Sunday, May 25, 2014

My Best Advice for Stock Market Traders

I consider myself an investor, not really a trader, but like a lot of people, I do think I pick a winning trade from time to time.  Unfortunately, since my funds are limited, like everyone, it leads me to sell stocks in order to buy new ones. 

This leads to my worst performance.  I always think that my current holding is not going to as good as my next one.  I sell what I have to chase something else.  Generally, this is usually a bad move.  The stock used to own does just as well or better than the new one I bought. 

Add to that fact that in the process I paid commissions to go in and out of the two positions.  That’s just dumb. 

Comparison to Baseball

I’m a baseball fan, and if there’s one thing I don’t like to see in baseball, it’s overmanaging, particularly when a manager changes relievers repeatedly, multiple times in an inning.  As if the next pitcher is guaranteed to get next guy out.  Like the next pitcher is going to be better than the one that is already in there. 

Sometimes he does the job, sometimes he doesn’t.  In baseball, there’s no way to know how the other guy would have done.  In stocks, we do know.  They continue to trade even if we don’t own them. 

So, a little advice:  STOP TRADING SO MUCH.  Review not only your past trades, but what happens to stocks after you sell them.  You will likely find that you would have been just as well off, or better even with commissions, as if you just held the first stock.

If you feel you have to trade just to do something, then you have another problem.  You aren’t trying to make money; you are trying to fill some other need.  If so, just expect to continue to underperform.  Nothing is going to help that. 

Where's the Stock Market Crash?

If you follow the stock market pundits, you know that many of them have been calling, or at least warning of a crash for some time now. So, you have to wonder, where is it?

I mean, it's been years now. Some of my favorites have been calling for a 50 percent fall for so long the market would have to fall 50 just to get back to the level where they first made the call.

Now, anything is possible, and I dont know the future, but neither does anyone else. Generally, the market doesnt make big moves. Only rarely is there more than a 5 percent move in a month's time.  You have a better chance of losing 5 percent by moving your money in and out than having the market take a tumble.

So, my advice is, every time you feel like making a trade, do something else. I won't suggest to you what, but anything. Get a candy bar. Watch a movie. Et cetera. If you still feel like making a move later, make a smaller one than you planned.

And if think Pundits have the answers, read Macke and Brown's book, Clash of the Financial Pundits.

Tuesday, May 13, 2014

Why is the Stock Market so High?

The stock market, as measured by the Dow Jones and SP 500, closed at another record high today.  That causes many people to ask:  Why is the market at all time highs?  Is it overvalued? Will it crash soon?

As to the first question, there is some debate as to whether the market is high.  Yes, it is, in dollar terms, higher than it ever has been.  But, if you take into account inflation, it isn’t as high in “inflation-adjusted” terms as it was a few times in the past. 

More importantly, there isn’t really a perfect measure of what “high” means.  It is only in terms of price, or a percentage of what companies earn (the P/E ratio).  Or you can look at the P/E over the last 10 years (CAPE ratio.)  You can find justification for just about any position you want.  

The Stock Market is High

If you accept that it is high based on the price, there are possible explanations.  I prefer the simple supply and demand explanation.  In basic economics, when there is more supply for a good, the price drops, and vice versa.  When demand for a product goes up, the price goes up. 

Right now, there is a bit of reduction in supply because companies are going private, fewer companies are going public, and public companies are buying back shares at an increased rate. 

I tend to think the big difference relates to increased demand for stocks because of low interest rates.  If an investor has money to put to work, his options are limited.  He can only get 2.6% on a ten year bond.  Other options, like real estate or gold, are less liquid.  That is, harder to get money out in a short time. 

Therefore, more money is pouring into stocks, many of which pay a dividend, and have recently gone up. 

So, why is the stock market high?  Because like Richard Gere in An Officer and a Gentleman, “(it’s) got no place else to go. “

As always, nothing here is meant to be a recommendation to buy or sell securities. 

Saturday, May 10, 2014

Compound Interest, Die Hard and Hans Gruber

Die Hard is a spectacularly entertaining movie and can be used as a lesson in compound interest.

Spoilers follow.

The villain, Hans Gruber, played marvelously by Alan Rickman, attempts to steal $600 million dollars and plans his escape so that he can retire to an island and earn 20%.

Now, even in those days, earning 20% wasn't easy, and it seems less likely now.  But, taking him at his word, he was very smart financially.  His plans are something everybody can sensibly aspire to.

The movie was made in 1988.  If he had been able to accomplish the two things:

1. Steal $600 million
2. Earn 20%

and hadn't had to touch the money,

he would, through the magic of compound interest, now have a fortune worth


That's $57 billion and change, which would make him 5th on Forbes' list of world's richest people

Not bad. .