In the last MarketPulse article we continued our discussion on why it is so important for investors to become disciples of trend following. It is one of the best known and longest held tenets in the history of the stock and financial markets: The trend is your friend. It’s a concept which we’ve probably all heard at some stage in the past and often very early on in our investing careers. However, it is unfortunately also one of the first things we forget when it comes to investing our hard earned money in the markets.

In the last couple of MarketPulse articles we’ve espoused the benefits of having an approach grounded in good technical analysis and upon the basis of always following the prevailing trend. This week we wanted to discuss a couple of the common myths of the markets which often prevent investors from following the trend.

Investing Myth 1 – “Blue Chip” Stocks

The first myth of the share market we’d like to bust is the myth that there exists such a thing as a “Blue Chip” stock. What is a Blue Chip anyway? When I ask the question at my workshops, the most common response I get from guests is “BHP”, “RIO”, and “The Banks”.

I totally expect the first two responses (how we love BHP and RIO!), but thoroughly enjoy the last response. Participants are simply too complacent (or lazy) to name individual banks, or simply assume that they are all Blue Chips. This theory that banks can never fail, and will always yield good investments, is embedded into the Australian investing psyche. It’s almost unshakeable.

Investors generally believe that Blue Chip stocks are big, steady, and safe companies to invest in, and probably ones which have been around forever. Often they consider that if a company is a household name, then it must be Blue Chip. If a Blue Chip’s share price falls, then it is a logical and safe strategy to buy those shares and hold on until the price rises again.

This is a very dangerous way about thinking of the share market. The problem with this notion of “Blue Chip” is that one will never know when a widely perceived Blue Chip is no longer that – a safe bet in the market. Take ABC Learning Centres for example. This stock was the market darling of the Naughties, increasing in value from around 40 cents to nearly $9 at its peak in late 2006. Many investors considered that the provision of childcare was a safe bet. After all, “Everyone needs childcare…don’t they?”

Many ABC shareholders probably had kids, grandkids, nieces or nephews who went to a centre near them. They probably drove past half a dozen centres on their way to work and had noted the proliferation of new centres over the last few years. “Surely ABC must be doing well!”

Because the investor could almost literally touch and feel the business, and there was a perceived security in the concept, it was automatically considered a safe Blue Chip investment. As it turned out, this couldn’t be further from the truth.

The truth was that ABC Learning Centres was actually a big ball of debt. When the Credit Crisis struck in late-2007-early-2008, everything came crashing down for ABC. The company fell from its peak of $8.62 to just 54 cents when it was finally suspended from the market. It never came back and shareholders lost everything.

There were numerous examples of other so-called Blue Chip stocks which suffered the same fate in the last GFC. Babcock and Brown, Allco Finance Group, and Centro Properties (which is still trading but down nearly 99% from its highs) are other stocks which failed investors miserably. In each case stunned investors held on in the belief (hope) that their beloved companies would once again return to their glory days. That couldn’t be further from the truth and large parcels of shares in many investors’ portfolios have simply become worthless.

The bottom line is that you never know what a Blue Chip is until it’s too late. A Blue Chip is a Blue Chip until it’s not!

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Investing Myth 2 – “The market goes up in the long run”

Whilst mathematically it may well be true that stock markets go up in the long run, there are a number of reasons why using this as a justification to buy shares when prices are low is a flawed approach. Firstly, it would be more accurate to say that “stock markets always go up and down in the long run”. We know that all bull markets are inevitably followed by bear markets, and whilst bull markets tend to push prices higher for longer, only foolhardy investors do not fear the severity of a bear market.

Secondly, due to a phenomenon called ‘survivorship bias’, the long run upward curve of the market is exaggerated. Survivorship bias refers to the common practice of dropping underperforming stocks out of a benchmark index. As those poorly run companies go down the gurgler, they are stripped from the index and better performing stocks are added. This tends to skew the performance of the index to the positive as the old dogs are discarded and forgotten.

The best way to illustrate how much survivorship bias can unduly inflate a benchmark index is to consider how well the top one hundred stocks listed in Australia in 1910 are performing now! Whilst I am the first to admit that I haven’t done this research, it is fairly safe to say that none of them are still listed on the market today. For example, history shows that many of the radio companies which boomed due to this amazing new technology in the early 1900’s, went the way of many of Dot-Com internet stocks in 2000!

So what about BHP, RIO, and “The Banks”? Surely they’re safe? Surely they can’t ever fail? Well
“forever” is a long time. And if anything is for sure, it’s that markets and the global economy will continue to change, at an ever increasing pace. Anything really can, and probably will happen. China could go into a recession tomorrow and destroy the share prices of BHP and RIO. Equally, we could find ourselves in another GFC and the banks could fall by nearly two-thirds of their value like they did in the last GFC. In the markets nothing is sacred and those stocks which fall by the wayside will wither and die – like they always have.

So whilst it is fair to say that ‘the market’ goes up in the long run, it is not fair to say that any particular investor’s portfolio will go up in the long run. This will depend solely on the investor’s ability to select and maintain a portfolio of outperforming stocks.

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Conclusions for now

If there is one thing which is constant in the market, and is reliable, it is that the trend really is your friend. Before any company in the history of the markets has gone bankrupt, it has found itself in a very well defined downtrend first. There are rarely shocks in the markets, and hardly ever any real surprises. Most of the announcements which heralded terrible times for a company were preceded by a severe downtrend. Investors could have seen the warning signs on the charts and exited the stocks before the worst hit.

It will only be when investors can truly abandon their love affair with Blue Chip stocks and the false belief that the market always goes up (to rescue their poor investing decisions), and resolve themselves to becoming a true disciple of the trend, that they will experience the returns they’ve always dreamed of. We’ll discuss the biggest myth of investing in next week’s MarketPulse and conclude this analysis of trend trading.

See Carl speaking at free trading and investing seminars all over Australia.
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Investors need to take responsibility for their own actions when it comes to making or losing money in the share market.

The recent review of the CFD industry by the Australian Securities and Investments Commission (ASIC) has thrown the spotlight on one of the fastest growing sectors of the financial services industry. Love them or hate them, it seems that their ever growing popularity will ensure that CFDs are going to be around for a long while still. Whether arguing for or against CFDs one should always argue from a position of complete understanding. I’ll attempt to set the record straight on a few issues regarding CFDs today.

CFDs are potentially the most revolutionary financial markets tool introduced into Australia in the last decade. They have allowed traders to access a wider range of markets for a fraction of the costs charged prior to their introduction, and to play both rising and falling markets. In terms of giving investors the opportunity to generate significant returns from the market and simultaneously protect their capital, they’ve had few peers in the financial services industry. In spite of this, there’s been plenty of talk recently regarding how risky CFDs are and how they’ve been marketed to unwitting retail investors.

Certainly there’s been plenty of scaremongering from the vocal anti-CFD lobby including a number of traditional brokers and elements of the financial press. Incredibly, CFDs have been described by ASIC itself as being “No better than a flutter on the horses”. Given this prior dim view of CFDs, it is unsurprising that the regulator has decided to take a similarly dim view in its latest regulatory guide.

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The major thrust of the guide is that CFDs are unsuitable for the majority of unsophisticated retail investors. I couldn’t find an official definition for an unsophisticated retail investor, however there is a well known official definition for a “sophisticated” investor in the financial services industry:

“It appears from a certificate given by a qualified accountant no more than 6 months before the offer is made that the person to whom the offer is made:

(i) has net assets of at least $2.5 million; or

(ii)has a gross income for each of the last 2 financial years of at least $250,000 a year.”

So, as far as the industry is concerned it seems that money is the only thing which buys you sophistication! Regardless of how much cashola a punter starts off with, my experience is that the size of your bank balance has very little to do with your ability to grow that balance. There’s an old joke amongst professional traders, “How can a punter finish up with a million dollars after their first year in the share market?” Answer: “Start with two million!”

Whether they’ve got a pittance to invest or millions, most investors simply aren’t equipped with the technique or the mindset required to make money in both rising and falling markets, and especially during periods of extreme market volatility much like we are seeing right now. Even more dangerously, most investors drastically overestimate their abilities when it comes to investing and assume that they will be able to master the markets with little-to-no experience.

ASIC notes that:  “Many retail investors appear to be over-confident in their understanding of CFDs and their ability to successfully trade them.” This is not uncommon for any type of investing – CFDs or otherwise. Many investors assume that success in other fields like a profession, or positive returns from other types of investments like property, will guarantee success in the share market. They believe that they’ll be able to take the same skills learned in these pursuits and apply them equally as successfully in the share market. Unfortunately far too often this simply does not happen and money is lost.

Ironically, the worst share investors and traders are often those who are the most educated in their “normal” lives. In my experience, more often than not it’s doctors, lawyers, dentists, and engineers who make the worst traders! The share market is unlike anything most have ever tackled before and an excess of book smarts rarely equates to an excess of profits. In fact success in the share market requires one to often think in total opposition to what makes sense in other fields of investing like property, but this is probably a topic for another time! Bringing this discussion back to CFDs, ASIC also found that:

“The majority of investors do not seek or receive personal financial advice prior to investing in OTC CFDs”… many retail investors:

• are confused as to how CFDs operate, and do not appreciate the risks associated with trading CFDs;
• often do not receive sufficient information to make an informed decision about whether or not to acquire CFDs;
• have difficulty understanding the information they do receive due to bias, poor presentation and subject complexity; and
• as a result, do not always make informed and confident financial decisions about whether CFDs are a suitable investment for them

With this in mind, I think that it’s a flawed argument to say that CFDs are risky or not risky. CFDs are just a tool which investors can use to improve their returns and manage their risk in the markets – much like a nail gun or a circular saw is for a carpenter. Neither a nail gun nor a circular saw are dangerous in the hands of an experienced professional meticulous about his safety, however put them in the hands of an apprentice who has not yet had any guidance…and the results could be disastrous (imagine spurting blood and a dash to emergency with a finger in a lunchbox!). Those looking to make consistent and sizeable returns in the share market face the exact same situation when dealing with CFDs – or any other security for that matter.

CFDs aren’t a risk to investors’ wealth – rather it’s the pervasive lack of understanding of what constitutes good investing practice.

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You see, plenty of people have done just fine losing a whole heap of money trading plain-old vanilla shares lately. It’s been just as easy to blow up your superannuation account trading shares, warrants, options or anything else. Interestingly, each of these three products is offered to practically anyone by share brokers and financial planners and advisers – sophistication is rarely a consideration. All have the apparent safety of being tradeable on the Australian Securities Exchange (ASX), yet despite this fact, many unwitting investors have lost their shirts trading them for decades! Interestingly however, none of these products have drawn any extra scrutiny from the regulators since the global financial crisis; but CFDs have.  This appears to be a double standard. Certainly there are parties who have a vested interest in perpetuating the myth that ASX listed products are “safe” and over the counter CFDs are “risky”.

I believe that to stop people losing money trading CFDs, or any other security for that matter, investors need to improve their understanding of what constitutes good investing practice. Investors need to stop blaming everything and everyone else for their poor performance in the markets, and take responsibility their own actions. Either seek out the correct education before you get involved – or don’t complain when it all goes wrong when you don’t!

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

   Written by: marketpulse   Other posts from: marketpulse

C no evil, Fear no evil, Deal no evil…dispelling the myths of CFDs

CFDs have been a hot topic in the mainstream press recently after the Australian Securities and Investments Commission (ASIC) released its long awaited review of the CFD industry. ASIC is Australia’s corporate, markets, and financial services watchdog. It is charged with the responsibility of protecting consumers with their dealings with any of the above.

In the lead up to the ASIC review there had been much noise against CFDs from mainstream share brokers, a financial press bent on sensationalising the potential pitfalls of CFDs and the odd punter who had done their shirt trading the product.

Mainstream brokers have felt threatened by CFDs since they first appeared in Australia around 2002. Discount brokers especially were quite vocal in their initial opposition to CFDs until they realised what a tour de force CFDs were proving to be for retail investors in accessing the market.

CFD providers were offering trading platforms which had functionality well in excess of anything the discount share brokers were (and still are) offering, and generally for free when many brokers were charging significant amounts for similar features. The biggest thorn in the discount brokers’ sides was the cut-price brokerage charged by CFD providers: most minimum dealing rates start at around $10 a transaction; around half the price of Commsec’s best rate and up to one-third of Etrade’s. The retail trading and investing public finally had a choice – and they flocked to CFDs.

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The two main players in the early days of Australia’s CFD industry were of course CMC Markets, who held an initial dominant market share of the burgeoning market, and IG Markets, who has recently overtaken their old rival as the most used CFD provider in Australia. Each offered an “over the counter” product where traders were trading with and (effectively in many circumstances) against their CFD provider. This structure is a “market maker” model where the CFD provider defines all parameters of the trade. History shows that the rise of one CFD provider, and the relative fall of the other, may come down to how each dealt with this important responsibility; that is, the decision to take the other side of the client’s trade or not…

Discount share brokers were quick to realise how lucrative the CFD market was and wanted in on the action. But rather than join forces with either of the CMC-IG duopoly (make no mistake, they considered it), the brokers chose to embrace an Australian Securities Exchange (ASX) “listed CFD” alternative (also known as exchange traded CFDs).

The ASX had also vehemently opposed CFDs initially because they were market made, arguing that an exchange model would be more open and transparent. But ironically, when the ASX realised that market markers were integral to the process of exchange traded CFDs, they ended up with a product also reliant on market makers; the pricing of the ASX’s exchange traded CFDs are 100% beholden to the market makers and their discretion. The ASX alternative has since languished on a relative basis and the vast majority of CFD industry experts have labelled them a poor interpretation of what CFDs are supposed to be to investors; offering broad-based, easy and cheap access to the world’s markets.

So presently we have the ASX’s exchange listed CFD market, which is supported by the large discount brokers and also anointed with ASIC approval in its latest review, and the incumbent CFD market makers, which are ASIC’s main target. Remember, both models are market made. Traders are going to have to pay their pound of flesh to trade either way. In fact, the market makers in the exchange traded version of CFDs mirror the exchange traded options (ETOs) market makers, traded on the ASX’s options exchange. Anyone who has traded ASX options will know that these instruments come at a price. Exchange traded or not…

Traders should know that the market makers who are employed to facilitate ASX’s CFDs are large banking and financial services institutions staffed with experienced professional traders. Retail investors are therefore trading in direct opposition to these firms, which have an obvious and distinct advantage. As one would naturally expect, market makers don’t work for charitable organisations and most can be relied upon to put themselves before the retail investor.

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The alternative, the common over-the-counter market made model for CFDs, has been unfairly tarnished in much recent commentary. Yet the main criticisms of this model don’t stand up to basic analysis. At least one CFD provider, IG Markets, offers Guaranteed Market Prices. Thus IG guarantees that for ASX listed equities their clients will always trade at the underlying market price. This means that whilst you are in effect trading with a market maker, they are bound to reflect exactly the prices on the ASX. This approach contradicts the unscrupulous measures claimed by most mainstream brokers and the press regarding over-the-counter offerings. In fact, this particular market made approach is far superior to the exchange traded model, because not even ASX exchange traded CFDs can offer guaranteed market prices.

Unfortunately a mature analysis on how CFDs actually work has been missing. Instead of rational debate, some sections of the press have found it easier to push emotional buttons than to report the cold hard facts and educate punters about CFDs; only a few specialised investment publications seem to bother with the finer details of the products. Most media has over-exaggerated the risks of CFDs, arbitrarily labelling them “high-risk”. Yet, with a little research and a calm and objective head, this could not be further from the truth.

CFDs aren’t evil; they’re just another trading product, with intrinsic opportunities and risks. They won’t evaporate your life savings at the push of a button unless you are ignorant to their risks and good trading practice in general. There aren’t any victims of CFD trading, just those who make bad trading decisions and as a direct result, lose their money – the same scenario which causes traders and investors to lose money on shares, options, futures, warrants and a host of other financial products.

Do your own research, be informed and get educated before trading CFDs and take responsibility for your own actions.

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

   Written by: marketpulse   Other posts from: marketpulse

Take it Seriously; Investing is a Profession, Not a Hobby

Last week we discussed how a professional approach was required for any of life’s pursuits we desire success. We used the analogy of Tiger Wood’s professional approach to his golf (forget his hobbies!) and how few investors took such an approach with their investing. Much like my woeful golfing performance, many investors fail to achieve their financial goals.

Let’s bring this back to your investing. I’ll say your investing because I certainly don’t treat my investing like I treat my golf. You see, apart from the small (ever so small) cheque Australian Stock Report send me for writing this column and presenting at their Live Data Trading Workshops, my investing is what pays the bills. I simply can’t afford to take this for granted. If I want to succeed, that is to beat the markets and grow my wealth in such a way that I rely far less heavily on other forms of income, which then helps me spend more time doing what I enjoy the most – spending time with my family (not golf), then I must be professional in my investing approach. It’s simply too important’ not to be. My investing simply can’t be a hobby if I want the results I seek…

This means that I must bring all of the traits to my investing which Tiger employs for his golf. Discipline to commit the necessary time to do my analysis and research. To create a well researched and robust trading plan. To implement this plan religiously and through ongoing feedback and response to improve it. I must take the time to make all of this happen and not be so arrogant that I ignore help from those who have gone before me and have themselves achieved the success I desire. I’ve got to take this seriously.

Now my question to you is: “How seriously are you taking your investing?” Is it a hobby? Are you one of far too many “punters” I talk to about their investments who say things like “Yes, I have a few stocks…yes I think they’re going ok…” Whose approach is most often one of “Oh, yes, well I read the financial section of the paper and a couple of financial news websites and try to pick blue chip stocks; then I just stick them in the bottom drawer and hold on.” When pushed on the time they’ve spent developing their approach, the answer is invariably: “Oh, yes, I keep an eye on things.”

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Remember what I said before about my lack of time to practice, and that I end up doing my practice in game-time on the run? Does that resemble your investing? Do you feel that you’re learning on the job? Or should you be learning and honing your skills before you put your hard earned money at risk in the markets?

If you feel like you’re feeling your way as you go, then it sounds more like someone talking about a hobby than a serious business! There’s far too much to chance! Where is the discipline? Where’s the perfect practice? Where is the relentless application and drive to improve, succeed, and exceed?

Let me make one thing very clear here. If you treat your investing like a hobby it will no doubt give you some fleeting pleasure from time to time, like my golf, but also like my golf it is going to cost you money. Whether that be upfront in the form of dismal losses during a bear market, or whether that be from underperforming the index in a bull market – it’s going to cost you.

So how do you ‘get good’ at investing? Take a leaf out of Tiger’s book. A coach is a good place to start, an investing coach in this case. Someone who knows the rules of the game who can make objective decisions as to where you’re going right and wrong – and on how you can continuously improve.

It’s not enough to say: “I’ll just bash away at it until I get it! I’m ok – I don’t need your help I can figure this out myself…” Remember what we said last week: It’s not practice which makes perfect, rather, it’s perfect practice which makes perfect. If you have no idea what the correct approach is in the first place, it could take you many years and a small fortune before you figure it out.

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Real professionals spend many years and the same small fortune at university studying to achieve their qualifications. They seek out knowledge, structured, researched and proven knowledge. They aren’t so arrogant to say that they will figure it out themselves. Imagine if a brain surgeon said “Don’t worry I’ve read a few books on cracking heads and it’s been a hobby of mine for ages now – I think I’ve got the hang of it so get on the table!” Why should investing be any different? Get some help, go to investing university!

This is where our Live Data Trading Workshops come in. In these workshops my colleagues and I spend 2 whole days trying to get to the heart of what makes you tick as an investor and how we can make you a better one. More importantly, we will give you a number of tried and tested systems and processes to go through before, during, and after each and every investment you make to improve your consistency and results. Keep in mind however that whilst we can show you exactly when and where to enter an investment, we can’t give you the discipline and passion to follow such a plan! That’s up to you.

We all want the benefits of improved investment performance. The rewards of such improvement could be lifestyle changing. However, are you prepared to put in the hard work to achieve these rewards? Most investors aren’t.  Your biggest impediment to becoming a better investor is simply getting started, to committing to your improvement by becoming more professional in your approach. The hard work begins now.

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

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Take it Seriously; Investing is a Profession, Not a Hobby

Last week we discussed the importance of being professional in one’s investing approach. The major part of being professional is executing a well documented, researched, tested and proven investing plan. Unfortunately however, not only do many not have such a plan, they overestimate the amount of effort they’re applying to their investing. Rather than treating their investing like a profession, it’s relegated to ‘hobby’ status.

This week I’m going to use an analogy to illustrate this concept. It’s one I’ve been using for quite a while at my workshops to prove the point of just how hard and how much time and effort is required to be truly successful in the markets. You’ll understand what I mean in a second, but funnily enough this analogy used to work well until quite recently. It’s now the source of great amusement to my students!

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I’m a keen weekend warrior golfer. I say warrior because you can often find me conquering the shrubs and bushes at a local golf course near you on a Saturday morning. No shrub is too thick, and no forest too impenetrable in my quest to find my ball after a wayward tee shot.

Sure, I like golf, but I’d hardly call it my profession. It will only at best be a hobby for me. I’ve got precious little time to practice my game and therefore most of my practice occurs in actual game-time when I really should be reaping the rewards of my efforts during the week. My lack of time in seeking golfing perfection is of course a big issue, but apart from my near phone number handicap, I would have to say that my biggest handicap is probably my lack of talent. I really don’t have much of it when it comes to yielding a club…

I’d like to say that my excuse for why I’m so lousy at golf is that I wasn’t born with the innate genius of Tiger Woods (you might be getting some idea of the mirth this analogy now causes in my workshops!).

However, one could argue whether Tiger was born with his talent and that’s why he’s so good, or whether it was an acquired ability? We are of course talking about Tiger’s golfing prowess and no other innate ability to score (ok, that’s the first and last joke I’ll make about that!).

How did Tiger get so good? Was he born with it or did he work really hard to acquire his talent? Well, I think his talent has more to do with the fact that he started playing golf as soon as he could walk and hold a club. He had an excellent coach and mentor in his father, he has worked almost religiously on his game seeking out the best professionals to show him where he’s going right and going wrong. Then there’s the practice. Tiger’s a bit of a hero of mine (golfing only) and I’ve seen a few documentaries on him. I’ve seen him practise rain, hail or shine for 8 hours a day. He’ll chip 300 balls out of a bunker, step one metre back, and chip another 300 balls, and so on.

I can only conclude that the secret to Tiger’s success isn’t actually a secret at all: It’s hard bloody work! Time spent practicing, which gives you experience, which gives you confidence, which gives you…you guessed it…talent! Who would have thought it would be so easy (hard!)?

It’s not enough to say that practice makes you perfect however. That’s just something our teachers told us at school to make us feel better about sucking at whatever it was we were doing. It’s more accurate to say that perfect practice makes for perfect application.

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You see, there’s a big difference between any old practice and perfect practice. Anyone can grab a set of golf clubs and bash away at 300 balls in a bunker, take a step back and do it again, and again, and again until the cows come home. Believe me, I have done this in the past and it certainly hasn’t made me a Tiger Woods.

Every shot tiger takes, both in practice and in a tournament situation, is recorded and studied. Not just by Tiger, but also those who he’s employed to coach him. Nothing gets taken for granted, and nothing gets missed. By constantly having an action, feedback, and adjustment loop, comes improvement. Continue this and you could improve to the point where you turn your hobby into a profession.

This is really the difference between me and Tiger. I don’t have a golfing coach so I have no idea that I’m doing wrong. Even if I did, because I don’t have an experienced coach I have no idea how to fix it. In my defence however, I really have no intention to quit my day job and start playing golf for a living. I’m never going to have enough drive and discipline to devote the time, resources, and importantly money required to invest in getting myself to that level. If I contribute none of these things then I should not be surprised that my hobby stays just that – something which gives me pleasure from time to time, but which ultimately costs me money.

What’s this got to do with our investing? Well clearly there are plenty of traits which Tiger applies to his golf to achieve his returns that we need to bring to our investing approach. Are we going to treat our investing like a profession and put in the appropriate time and effort and apply this with sufficient passion and discipline? Or are we going to be a ‘weekend warrior investor’ and treat what we do with our money as a hobby? Certainly the two approaches are likely to generate very different results. We’ll investigate further next week.

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

   Written by: marketpulse   Other posts from: marketpulse

Take it Seriously; Investing is a Profession, Not a Hobby

If you’ve chosen to manage your own money you’ve taken on one of the most important tasks which will ever befall you in life. Apart from the love of our families, and perhaps our careers, the next most important thing is how we manage our money. That is, whether that little bit you’ve set aside grows, stagnates, or worse, whether it shrivels and dies. This will depend on the quality of the decisions you make now and into the future. Of course if we manage our money better, then perhaps we’ll be in a position to shorten our careers, or not have to rely solely on them to produce our income allowing us to spend more time with our families. I certainly know what I’d rather be doing…working 9-to-5 or playing with my kids…

Yet unfortunately most people do not put anywhere near as much time, effort or consideration into their investing as they do into their families and careers. Too many adopt a “She’ll be right mate” approach with their investing. It takes a very distant back seat to the rest of their life, yet in so many ways it’s just as important as forging a successful career. Get your investing right and there’ll be plenty more to leave to your loved ones when you finally check out!

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In my seminars and workshops I’ll often push people on their investing approach and try to get to the heart of just how much time and effort they’re actually putting into their investing. The results are uncannily consistent: Not enough! Most investors simply have no comprehension on the work required to be successful in the markets. They truly believe that they have a sound and credible investing plan but in actual fact their methodology falls far short of one.

“What I do is find blue chip stocks with a good story and hold them for the long run. The market goes up in the long run, how hard can it be?” This has shown to be an extremely faulty plan (or not really one at all) over the last few years as markets have melted down. Blue chip stocks have shown to be no more reliable or safer than their more speculative counterparts and indeed, many have simply vanished. There’s far more to successful investing than buying so called blue chip stocks and hoping for the best.

Unfortunately most investors can be described as ‘hobby’ investors. They’re part-timers. They don’t put the same time, effort, consideration and professionalism normally reserved for their careers as they do into their investing.

Professional career investors however will without fail possess a well thought out, researched, tested and documented approach. This is more commonly referred to as a “trading plan”. It makes sense that every successful individual or business achieved that success through excellent planning and execution of a well thought out plan – and certainly not by luck. Investing is, and should be no different. Luck has nothing to do with it.

Why is it then that so many investors come into this game with no plan whatsoever, or a plan of attack which can only be described as “flimsy”? They’re simply hoping to get lucky!

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I see far more investors who are not achieving their full potential, are not even aware of what this is, than those who are – hands down. I’m not sure that there’s any way to sugar coat this – but most investors I meet are lazy and complacent. Unfortunately for them, they just don’t realise how lazy and complacent they actually are!

Most truly believe that they’re doing a bang-up job. Then I point out that the goal is not to just make money, but to beat the market. Sure it’s great to make a 10% return over the course of a year. But what if the market went up 20%? If this is the case then you’ve made money, but lost significant opportunity. You would have been better off by simply giving your money to an index fund manager, not having any stress, not putting in any effort, and just matching the market.

Most investors I talk to realise that what they thought was a good performance is actually costing them thousands and thousands in missed opportunity! A dollar not earned today because of laziness and complacency is going to cost you $6.72 in spendable capital in 20 years at a compound rate of 10% per annum. That might not sound like much, but extrapolate it out over every investing dollar you’ve flittered away over years and you’ll get some idea of just how important it is to get your investing right today.

If every successful individual and company achieved such success through meticulous planning and execution, why do so many investors put their hard earned money at risk in the market without the same application? Can you afford not to have a trading plan? Can you afford to be lazy and complacent and treat your investing like a hobby? Are you going to have a well defined, researched, tested and proven investing plan or are you going to leave it to chance?

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

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“The Australian banking sector, with its large deposit base and small exposure to the recent subprime mortgage turmoil, stands to weather the storm better than its overseas counterparts?

Relatively large deposit bases compared to the troubled US mortgage originators mean that Aussie banks have enough capital to survive the liquidity crisis. Further, local loan defaults have remained low, backed by the strong Australian economy which is in turn being bolstered by record-low unemployment and robust Chinese demand.

Bank profits amongst the Top 12 banks in Australia are up 15% on the previous year and the recent correction in prices leaves many banks at extremely low historical price to earnings ratios (20-year lows). With this in mind, the Australian banking sector is now offering compelling value.

We view the current environment as an ideal time for investors to increase their weightings in the Australian banking sector”

Source: Unnamed analyst at large broking firm – pre GFC in late 2007!!

The above statement certainly appeared to be factually correct at the time of writing. But did those “facts” prevent Australian banks from being devastated by the 2008 GFC? History shows that the answer is an emphatic “No”. So, when it comes to good trading, are the facts relevant or are they downright dangerous?

A novice trader without a trading plan is all too susceptible to following this sort of advice from so-called “experts”. It is very tempting defer to the better judgement of those who appear to be more learned than us – especially when they are armed with a plausible theory as in the analyst’s recommendation above.

If we have not developed a trading methodology of our own, surely it makes sense to simply follow the experts? At least when things go wrong, we are less to blame. Right?

Wrong – when it comes to trading – the buck stops with us. We have nobody to blame for our mistakes or our losses but ourselves!

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Fundamentally Sound or Fundamentally Flawed?

The contemporary research industry is almost exclusively based upon this sort of “fundamental analysis”. Fundamental analysis is the study of a company’s business operations, market prospects, management and systems. Ultimately, this method of analysis boils down to the study of the determinants of the price for the goods and services a company produces.

The analyst must then extrapolate past performance into the future to predict the expected revenues likely to be generated by the company. By subtracting expected expenses he/she may then determine the company’s likely future profits. Analysis of these profits going forwards (and through some convoluted valuation model!) allows the analyst to calculate his/her perceived value of what the company is worth today.

The analyst then divides this perceived value of the company by the number of shares on issue to calculate the value per share. Now the analyst compares the perceived value per share to what the company’s share price is actually trading at on the share market. If the current share price is significantly below the perceived valuation, the analyst will label the company’s shares a “Buy”. If the current share price is significantly above the perceived valuation, the analyst will label the company’s shares a “Sell”.

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That sounds fair enough doesn’t it? Well, this analysis is indeed good enough for the vast majority of institutional investors in the stock market and constitutes the basis of their buying and selling of shares under most circumstances. For this reason, in most cases, it is worthwhile keeping an eye on what the brokers are saying. In practical terms we can do this by monitoring “broker consensus” data.

Broker consensus data is simply the compilation of a number of brokers’ recommendations in order to gain an understanding of the average valuation of a company, sector, or market. This average valuation often gives us clues to whether the market overall is being influenced by bullish or bearish broker sentiment. As we imply above however, there are going to be some times where this sort of analysis isn’t as effective as most of the investors who follow it would like. In fact, there are times when it is downright useless.

The above statement about the banking sector by our unnamed analyst is an excellent example. Whilst appearing to be sensible and grounded in observable and valid analysis of the facts, it only considers the determinants of the value of a company’s shares, not the determinants of the price of a company’s shares. Value is not price and price is not value. So is it better to study value or price?

Fundamental analysts believe these concepts are interchangeable. They assume that all things being equal, price will tend to move towards value over a period of time. But how long will it take the market to catch up to the analyst’s perceived value of the share, and what then should the determinants of value change in the mean time?

Value tends to based upon assumptions and beliefs, upon plausible theories. What is an example of a plausible theory? Perhaps: “The internet will revolutionise the way the world does business and “new economy” companies can not be valued in the same way as “old economy” companies”. Many will remember that cracker from 1999-2000 when the mania of the Dot-com boom gripped stock markets around the world. How about: “The miracle of Chinese economic growth, and not to mention that of other developing countries such as India will power global growth for the next 20 years driving a sustained commodity boom…”

Plausible theories are potentially the most dangerous red herrings facing novice traders. Unfortunately when the world changes (and the recent financial crises have reminded us of just how quickly this can happen), plausible theories spontaneously combust into a poof of smoke. That’s the fundamental analyst’s bull market profits going up in flames by the way! Comfortingly, the price of a company’s shares will always be determined by the market – regardless of the prevalence of plausible theories. It is for this reason that traders study and follow the market price. Not perceived value. Value is a concept, price is the reality.

We’ll pick up this discussion in next week’s blog titled “The market is always right”.

See Carl speaking at free trading and investing seminars all over Australia. To see when the next seminar closest to you is – click here…

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A new and exciting concept for traders and investors.  This VIP Traders Conference will be the third of its kind run by Australian Stock Report.  An even better line up of trading eduction, strategies, activities and personal sessions to advance a traders knowledge and skill will be on show.

Held at the prestigious Hyatt Regency Coolum Resort between October 4th and October 8th, the conference will be conducted over 5 days. All of Australian Stock Report’s senior education team will be involved in presenting at the conference, covering advanced trading concepts with a special focus on building and developing a robust trading plan, trading psychology, and also a number of advanced trading strategies.

For more information click here.

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By Carl Capolingua
Head of Education

Most people know of the two great animals we usually associate with the stock market. Perhaps the best known are the bulls. These represent investors which are driven by greed and optimism. The bulls can be found rampaging down Wall St when better times are perceived ahead, flooding the market with cash to buy shares and pushing prices higher. Bull markets are markets which rise pervasively over time – we all love bull markets – everyone makes money!

The bulls’ sworn enemy are the bears. Imagine now a bear emerging from hibernation after a long cold winter. Cranky and hungry is not a good combination. Imagine now poking this bear with a sharp stick and what he would do to you. Well that’s pretty much what the bears do to share prices in a bear market! These markets are caused by investors who have little faith in the ability of prices to rise and therefore wish to sell. Driven more by fear and pessimism the bears smash prices lower.

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There is another far less well known animal which I have recently found describes most investors at the moment. At each free seminar I’ve done lately I’ve been asking attendees to participate in a survey where they declare themselves to be bulls or bears. Increasingly, as the market has unravelled, I am finding far fewer bulls, far more bears, but even more of another group – those who do not fit into either camp. When pushed on the matter they declare themselves as fence sitters – they have no idea where the market is going and therefore intend to ‘bury their head in the sand and hope for the best’.

Ergo my third group of animals in the markets – the ostriches!

My trading mentor often described the inability of investors to act decisively in crumbling markets as the ‘ostrich technique’. This involves deferring acting one way or the other in the hope that things will get better, or simply ignoring the situation altogether. The theory here is perhaps ‘What you don’t know can’t hurt you’.

Many adopt the ostrich technique out of ‘analysis paralysis’. Based upon the deluge of information in front of investors they become confused and lose the initiative to act. Soon, they wouldn’t know what to do even if they wanted to. This is rarely the best solution as markets can and often do fall much further than most expect. Getting out half way down is still better than holding all the way to the bottom. Most just assume however, rather incorrectly, that it’s too late to act and they might as well hold on.

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It’s never too late to act. Good investors are decisive. More importantly, good investors are decisive at following a plan. Ostriches on the other hand are indecisive and do not have a plan…

As my mentor would often say “There are great benefits in adopting the ostrich technique. At least with your head in the sand you can’t see what’s going on. This might be comforting for some but there’s also a major drawback as well…with your head in the sand it means that other more delicate parts of your anatomy are rather exposed…and that’s not good for anyone!”

My advice to investors? Be a bull – commit your funds in the market and take a position. Be a bear – recoup your funds and live to fight another day. But whatever you do, please, please don’t be an ostrich!

I speak regularly at free trading and investing seminars all over Australia about the importance of developing an investing plan. To see when the next seminar closest to you is – click here…

Until next week…

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