
Mike attempts to explain the crash. I liked John Authers’ explanation: The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How To Prevent Them in the Future
http://www.amazon.com/The-Fearful-Rise-Markets-Synchronized/…
Authers lays the blame on misallocated incentives, on seduced agency. This line of thinking is entirely consistent with emergence, the crisis emerges driven by the misallocated incentives. This is a book you can add to my above reading list.
Denny Schlesinger
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But how have these lines of thought concretely altered the way you invest? And what have been the results?
If you asked me how learning about any one subject – probability theory or accounting or psychology or math – has specifically altered the way I invest or what the particular results were…I couldn’t tell you. Learning about behavioral economics and complex systems add to these mental models, and the process is integrated and cumulative. I can’t point to any specific change or result attributed to just one subject.
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But how have these lines of thought concretely altered the way you invest? And what have been the results?
That could fill a book!
To answer the second question first. So-so for two reasons. For one because I still have speculative issues that I really shouldn’t have bought. The secret of investing is not so much making money but not losing it. I’m currently in the process of getting rid of my speculative positions. And second, while I’ve made sense of short term price movements and have developed techniques for profiting from them, long term investing has proven more difficult to deal with. Maybe the solution is to forget about long term altogether since long term we’ll all be dead anyway. 
Prices have a logic to them and Ben Graham knew it long before the science of complexity was invented. He expressed it succinctly: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” The logical conclusion is that the short term and the long term strategies should be different. I’ve pretty much devised a good short term trading strategy. Since “In the short run, the market is a voting machine” the short term strategy is based almost exclusively on prices, company fundamentals are mostly irrelevant. In the long run the price attractors are earnings and cash flow making company fundaments of vital importance for stock picking but not so the reductionist drilling down into the financial statements which has a different use I’ll comment on below. The most powerful long term driver is growth which is influenced by things like “path dependence” and “increasing returns” concepts studied by the science of complexity as well as old fashioned empire building (conglomeration). Drilling down into the financial statements serves mainly to avoid poorly run businesses which is a tactical maneuver. Good financial statements say little about the long term prospects of a business.
Stocks should be picked for their long term potential and the main driver is growth. A good way to identify strong long term growth is to look at historical price charts. The downside is that fast growers tend to be volatile, they can regularly lose half of their value at any time. But this is a two edged sword, those collapses might also be the good time to buy the stock. The difficulty I’ve been having here is timing the purchases. The Foolish notion of buying in thirds might be an excellent solution.
The short term strategy is based on the notion that prices are random and unpredictable, therefore I don’t try to predict them but simply react to them or I try to reduce my cost basis using options. My option trading has now been reduced to selling covered calls which is the lowest risk option strategy in existence. The short term strategy has been quite successful with the following notes.
- The goal is to lower the cost basis while increasing the number of shares
- It works best with range bound prices
- Trading does not work with continually falling prices because I don’t sell short
- With fast growers buy and hold is best
Denny Schlesinger
PS: This post about National Oilwell Varco (NOV) illustrates some of my long term thinking:
http://discussion.fool.com/sometimes-im-totally-befuddled-by-how…
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Karen, good for you! If selling AMBA is what makes you feel safer and better, then great. You are decisive and disciplined. And although it is a cliche, you don’t go broke taking profit.
Now, the thought that many here are concerned with is the notion of blindly taking profit when a stock rises by some measure. There are variations of this, such as trailing stop-losses and such. But this is not based on anything other than an arbitrary number, which forsakes the fundamentals. Traders often trade based on channels, buying when the price is low in the channel and selling when it nears the top of the channel. It is nothing more than observing a pattern on a chart, learning that pattern over time, and acting upon the pattern repeating itself.
I’ve been both a trader and an investor, and in trading the key is preservation of capital, which typically suggests cutting any trade short (immediately) if it doesn’t confirm or it moves opposite to your expectation. Traders also tend to lock-in profits, never letting a winner turn to a loser. But traders use technicals and other hit and run strategies. For traders it is a matter of percentages, where 5 bad trades, if cut short, will easily be offset with 1 good winning trade.
Investors, on the other hand, prefer to work off fundamentals of the company, and tend to look for long-term appreciation based on financial performance, quality of management, strength of the business, the moat, etc.
Both strategies work! Don’t let anyone fool you about that. Dr. Alexander Elder has many great books on trading philosophies and techniques, and there are many wildly successful traders out there. There are also great investors out there, many of whom are here at TMF.
As a related side note, I personally have been refining my investing with a slightly different approach to investing, where I periodically add to those companies that are rising. This is probably the opposite of the trailing stop/cash-out approach, but for me it makes sense. When I first take a position in a company I hope I made a good decision. If that company rewards me with continued solid performance that confirms my research, I will grow my stake in that company as long as the fundamentals remain intact or improve. This has proven very profitable for me, with companies like AAPL, FB, SWKS, CHKP, AFSI and others. But then, I’ve also caught a few falling knives too, so I can’t say I’ve been all that successful, I have plenty of skeletons to remind me. I also chased SWIR as it ran up, and added as it came down. Right now I’m in the red with SWIR, but as others have commented the company has been steady so I’m not too concerned about the 50% correction over the past 9 months - I expect over the next 3-5 years SWIR will bounce back strong provided they keep doing what they are already doing.
Back to AMBA, it is a high-flier. I wrote puts repeatedly on AMBA for nice returns, but never got the shares. I stopped writing puts about 3 months ago. Now that it has pulled back, I’ll start writing puts again.
One more thought. Have you considered strangling AMBA instead of selling it? It may yield better returns, although you may be put some more shares (albeit at a lower price).
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Invest wisely my friends
CMFSoloFool
Ticker Guide: NTGR and OTEX
4 Likes
For what it’s worth, I increased my AMBA position on 9/2. I paid $78.28 per share and bought enough to increase the number of shares by 30 %.
I also have gradually increased my cash reserves over the last few weeks.
I like to always have cash reserves available . Being retired, our only income is Social Security and MF investing.
Cannot ever accurately know when the next significant downturn will happen, but it has not happened yet.
When it does happen I will be able to buy new positions while also adding to existing.
Of course I won’t know when the bottom is, but I won’t care. Buying at lower prices is a good thing…when all the short termers stampede
to the exits, buying opportunities will be there in the rooms they just vacated.
Finding bottoms is impossible…Simply not selling and/or buying when others are in panic selling mode is the historically proven method of investment prosperity.
Frank
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‘… there are many wildly successful traders out there…’
My reading of this is that there are successful traders who command massive capital at institutions with big money spent on computer analysis and risk-control. A significant proportion of profit comes from known, low-risk arbitrage opportunities where huge sums can be deployed globally to capture transient tiny discrepancies in currencies, commodities, stocks and the rest.
Otherwise, are there really ‘wildly successful private traders’ out there? A few no doubt. Luck is a wonderful thing. I have never had the smallest interest in technical analysis or trading (as opposed to the occasional, rare seizing of some obvious opportunity) precisely because, so far as I know, there is no evidence to show it works.
It is of course useful at times to know what technical analysts and traders are thinking, but not because they are likely to be right.
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@strelna,
though not popular here on TMF, there are private traders that make a great living trading. I suggest you read Dr. Elder’s books; Entries & Exits, Come Into My Trading Room, or Trading For A Living.
You have to have a certain unemotional mindset to trade successfully, which I don’t. But I know some who do and they have done pretty well at it. It take discipline.
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Invest wisely my friends
CMFSoloFool
Ticker Guide: NTGR and OTEX
1 Like
Does Dr. Elder have audited results over 10 years or more (like a fund manager) to take a quick look at before reading his books?