Value Investing Lessons from Moneyball
Is baseball a metaphor for life, as many literati have suggested, or for value investing? Michael Lewis’ 2003 bestseller Moneyball argues the latter. More recently, the book has been adapted to make a thoughtful movie that will be of special interest to investors who believe in trying to find hidden bargains.
An article by Laurence B. Siegel, as seen in Advisor Perspectives
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Improving on Morningstar Style Boxes
No one would ever confuse a short man with dark hair and a tall one with light hair. But this is precisely what investors do when they categorize stocks as either growth or value. Those style definitions, championed by Morningstar and others, are flawed, and I have a way to fix them.
An article by Stephen Dodson, as appeared in Advisor Perspectives
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The Road Ahead: Is it Inflation or Deflation?
The secular bear market in bond yields may well be in its terminal phase but a reversal has not yet been signaled by any of our long-term indicators. However, being 30-years old this month, it is getting long in the tooth, whereas the secular commodity advance at a relatively young 10-years is half the age of its average predecessor. While the very long-term trend for commodities is up we also need to recognize that the primary trend of is bearish. They are therefore likely to experience additional corrective action prior to any attempt at new all-time highs.
An article by Martin Pring of Pring Turner Capital Group
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An Unsettling Trifecta for Market Contagion
At an event last week in Washington, I was asked about my feelings about the global economy. My response was “between concerned and scared.”
I worry that, absent a dramatic change in policies in America and Europe, things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.
An article by Mohamed El-Erian of PIMCO
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Strategic Set-Up
The first component of a trading system is the strategic set-up.
(I will use the term trading system and trading methodology interchangeably throughout my discussion and will be using a trend-trading strategy to illustrate my points).
Strategic set-up refers to the identification of the current trend to decide whether you would consider taking a long or short position in the direction of the trend. It is about looking at the big picture. We have often heard the adage “trend is your friend” and “trading in the path of least resistance”. These refer to the strategic set-up of the market.
But how do you determine a trend?
Some people use trend-lines to help them determine the trend. Others use wave patterns or indicators such as Moving Averages or MACD. And some traders swear by using higher time-frame charts to identify trends.
There is no right or wrong way, and there is definitely more than one way to determine the trend. I personally prefer a much simple method – eye-balling the charts. With a quick glance of a chart, one can often intuitively form a strong feel about where the market is going, one way or another, or nowhere in particular. Human mind is extraordinary. It can recognize patterns easily. By immersing ourselves in looking at charts everyday, our minds are “trained” to look at patterns naturally. One of the patterns that our minds have been trained to recognize is trend, or a lack of it.
This first step of identifying the trend is very important. Without first determining where the trend is, it is very easy to get into trades and get whip-sawed out of the position numerous times. How often have we been confounded by the signals we get from various indicators or chart patterns that are in conflict: MACD just cut up but the Stochastic is too high and so on…… Or how often are we being confused by the fact that when we rely on MACD signal to enter a trade, we often end up losing money 6 out of 10 times and barely break even on the other 3, with the remaining 1 giving us some consolation.
A very clear trend. Would you want to trade counter-trend?
The indicators are not at fault. When and how we use them is the problem. The problem is chiefly the ignorant of the main trend and using the indicators at the wrong moment and ended up trading counter-trend, or even if there is no visible trend.
Before we ”meet” again to talk about the second component of a trading system: technical triggers, I urge you to start practicing on developing that intuitive feel about the direction of the trend by looking through charts after charts. This is a simple exercise which you can do at your own pace and it does not take up much of your time. Try it, and you may like it. You may even start to realize that 50% of the past trades which you have taken and lose money may actually be trades that you will not have taken have you been more cognizant about the trend of the market.
Trading System
“Let me tell you a secret. You can make big bucks by looking at this particular combination of special technical indicators that I have spent thousands of hours researching. Our clients have been making millions by trading this system. You can do it too! You can make a bundle and be financially free forever!. Here’s how you do it…..”
Did that pitch sound familiar to you? Well, it has attracted thousands of speculators and investors like you and me. And while there’s maybe some truth to it, it’s certainly not the secret sauce to trading success. Many people could go broke following that advice because it’s only part of a sound methodology. Even though the pitch may tell you when to get in and out of a trade, it may even tell you how to protect your capital if the market goes against you, it probably won’t tell you when the method would work and when it would fail miserably.
Most importantly, you must ask yourself the following questions before you sink thousands of dollars subscribing to the system:
- Does the method fit you?
- Is it something you’d be able to trade?
- Does it fit your personality?
- Can you tolerate the draw-downs or the losing streaks which are inevitable to all system?
There are probably thousands of trading systems that could work. But most people, when given such a system, will not follow it. Why not? Because the system doesn’t fit them. One of the secrets of successful trading is to find a trading system that fits you. In fact, the most important characteristic of all good traders is that they have found a system or methodology that was right for them.
A good trading system comprises the following components:
- Strategic set-up
- Technical trigger(s)
- Position management: Initial stops and trailing stops
- Money management strategies; aka betting size
- Trade recording
- You
Strategic set-up refers to the identification of the current trend and deciding whether you would consider taking a long or short position in the direction of the trend. This is the phase where you would decide if you want to trade this market, not when to enter the trade.
Technical trigger or triggers are the identification of specific chart formations or the triggering of certain technical indicators after identifying the trend. This gives you a clear entry signal to trade in the direction of the trend being identified in the set-up phase.
Position management refers to how we should manage the trades after we have entered them. To enter a trade is easy, to exit is more difficult. But the most difficult phase in trading is the time in between entry and exit when you’re constantly facing the dilemma of should I get out of this trade or to hold on? To “allow the market more breathing space or to end the pain by cutting lose?” “Should I take my profit and run or should I sit tight but risk given back all the profits I have accrued so far?” This phase deals with the systematic ways of establishing initial and trailing stops which are the important in dealing with the roller-coaster psychology of managing an open position.
Money management refers to how much we are willing to lose in each and every trade. The process of arriving at a betting size should not be a haphazard one. It has to relate to the amount of trading capital that we have set aside for the trading venture. The betting size being too little provides no incentive to trade, while being too much will ruin any amount of trading capital. By far, this should be the most important aspect of designing a successful trading system.
Trade recording is an extremely important habit to inculcate if you want to be a successful trader. Trade records form the backbone of analysis where you can find out whether the system will make money in the long run (a statistics which we call expectancy) and how to improve your system so that your trading equity could be maximized.
Throughout my subsequent blog entries, I will be discussing the various components of a good trading system. I will be illustrating it by using a simple and yet effective trading methodology. I hope you could use these discussions to form the framework of your studies to build a system of your own. I cannot overly emphases the importance of having your own trading system, a system that speaks to your own personality. Only when you have a system which you can feel 100% comfortable in trading that you will have the faith to stick to it; for no system is 100% profitable and will suffer it’s fair share of losing streaks and equity draw-downs, the ability and the faith to stick to your trading system is going to decide whether you will be successful in trading in the long run.
This is the YOU part of a good trading system.
Cash vs. Tail Risk Hedging: Which Is Better?
An interesting article from PIMCO exploring deeply a basic and common alternatives to hedge against tail risk.
“The huge swoons seen in the stock market this past week raise the question that has been raised so many times in recent years: What should an investor do to weather extreme volatility? The most practical solutions include two choices at opposite extremes – hold cash or buy options-based hedges – with lots of alternatives in the middle. Which way is best and why?”
Full article:Source
Black swan bottoms up
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