New Here - Opinions on my plan welcome! [Archive]

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Shawarma

01-23-2009, 02:08 PM

aiki14

01-23-2009, 06:10 PM

clavocat

01-23-2009, 06:52 PM

Why not buy an index fund like VTI, and have 3000 stocks to diversify out systemic risk?

john_for_u80

01-23-2009, 07:02 PM

Take a look at Gold or Oil related stocks. Also you can short SPY (35-40% of your portfolio) and build position as market rallies! This is not the bottom in S&P!

Shawarma

01-23-2009, 07:45 PM

You might want to consider a Conglom like CVX or XOM in there as well.

Pardon the ignorance but is a "Conglom" an oil company? If so, I was considering adding MRO to the mix.

What do you think of the strategy overall?

Shawarma

01-23-2009, 07:48 PM

Why not buy an index fund like VTI, and have 3000 stocks to diversify out systemic risk?

The only reason a VTI type funds scare me is that I currently dont know enough about what they invest in to feel good about it.

Is there anything I could read that would educate me on index funds?

Do they just focus on one business sector?

The replies are much appreciated!

Shawarma

01-23-2009, 07:51 PM

Take a look at Gold or Oil related stocks. Also you can short SPY (35-40% of your portfolio) and build position as market rallies! This is not the bottom in S&P!

As you can see in my above post I was considering MRO to have some oil in my investment package...I am still open to having it in there.

As for the S&P, can you put that into more layman terms for me? Are you saying to set aside a chunk of my investment and buy SPY at a later date?

aiki14

01-23-2009, 11:50 PM

Pardon the ignorance but is a "Conglom" an oil company? If so, I was considering adding MRO to the mix.

What do you think of the strategy overall?

A conglomerated corp is the biggest of the big oil companies that have tentacles that extend into every facet of the Oil business. CVX, XOM, BP are examples, MRO doesn't quite rise to the same level but may still be a good play.

clavocat

01-24-2009, 12:29 PM

The only reason a VTI type funds scare me is that I currently dont know enough about what they invest in to feel good about it.

Is there anything I could read that would educate me on index funds?

Do they just focus on one business sector?

The replies are much appreciated!

Vanguards site, they have positions in I believe 3600 of the largest companies. Yahoo finance will give a breakdown of the top 20 holdings, XOM being the largest last time I checked.

pa-sale

01-24-2009, 12:46 PM

I would avoid eBay like the plague. I am a powerseller on the site and things have changed. There is a serious exodus of people leaving. Ebay has changed their fee structure, and little details so much that revising 10,000 + personal auctions takes more time than it is worth.

People are flocking to their own websites and "the river" (amazon, you cannot say amazon on ebay message boards or you will be kicked off).

It does not sound like you are going to be trading intraday so unless you see a technical bounce, I would avoid ebay.

Shawarma

01-24-2009, 04:50 PM

A conglomerated corp is the biggest of the big oil companies that have tentacles that extend into every facet of the Oil business. CVX, XOM, BP are examples, MRO doesn't quite rise to the same level but may still be a good play.

Great, thanks for clarifying. One more question though! Why do you suggest that a conglomerate is added to my plan? Is it just to further diversify?

Shawarma

01-24-2009, 04:51 PM

Vanguards site, they have positions in I believe 3600 of the largest companies. Yahoo finance will give a breakdown of the top 20 holdings, XOM being the largest last time I checked.

Thanks, I'll check it out!

Shawarma

01-24-2009, 04:55 PM

wehttamsivad

01-24-2009, 10:04 PM

i like abt over jnj

Shawarma

01-26-2009, 08:42 PM

I'm sure some of you heard of the CAT layoffs pending...thoughts?

smartinvestor30

01-26-2009, 10:19 PM

Pardon the ignorance but is a "Conglom" an oil company? If so, I was considering adding MRO to the mix.

What do you think of the strategy overall?

Why do I get the feeling you are going to lose most of this money :|

Are you sure you want to go at this yourself? What's your investment experience? Why invest now? I think buy and hold is done for.

none9999

01-26-2009, 10:30 PM

Why do I get the feeling you are going to lose most of this money :|

I am glad somebody said this before me :)

Shawarma, its good to ask questions and consider everyone's opinion but in the end you gotta make the decisions yourself. Everybody will mean well and give you their own opinion but you gotta be able to separate the wheat from the the chaff. You have to be convinced that you are making the right decisions and fully well understand the rationale behind your picks because there is a good chance that things wont work out as you planned and then you will have to take the responsibility yourself. Much easier to live with yourself and the losses if you are convinced you did the right thing!! Also have an exit strategy in place.

Shawarma

01-27-2009, 06:03 PM

Why do I get the feeling you are going to lose most of this money :|

Are you sure you want to go at this yourself? What's your investment experience? Why invest now? I think buy and hold is done for.

LOL...well lets hope that isn't the case!

My investment experience is extremely low. The reason I want to invest now is I feel that buying now while prices are low and holding on to them until the market corrects itself is an intelligent thing to do.

The companies I have picked are larger corporations that have been around for quite sometime and I expect they will bounce back when the market does. Sounds like a plan to me!

aiki14

01-27-2009, 06:21 PM

I am gonna go against what appears to be the prevailing opinion and say you're right in that this is a good time to put money into the market long term. We have held 8k on the DJIA now for 4 hits and range traded for 5 months, something we didn't do at 11k or 9k. I am betting that if we look back to this point in 5 years we'll be damned glad we got in here.
While your plan makes sense, there is no doubt that a logical and viable argument can be made that the paradigm has changed and as Smartinvestor30 has stated buy and hold is done. I am of the opposite opinion but I am hedged and have been doing this thing long enough to survive if I am wrong.
I would educate myself if I were you before dropping money in, you'll be fine if you wait a month or 3 or 6. Even if your premise is correct you still need to make educated choices with regards to allocation and stock selection, and it seems that you haven't spent the necessary time to be much more than a straw in the wind, and you could land on the neighbors daughter or in the BBQ.
Good Luck in whatever you decide.

XOM

01-27-2009, 06:36 PM

MRO is a poor choice among those available imo, look at the period from 5/08 thru today, down approx 50%. Look at CVX in the same period, down approx 28%. Then check the dividend on each of them MRO = .24 vs CVX = .65. The dividend should play a significant part in your choice for buy and hold strategy.

aiki14

01-27-2009, 07:05 PM

Great, thanks for clarifying. One more question though! Why do you suggest that a conglomerate is added to my plan? Is it just to further diversify?

Yes, and the congloms held up better during the last year than most. With oil so low it seems like they would provide an excellent risk/.reward ratio

smartinvestor30

01-27-2009, 08:02 PM

LOL...well lets hope that isn't the case!

My investment experience is extremely low. The reason I want to invest now is I feel that buying now while prices are low and holding on to them until the market corrects itself is an intelligent thing to do.

The companies I have picked are larger corporations that have been around for quite sometime and I expect they will bounce back when the market does. Sounds like a plan to me!

This really depends what your outlook is. If you think that America is headed for a depression then maybe you can get a lower price on these corporations. Remember, just because the nominal value of the price of a stock has gone up doesn't mean you've made money. If XYZ costs $10/share and the price jumps to $20/share then you've made a 100% return. But, what if that $20 can now only purchase half of what it used to? If when you bought it at $10 that money would buy you 10 Whoppers, but now because of inflation that same $10 only buys you 5 whoppers; you've lost half your purchasing power, but in terms of the nominal value you've made 100% return on your investment.

It's just something to think about as you invest in this market. If you don't understand what I'm talking about and want to take a gamble with your money I hear the casino's in vegas are still open and itching for someone to come play.

Investing is not easy business, I've lost plenty of money in my early years probably thinking the same way you do, I had no idea what I was doing but "felt" I should buy this or that. Unfortunately, feelings do not produce steady gains, facts do.

Let me wish you the best of luck in your investing endeavor and commend you for actually having money saved up. You are ahead of many people already. Perhaps you will look back at this time and be glad you got in.

*On a side note, let me add that I think there will be a huge paradigm shift in the way people invest, think about money, jobs, school, and retirement. I don't think people will fall into the fallacy again that stocks always rise as a function of time, that if your outlook is far enough into the future that any price is a good price to get in. OBVIOUSLY, the latter has been disproven.

Imagine you had put part of your retirement portfolio in Washington Mutual, regardless of your time outlook, whether it be 20yrs, 50yrs, 100yrs, 1000ys, you would have been left with $0 ZERO dollars. The shareholder got wiped out. But that's why you need to be diversified right? ;) We'll see how all these theories work out in the future.

Shawarma

01-27-2009, 08:27 PM

I am gonna go against what appears to be the prevailing opinion and say you're right in that this is a good time to put money into the market long term.

...and it seems that you haven't spent the necessary time to be much more than a straw in the wind, and you could land on the neighbors daughter or in the BBQ.
Good Luck in whatever you decide.

I appreciate the comments and of course its nice to hear someone side with you but just look to your signature and the smart people know its good to hear all viewpoints before diving in.

And on the second part I quoted, I completely agree with you. I have more research to do and that's one of the reasons I am here.

Thanks to all of you contributing to not only this thread but all of the questions/comments on this board. If you can sift through the BS you can learn quite a bit one here!

Shawarma

01-27-2009, 08:30 PM

If XYZ costs $10/share and the price jumps to $20/share then you've made a 100% return. But, what if that $20 can now only purchase half of what it used to? If when you bought it at $10 that money would buy you 10 Whoppers, but now because of inflation that same $10 only buys you 5 whoppers; you've lost half your purchasing power, but in terms of the nominal value you've made 100% return on your investment.

It's just something to think about as you invest in this market. If you don't understand what I'm talking about and want to take a gamble with your money I hear the casino's in vegas are still open and itching for someone to come play.

Thanks, replies such as yours is actually what I am looking for on here. The reason being I don't want a whole bunch of guys saying "yeah man, your plan looks great!". I want to hear all the opinions out there so thanks again!

As for understanding what you are saying, I am with you. I may be inexperienced in the stock market but I am fairly seasoned in business (I did say fairly :biggrin:).

Bolimomo

01-27-2009, 10:12 PM

.....
As for understanding what you are saying, I am with you. I may be inexperienced in the stock market but I am fairly seasoned in business (I did say fairly :biggrin:).

You know that they say "over 90% of the traders fail in this business (making money trading)". You know that there is no lack of PhDs, engineers, scientists and scholars among those 90% who failed. Many people entered the trading arena thinking that because they are already successful in their own fields, they *will* be successful in trading as well. But they only face the hard reality that trading requires an entirely different mindset. Having achievement elsewhere in one's career is no help in being successful as a trader. I had to start over from the ground up myself.

Investors are traders too. They just have a much longer time horizon. Unless you plan to buy some assets and hold them forever and never sell. Or else, you investors are traders just the same.

I am an engineer by training and a computer professional by trade. But being an engineer actually hampered my success as an equity trader. Why? Because... being an engineer, we always have to know WHY. "Why does a stock go up?" "Why does a stock go down?". We are rational beings. We don't act unless/until we know the causes. We always have to know WHY. In stock trading, there is no WHY man! If the price moves, it moves! There might be thousands of reasons why. There might never be a real reason why. There is NO NEED to know why. When price moves, act! Forget about having to know the why!

Good luck on whatever you decide to do. Always think about the time-horizon. Don't fool yourself like thousands of sheep-investors. They just want to get in. They never think about when to get out (how long will you let your idea run before you call it quit). 1 year, 3 years, 10 years... they just don't have a clue. They just say "I have time on my side", and "average down", as adviced by thousands of personal finance books written by Suze Orman and the likes. That's just fooling yourself.

Florida

01-28-2009, 10:20 AM

Bolimomo

01-28-2009, 03:54 PM

While ETFs can protect you from holding one rotten apple, but don't rest on comfort with the false sense of security that you are fully protected. Rising tides raise all boats. It is usually the same set of forces and environments that cause the whole industry to go down (e.g. banking, computer box makers, semi, etc..). And one industry feeds on to another. No one is immune. If you see DELL, HPQ, AAPL, (computer box makers) all get hit, it's unlikely IBM can do well on its own. And if consumers/businesses slow down in buying new computers, then INTC and AMD (chip makers) will get hit. Then AMAT, KLAC (semi equipment makers) will get hit. Then the raw material suppliers will get hit. Then the transportation providers (with nothing to ship) will get hit. Etc.. The chained relationships continue, though they start/stop at different times.

They are all tied together. Few businesses stand on their own against the tides, except those biotech or sound-too-good-to-be-true technology firms (which are high risk).

Shawarma

01-28-2009, 04:36 PM

Rising tides raise all boats. It is usually the same set of forces and environments that cause the whole industry to go down (e.g. banking, computer box makers, semi, etc..). And one industry feeds on to another. No one is immune.

Great point here, I am sticking to buying individual stocks, only time will tell whether that is the right choice!

eaglearb

01-30-2009, 03:30 AM

You are essentially betting on market direction which is a gamble at best.

Bolimomo

01-30-2009, 03:41 PM

You are essentially betting on market direction which is a gamble at best.
Would you expand more on this? Do you advocate hedge trading only?

Shawarma

02-02-2009, 09:59 AM

the forces in the economy trump all

I would actually think that this supports my plan then since I am "betting" that the economy takes a turn for the better.

Florida

02-02-2009, 10:14 AM

I would actually think that this supports my plan then since I am "betting" that the economy takes a turn for the better.

This is exactly the opposite of your plan. The current forces of the economy are down, and do not justify playing the list of stocks you have to the long side. Wait until the direction changes to enter the plays. You may miss a few percentage points, but in the long run, you will be money ahead to play the trend in your favor, and not try to predict when it will change direction.

Use Jeff Macke's purple crayon theory for long term investing, the trend is your friend.

Shawarma

02-02-2009, 05:49 PM

This is exactly the opposite of your plan. The current forces of the economy are down, and do not justify playing the list of stocks you have to the long side. Wait until the direction changes to enter the plays. You may miss a few percentage points, but in the long run, you will be money ahead to play the trend in your favor, and not try to predict when it will change direction.

Use Jeff Macke's purple crayon theory for long term investing, the trend is your friend.

Actually after reading that I would say we are on the same side except you are saying to wait for an upward turn before buying.

Do you have any info on the purple crayon theory? Can't seem to find a clear-cut description.

Thanks!

Florida

02-02-2009, 08:09 PM

Actually after reading that I would say we are on the same side except you are saying to wait for an upward turn before buying.

Do you have any info on the purple crayon theory? Can't seem to find a clear-cut description.

Thanks!

The purple crayon theory was made famous by Jeff Macke on Fast Money. This past spring, the conversation on the show was about the price of oil continuing to rise, when everyone was saying it just can't go higher. Jeff simply explained to the group to print out the long term chart of the stock, and take out your kids purple crayon and ruler, and draw a trendline connecting the lows of each pullback and extending it out to the current period. He stated that on USO, you could stay in this trade long until the price dipped below this trendline. His theory held true, with the stock riding the trendline from below $50 in August of '07, to over $115 in June of '08. Finally, in late July of '08, the trendline was broken, and the stock has been falling ever since.

With your choices to go long, you need to print out the charts, connect the tops of all rallies in the current downtrend, and don't enter the trade until the price breaks above this donwtrend line.

This is way over simplified, but it's funny how true it usually works out to be.

On your selections, the only one that shows any signs of having broken the downtrend line is IBM. This might be one you could consider, but draw a new uptrend line connecting the low points of the pullbacks in the uptrend since late November, and be prepared to exit the trade if it dips below this line, which would indicate a new downtrend may have started.

Good luck, keep your powder dry until the market shows you it is ready, then enter your trades smartly and monitor them closely.

Roger

02-05-2009, 05:11 AM

Hello All -

I've been lurking here for a little while now trying to get a gameplan together for some extra cash I have that I would like to invest. Thanks so much for all the insight you guys have already provided!

My plan is to invest in larger corporations who are feeling the economic woes right now (there are lots to choose from) but whose future looks bright in the next couple years.

Below are my choices as of now and my plan is to stick with them until the market corrects itself and these companies bounce back (hopefully!).

So please, tell me what you think of my plan and what you think of my picks! I am looking to dump roughly $25K total spread out amongst these stocks.

JNJ (Johnson & Johnson)
DLM (Del Monte)
CAT
EBAY
IBM
PPG
T (AT&T)

Thanks in advance!

Here is my opinion per stock. I base my view mainly on quantitative research. When deciding to buy I strongly recommend going deeper into the fundamentals.

JNJ
I’ve been following JNJ for a while, so I know something about it.
JNJ is a very stable company known for its high quality of earnings and dividends. Looking at some valuation ratios the company doesn’t seem to be cheap but neither too expensive. Among the healthcare firms I think JNJ is a good pick compared to others. The coming 5 years a lot of patents of big healthcare firms will mature. Therefore you see firms like Pfizer buying smaller healthcare firms who did invest in new products. For the big firms like Pfizer more than one third of the revenues stems from patented products, who will mature the coming 5 years. For JNJ this problem is less severe. In the first place their share of patented revenue is lower (below 20%), and JNJ is more diversified (JNJ also has a lot of revenue from medical devices unit while Pfizer is more focused on pharmacy).
In general I think JNJ is a good pick in these times.

DLM
A bit the same story as for JNJ although I must say I don’t know the company that well as JNJ. Regarding valuation I think the company is normally priced (relatively in these times). The profitability is decent and stable (8% ROE) and the dividend yield is also nice (2.5%). Estimates show also stability.
DLM seems just like JNJ a defensive pick.

CAT
I’ve followed CAT more than a year ago for a while. I was by then very optimistic because I thought CAT could profit from emerging markets (especially china) and the booming mining industry. Regarding the situation on the US market I was less optimistic. At the beginning of the financial crisis (July 2007), it seemed that CAT could compensate with the strong demand from China. But when commodities started to decline and the crisis became severe CAT was hit very hard.
Currently Cat has a p/e of around 5 which seems to be low. But p/b is high (3 and p/tangible book more than 5). The estimates of CAT are very uncertain, there are a lot of negative revisions last months, and there might be pressure on the low p/e ratio. Positive things are the high dividend yield (caused by the decline of price) and high ROE.

CAT is a risky pick in my eyes. A lot depend on when and how the commodity market will recover, and on the performance of the emerging markets (a real cool down of china will be bad for CAT).

EBAY
EBAY seems to me financially in good condition. Profitability is okay, and the firm’s valuation is moderate. Although the firm pays no dividend, the growth prospects seem to be good. However, you have to be careful about these expectations (I am not very familiar with this industry, so I find it hard to say something about the prospects). But I think positive factors are the strong brands of the company. Ebay for example has a really dominant position, just like many other brands it owns (I know for example marktplaats in Holland which is a very strong brand). Finally the financial strength of the company looks very good (definitely an important thing during this financial crisis).

I am in general very positive about EBAY. I recommend to look deeper into the fundamentals of this industry (how cyclical is it, and how deep will it suffer from further deterioration of consumer confidence).

IBM
Also IBM looks financially good. I am only concerned about the high p/b ratio (9), which is very high. But all other numbers look okay. However, I recommend to be carefully about the fundamentals. IBM nowadays is an IT company, active in the industry of IT services and outsourcing. I would look more into the kind of contracts IBM has with it’s clients (the outsourcing contracts, for example length of the contracts). One more positive remark is that also IBM is a big company with strong market position worldwide.

I think a very important advantage of IBM is it’s strong worldwide position. It could be a good pick, but do your homework carefully.

PPG
To be honest I now almost nothing about this firm. Therefore I will remain carefully with my opinion. I can see that it is a more chemical company producing things like coatings. One of it’s main clients is the automotive. Therefore I would be very carefully on this firm. I would only go into such a firm if it is heavily undervalued. Regarding the p/e of around 10 and no intangible p/b, I don’t qualify it as “heavily” undervalued.

Therefore I would be careful with this company. I think this is too risky, and it is better to prevent this isk.

T
The telecom sector is one of the better industries in these times. I am very familiar with dutch telecom KPN which situation seems to be the same. I think T is such an example. It’s valuation remains around 10/11, and p/b 1.5 is good (no tangible p/b but is common in this industry). A very positive point is the dividend yield (above 6%). A negative point is the financial strength. I recommend checking these ratios carefully, and checking the state of the credit facilities (like duration).

In general I think T could be a stable pick. But check the financial strength.

In general I think you picked good stocks. Regarding diversification I think diversification is okey, but not optimal. The companies you picked are big companies with strong brands and strong market positions. Regarding valuation you didn't picked a real heavily hit firm, but therefore these are more stable. Adding a real severe hit company could be a good idea in my opinion. But as you said you focussed more on the big companies with more stability, and good prospects after the crisis.

aiki14

02-05-2009, 07:40 AM

[COLOR=black][FONT=Verdana]Here is my opinion per stock. I base my view mainly on quantitative research. When deciding to buy I strongly recommend going deeper into the fundamentals.

Quantitative research? I'd be interested in your alpha generative model that lets you opine on these stocks. Possibly you could elaborate further on how you came up with your opinions which appear to be based on qualitative research. Could you detail your stochastic calculus leading to these opinions or any statistical analysis you did, and lay out your metrics.

Since you go deep into fundamentals, I am interested in how you weight each indicator. You mention P/B and P/Tangible Book, how do you weight each, and how do you assign the goodwill value? Do you analyze the trend in the goodwill value?

Being from Holland I'll give you a pass on your English.

Welcome to the forum

Roger

02-05-2009, 08:06 AM

Quantitative research? I'd be interested in your alpha generative model that lets you opine on these stocks. Possibly you could elaborate further on how you came up with your opinions which appear to be based on qualitative research. Could you detail your stochastic calculus leading to these opinions or any statistical analysis you did, and lay out your metrics.

Since you go deep into fundamentals, I am interested in how you weight each indicator. You mention P/B and P/Tangible Book, how do you weight each, and how do you assign the goodwill value? Do you analyze the trend in the goodwill value?

Being from Holland I'll give you a pass on your English.

Welcome to the forum

Hi aiki14. First I'd like to thank you for your welcome.

Well, I said quantitative analysis. By this I actually meant using ratios like those I mentioned. So quantitative is perhaps not the best expression. I just wanted to give a quick opinion on each stock. It was not meant to be a very detailed analysis.
I am willing to do a detailed analysis for one of these stocks (for all it takes me too much time). After a thorough analysis I can give a clear buy or sell judgment on the stock (from my point of view of course). I also will give detailed explanation on my work. Maybe we can have a discussion on that stock?

Do you agree with this? You can pick a stock for me.

aiki14

02-05-2009, 08:25 AM

Hi aiki14. First I'd like to thank you for your welcome.

Well, I said quantitative analysis. By this I actually meant using ratios like those I mentioned. So quantitative is perhaps not the best expression. I just wanted to give a quick opinion on each stock. It was not meant to be a very detailed analysis.
I am willing to do a detailed analysis for one of these stocks (for all it takes me too much time). After a thorough analysis I can give a clear buy or sell judgment on the stock (from my point of view of course). I also will give detailed explanation on my work. Maybe we can have a discussion on that stock?

Do you agree with this? You can pick a stock for me.

I have to admit I don't trade any of these but I would pick IBM. It's a pick everybody can get their brain around. I am more interested in methodology than in a "stock Pick". I can get all the data, I'd be interested in how you assign each data point some value. So if you use P/E why not PEG ratio as an example. Or absolute value versus value in industry or sector of any data point.

Roger

02-05-2009, 08:46 AM

aiki14:

I have to admit I don't trade any of these but I would pick IBM. It's a pick everybody can get their brain around. I am more interested in methodology than in a "stock Pick". I can get all the data, I'd be interested in how you assign each data point some value. So if you use P/E why not PEG ratio as an example. Or absolute value versus value in industry or sector of any data point.

Okey. I will give my opinion on IBM and try to explain my methodology carefully. As you require, I will explain which ratios I prefer and provide argumentation. I also will go deeper into the fundamentals.

Please give me some time. I dont exactly know how long it takes, but in the weekend I have some time.

I see this as a challenging work in which we can give some feedback on each other's methods. I look forward to your comments and hope to learn from it.

aiki14

02-05-2009, 08:51 AM

Florida

02-05-2009, 10:50 AM

aiki14:

Okey. I will give my opinion on IBM and try to explain my methodology carefully. As you require, I will explain which ratios I prefer and provide argumentation. I also will go deeper into the fundamentals.

Please give me some time. I dont exactly know how long it takes, but in the weekend I have some time.

I see this as a challenging work in which we can give some feedback on each other's methods. I look forward to your comments and hope to learn from it.

ROE, yield, p/e, ratios, PEG, yadda, yadda, yadda. All of this junk does not mean anything! All Traders, and for that matter Investors care about is price action, is it going up or down.

Spend your weekends with your family, enjoy life, then spend about 2 minutes on each stock looking at the charts, and base your picks on what the price action is doing, you will come out money ahead.

aiki14

02-05-2009, 11:48 AM

ROE, yield, p/e, ratios, PEG, yadda, yadda, yadda. All of this junk does not mean anything! All Traders, and for that matter Investors care about is price action, is it going up or down.

Spend your weekends with your family, enjoy life, then spend about 2 minutes on each stock looking at the charts, and base your picks on what the price action is doing, you will come out money ahead.

Sorry Florida but I disagree, if you can trade your entire portfolio every day maybe you have a point, but if you have longer term investments these things are important. Of course I only know what works for me.

Florida

02-05-2009, 12:55 PM

Sorry Florida but I disagree, if you can trade your entire portfolio every day maybe you have a point, but if you have longer term investments these things are important. Of course I only know what works for me.

I don't care if you are trading your entire portfolio daily, or if you are updating it monthly, the price action is what matters. It should not matter what any of the fundamental data shows, if the price is trending up, I want to be in long, if it trending down, I will look for another play.

Many investors are still holding stocks like AAPL at close to $200, and GS at prices close to $250 as well as others based on fundamental information, but the price action gave clear indications that it was time to get out. Will these stocks regain their previous highs? It is questionable to me regardless of what the fundamentals may tell you.

Fundamental analysis may work great in trending markets to help you select one stock over another, but show me a stock where the price action has not given the same indication and I will shut up.

aiki14

02-05-2009, 01:20 PM

Fundamental analysis may work great in trending markets to help you select one stock over another, but show me a stock where the price action has not given the same indication and I will shut up.

So what you're saying is fundamentals and price action give the same information, so you use one and I use the other to the same end. For the record I use technicals for shorter term and fundamentals for longer term, and I have managed some success, which after all is said and done is the final arbiter in all this. I also believe a stock with good fundamentals will be more reliable for price action analysis than one that isn't.

Florida

02-05-2009, 02:06 PM

So what you're saying is fundamentals and price action give the same information, so you use one and I use the other to the same end. For the record I use technicals for shorter term and fundamentals for longer term, and I have managed some success, which after all is said and done is the final arbiter in all this. I also believe a stock with good fundamentals will be more reliable for price action analysis than one that isn't.

No, that is not really what I am saying. What I am saying is that price action, (the charts), always tell the truth, fundamentals don't. The fundamentals may point to the best stock in the world, but if the charts don't indicate the same, I don't want any part of it. Price is what matters, when I am long a stock, I want the price to go up, not a bunch of statistics that say it should go up.

I will agree with you that if a stock has good fundamentals and good price action, so much the better, but as soon as the price action falters, I'm gone.

The original point to my post was that why waste hours upon hours of time analyzing all kinds of fundamental data, if a quick look at the charts can tell you in a glance if you want to be in a stock or not.

aiki14

02-05-2009, 05:02 PM

The original point to my post was that why waste hours upon hours of time analyzing all kinds of fundamental data, if a quick look at the charts can tell you in a glance if you want to be in a stock or not.

Because it works for me, and I am not as good a technician as you seem to be. I like the work, and if it's time wasted by your standards so be it. I took 22 weeks of vacation last year where I rested from all the work, seems like a good balance to me.

Scooby2clutch

02-05-2009, 05:13 PM

Because it works for me, and I am not as good a technician as you seem to be. I like the work, and if it's time wasted by your standards so be it. I took 22 weeks of vacation last year where I rested from all the work, seems like a good balance to me.

this might be off topic, but 22 weeks of vacation? LOL

That's knowing how to enjoy yourself....by the way, if you don't mind me asking. What type of annual returns do you look for? like 20 percent or so?

aiki14

02-05-2009, 05:54 PM

this might be off topic, but 22 weeks of vacation? LOL

That's knowing how to enjoy yourself....by the way, if you don't mind me asking. What type of annual returns do you look for? like 20 percent or so?

My goal is to net 2% per week portfolio wide, and I trade about 20% of my porfolio on any given day. I have not been able to bring my average up to that 2% but over the last 4 years it's around 1.5%. I had it pretty close in Nov of '07 but '08 has been more challenging due to my inherent bullishness.
If I looked at all my investment asset's in aggregate 20% would be acceptable and I would have to look but I think I have averaged that or pretty close for 20yrs. My trading portfolio is 15% of my investable assets and I limit it to that by design.

Roger

02-05-2009, 06:11 PM

florida:

ROE, yield, p/e, ratios, PEG, yadda, yadda, yadda. All of this junk does not mean anything! All Traders, and for that matter Investors care about is price action, is it going up or down.

Spend your weekends with your family, enjoy life, then spend about 2 minutes on each stock looking at the charts, and base your picks on what the price action is doing, you will come out money ahead. Well, I dont agree with you. I guess you are more into TA and stuff. Are you maybe a kind of day trader? Just curious.

First let me defend my own strategy. You think ratios like p/e, roe etc. are useless. First let me say that my strategy is focused on the longer term (important point). I invest in value, and for this purpose you need these ratios.
On the long term the value of a stock will follow the earnings. More specific: the stock price is based on the EPS multiplied by a multiple (p/e ratio). It is this multiple that varies from time to time. Hereby I agree that these valuation ratios are useless on the very short term (as the multiple can change quite fast). But on the long term the price of the stock will remain in a range of the EPS. In good times you have high multiples and vice versa (also depends on industry). Right now you see very low multiples because of a very pessimistic sentiment.

When analyzing a stock, I look for undervalued firms. But just picking a very cheap firm (low p/e, low p/b) is not enough. You need to check how stable the future earnings are (earnings quality). If for example earnings decline, the valuation ratios will deteriorate automatically. So how can you judge the earnings quality? Of course you can check the analysts’ estimates. However to have a clear view, and to identify potential risks, you need the FUNDAMENTALS.

florida:

No, that is not really what I am saying. What I am saying is that price action, (the charts), always tell the truth, fundamentals don't. The fundamentals may point to the best stock in the world, but if the charts don't indicate the same, I don't want any part of it. Price is what matters, when I am long a stock, I want the price to go up, not a bunch of statistics that say it should go up. Interesting point. Recently, I had a visit at a stock consultancy firm. They also argued the best information of a stock is given by the market itself. But they also used the fundamentals. Let me ask you: if your quick look at graphs tells you that both oil and a random airline firm will go up (quite illogic). Do you think both will actually go up? What I am trying to explain is that acting only on TA can generate illogic movements. You need fundamentals to clarify things.

florida
The original point to my post was that why waste hours upon hours of time analyzing all kinds of fundamental data, if a quick look at the charts can tell you in a glance if you want to be in a stock or not. Is your strategy working consistently? I believe being good with TA can help, but there is lack of proof in history or literature that proof (consistent) successful TA. Further, I believe that TA can work in combination with some fundamentals.
On the other side there is more proof for value investing. It is the only strategy proven to have worked for a long time span (like warren buffet). Besides that there is some research giving further explanations on ratios like p/b (think for example of the well known research of Fama & French).

Bolimomo

02-06-2009, 03:51 AM

Similar to florida, I am a trader who relies purely technical analysis (charts) to trade. I don't pay attention to fundamentals. And I don't pay attention to 99% of the stocks either. I only trade 5 stocks and look at maybe 10 others on a daily basis.

I agree that the price of a stock is "ultimately" driven by fundamentals. I said "ultimately", not "immediately". Prices of the dot-com stocks, many of which no longer exist today - like Webvan, reached the sky first before crashing down to the earth. So if you are purely a fundamentalist, you probably had shaken your head for 5 years and not touching any of that dot-com stuff between 1995 to 2000. P/E. Price over Earning. What Earning? Who needs earning?

I am sure fundamentalists can make nice living as well as any chartists. After all Buffett is the world-renowned example. We just take different approaches. I take the TA approach because it is easier for me and it fits my personality.

There are 2 things that I think are disadvantages on fundamental analysis:

1) It does not take into account the market's sentiment. As Roger pointed out, the "acceptable" P/E ratio changes from time to time. In a bullish arena, people will take higher P/E. Bearish, lower. There is no rule telling what is an acceptable level.

2) All published fundamental data are history. They tell you what things have been in the past. Price fluctuations are highly affected by forward-looking. Well you can say that about price charts too. Prices are historic data. A rising price does not guarantee it will be higher tomorrow. But with price charts, at least I can reassess everyday, every hour. I am not waiting for a quarterly released info to adjust my bets. And in recent years, there is this added problem of CEOs cooking the books.

Roger

02-06-2009, 06:46 PM

Hi Bolimomo

First let me react on your two disadvantages of fundamental analysis.

1) It does not take into account the market's sentiment. As Roger pointed out, the "acceptable" P/E ratio changes from time to time. In a bullish arena, people will take higher P/E. Bearish, lower. There is no rule telling what is an acceptable level.I agree with you on this point. Fundamentals dont tell anything about the sentiment. Therefore I focus on long term. In the long term you CAN say something about valuation. Also market sentiment is less important in the long run.

2) All published fundamental data are history. They tell you what things have been in the past. Price fluctuations are highly affected by forward-looking. Well you can say that about price charts too. Prices are historic data. A rising price does not guarantee it will be higher tomorrow. But with price charts, at least I can reassess everyday, every hour. I am not waiting for a quarterly released info to adjust my bets. And in recent years, there is this added problem of CEOs cooking the books.
With fundamental analysis you also look forward (this is actually a main part of fundamental analysis). Every released info can help you with judging future prospects.
I agree with you that bad CEO's can be a problem. However, I am confident in regulation to prevent things like this.

My conviction in long term value investing lies in the overwhelming evidence of it's succes (empirical and scientific). As far as I know, value investing is the only strategy proven to be succesful over a long time span.
The danger of TA lies in the fact that you need to be careful, and very precisely with reading the graphs. One wrong decision can have a very bad outcome. It can take a long time to recover from such a misser. Value investing instead is partly based on preventing bad decisions (more certainty).

none9999

02-06-2009, 07:09 PM

The danger of TA lies in the fact that you need to be careful, and very precisely with reading the graphs. One wrong decision can have a very bad outcome. It can take a long time to recover from such a misser. Value investing instead is partly based on preventing bad decisions (more certainty).

All well and good but I have trouble understanding the above part. Infact, I think just the opposite is true and this is why.......

When you apply fundamental analysis, you basically put in a lot of work studying the stock - going through the balance sheet, all the ratios etc. And when you finally decide to buy a stock, you get in with a lot of confidence as you have done your homework. In this case, due to the high confidence level and having a long term approach (which you have stressed), one might even average down if the stock goes down. I believe even Buffet does that. Now in this case, a loss "can have a very bad outcome." And take a long time to recover.

On the other hand, when I am using TA, I do realize that I am going purely my own interpretation of the charts. I do realize that I know know nothing about the fundamentals of the company. And I am also playing for short term. So, as soon as I see things are not going my way, I get out! Now this way, no loss turns into a big loss. And you are all set to get back in the game again.

Just my two cents....

Roger

02-06-2009, 08:28 PM

Hi none9999

When you apply fundamental analysis, you basically put in a lot of work studying the stock - going through the balance sheet, all the ratios etc. And when you finally decide to buy a stock, you get in with a lot of confidence as you have done your homework. In this case, due to the high confidence level and having a long term approach (which you have stressed), one might even average down if the stock goes down. I believe even Buffet does that. Now in this case, a loss "can have a very bad outcome." And take a long time to recover.What I mean is that you dont need to do much after doing your homework. Of course you need to keep an eye on it, as their always can occur something dramatic. When you decide for a value investment ( based on undervaluation), you check the firm thoroughly (prevent buying a lemon, there maybe some info not detected by the market, check earnings quality etc.). Another important point is to be sure there is a margin of safety. This MoS concept makes the investment safer, because it provides you some extra space for negative adjustment.

I dont see your point why this should be riskier. The concept of value investing, and more specific MoS, is based on preventing fatal decisions (numerical example: a loss of 20%, requires a return of 25%).

On the other hand, when I am using TA, I do realize that I am going purely my own interpretation of the charts. I do realize that I know know nothing about the fundamentals of the company. And I am also playing for short term. So, as soon as I see things are not going my way, I get out! Now this way, no loss turns into a big loss. And you are all set to get back in the game again. I understand what you mean. You are cutting your losses. But do you agree with me that making mistakes can occur easily?
I will try to explain with an example (my knowledge on TA is not like yours, but i think it's sufficient to explain what i mean):
Suppose you are following a stock, and you have made some trendlines. As far as my knowledge on TA goes I know that breaking through a downchannel is a good sign. However, a breakthrough could be a false sign. So what action do you take? In my eyes this is very risky, causing some wrong decisions.

I know that you can counter my example with your argument of cutting losses. I also truely believe that you are very good with TA, and make nice returns.
My next question then is: Can you give any proof of consistent succes of applied TA?
With value investing I clearly explained why it isnt risky (concept of MoS). And there is overwhelming proof of consistent succes.

none9999

02-06-2009, 08:41 PM

I understand what you mean. You are cutting your losses. But do you agree with me that making mistakes can occur easily?
I will try to explain with an example (my knowledge on TA is not like yours, but i think it's sufficient to explain what i mean):
Suppose you are following a stock, and you have made some trendlines. As far as my knowledge on TA goes I know that breaking through a downchannel is a good sign. However, a breakthrough could be a false sign. So what action do you take? In my eyes this is very risky, causing some wrong decisions.

I know that you can counter my example with your argument of cutting losses. I also truely believe that you are very good with TA, and make nice returns.
My next question then is: Can you give any proof of consistent succes of applied TA?
With value investing I clearly explained why it isnt risky (concept of MoS). And there is overwhelming proof of consistent succes.

One has to keep in mind that TA is an art and not a science. So, of course there is a greater margin for error but a good technical analyst will make more winning trades than losing ones. And thats all the edge that one needs if one is good at risk management - letting your profits, cutting back on losses, position sizing. This debate between FA and TA could go on for ages but I dont think we will ever converge. I personally believe that FA or TA - its risk management that really counts. And yeah, if I was buying something for long term, I would definitely look at fundamentals first and then do TA for entry and exit.

And I am sure there are people even on this board that have been getting consistent returns using just technical analysis!! Where is Bolimomo when you need him?? :D

On a separate note, thanks for your detailed posts! It looks like you are going to be a great addition to the forum.

Roger

02-06-2009, 08:53 PM

Thank you none9999.
I think I can agree with your last post concerning our discussion.
I hope to contribute and have good discussions. I searched for a while for a good and populated forum (hard to find btw). Finally this one seems to be okey. Are there actually more foreigners here? I guess 99% is american. For me thats okey. Maybe I can also contribute with some more inside knowledge of european markets and stocks.

aiki14

02-06-2009, 09:23 PM

All well and good but I have trouble understanding the above part. Infact, I think just the opposite is true and this is why.......

When you apply fundamental analysis, you basically put in a lot of work studying the stock - going through the balance sheet, all the ratios etc. And when you finally decide to buy a stock, you get in with a lot of confidence as you have done your homework. In this case, due to the high confidence level and having a long term approach (which you have stressed), one might even average down if the stock goes down. I believe even Buffet does that. Now in this case, a loss "can have a very bad outcome." And take a long time to recover.

On the other hand, when I am using TA, I do realize that I am going purely my own interpretation of the charts. I do realize that I know know nothing about the fundamentals of the company. And I am also playing for short term. So, as soon as I see things are not going my way, I get out! Now this way, no loss turns into a big loss. And you are all set to get back in the game again.

Just my two cents....

The fundamental equivalent of your trailing stop is a hedge. If I have the luxury of time I take a hedge position and thereby have an absolute limit to my losses, the cost of the hedge. Then if the stock position goes against me I can sit around and watch without incurring loss or additional risk, even have lunch during the trading day or go to the bathroom.

As an aside, I use both T/A and short term plays and F/A and Long term plays, I don't see any reason to limit myself to any set of rules arbitrarily.

none9999

02-06-2009, 09:35 PM

If I have the luxury of time I take a hedge position and thereby have an absolute limit to my losses, the cost of the hedge.

Pardon my ignorance (or stupidity, take your pick!) but could you please explain the above aiki. I have trouble understanding how a small hedge position could cover a losing position long term. Thanks!!

Bolimomo

02-06-2009, 09:40 PM

My next question then is: Can you give any proof of consistent succes of applied TA?
With value investing I clearly explained why it isnt risky (concept of MoS). And there is overwhelming proof of consistent succes.

I think we are getting into a classical, endless debate of fundamental investing versus technical trading.

I think this is a topic much larger than what we participants here on "onlinetradersforum.com" should spend time to do. Why arguing about the topic that has been around for decades and will never be resolved?

I had said before: I am sure fundamentalists can make money from the market AS WELL AS any technical traders.

I am not doubting your methods. I have no question about it. I have never said it will not work.

Proof - I really don't know how one can compose a so-called "proof", one way or the other. It is not my goal to be a scholar who thinks he knows the "proper" way to trade by sniffing statistics. I am in the stock market for one reason only: to make money. I don't study the company in detail. I don't care what they do. I don't care who the CEO is. I don't care if the CEO is taking a leave of absence for health reasons. I don't care if the company makes 3 cents less this quarter than the last. The chart is a end sum of all the factors that I don't care to spend time to keep track of. I take the easy route: I only look at the charts to trade. Nothing else. The only proof I have is my own result. I have been making a living the way I trade - based purely on charts, nothing else. And you would say "you will not last long term". I say "screw it". I will eat dirt when it comes to that. Just no more preaching on the value investing beats technical trading "in the long run" please. To me, "Rock And Roll" is every bit a music as well as any "Classical" symphony stuff.

I have wasted enough time on typing these messages. Not a word from me again. Go on... debate this topic until the cows come home. I just sit on the sideline and be amused.

aiki14

02-06-2009, 09:50 PM

Pardon my ignorance (or stupidity, take your pick!) but could you please explain the above aiki. I have trouble understanding how a small hedge position could cover a losing position long term. Thanks!!

Ok, here goes, and don't sell yourself short (pardon the pun), this can be confusing if you don't do it often.

I buy 100 shares ABC long at $100, and I buy 1 at the money put for $5. If the price of the stock goes down the put allows me to sell the shares at 100 regardless, if the stock goes up the put expires worthless and I keep the gains minus the price of the put. Here's a diagram:

4093

aiki14

02-06-2009, 09:53 PM

I think we are getting into a classical, endless debate of fundamental investing versus technical trading.

I think this is a topic much larger than what we participants here on "onlinetradersforum.com" should spend time to do. Why arguing about the topic that has been around for decades and will never be resolved?

I had said before: I am sure fundamentalists can make money from the market AS WELL AS any technical traders.

I am not doubting your methods. I have no question about it. I have never said it will not work.

Proof - I really don't know how one can compose a so-called "proof", one way or the other. It is not my goal to be a scholar who thinks he knows the "proper" way to trade by sniffing statistics. I am in the stock market for one reason only: to make money. I don't study the company in detail. I don't care what they do. I don't care who the CEO is. I don't care if the CEO is taking a leave of absence for health reasons. I don't care if the company makes 3 cents less this quarter than the last. The chart is a end sum of all the factors that I don't care to spend time to keep track of. I take the easy route: I only look at the charts to trade. Nothing else. The only proof I have is my own result. I have been making a living the way I trade - based purely on charts, nothing else. And you would say "you will not last long term". I say "screw it". I will eat dirt when it comes to that. Just no more preaching on the value investing beats technical trading "in the long run" please. To me, "Rock And Roll" is every bit a music as well as any "Classical" symphony stuff.

I have wasted enough time on typing these messages. Not a word from me again. Go on... debate this topic until the cows come home. I just sit on the sideline and be amused.

I agree in the sense that there are many ways to skin the cat, if you find one and can stick to it whatever it is, great.

none9999

02-06-2009, 10:13 PM

Ok, here goes, and don't sell yourself short (pardon the pun), this can be confusing if you don't do it often.

I buy 100 shares ABC long at $100, and I buy 1 at the money put for $5. If the price of the stock goes down the put allows me to sell the shares at 100 regardless, if the stock goes up the put expires worthless and I keep the gains minus the price of the put. Here's a diagram:

4093

Aha! Now I get it. Thanks aiki!! I am nowhere close to having the money to hedge my positions but maybe one day....:rolleyes: This is so delightfully simple!! What time frame positions do you generally hedge??

BTW, I read that you were considering to hold BAC overnight if it didnt touch 6.40 (which it did later). But knowing how volatile it is, did you have any means of reducing your risk if you had held it overnight.

Thanks!! Sorry for so many questions.

aiki14

02-06-2009, 11:17 PM

Aha! Now I get it. Thanks aiki!! I am nowhere close to having the money to hedge my positions but maybe one day....:rolleyes: This is so delightfully simple!! What time frame positions do you generally hedge??

BTW, I read that you were considering to hold BAC overnight if it didnt touch 6.40 (which it did later). But knowing how volatile it is, did you have any means of reducing your risk if you had held it overnight.

Thanks!! Sorry for so many questions.

Actually I said I would sell if it got to 6.50, and it got to 6.49. I am ok with it because it would have to drop to $.86 to break even and I think it will react positively to mondays Geithner show. I reduced the risk by taking 1/3 off the table at 5.60 and 1/3 off at 6.02. My basis in the whole position was 4.14 so now it's a matter of maximizing my profit. I'll bail if it gaps down, or sell it on the morning rally.

I hedge anything I think is a good long term play based on my criteria for risk, and then I hedge with the option that meets my time frame. This is to save on the cost of the hedge. If I have a play I think will run, I'll determine how long I am willing to wait for that to happen and use the nearest month contract that fits the bill. If it doesn't move or goes against me I exit the position and move on. I also use portfolio hedges so if I am playing a bunch of low beta plays I can cover the positions with a few VIX calls, Index Puts, or short futures positons.

none9999

02-06-2009, 11:24 PM

I hedge anything I think is a good long term play based on my criteria for risk, and then I hedge with the option that meets my time frame. This is to save on the cost of the hedge. If I have a play I think will run, I'll determine how long I am willing to wait for that to happen and use the nearest month contract that fits the bill. If it doesn't move or goes against me I exit the position and move on. I also use portfolio hedges so if I am playing a bunch of low beta plays I can cover the positions with a few VIX calls, Index Puts, or short futures positons.

Thanks aiki!! I was reading about it and now I know its called the married put strategy. I would like to believe I learnt something. Thanks for the lesson!! :beerglass:

Roger

02-07-2009, 04:39 AM

bolimomo
Proof - I really don't know how one can compose a so-called "proof", one way or the other. It is not my goal to be a scholar who thinks he knows the "proper" way to trade by sniffing statistics. I am in the stock market for one reason only: to make money. I don't study the company in detail. I don't care what they do. I don't care who the CEO is. I don't care if the CEO is taking a leave of absence for health reasons. I don't care if the company makes 3 cents less this quarter than the last. The chart is a end sum of all the factors that I don't care to spend time to keep track of. I take the easy route: I only look at the charts to trade. Nothing else. The only proof I have is my own result. I have been making a living the way I trade - based purely on charts, nothing else. And you would say "you will not last long term". I say "screw it". I will eat dirt when it comes to that. Just no more preaching on the value investing beats technical trading "in the long run" please. To me, "Rock And Roll" is every bit a music as well as any "Classical" symphony stuff.

Bolimomo.
I hoped to convince you with my arguments for my case. But I agree that this could become a lasting debate, as it is in history.
Maybe I am stressing a bit too much on the empirical proof. But in my view this is the best way of proving a strategy.
I believe that you making nice returns with your strategy. In the end it doenst matter how you achieved it, but it is important to achieve it at all.

Florida

02-07-2009, 12:27 PM

Aha! Now I get it. Thanks aiki!! I am nowhere close to having the money to hedge my positions but maybe one day....:rolleyes: This is so delightfully simple!! What time frame positions do you generally hedge??

The sellers of the options and the brokers are the only ones that come out ahead with hedging. Hedging is meant for the big players and institutions that through rules, or sheer size cannot liquidate their stock positions quickly enough to counteract a quick move against them. I doubt seriouslty if anyone on this forum qualifies for this status, regardless of what they might say.

As my name suggests, I live in Forida where property insurance rates are riduculous due to the threat of hurricane damage, but we still do not pay the insurance rates that would equate to what options premiums are to insure a stock position.

In the example aiki14 uses, with a $5 put on a $100 stock, that equals about 60% per year. That means that on a long term hold that has been discussed in this thread, you would have to make 60% annually to just break even, let alone commissions and fees.

Reasonable stops fill the bill for retail traders or investors, and that's what they are for. I do not need to pay anybody 60% a year just so I can go to lunch or the bathroom.

Perhaps short term protection may be warranted if you are holding a stock through a known period where volatility may spike, like earnings, but there is no need to insure your holds on a long term basis.

aiki14

02-07-2009, 01:49 PM

The sellers of the options and the brokers are the only ones that come out ahead with hedging. Hedging is meant for the big players and institutions that through rules, or sheer size cannot liquidate their stock positions quickly enough to counteract a quick move against them. I doubt seriouslty if anyone on this forum qualifies for this status, regardless of what they might say.

As my name suggests, I live in Forida where property insurance rates are riduculous due to the threat of hurricane damage, but we still do not pay the insurance rates that would equate to what options premiums are to insure a stock position.

In the example aiki14 uses, with a $5 put on a $100 stock, that equals about 60% per year. That means that on a long term hold that has been discussed in this thread, you would have to make 60% annually to just break even, let alone commissions and fees.

Reasonable stops fill the bill for retail traders or investors, and that's what they are for. I do not need to pay anybody 60% a year just so I can go to lunch or the bathroom.

Perhaps short term protection may be warranted if you are holding a stock through a known period where volatility may spike, like earnings, but there is no need to insure your holds on a long term basis.

I'll respond to your absurd premise and contentious dig, clearly you are a little confused. No matter what you might say in your proclamations, hedge positions to protect portfolio's or positions can and are taken by regular investors every day.
As to 60% per year you're really confused, even on AAPL which after hours was right at 100 you can buy put options for jan 2011 for $26 and we're in an era of historic volatility in both the stock and the market in general. If you can't even get that simple point correct to within a factor of 4 the rest of your nonsense is just yadda yadda.
I am sorry you feel your way is the only way, that's just ego. I'll continue to do things my way and I'll advocate for my methodology as long as it works.

Florida

02-07-2009, 04:31 PM

I'll respond to your absurd premise and contentious dig, clearly you are a little confused. No matter what you might say in your proclamations, hedge positions to protect portfolio's or positions can and are taken by regular investors every day.
As to 60% per year you're really confused, even on AAPL which after hours was right at 100 you can buy put options for jan 2011 for $26 and we're in an era of historic volatility in both the stock and the market in general. If you can't even get that simple point correct to within a factor of 4 the rest of your nonsense is just yadda yadda.
I am sorry you feel your way is the only way, that's just ego. I'll continue to do things my way and I'll advocate for my methodology as long as it works.

First, by all means, do not take any of my "digs" personally, as I respect your opinions more so than most on this forum. However, a forum of people that all think the same way, and just go along with each other is kind of boring. Spicing it up a little with contrary opinions makes for more activity on the forum, and a chance for some to maybe learn different theories.

As for the 60% per year, that was based on your figure of $5 for a put option on a $100 stock which in reality can only be based on front month options. In fact, with the current volatility you reference, it would be more like 6% to 8% per month, but I was just using your example.

You are correct that a $100 Jan 2011put on AAPL is around $26, but now let's look back at recent history. Had you purchased AAPL at around $80 on November 20th, thinking that was the bottom, and protected it with an $80 jan 2011 put, you would have paid about $28 for the put. On Dec 9th, with the stock price at $100, you may want to move your protection level up a notch. So you will now sell your Jan 2011 80 put for $21, a $7 loss, (which takes away over 30% of your gain on the stock itself), incur another commission and any other fees, and buy the $100 Jan 2011 put for $32. Now, on Jan 20th, with the stock back down to $80, you are back to breakeven on the stock, (albeit $20 down from the high), but oh I have the protection of the $100 put which is now worth $36, ($4 more than I paid for it). So now I am at breakeven on the stock, and down $3 plus fees on the "protection" that I paid for, and the stock has moved up 25% and down 20% during this period of time.

Now with a protective stop, purchasing AAPL on November 20th for around $80, and moving the stop up on daily pivots, you would have been taken out on the morning of Dec 17th at around $91 for a 13% gain in 18 trading days. Now if you would have entered again on Jan 26th when the most recent breakout began on the daily charts, you would be up another 10%.

As with the conversation on fundamental vs. T/A, I will make the same challenge, show me a case where hedging on an individual stock has paid off, vs. just using common practice of the use of protective stops, and I will shut up on this matter.

I am also anxiously awaiting Roger's fundamental analysis on IBM, but wait a minute, the week-end is not over yet, so he is probably still working on it.

Florida

02-07-2009, 06:37 PM

First, by all means, do not take any of my "digs" personally, as I respect your opinions more so than most on this forum. However, a forum of people that all think the same way, and just go along with each other is kind of boring. Spicing it up a little with contrary opinions makes for more activity on the forum, and a chance for some to maybe learn different theories.

As for the 60% per year, that was based on your figure of $5 for a put option on a $100 stock which in reality can only be based on front month options. In fact, with the current volatility you reference, it would be more like 6% to 8% per month, but I was just using your example.

You are correct that a $100 Jan 2011put on AAPL is around $26, but now let's look back at recent history. Had you purchased AAPL at around $80 on November 20th, thinking that was the bottom, and protected it with an $80 jan 2011 put, you would have paid about $28 for the put. On Dec 9th, with the stock price at $100, you may want to move your protection level up a notch. So you will now sell your Jan 2011 80 put for $21, a $7 loss, (which takes away over 30% of your gain on the stock itself), incur another commission and any other fees, and buy the $100 Jan 2011 put for $32. Now, on Jan 20th, with the stock back down to $80, you are back to breakeven on the stock, (albeit $20 down from the high), but oh I have the protection of the $100 put which is now worth $36, ($4 more than I paid for it). So now I am at breakeven on the stock, and down $3 plus fees on the "protection" that I paid for, and the stock has moved up 25% and down 20% during this period of time.

Now with a protective stop, purchasing AAPL on November 20th for around $80, and moving the stop up on daily pivots, you would have been taken out on the morning of Dec 17th at around $91 for a 13% gain in 18 trading days. Now if you would have entered again on Jan 26th when the most recent breakout began on the daily charts, you would be up another 10%.

As with the conversation on fundamental vs. T/A, I will make the same challenge, show me a case where hedging on an individual stock has paid off, vs. just using common practice of the use of protective stops, and I will shut up on this matter.

I am also anxiously awaiting Roger's fundamental analysis on IBM, but wait a minute, the week-end is not over yet, so he is probably still working on it.

In all fairness, I forgot the most recent move up from $80 back to $100. So now, I am up $20 on the stock and the Jan 2011 100 puts are now worth $26, so net, less commissions and fees, I am up $20 on the stock and down $13 on the options, so net $7 up or 9%, vs the current 23% gain in the stock alone with a protective stops on 2 simple trades.

TraderPete

02-07-2009, 07:55 PM

I'm new myself but i'm seeing a lot of buzz about DCMT. Document capture software with a 70% share of the usb powered market. Digital is the wave of the future. Doing DD I'm convinced at one point this one will fly. 25 years in IT I can see the need and hope for it's future. I got a starter pack last week but am getting more sure of the potential of this company as I read more. Waiting for Mondays start to get in at another level. Then I'm hoping it will be a good week. The volumes been increasing so who knows.

aiki14

02-07-2009, 08:22 PM

First, by all means, do not take any of my "digs" personally, as I respect your opinions more so than most on this forum. However, a forum of people that all think the same way, and just go along with each other is kind of boring. Spicing it up a little with contrary opinions makes for more activity on the forum, and a chance for some to maybe learn different theories.

As for the 60% per year, that was based on your figure of $5 for a put option on a $100 stock which in reality can only be based on front month options. In fact, with the current volatility you reference, it would be more like 6% to 8% per month, but I was just using your example.

You are correct that a $100 Jan 2011put on AAPL is around $26, but now let's look back at recent history. Had you purchased AAPL at around $80 on November 20th, thinking that was the bottom, and protected it with an $80 jan 2011 put, you would have paid about $28 for the put. On Dec 9th, with the stock price at $100, you may want to move your protection level up a notch. So you will now sell your Jan 2011 80 put for $21, a $7 loss, (which takes away over 30% of your gain on the stock itself), incur another commission and any other fees, and buy the $100 Jan 2011 put for $32. Now, on Jan 20th, with the stock back down to $80, you are back to breakeven on the stock, (albeit $20 down from the high), but oh I have the protection of the $100 put which is now worth $36, ($4 more than I paid for it). So now I am at breakeven on the stock, and down $3 plus fees on the "protection" that I paid for, and the stock has moved up 25% and down 20% during this period of time.

Now with a protective stop, purchasing AAPL on November 20th for around $80, and moving the stop up on daily pivots, you would have been taken out on the morning of Dec 17th at around $91 for a 13% gain in 18 trading days. Now if you would have entered again on Jan 26th when the most recent breakout began on the daily charts, you would be up another 10%.

As with the conversation on fundamental vs. T/A, I will make the same challenge, show me a case where hedging on an individual stock has paid off, vs. just using common practice of the use of protective stops, and I will shut up on this matter.

I am also anxiously awaiting Roger's fundamental analysis on IBM, but wait a minute, the week-end is not over yet, so he is probably still working on it.

If you're watching every second then a stop can be cheaper (if the hedge is 5% and your stop is 6% then the hedge is cheaper) and probably better than hedging, but if your gonna hold overnight or in the rare cases where a stock is halted by the exchange the hedge is still good and the stops worthless. If you had puts on Enron when they were halted it was a 5% loss, if you had a stop it made no difference you were crushed.
I am not asking you to shut up on this or any other matter, you're a real contributor here, but there are ways of doing things that differ from yours, that have merit when applied in the proper context, or by a person whose style requires a different approach.

I don't understand what you're saying about the hedge only being on the front month contract, no law says you have to do it month by month,14 months ago the at the money Jan2010 195 LEAPS on AAPL were only $11, I had a $80 basis in the stock and was wrongly bullish. I locked in a $104 per share profit. Now you might have said why not just sell as it went down? In this admittedly rare case I held certificate shares so selling out quickly was not an option.

One other thing about hedges, let's say you have the at the money puts protecting your position, then you can sell far out of the money puts to fund your protection reducing your cost, while only slightly increasing your risk.

Florida

02-13-2009, 11:48 AM

Scooby2clutch

02-13-2009, 12:38 PM

WOW....this forum needs more conversations just like this. Its treads like this that makes us think and learn at the same time.

We can get statistics off any site or whatever, but to read whats in the mind of certain investors is pure gold. Its up to the individual to decide if they're right or wrong. The important part is they are hearing both sides of the story. Any type of challenge, formal argument, theories will help push this forum to being more active and a better place.

ME? I'm just waiting patiently for more analysis to be made....ARGUE away!! friendly conversations are always welcome.

Roger

02-13-2009, 04:35 PM

Okey here is my anlysis on IBM. I'm sorry that it took a bit longer than the weekend. I look forward to your comments.

*I'm sory for the unclear tables. I typed the whole thing first in word, the conversion seems a bit problematic.

Stock analysis International Businss Machines (IBM)

The Business

First let me say something on the business. IBM made some huge changes last decade. IBM changed from being a producer of computers to a real IT company. It provides IT services like: IT outsourcing, and (the emerging) business process outsourcing (BPO).

The segments of IBM (with share % revenue):
(37%) Global technology services: IT infrastructure, outsourcing, BPO, other services
(18%) Global business services: services focused on business, consulting
(22%) Systems and technology: offering of solutions regarding use of technology and IT infrastructure
(20%) Software: software used to improve the IT infrastructure (support systems and technology uit)
(3%) Global financing: lease&loan financing, receivables

IBM is the largest IT company in the world with a complete package of products it can supply. IBM is focused on supply of IT and business solutions. It is their task to make other firms better and more efficient.
One remark I need to make on the financing segment. I consider the financial sector as too dangerous right now. I checked this segment of IBM carefully. There is one unit which could be risky, namely the client financing unit, which gives loans to clients (up to 10 years). This unit is small (3%) regarding revenue, but its impact could be bigger. There is one concern I have: in their annual report I read the following: “ The assets and debt associated with the Global Financing business are a significant part of the company’s financial position”. It appears that IBM has an amount of around 30 billion used for financing services to its customers (causing a receivable account of around 30 billion). In this crisis this can be risky. I will weigh this aspect definitely in my analysis.

View on business
My general view on the business is positive. IBM has a strong market position globally. It is much diversified around the world, with more than 50% revenue outside US. Another plus is the presence in emerging markets. This enabled the firm to grow strong over the past years. But most important thing in my opinion is the strong market position worldwide together with its broad collection of services. This gives them a comparative advantage compared to other firms. IBM is also seen as a “powerful” company. I am impressed how the company transferred from a big computer manufacturer to a major IT firm.

About the future prospects of the firm I am confident. Of course the recession will have influence. But I think IBM has to do with two emerging things: the geography (emerging markets), and the business itself (which is emerging). I think these two things can enable IBM to grow in the future at a very nice pace. Another aspect is that my analyses is for the long term and therefore look beyond the current crisis.

What I said above was a brief overview of the business and my thoughts on the business. This part is not the main part of my analysis. I use this to check whether the sector of the firm is decent, and doesn’t contain any structural problems. Another aspect I really emphasize is strong market position (which for IBM is really good).
IBM definitely passes for previous part. But to be an attractive stock, IBM should not only be a good firm, but it should be relatively cheap. This is the most important part of my analysis. If the firm is valued too high it is simply not wise to buy the stock (even if it would be the best company of the world).

Earnings and dividend stability/quality

After we checked that the business itself is okay we’re going to do the next step: earnings and dividend stability.
I give high importance to stable earnings. Stocks are namely valued on their earnings. Investors check things like p/e ratios. If the earnings are stable you can give higher value to these valuation ratios. It also gives you more certainty.

Let’s do the earnings test: EPS+(growth of EPS):
2010(est) $9,77 (8%)
2009(est) $9,02 (-9%)
2008 $9,92 (38%)
2007 $7,18 (18%)
2006 $6,11 (25%)
2005 $4,87 (11%)
2004 $4,38

We can see stable growth until 2009 (-9%), and a recovery in 2010. Recall that 2009 and 2010 are estimates. These numbers give me in general a good feeling. The dip in 2009 can be assigned to the recession. There will be some uncertainties but the earnings remain quite stable (when for example comparing with other firms). This information is important to judge the valuation later.

Another important thing for me are dividends. There is much debate on dividends. Many people argue that high dividends are not necessarily a positive thing. However, in value investing dividends are considered important, and there is support of research to proof this. Therefore I also do a stability check on dividends:

2008 $1,90 (27%)
2007 $1,50 (36%)
2006 $1,10 (62%)
2005 $0,68 (-3%)
2004 $0,70

For dividends the same story as EPS. In 2009 there will be possible a dip, but I think the decrease will be small.

Another impressive figure is the return on equity(ROE): 58% (33% 5 year average).

Financial strength

Next thing is the financial strength. I will test whether the liabilities of IBM aren’t too high (so risky). Especially during the current period this aspect is important.
There are a few figures I check. Most important for me is debt/equity ratio. For the short term situation I check the quick and current ratio.

I am disappointed about the debt/equity. D/e is 2.51 according to Reuters. My own calculations show even a d/e above 3 (based on most recent balance sheet). Recall my concerns on the finance unit. As it appears this unit holds large amounts of liabilities causing the high amount of debt.
Other ratios (quick and current) are both above 1.5 (and thus fine). IBM covered the liabilities with receivables (it provides finance services to their customers). The account for doubtful debtors is less than half a billion, but I think this could become larger during current bad times (recall that we are talking about accounting numbers, no reality).

In general I am not happy with their financial strength. It would be a lot better if IBM hadn’t this financing unit.

Valuation

Now we come to the most important part: the valuation. Stable earnings give me more certainty in analyzing the valuation. Until now I was very optimistic on IBM except the financial strength part.

The first thing I check is the tangible book value. Tangible means that I subtract all the soft assets (goodwill, intangibles) from the total assets before subtracting the liabilities. This gives me the most conservative valuation method. Here we also encounter the term “Margin of Safety (MoS)”. The lower the price/tangible book value (p/tb), the more MoS we have, and the more we are protected for bad news.

Let’s have a look:
P/TB: 9.49
The p/tb is very high. This means you pay almost 10 times the tangible book value. The MoS becomes already very thin. The normal price/book (p/b) is almost the same. It appears that not a large amount of intangibles or goodwill causes this high ratio, but it’s just that IBM has few assets versus its liabilities.

P/e ratio is 10.5 which is quite normal now, and low enough for me. A positive thing is that this low p/e will be sustainable, as the earnings are stable. For me this could be a relaxing condition for the bad book value figures.
Finally there is one more positive remark. IBM repurchased for $18 billion shares in 2007. Share repurchases I see as a very positive thing. Especially when a company has a history of regular repurchases. How often ,and in what extent, it will happen in the future is unclear. But it is definitely a positive point for me.

Final judgment

I must say that my final decision was very difficult. Right now stocks suffered a lot and became cheap. Therefore I believe that you can pick good and cheap firms when you do your home work (like checking for the earnings stability). Because markets are in a bad sentiment I use a very strict valuation judgment. I look for firms with a maximal p/e of 10, and a maximal p/tb of 2 (there are even good companies below or near 1). I admit that these criteria are very strict, but in the current the market the possibilities are present. And very important: such a strict method assures me of the Margin of Safety.

IBM has high earnings quality, I have a good feeling on the future of its business, there are no structural problems with the business, and IBM has a very strong market position (very important for me!). After this I was confident enough to relax my valuation criteria (especially regarding p/tb). But the enormous high p/tb of 9.5 was really disappointing for me. A higher p/tb can be earned with a strong brand and market position. Therefore I still wasn’t saying no. The p/e gave me a bit hope combined with the strong earnings. According to the estimates, earnings will remain stable in 2009 an 2010, and thereafter they probably can improve. But I doubted. Eventually the financial strength pushed me further away.

My final decision is no, I would not invest in IBM. The financial strength is a significant risk factor when you consider the current deep recession and financial crisis. Besides this aspect, I see better opportunities in the market. The p/e was nice, but on the edge. If the recession would cause a decrease of the estimates, or even a profit warning, I see little space to absorb such a shock (no Margin of safety). Stock price would be under pressure then.

Florida

02-13-2009, 04:57 PM

Okey here is my anlysis on IBM. I'm sorry that it took a bit longer than the weekend. I look forward to your comments.

My final decision is no, I would not invest in IBM. The financial strength is a significant risk factor when you consider the current deep recession and financial crisis. Besides this aspect, I see better opportunities in the market. The p/e was nice, but on the edge. If the recession would cause a decrease of the estimates, or even a profit warning, I see little space to absorb such a shock (no Margin of safety). Stock price would be under pressure then. [/FONT][/SIZE]

Great analysis Roger, but had you entered IBM back at the open on the 3rd following my analysis on the 2nd, you would be up about 4% right now, and would not have spent all that time on research that is not really necessary in my opinion.

The stock is in an uptrend, and until that trend breaks, it's a long play. I would feel comfortable holding this stock unless it was to break the uptrend at about $87.

Now, I might ask, what stocks do you see as presenting better opportunites in the market?

Roger

02-13-2009, 05:20 PM

Florida:

Great analysis Roger, but had you entered IBM back at the open on the 3rd following my analysis on the 2nd, you would be up about 4% right now, and would not have spent all that time on research that is not really necessary in my opinion.

The stock is in an uptrend, and until that trend breaks, it's a long play. I would feel comfortable holding this stock unless it was to break the uptrend at about $87.

Thank you florida. Well, we are just two different type of stock investors. you are more the trader while I am more the investor. Indeed it seems that your job is less labor intensive than mine:(.

Now, I might ask, what stocks do you see as presenting better opportunites in the market?

Nice you are asking this. Few days ago I constructed a portfolio based on the AEX (main dutch index, like dow jones for US) and AMX (second important dutch index, midcaps).
I want to do the same with the dow jones index. I had a quick overview, and I've found that in holland far more and better opportunities are present.
My first selection Ive based on a very strict criteria: that of "blended multiplier". I multiplied p/e by price/tangible book. My criteria was that this number should be below 22.5. In the two dutch indices (total 50 stocks) Ive found 21 stocks meeting this criteria. After my analysis (like i did for IBM, but less intensive), 5 stocks were left in which i have confidence.
In the Dow Jones there were only 2 stock meeting my first selection. Both of them were financials so I skipped them immediately, leaving me with none. For the Dow jones i definitely need to relax my criteria. I must say that many dow jones stocks have VERY strong brands and market positions, which justifies their amounts of goodwill/intangibles a bit.