It Takes Volume To Be Bullish

A market that rises without real demand is a market that is whistling past the graveyard.

Shares battled back for the second session Monday following last week’s harsh selling. But the rally coincided with tepid volume, doing little to instill confidence that there is enough demand to sustain the seven-week advance.

After a market puts in a low and begins rallying, it is preferable to see that rally occur on strong volume. This is a sign that large investors, the lifeblood of any durable advance, are on board. However, after a market advance goes roughly six to eight weeks without at least several major accumulation days showing up, it is time to be concerned about the sustainability of that rally.

This lack of market volume was evident just prior to the end of the 2002-2007 bull market in mid-October 2007. It was also apparent during the six weeks leading up to the May 2 peak in the Standard & Poor’s 500 Index

The adage “it takes volume to put stocks up, but stocks can fall of their own weight.”

A brand-new bull market will typically see emerging leaders break out of bases and move up 20%-25% or so before pausing to digest their gains.

Adapted from: 

Demand wanted

By Kevin Marder

Sept. 27, 2011, 12:01 a.m. EDT

http://www.marketwatch.com/story/demand-wanted-2011-09-27

We Are On Our Own

When it comes to our money, don't trust anyone . In the end nobody cares more about our money than we do. Advisors can be counselors in a crisis market . But they don't have any more of a clue than you or I as to the future of the economy or stocks. Nobody has lived through a previous global deleveraging , coupled with instantaneous communication of every bit of noise as exists today. We are on our own.

Fear Of A Worse Tommorrow

We are afraid not just of today's terrible markets but of a worse tomorrow.

We feel like bystanders in our own financial lives—almost as if we were spectators at a racetrack equally incapable of stopping an impending car crash and of tearing our eyes away from it.

In the short run, it always feels better to be a buyer when the market is euphoric; in the long run, the investors who make the most money are those who buy when the market is miserable. For investors full of anger and fear, however, benign neglect might be the best they can muster

- Jason Zweig

http://online.wsj.com/article/SB10001424053111904070604576518584290614602.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond

The Soothsayers

Seeker-Sucker

Uncertainty is something that frightens us.   We seek assurance and knowledge of the future to reduce the uncertainty in our life and future.  We seek out Prophets, soothsayers, fortune tellers and even politicians offering hope and change.  We consult and listen to brokers, bank relationship managers, and fund managers looking for some shortcut to investment success and to get the best outcome for our investment or for peace of mind about investing. We also want to identify the fastest, easiest and safest way to get rich.  We believe that there is such a way.

On the other hand, the financial Industry try to meet this need of ours by trying to predict the future.   The more financial predictions they make, the more business they do and the more commissions they get.  As result, “the brokers began adding the business of prophecy to the business of brokerage.”

In this quest, we often also turn to various sources of so-called expert for information.  A very common source will be the popular financial media: magazines, newspapers, books, TV, radio, and the internet.

Unfortunately, the media is designed to “sell” newspapers, books, magazines, advertising time, and investment products—not to help us make good investing decisions.  Researchers found correlation between mutual fund recommendations and past advertising in three personal finance publications.  Positive mentions in these financial publication increase fund inflows by as much as 7% to 10%.

Do Ads Influence Editors?

Advertising and Bias in the Financial Media

Jonathan Reuter and Eric Zitzewitz

First Draft: October 2003

Current Draft: October 2004

http://129.3.20.41/eps/fin/papers/0501/0501003.pdf

We find that mutual fund recommendations are correlated with past advertising in three personal finance publications but not in two national newspapers. Our tests control for numerous fund characteristics, total advertising expenditures, and past mentions. While positive mentions significantly increase fund inflows, they do not successfully predict returns Overall, positive mentions in personal finance magazines and Consumer Reports are associated with an economically significant 7-10 percent increase in fund size over the next 12 months, while a positive mention in the New York Times is associated with a 15 percent increase.

The market is unpredictable, and yet so many people - financial analysts, brokers, mutual fund managers, pension fund managers, hedge fund managers, newsletter editors, market commentators on TV, bank and insurance sales personnel - make so much money by making predictions. It is also known that if someone is waxing poetic about a certain stock in chatrooms or blogs, that person could well be paid to do it.  

The investment advice and management industry is mammoth. The total revenues are well over $200 billion per year in the United States alone. A percentage of investors' assets provides the entire financial support for this industry. In 2004, the average cash take-home pay for each of the top 25 hedge fund managers was $251 million. It comes straight out of the investors' accounts. (Source: "The Big Investment Lie" by Michael Edesess).

Simply, the financial experts become oracles often with the customers' inclination and even enthusiastic cooperation.  We always think someone else has the answers. That's how Bernie Madoff  stole money from his investors.  Madoff ‘s victims are not ignorant people.  They are very smart and successful in their own fields.  However they are fools when it comes to investing. They believe either that they are smart enough to beat the market, or someone else is.    It's how scam artists make their living. 

We must always bear in mind that these advisers have their own self interest which will come before us.  Quoting John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine:

“The investor’s need to believe somebody is matched by the financial advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former.”

Con artists are only interested in people who they can turned around to believe in them without question, and who they can manipulated to believe in their illusions.  They don't merely seek out the greedy or the weak or the stupid.  They seek out the needy - someone who has an unfulfilled desire. No one is immune. Many wealthy people are vain, and to them, appearing to be a high-roller is very important and as a result take unnecessary risk with their money.

You can be forgiven if you sometimes confused financial experts as con artists.  When trying to make a sale, it is not uncommon for the bank sales personnel to tell us that many of his clients has invested in the products and or that he is also invested and engaged in leveraging.  There is also the possibility of him give us assurance of profitability and low risk.  The more aggressive ones may even actively encourage leverage by 5 times the amount invested in a product saying that the yield from the investment product is higher than the present interest rates which will remain low.  It sounds like a free lunch.  What he failed to tell is that whatever the result, it will be amplified by five times. If the value of the investment product dropped by 20%, the total amount invested will be wipe out. Investors are encouraged to leverage simply to earn more commission for the financial experts or sales personnel.

There are many other examples of unethical practices by financial experts to increase their income.  One of the more common one will be “churning” – increase frequency in trading of products.  And this happen not only stockbrokers but by insurance agents encouraging clients to change their insurance policies at the detriments of the clients.  

Ben Graham Views of Market Crisis

Opportunities in Crisis

危机

When the market is desolate – everyone has lost money on everything.  We are so consumed by mental anguish that it is difficult to make rational decisions. The future is seems so bleak and every piece of news added to your agony. 

Nevertheless, the financial future is no more uncertain now than it used to be; in fact, it is  far less uncertain than when the market was at its peak, the future seemed bright, and  no one even imagine the disaster that would befall the market. Now, we realised the absolute certainty of blue skies ahead then was an illusion.  But all we now is the feeling and fear that worse misery may lies in store.  At this point of time, we may not be aware that this notion is also most likely to be an illusion.

With the market is plunging and the everyone is panicking, the easiest thing is to join in the mass exodus.  Many stress-out investors liquidated their whole portfolios in March of 2009, just as equities bottomed out.   

Investors who are  stampeded by the market panic is “perversely transforming his basic advantage into a basic disadvantage.”  How is this so?

Market fluctuate.  Though the price may change every seconds and minutes but the value should remain the same unless the fundamental changes.  Why suffer mental anguish over something which we have no control.  We, however, can control how we respond to it.

雨过天青

Yes, it is absolutely terrifying to be in the midst of a market crisis. However we cannot based on fear to make rational decisions. So when opting between following your emotions or investment plan, stick with your plan. Panic will not last forever, the crisis will eventually tail off. This one will too.  All crisis will passed as the history of markets showed for the past 200 years - Markets do recover.  When in a market crisis, think "This too shall pass."

Do not panic.  Do not sell off - this is where most investors made the serious mistake of selling low and buying high.  Selling will cause you irrevocable loss.  As Elis put in, "Flight to safety is like locking the barn door after the sheep had run off."  You are unlikely to buy back until the market has risen and regret will cause you to buy near the market peak - what Jason Zweig, call the Sheepish Bulls.

機不可失

Buffet said:  When other fear, we are greedy.  When others are greedy we are fearful.  We invert our emotions.  Market Crisis offers us the best opportunity to buy good stocks at wonderful prices.  History has shown that best money were earned by the people who stepped up and bought stocks and kept buying on the way down during market crisis.  Those who fled stocks for the safety of bonds and cash suffered. As it is popularly known - buy when there is blood in the street; even if the blood is yours.

So see Market Crisis as an opportunity and an advantage.  Though Bear markets may be gut-wrenching, they are the only means by which future returns can be raised.

泰然自若

Look at Market Crisis like disruptions in life ie floods, electrical failure, or earthquake. People are unable to continue their normal life and suffer a lot of inconveniences.  But things will return to normal with some changes and life continue. As an investor, your investment also go through raining day and sunshine.

Adopt an outlook of imperturbability - as long term value investor, prices in the short terms does not matter to us. .  If you have to know what your investments are every day, you're making a mistake. Look at it as trying to shake us off from our beliefs ground in history and facts.  Avoid investment pornography will prevent us from joining the market irrationality.

References:

Grace Goner (Truth Story)

Simple Way of Investing -
Grace Groner Way

I read about a true case in USA.  Grace Groner. 

She brought 3 shares of Abbot Laboratories, held it for about 70 years, and leave behind USD 7 million for charity.

Jim Royal, How You Can Become an Accidental Millionaire, May 28, 2010

http://www.fool.com/investing/dividends-income/2010/05/28/how-you-can-become-an-accidental-millionaire.aspx

Jonathon Hoenig, The Perfect Hedge for a Risky Era?,  8 March 2010, SmartMoney.com

http://www.smartmoney.com/investing/stocks/The-Perfect-Hedge-for-a-Risky-Era/#ixzz0koU35A2y

Details of above  posts or articles can be found at the end of this post or at the links.

She brought the 3 shares of specially issued Abbott Laboratories for USD 180 (about USD 3,000 in today’s dollar) around 1935.  She held on to these shares until she passed away in 2010 leaving behind a fortune of USD 7 million to her alma mater, suburban Lake Forest College.

How did she amass such a sum?

She lived within her means.  Groner was thrifty perhaps from her experience with the Depression.  Grace did not drive but walked around her town of Lake Forest, Ill. just outside Chicago. She owned a house that she had inherited from a friend. The one-bedroom place was stocked with the barest of possessions. She bought second-hand clothes at yard sales.  She also enjoyed giving money to needy local residents, and many years ago she even established a scholarship program at Lake Forest College by donating $180,000.

You can do that?

Grace's story demonstrates the power of buy-and-hold investing and compounding by reinvestment of dividends over a long period of time.. After many stock splits over decades and reinvested dividends, her three original shares became 129,000 shares worth roughly $7 million.

Her simple living is what permitted her to hold on to her investment over a lifetime. 

What I think happened?

After graduating in 1931, Groner began work as a secretary at Abbott. A few years later, she bought the three shares of Abbott.  She worked there for 43 years.  She is likely to have brought the 3 shares on urging of her colleagues or as a form of loyalty to her employer. 

She was not likely to be active in the stock market at all.  She was not likely to know the complexity of the market and may deemed it too dangerous to buy and sell stocks with her Depression era experiences.  As a result she is not affected by investment pornography and noises. 

As Hoenig put it, “she didn’t use Fibonacci retracements, high-frequency trading or advanced moving averages, but simply reinvested her dividends and never sold.”  Likewise, she is unlikely to have read Ben Graham or Taleb. If she did, she may have sold her stocks much earlier (because she was likely then to be an active investor).

She may even have a stoic and imperturbable attitude in life as I presume from her simple living. She was regularly employed and thrifty and had no demands for extra money. She did not put a lot money into the stocks and is not concerned about its performance.  As a result, she had the fortitude and discipline to hold on to her stock during its ups and downs.

Of course, these are my presumptions.  I know it is not easy doing what she and perhaps Uncle Chua had done.   What I am trying to deduce is how we can act like her in our investing behaviour.

Warren Buffet said “Investment is simple but not easy.”

Simple as Grace Groner or Uncle Chua have done.

But difficult …. The human temperament.  Most of us don’t want to wait 65 years for our money to compound into millions.

Most of us want to get the hand on some extra money to spend – we are not thrifty and often lived beyond our means.

Most of would have sold much earlier ……

Uncle Chua

Simple Way of Investing
The illiterate but smart way

I read how Uncle Chua made $17 millions (it was not stated in which currency, Malaysian or Singapore dollars)  from stocks in these postings:

The story of Uncle Chua

Thursday, May 14, 2009

http://myinvestingnotes.blogspot.com/2009/05/story-of-uncle-chua.html

Value Investing Made Simple by Uncle Chua

Just for Laugh ...

Sunday, 16 January 2011

http://createwealth8888.blogspot.com/

True story Or made up?  Most of us are unlikely to believe the story but agree that it is possible to do so. It isn’t important whether this is a true story or not. It is a nice case study for us to learn from. 

Uncle Chua is a retired businessman with cash.  He has been investing in stock for a long time. “Uncle Chua explained: "I bought some of them as early as in the 60s. I was then in my 50s and retired”. In 1997, he would be at least in his 80s when “In mid-1997, when the Asian Financial Crisis started sweeping across regional markets, Uncle Chua didn't sell a single share. Instead, he started buying shares - again ALL blue chips and ONLY blue chips”

How he did it?

It took a lot of guts.

I presume the following:

He had lot of experiences in stocks and gone through many cycles up and downturns of the market.   Though he was illiterate and may not studied the history of the stock markets, he was confident from his experience that eventually markets recovered.

So he may not know about Baron Rothchild’s, John Templeton and Ben Graham, he did it correctly – “buy when there is bloodshed in the street.”

His illiteracy also helped in that he may not be exposed to much investment pornography that may derailed him from his single minded and simple investing style.  He would also not monitor his stock daily as he does not even know  “how to use the Teletext facility on his TV set,” sparing him the antics of Mr Market.  He truly exemplified what Warren Buffet said, "Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

He must be very rich to continue investing in 1997 with “couple of hundred thousand,”  especially at the age of 80+.  This amount should only be a small portion of his total wealth as he is unlikely to risk everything in the market at his age.  There is also no need for him to do so.  That is why in this world, the rich get richer.

Most of us may not be in the same position as him – with so much money to spare.  However, we need not do it to the same extent but we must take advantage of the situation to invest some of our savings, on what Ben Graham would call,  “very satisfactory terms."  This would minimize our regrets which may cause us to charge into the peak of the market after its recovery like Jason Zweig’s “sheepish bulls”.

References:

Baron Rothschild

Simple Way of Investing
The time to buy is when there's blood in the streets

Baron Rothschild did this

Warren Buffett buy when there is fear in the market

Marty Whitman does it with great interest in distressed debts.

Sir John Templeton" buy during “point of maximum pessimism."

In fact, all great investors do this.

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, made a fortune buying in the panic after Napoleon’s lost at the Battle of Waterloo. He opined: "The time to buy is when there's blood in the streets."

A second part to Rothschild's quote attributed to Mark Mobius "even if the blood is your own."

Marty Whitman, of the Third Avenue Value Fund,  likes purchasing bonds in distressed companies with rebound potential. Whitman bought bonds in the oil-drilling company, Nabors Industries, which filed for bankruptcy protection in 1987. A year later the company emerged and the bondholders' debt was converted into equity. He also purchased bonds of K-Mart both before and after it filed for bankruptcy protection in 2002.  He only paid about 20 cents on the dollar for the bonds as there is a great danger that the company would shut its doors for good.  Whitman made a nice profit when the company emerged from bankruptcy and his bonds were exchanged for stock in the new K-Mart. The shares jumped much higher in the years following the reorganization. In 2009, Third Avenue Management LLC increased its stake in Forest City Enterprises Inc., the property developer whose shares have tumbled 83 percent in the past year.  The fund is investing in distressed debt while avoiding most stocks, reported Bloomberg on 28 May 2009. Whitman said that Third Avenue plans to invest in more companies that are seeking to pay down debt and is avoiding stocks because of short sellers’ ability to drive down prices. Whitman said he’s finding “huge, huge opportunities,” in distressed debt and may launch a new fund for those investments.

Sir John Templeton ran the Templeton Growth Fund from 1954 to 1992. He was a contrarian investor, buying into companies when they hit the "point of maximum pessimism." His investing style can be summed up as looking for He looked for value investments, or what he called "bargain hunting", by searching out such targets in many countries around the world that offered low prices and an excellent long-term outlook.  He pioneered international investing.

He is one of the past century's top contrarians. In 1939, with war raging in Europe, Templeton bought $100 of every stock trading below $1 on the New York and American stock exchanges of some 104 companies, 34 of which were bankrupt, for a total investment of roughly $10,400. Four years later he sold these stocks for more than $40,000! Templeton was also said to profited when he bought low during the Depression and sold high during the internet boom.

Templeton became a billionaire as a true pioneer of globally diversified mutual funds, including the Templeton World Fund, which was formed in 1978. His flagship Templeton Growth Fund posted a 13.8% annualized average return from 1954 to 2004, well ahead of the Standard & Poor's 11.1%.

Warren Buffett found the opportunity in the 1973-74 bear market to purchase a big stake in the Washington Post Company - an 100 bagger investment.   According to him, he was buying at a deep discount the company could have "… sold the (Post's) assets to any one of 10 buyers for not less than $400 million, probably appreciably more." The company had only an $80 million market cap at the time.

A useful reference for this topic where I obtain most of the above information:

Buy When There is Blood In The Streets

 by Daniel Myers, CFA

http://www.investopedia.com/articles/financial-theory/08/contrarian-investing.asp

Fred Schwed

Simple Way of Investing
A little wonderful advice

Fred Schwed J. give “a little wonderful advice” in his book, “Where Are the Customers’ Yachts?”. 

It is still relevance.  John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine has this to say about his book:

It’s amazing how well Schwed’s book is hold up after fifty five years.  About the only things that’s changed on Wall Street is that computers have replaced pencils and graph paper.  Otherwise the basics are the same.

Schwed recommended:

Like other great ideas, this one is simple:

When there is a stock-market boom, and every is scrambling for common stocks, take all your common stocks and sell them.  Take the proceeds and buy conservative bonds.  No doubt the stocks you sold will go higher. 

Pay no attention to this – just wait for the depression which will come sooner or later.  When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. 

When the Market Crash, there would be as many shares sold as brought.

The public reads the papers and reading about the “large selling”, “new selling wave threw the market into utter chaos”, and “during the final hour equities were thrown overboard in huge lots, without regard for price or value.”, it get the impression that on the catastrophic day everyone sold and nobody bought.  Of course, there is just no truth in that at all.  If on that day the terrific “selling” amounted to seven million, three hundred, sixty-five thousand shares, the volume of the buying can also be calculated.  In this case it was 7,365,000 shares.

No doubt the stocks will go still lower.  Again pay no attention.  Wait for the next boom.  Continue to repeat this operation as long as you live and you’ll have the pleasure of dying rich.

A glance at financial history will show that there never was a generation for whom this advice would not have worked splendidly. …….

In fact, I think you need to do it only once and will benefit greatly from it

Simple But Not Easy

It looks as easy as rolling off a log, but it isn’t.  The chief difficulties, of course, are psychological.  It requires buying bonds when bonds are generally unpopular and buying stocks when stocks are universally detested.

Schwed Jr, F. (1940). Where Are the Customers’ Yachts? By Fred Schwed Jr,. John Wiley & Sons,.

Jim Roger

Simple of Investing
Wait for Opportunity

Jim Rogers is somebody else you ought to listen to on the subject of managing your own money. He used to work with George Soros. Rogers drove around the world twice, once on a motorcycle and once in a car, and wrote a book about each trip.

Rogers told author John Train in 1989 that you should, "take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.

"Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.

"You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money."

We don't get to see Rogers' balance sheet because he's not a public company. But Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash & equivalents of more than $46 billion, equal to about 27% of the entire company's current market value.

Not Easy

The only problem with this simple strategy of sitting in cash and investing only when circumstances are ideal is human nature. Nobody wants to do it. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results most people get, they really just want to buy and sell quickly, whether they make a fortune or not!

Of course, the average investor's impatience is just another easy way for us Extreme Value types to get an advantage. We can sit in cash, wait for something that is too good to pass up, then buy it and hold on.

Jim Rogers and Warren Buffett on How to Manage Your Money

By Dan Ferris, editor, Extreme Value

Saturday, May 26, 2007

http://www.dailywealth.com/960/Jim-Rogers-and-Warren-Buffett-on-How-to-Manage-Your-Money