Oops, I said the 'R' word: Recession.
The US stock market seems to be reflecting a state of denial.
Every time the US Census or another body that produces economic indicators releases some figures on how things are going in the US, the market takes a dive.
Then, just days later, the market makes a rebound based on information that seems... well, not very significant.
This latest roller coaster was due to information released by the Chicago Purchasing Managers' Index released on Feb 29 which indicated that the economy is contracting. As one would expect, the markets dropped by roughly 3% and continued a slight downtrend for the next couple trading sessions.
Then yesterday on Tuesday, March 4, the market makes a late day rally to end up nearly even for the day. Explanations? A possible Ambac Financial Group (NYSE:ABK) bailout. Wow. Uh, why is this cause for celebration and the repurchasing of stock en masse? Let's see, Ambac made some serious errors in judgement about insuring really bad bonds and is now paying the price. Yet the result of a bailout is a positive sign that a recession is not on its way? In other words, why would one invest long in a market that has most indicators pointing to a nice bloody recession? Because some poorly managed company may receive a "get out of jail free" card? Well.... that makes perfect (non)sense...
UPDATE: Ho HO! Just hours after this post, Ambac has filed with the SEC that it is issuing new stock to raise capital to uphold its AAA rating with Moody's Investor Services. The market has seen this as too little too late and ABK has dropped by over 10% already after the NYSE restarted trading on this ticker (which it halted before the announcement).
Daniel McMahon of Oppenheimer was quoted on Bloomberg that: "The market never should have rallied on this news in the first place", referring to the jump in price when several publications announced that a deal with banks may be nearing. Well put Mr. McMahon. Now if only the rabid, reckless investing public (and professionals) could simply use reason when pulling the trigger.
Wednesday, March 5, 2008
Tuesday, January 8, 2008
Bracketing on Stock Price Fluctuation
I've taken notice of a pattern recently. A price drop of roughly 20% is about the most the market is willing to take until people start to buy that stock again.
How can we take advantage of this pattern to make money?
Buy a stock as it drops. The more it drops, the more you buy. Sounds like a death wish right?
This situation reminds me of a story I've heard about a reporter once asking Einstein how to profit from gambling at a casino. The supposed response was simple: "double your bets when you lose".
Doubling your bets as you lose relies on the principle that a string of losses (or wins) becomes harder to maintain as the streak continues. For example the chances of you getting heads on a flip of a coin is 50%. What are your chances of flipping a coin and it landing on heads for the next five flips? Just over 3%. (Multiple your chances of each flip with each other, or .5 x .5 x .5 x .5 x .5 = .03125 or 3.125%.
If you have the funds to keep doubling your bet as your losing streak continues, you will eventually recoup the losses from each lost bet since you keep doubling your wager. You will eventually win a round, thus getting all your money back, plus whatever the payout is.
Table betting limits in Casinos defeats this exact system. Check out the tables the next time your in Vegas and you'll see min. and max. bets. Sometimes the brackets are small like min. $1, max $10 or large: min. $10 max. $10000. The larger the bracket, the more times you can double your bet during losses before you'll hit the limit. Once you hit that limit, you'll no longer be able to sustain the streak and this is how over time Casino's can guarantee their profit.
Now, take all this and apply it to a stock you enjoy betting on, say Apple (AAPL). As robust of an investment AAPL is, its price is subject to some serious dips. Take a look at Nov. 6 to Nov. 12 period of 2007 for AAPL. That's a 19.8% drop over a week.
With this experiment, lets say that we purchase the same amount you already have invested with each 5% drop in price from your baseline ($191.79 Nov. 6 price in this case). You started with $2500 in AAPL? When it hit 182.20, (i.e. 5% less than 191.79), purchase another $2500. Continue this with every 5% or $9.59 drop in price. By the time it hit bottom you would have purchased another $10K worth of Apple, ending at 153.43. After this AAPL rose back to 169.96 very quickly, then continued to edge upwards somewhat steadily till it hit $200 in late Dec.
As the price of the stock climbs back up, sell the additional stock that you purchased on the way down. At $163.02 sell the stock you bought at $153.43. That's 16 shares you bought for 153.43 ($2454.88), sold at 163.02 ($2608.32). You end up with $153.44 minus your transaction costs. Continue this on the way up. At $172.61 (another $9.59 higher than your previous bracket of $163.02) sell the stock you purchased at 163.02 (2500 / 163.02 = 15 shares) ending up with $143.85 profit. Repeat at 182.2 (14 shares x $9.59) for $134.26 and at 191.79 for another $134.26. By the end of the wild ride you would have seen a gross profit of $565.81. Minus transaction costs of $10 a trade you end up with $485.81. Granted, this isn't a lot of return for the amount invested over the period, which is $485.81 / $10000 or 4.9%. On top of that you need to have a lot of cash sitting around to make this work. You could always get greedy and sell late on the way back up, hoarding profits until the ticker price hits its pre-dip levels, but that has its own downfalls including locking up a lot of cash and increasing your exposure.
An important point to keep in mind: this only works for price drops not directly related to the performance of the underlying stock. I.e. don't expect this pattern of drop and rise to happen on a company that just got rung up on charges of accounting fraud. The difficult thing to say with any drops in the market is how far the price of any certain stock will decline. That's why we purchase on the way down, in brackets, and again, sell on the way up, in similar brackets. Unless your oracle of market wisdom is much better than the rest of the players in the stock market, none of us can predict precisely where the plateaus and troughs on a ticker price will be.
How can we take advantage of this pattern to make money?
Buy a stock as it drops. The more it drops, the more you buy. Sounds like a death wish right?
This situation reminds me of a story I've heard about a reporter once asking Einstein how to profit from gambling at a casino. The supposed response was simple: "double your bets when you lose".
Doubling your bets as you lose relies on the principle that a string of losses (or wins) becomes harder to maintain as the streak continues. For example the chances of you getting heads on a flip of a coin is 50%. What are your chances of flipping a coin and it landing on heads for the next five flips? Just over 3%. (Multiple your chances of each flip with each other, or .5 x .5 x .5 x .5 x .5 = .03125 or 3.125%.
If you have the funds to keep doubling your bet as your losing streak continues, you will eventually recoup the losses from each lost bet since you keep doubling your wager. You will eventually win a round, thus getting all your money back, plus whatever the payout is.
Table betting limits in Casinos defeats this exact system. Check out the tables the next time your in Vegas and you'll see min. and max. bets. Sometimes the brackets are small like min. $1, max $10 or large: min. $10 max. $10000. The larger the bracket, the more times you can double your bet during losses before you'll hit the limit. Once you hit that limit, you'll no longer be able to sustain the streak and this is how over time Casino's can guarantee their profit.
Now, take all this and apply it to a stock you enjoy betting on, say Apple (AAPL). As robust of an investment AAPL is, its price is subject to some serious dips. Take a look at Nov. 6 to Nov. 12 period of 2007 for AAPL. That's a 19.8% drop over a week.
With this experiment, lets say that we purchase the same amount you already have invested with each 5% drop in price from your baseline ($191.79 Nov. 6 price in this case). You started with $2500 in AAPL? When it hit 182.20, (i.e. 5% less than 191.79), purchase another $2500. Continue this with every 5% or $9.59 drop in price. By the time it hit bottom you would have purchased another $10K worth of Apple, ending at 153.43. After this AAPL rose back to 169.96 very quickly, then continued to edge upwards somewhat steadily till it hit $200 in late Dec.
As the price of the stock climbs back up, sell the additional stock that you purchased on the way down. At $163.02 sell the stock you bought at $153.43. That's 16 shares you bought for 153.43 ($2454.88), sold at 163.02 ($2608.32). You end up with $153.44 minus your transaction costs. Continue this on the way up. At $172.61 (another $9.59 higher than your previous bracket of $163.02) sell the stock you purchased at 163.02 (2500 / 163.02 = 15 shares) ending up with $143.85 profit. Repeat at 182.2 (14 shares x $9.59) for $134.26 and at 191.79 for another $134.26. By the end of the wild ride you would have seen a gross profit of $565.81. Minus transaction costs of $10 a trade you end up with $485.81. Granted, this isn't a lot of return for the amount invested over the period, which is $485.81 / $10000 or 4.9%. On top of that you need to have a lot of cash sitting around to make this work. You could always get greedy and sell late on the way back up, hoarding profits until the ticker price hits its pre-dip levels, but that has its own downfalls including locking up a lot of cash and increasing your exposure.
An important point to keep in mind: this only works for price drops not directly related to the performance of the underlying stock. I.e. don't expect this pattern of drop and rise to happen on a company that just got rung up on charges of accounting fraud. The difficult thing to say with any drops in the market is how far the price of any certain stock will decline. That's why we purchase on the way down, in brackets, and again, sell on the way up, in similar brackets. Unless your oracle of market wisdom is much better than the rest of the players in the stock market, none of us can predict precisely where the plateaus and troughs on a ticker price will be.
Thursday, December 20, 2007
RIMM Christmas Present
Research in Motion posted Q3 2007 Earnings tonight, Dec. 21, 2007 and it did not disappoint (except the shorts).
Learning from the LDK situation, which was the lesson of "listen to the market", RIMM was a nice chance to put that knowledge into play. RIMM had been drifting downwards toward the $100 mark since mid-November, but today it started to rise with no new information except that earnings were to be released after the closing bell.
From a sliding position for the past four weeks, to suddenly rising nearly 5% today... what gives? The only thing this points to is a positive earnings report, i.e. better than expected earnings. Analysts give us their estimates of what a company will report their earnings at. In most cases when a company beats those earnings, the response is usually positive with a large jump in stock price. Keep in mind that the difference between actual earnings and the expectation of the market is what causes the price jump. A better than expected earnings report can sometimes disappoint the market, leading to a slide in share price, when the earnings report didn't surprise the market enough. Bizarre, eh? This situation is often closely tied to a competitor that has recently released a similar surprising earnings report, but their difference in actual vs. expected earnings was greater. Talk about keeping up with the Joneses.
So the price of RIMM started to climb today leading up to the earnings report. To me this was the market saying: "RIMM is going to beat earnings". Where this information is coming from and how it is arriving at the market is not of my concern. One can guess that from a company of 6000 there is some information leaking out about how they're going to do. To think that a secret like earnings from a company as hot and as well known as RIMM was going to stay 100% under wraps... you gotta be kidding. Another interesting thing about human nature... we love secrets. And not keeping them, but sharing them. In the past two days we've seen this information played out in the markets with LDK and RIMM, one reporting less than stellar earnings, the other better than expected.
Now that we've listened to the market information with a near 5% rise in price just today, the big question was and still is: how high can it go? Checking the previous earnings release for Q2 2007, RIMM beat earnings by a bare cent, but over the course of the two following trading days their share price jumped 20%. That at least gives us some idea of the movement possible with this latest surprise EPS report.
A useful site for looking at historical and future EPS reports is Reuters. For capturing the latest news on a stock The Fly On the Wall does the trick.
Learning from the LDK situation, which was the lesson of "listen to the market", RIMM was a nice chance to put that knowledge into play. RIMM had been drifting downwards toward the $100 mark since mid-November, but today it started to rise with no new information except that earnings were to be released after the closing bell.
From a sliding position for the past four weeks, to suddenly rising nearly 5% today... what gives? The only thing this points to is a positive earnings report, i.e. better than expected earnings. Analysts give us their estimates of what a company will report their earnings at. In most cases when a company beats those earnings, the response is usually positive with a large jump in stock price. Keep in mind that the difference between actual earnings and the expectation of the market is what causes the price jump. A better than expected earnings report can sometimes disappoint the market, leading to a slide in share price, when the earnings report didn't surprise the market enough. Bizarre, eh? This situation is often closely tied to a competitor that has recently released a similar surprising earnings report, but their difference in actual vs. expected earnings was greater. Talk about keeping up with the Joneses.
So the price of RIMM started to climb today leading up to the earnings report. To me this was the market saying: "RIMM is going to beat earnings". Where this information is coming from and how it is arriving at the market is not of my concern. One can guess that from a company of 6000 there is some information leaking out about how they're going to do. To think that a secret like earnings from a company as hot and as well known as RIMM was going to stay 100% under wraps... you gotta be kidding. Another interesting thing about human nature... we love secrets. And not keeping them, but sharing them. In the past two days we've seen this information played out in the markets with LDK and RIMM, one reporting less than stellar earnings, the other better than expected.
Now that we've listened to the market information with a near 5% rise in price just today, the big question was and still is: how high can it go? Checking the previous earnings release for Q2 2007, RIMM beat earnings by a bare cent, but over the course of the two following trading days their share price jumped 20%. That at least gives us some idea of the movement possible with this latest surprise EPS report.
A useful site for looking at historical and future EPS reports is Reuters. For capturing the latest news on a stock The Fly On the Wall does the trick.
LDK Solar - December wild ride
LDK Solar is a great stock to follow in Google Finance Discussions. It is hilarious to read what people are saying on the discussion board in terms of predictions or even reasons why this stock was going to bust through the roof with nary a pause after the audit report comes up clean.
Even after the audit report cleared LDK of any accounting foul play, LDK never reached it's pre-SEC investigation level of $75 and continued to slide slightly as everyone waited for them to post 3rd quarter earnings results.
The key to predicting that this stock wasn't going to beat earnings was that it never surpassed pre-investigation price and continued to slide after the audit report came clean. Squeaky clean even. Why wouldn't the price surpass it's previous high before the investigation? Because the market was saying: I don't have confidence that they're going to pull a First Solar and shatter earnings predictions like a balsam wood model bi-plane vs. a Louisville Slugger.
The market has information, hidden in each little movement. It's all about information. Those who have it, profit from its pure essence of value. Knowing that the earnings report was not going to beat expectations was a license to print money.
All those short sellers, to the tune of something ridiculous like an 8th of the entire pool of outstanding shares, were saying something. And there were plenty on the Google Finance discussion boards that weren't listening at all. Do you think that all of these sophisticated traders and their pocketbooks were wrong? That they were somehow illogical and irrational in thinking that LDK would tumble big after they did not beat earnings?
Sorry, but, you've got one hell of an ego to think that you know better than the market. When I say the market, I mean the market sentiment. It's the collective knowledge surrounding a stock. A composite of all that is known about a stock, information obtained legally or otherwise.
The lesson learned from LDK solar: listen to the market, ignore the vocal minority. Listen to that huge background noise whispering: massacre after earnings are released. The vocal minority that use message boards like those found at Google Finance and Yahoo Finance are speaking to ease their worries and anxiety about what will happen. If you think about it, they are the vocal few who do not have privileged information. If they did, they would keep it for themselves and profit from it. This past month with LDK solar is a perfect example of this.
There are still some on that board who speak of LDK hitting 80 by Friday, Dec. 22. It must be great to live in that dream world, where every wish came true. There is lots of noise about how all the shorts are going to have to cover and thus the buying demand will rocket the price of LDK up to stratospheric levels. Except... that's not going to happen when you have the majority of the shareholders who did not have privileged information offloading the stock like it's last year's hottest fashion trend (which now stinks to high heaven). The price will only go up if there is no group willing to unload the stock. And after that barely sufficient earnings report, there's going to be a boat load of people willing to drop that stock in a hurry.
Good luck to all on LDK hitting 80 in 30 hours time. But, I wouldn't hold your breath.
Even after the audit report cleared LDK of any accounting foul play, LDK never reached it's pre-SEC investigation level of $75 and continued to slide slightly as everyone waited for them to post 3rd quarter earnings results.
The key to predicting that this stock wasn't going to beat earnings was that it never surpassed pre-investigation price and continued to slide after the audit report came clean. Squeaky clean even. Why wouldn't the price surpass it's previous high before the investigation? Because the market was saying: I don't have confidence that they're going to pull a First Solar and shatter earnings predictions like a balsam wood model bi-plane vs. a Louisville Slugger.
The market has information, hidden in each little movement. It's all about information. Those who have it, profit from its pure essence of value. Knowing that the earnings report was not going to beat expectations was a license to print money.
All those short sellers, to the tune of something ridiculous like an 8th of the entire pool of outstanding shares, were saying something. And there were plenty on the Google Finance discussion boards that weren't listening at all. Do you think that all of these sophisticated traders and their pocketbooks were wrong? That they were somehow illogical and irrational in thinking that LDK would tumble big after they did not beat earnings?
Sorry, but, you've got one hell of an ego to think that you know better than the market. When I say the market, I mean the market sentiment. It's the collective knowledge surrounding a stock. A composite of all that is known about a stock, information obtained legally or otherwise.
The lesson learned from LDK solar: listen to the market, ignore the vocal minority. Listen to that huge background noise whispering: massacre after earnings are released. The vocal minority that use message boards like those found at Google Finance and Yahoo Finance are speaking to ease their worries and anxiety about what will happen. If you think about it, they are the vocal few who do not have privileged information. If they did, they would keep it for themselves and profit from it. This past month with LDK solar is a perfect example of this.
There are still some on that board who speak of LDK hitting 80 by Friday, Dec. 22. It must be great to live in that dream world, where every wish came true. There is lots of noise about how all the shorts are going to have to cover and thus the buying demand will rocket the price of LDK up to stratospheric levels. Except... that's not going to happen when you have the majority of the shareholders who did not have privileged information offloading the stock like it's last year's hottest fashion trend (which now stinks to high heaven). The price will only go up if there is no group willing to unload the stock. And after that barely sufficient earnings report, there's going to be a boat load of people willing to drop that stock in a hurry.
Good luck to all on LDK hitting 80 in 30 hours time. But, I wouldn't hold your breath.
Learning from mistakes
Investing in the stock market is about learning from your mistakes. Mistakes that are made due to a common human characteristic: greed. Greed clouds your vision, imparts bias, and makes one do stupid, irrational things, all with the thought of making loads of money in a very short time followed by endless days of sunning oneself on the beaches of some tax haven island in the Caribbean.
The vast majority of traders learn quickly that this is not to be.
So, why is investing about learning from mistakes? Because in hindsight, we see where our greed got the best of us, where it forced our hand into pushing that buy button on a stock at a ridiculous price hoping... no... knowing, that that ticker was going to rocket us to financial freedom. That fantasy generally ends up being a loss of a few thousand dollars, after which we regroup to think about what the hell just happened.
But, making mistakes is good because you've realized that it was a mistake. This is the way we humans learn. Once you've recognized your mistake, you can learn from it. Unless you were born with rabbits feet coming out of your ass, you're like everyone else, making a ton of mistakes along the way, but learning from each and moving in a different, and hopefully, better direction.
Investing is about looking at the past. It's the only information we have that is fact. No one can predict the future. If we could we'd all be done with investing, spending our millions in countless different ways, one of them not being stuck in front of a computer watching numbers flash green and red.
This blog is about my mistakes in investing. Perhaps you can learn from these mistakes and use this information to prepare yourself for when you do the same. Simply avoiding the mistakes of others is far too simple and efficient! You have to feel the pain to remember anything! It's just the way it is...
The vast majority of traders learn quickly that this is not to be.
So, why is investing about learning from mistakes? Because in hindsight, we see where our greed got the best of us, where it forced our hand into pushing that buy button on a stock at a ridiculous price hoping... no... knowing, that that ticker was going to rocket us to financial freedom. That fantasy generally ends up being a loss of a few thousand dollars, after which we regroup to think about what the hell just happened.
But, making mistakes is good because you've realized that it was a mistake. This is the way we humans learn. Once you've recognized your mistake, you can learn from it. Unless you were born with rabbits feet coming out of your ass, you're like everyone else, making a ton of mistakes along the way, but learning from each and moving in a different, and hopefully, better direction.
Investing is about looking at the past. It's the only information we have that is fact. No one can predict the future. If we could we'd all be done with investing, spending our millions in countless different ways, one of them not being stuck in front of a computer watching numbers flash green and red.
This blog is about my mistakes in investing. Perhaps you can learn from these mistakes and use this information to prepare yourself for when you do the same. Simply avoiding the mistakes of others is far too simple and efficient! You have to feel the pain to remember anything! It's just the way it is...
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