Bruce Bower’s Lessons from a Citibank Trader

Tags

, , , , , , ,

bruce bower

The financial markets are complex and dynamic, and actively managing money as an investor or a trader demands energy, tough work and a lot of discipline.

Portfolio Manager Bruce Bower understands this, and in an article last year from SMB Capital’s SMBU website, Bower shared his early years of experience when he first joined the investment industry as a trader.

Many of the lessons and interesting insights shared by Bower echoes throughout what has been shared thus far on BillionaireInvestor. Here are some of the key takeaways that we can learn:

(1) Find A Mentor

Trading and Investing is a skill, half art and half science. Like any other skills in life; whether its cooking or writing or martial arts, they all require huge amounts of discipline, time and effort to be able to acquire, much less master them. A surgeon becomes good at surgery through years of study and experience. A musician studies and practices for many hours everyday to become proficient at his instrument. Being a good trader or investor demands the same amount of discipline, practice and effort – making money is simply not as easy as what many think. But all forms of skills requires a mentor to impart and facilitate. Finding a good mentor for your investment journey will shorten your learning curve, and guide you along the way.

Bower got a job at Citibank’s currency and fixed income trading desk, and he found a mentor in one of Citibank’s best proprietary traders, and he utilized the opportunity well to learn as much as he could.

(2) Stick To Your Investment System: “It’s OK not to have a position”

Be sure to take positions that meet your investment criteria. Traders are often biased towards action and believing that they always must have a position. However, if one diligently read about the great traders of our time, one will undoubtedly realize that they spend most of the time researching and taking positions that only strictly meet their investment criteria. The size of their positions are usually directly proportionate to the amount of conviction they have with regards to their views of the market.

Another way to view this is to always monitor the risk/reward metrics of any investment idea that is being generated. If the upside potential / reward isn’t worth the downside risk then it simply doesn’t count as a good trade. Some traders like to go for 2:1 reward/risk ratio: meaning that they only take trades that have an asymmetric profile in terms of profit and loss.

(3) Sit With A Position If It Remains Valid

Traders are often impaired by emotional and psychological fears when faced with adverse price movements or when the market moves against their positions. A healthy and bullish price movement often contains corrections along the way, normally within a range of 20 – 30%. Traders who ride through the move normally feel anxious when corrections occur – with good reason, as traders would want to lock in their gains.

One way to ensure that one could stay in a position is to list out the reasons for the investment thesis or the reasons for taking a particular position. Markets are prone to adverse movements from a lot of ‘noise.’ When markets do move against positions or undergo corrections, Bower said that the Citibank trader that he understudied often goes through his investment thesis again to see if it still remains valid. If it is still valid, the trader holds on to his position. If there are market events that knocks out the reasons and hence makes the position invalid, it simply has to be cut. Going through the list of reasons for taking the trade will help you to remain disciplined and calm when your emotions might otherwise get the better of you.

There are other insights shared by Bower, and the above three points are major and familiar points that have been echoed time and time again by the investment industry and their professionals.

For more of what Bower has to say, here is the link to the full article: http://www.smbtraining.com/blog/what-i-learned-from-the-best-trader-at-citibank

For more information about Bruce Bower and his work, here is the link to his website: http://howoftrading.com/

Happy Trading!

Advertisements

Investing like a Fund Manager

Tags

, , , , , , , , , , ,

Peter Elston

Peter Elston, Head of Asia Pacific Strategy and Asset Allocation at Aberdeen Asset Management, was recently interviewed by Channel NewsAsia and featured on their program ‘Money Mind.’ The program gave viewers a glimpse of the asset management industry’s work process and the inner workings and thoughts of a fund manager.

Many retail investors and non-investment professionals often wonder how the professional investors and financial experts manage assets and capital. This interview with Elston offered certain insights at the thought processes of a professional fund manager and as well simple fundamental knowledge into how large institutional portfolios are managed.

Below are major points and takeaways of Money Mind’s interview with Peter Elston:

Quantify the Investment Process:

Like the legendary investor Sir John Templeton, Elston stresses that quantifying the investment process is extremely vital for investment management. Objectifying and quantifying decision parameters and gauges helps the investor to remain calm and disciplined to carry out important decision making. 18th Century philosopher David Hume once famously proclaimed that reason is the slave of human emotion, and modern day neuroscience studies seem to confirm this phenomena. When huge unexpected movements happen in financial markets, emotions tend to get the better of many investors – only the disciplined ones who have quantified their investment parameters will know how to respond and make decisions based on those parameters.

Elston has repeatedly mentioned throughout the interview that its all about “numbers, numbers, numbers” when being asked on how he responds to world events. The idea that he stresses is “to be as rational as possible in all possible circumstances.” This doesn’t necessarily mean that investors should automate and formulate algorithms, but it does mean that investors should have a cool and disciplined system that uses quantitative reasoning in light of irrational markets situations.

Be Sure to Profit from Fear or Greed: 

The shrewd investor must be positioned to profit from bouts of human emotions being manifested in the financial markets. Quantifying the investment process, as mentioned earlier, will help the investor execute this classic golden mantra and be well positioned to profit from fear or greed. Throughout history, humans have been known to overreact, and sometimes panic can manifest into huge amounts of selling pressure in the markets – further depressing asset prices. The intelligent investor will use these emotional floods repeatedly to his advantage.

Stress Test Your Portfolio and Perform Scenario Analysis:

It is extremely important to have an opinion on the overall situation of the portfolio’s position in light of major near future major events. Institutional investors and professional money managers often perform scenario analyses and stress-test their portfolios repeatedly based on those research and analyses. From there, they could come up with hedging strategies or rebalancing adjustments to optimize their portfolios and the positions of their assets.

Basic decision trees and path dependency frameworks can serve as aid tools to many investors. It is near impossible to predict the future, or the direction of interest rates, or the exact value of a currency pair within a certain time frame. However, what is extremely crucial is how one responds and reacts to what is transpiring! As what legendary investor George Soros proclaims: “It doesn’t matter if you don’t know what is going to happen, what is more important is how you respond to it.” Mapping out decision trees and setting down various probable courses of actions from there will give investors some form of idea (as well as the costs and benefits of those actions) into optimally positioning themselves against future events – whether positive or adverse.

If anyone wants to improve his or her investment performance, he or she ought to formalize their investment systems and perhaps adopt a similar framework and practices of the asset management industry as explained and shared above.

Lessons from Dr Marc Faber (Part II)

Tags

, , , , , , ,

Marc Faber

Famed Swiss Economist and Investor, Dr Marc Faber, has garnered a wealth of investment experience throughout his career and life. He currently resides in Thailand, runs Marc Faber Limited, and monitors economic growth in Asian markets closely.

He has shared his economic insights, in-depth study of financial markets, and knowledge in his book: ‘Tomorrow’s Gold.’ It is a well-paced, elegantly written, and brilliant book that would be a great add on to the serious investor’s library.

Tomorrow's Gold

Here are some main points and takeaways from Faber’s book and career:

1) Study History:

The only thing that mankind ever learnt from history is that we never learn from it – writes 19th century German statesman Otto Von Bismarck. Turning the clocks forward into the 21st century, it seems that Bismarck is not entirely wrong about his sharp observation and comment on mankind.

Faber explores the history of financial markets, particularly the history of financial panics, manias and bubbles. He has pointed out that he enjoys the works of the renowned economic historian Charles Kindleberger.

Knowing the history of manias and bubbles will equip the student of history with certain patterns, parameters and signs that he or she can identify or observe in the present. This will greatly sharpen the thinking and objectivity of the serious investor.

2) Do Your Own Homework and Research 

It is of utmost importance that every serious investor must put in the time and effort to conduct their own research, study and due diligence when managing their own money. Nobody’s advice, no matter how capable that person is, will help you in the long run in investing.

Faber also quoted the famous English philosopher, Bertrand Russell, who said: “The degree of one’s emotion varies inversely with one’s knowledge of the facts – the less you know, the hotter you get.” We may all get excited on hearing what seemed to be fantastic investing opportunities, but merely investing based on those emotions is the fastest way to the poorhouse. Studying about the opportunity and getting to know the facts will help objectify the thinking and decision making process.

3) Do Things That No One Else Is Doing

Faber has explicitly mentioned in his website that he greatly enjoys Paulo Coelho’s ‘The Alchemist.’ He writes: “This is not a typical investment book written by another Wall Street shark or by someone who won a lottery and then writes how you can with his system also win the lottery. This book, however, will give you an insight that in order to fulfill your dreams much hardship will have to be endured and also that you must do things no one else would remotely consider doing. It is a book you will never forget and never regret having read.”

One has to take the road less travelled some times. This requires audacity, boldness and a tough mental state. Often, the road less travelled can be psychologically daunting and mentally challenging. One has to be exceptionally brave, ignore conventional wisdom and daring to be different. The rule of thumb is simple: when a route gets very crowded, it is time to avoid it.

Faber makes his case for it throughout his book, applying contrarian investment wisdom to the markets.

Faber has also recommended reading the works of the famous Austrian economists like Joseph Schumpeter, Ludwig Von Mises and Friedrich Hayek. He is known to align himself with the Austrian school, and is often a fierce critic of the Neo-Keynesian way of running economics.

In ‘Tomorrow’s Gold’, Faber covers inflationary and deflationary cycles, and how astute investors can take advantage of such conditions. The book also has chapters on Long Wave / Kondratieff Cycles and his own economic model on growth in Emerging Economies.

More information can be found on his website: http://www.gloomboomdoom.com/

Lessons from Dr Marc Faber (Part I)

Tags

, , , , , , , , ,

Marc Faber under Skagenfondenes nyttårskonferanse 2009. Foto:Gunnar Lier

Dr Marc Faber, renowned economist, investor and publisher of the popular Gloom, Bloom & Doom Report newsletter, has something to say to all investors. Hailed by some as a financial markets guru and a brilliant economist, he has an uncanny track record of calling certain major events that utterly shook the world (1987 crash, Collapse of the Japanese Bubble in 1990, the 1997 Asian Financial Crisis, etc).

Born in Zurich, Switzerland and obtaining his doctorate in Economics at the age of 24, he is also known for being a Contrarian in his investing philosophy. He was a Managing Director at Drexel Burnham Lambert when the firm was the junk-bond king of Wall Street. Having spent a quarter of a century in Hong Kong, he currently resides in Thailand, running Marc Faber Limited as a fund manager and investment advisor.

Here are 10 Observations that he has shared from his website:

1. There is no investment rule that always works.

If there was one single rule, which always worked, everybody would in time follow it and, therefore, everybody would be rich. But the only constant in history is the shape of the wealth pyramid, with few rich people at the top and many poor at the bottom. Thus, even the best rules do change from time to time.

2. Stocks always go up in the long term.

This is a myth. Far more companies have failed than succeeded. Far more countries’ stock markets went to zero than markets, which have survived. Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.

3. Real Estate always goes up in the long term.

While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1000 years, but not for America’s Red Indians, Mexico’s Aztecs, Peru’s Incas and people living in countries, which became communists in the 20th century. All these people lost their real estate and usually also their lives.

4. Buy Low and Sell High.

The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower and what is high will continue to rise.

5. Buy a basket of high quality stocks and hold!

Another highly dangerous rule! Today’s leaders may not be tomorrow’s leaders. Don’t forget that Xerox, Polaroid, Memorex, Digital Equipment, Burroughs, Control Data were the leaders in 1973. Where are they today? Either out of business or their stocks far lower, than in 1973!

6. Buy when there is blood on the street.

It is true that very often, bad news provide an interesting entry point, at least as a trading opportunity, into a market. However, a better long term strategy may be to buy on bad news, which has been preceded by a long string bad news. When then the market no longer declines, there is a chance that the really worst has been fully discounted.

7. Don’t trust anyone!

Everybody is out to sell you something. Corporate executives either lie knowingly or because they don’t know the true state of their business and the entire investment community makes money on you buying or selling something.

8. The best investments are frequently the ones you did not make!

To make a really good investment, which will in time appreciate by 100 times or more, is like finding a needle in a haystack. Most “hot tips” and “must buy” or “great opportunities” turn out to be disasters. Thus, only take very few investment decisions, which you have carefully analyzed and thought about in terms of risk and potential reward.

9. Invest where you have an edge!

If you live in a small town you may know the local real estate market, but little about Cisco, Yahoo and Oracle. Stick with your investments in assets about which you may have a knowledge edge.

10. Invest in Yourself!

Today’s society is obsessed with money. But the best investments for you may be in your own education, in the quality of the time you spend with the ones you love, on your own job, and on books, which will open new ideas to you and let you see things from many different perspectives.

Additionally, Dr Faber is also known to be aligned to the Austrian School of Economics. For anyone who wants to understand more on financial markets and economics, he has recommended reading the works of the great Austrian economists like Joseph Schumpeter, Ludwig Von Mises and F.A. Hayek.

More information at his website: gloomboomdoom.com 

Trader Anton Kreil Shares His Insights and Experience

Tags

, , , , , ,

Anton Kreil

Successful trader Anton Kreil shares his insights and experience in an interview session at Cass Business School, City University London.

The interview covered a wide range of topics that include everything from money management, trading, to Kreil’s experience back in Goldman Sachs and JP Morgan.

Here is a short summary of some interesting points raised and discussed in the interview:

(i) Be a Self Starter and do not trust the ‘marketing gimmicks’ or ‘advice’ 

AK: As a trader you need to be a self starter. You have to be inquisitive and curious, you have to be incredibly disciplined and committed to your work; you have to be hungry for the markets. It takes a great deal of work to succeed in the markets. Do not buy the hype out there that it is easy. Most of those ‘advices’ are marketing gimmicks from brokerage houses and market makers.

(ii) On Fundamental / Technical Analysis:

AK: Suppose by your fundamental research you know that X is going to do very well the next year. You check the technicals and realized that your fundamental view of X is going to be wrong for a period of a few months. You then put X onto your watchlist and monitor it. This combination of both FA and TA will help you increase the probabilities in your favour, and when “all the planets are aligned,” you have more confidence to take that trade.

(iii) Anton’s take on Day Trading:

AK: The markets these days are filled with many computers, high frequency traders and algorithmic trading systems that fire huge amounts of market and limit orders into various instruments across the board. The human click trader will always be slower than the automated computers detecting price and market inefficiencies and slower in placing orders. The probabilities are against the human day trader. I don’t have to worry about the computers and algos because I take a longer term view these days – I trade and hold positions for weeks to months / quarterly.

(iv) Is the Bottom Up / Warren Buffett-Peter Lynch model obsolete?

AK: It is not entirely obsolete. Even though my approach is top down, sometimes, if you do not check the bottom details and you miss a factor of consideration that perhaps its vital for that particular investment – you could be making a serious mistake. For example: shorting a stock at intrinsic value.

(v) The Trader needs Volatility

AK: The short term trader needs to embrace volatility. He/she needs to trade volatile instruments.

Point V brings to mind the quote from hedge fund manager Louis Bacon, who said that a speculator must embrace disorder and chaos.

Catch the interview session to hear more from Anton!

Here is part 1 of the interview:

More information about Anton Kreil and his work is available at his personal website : http://www.antonkreil.com/home/

Short Selling Requires a ‘Catalyst’

Tags

, , , , , , ,

Key Speakers At The Robin Hood Veterans Summit

Billionaire Steve Cohen, hedge fund manager of SAC Capital Advisors, is a successful American business magnate and an investor known for short term trading in equities.

In his interview with author Jack Schwager in the Stock Market Wizards series, Cohen revealed his way of making trades via what he calls a ‘Catalyst’.

Schwager: When you put on a trade and it goes against you, how do you decide when you’re wrong?

Cohen: If I am in the trade because of a catalyst, the first thing I check is whether the catalyst still applies. For example, about a month ago, I expected that IBM would report disappointing earnings, and I went short ahead of the report. I was bearish because a lot of computer and software companies were missing their numbers [reporting lower-then-expected earnings] due to Y2K issues. Customers were delaying the installation of new systems because with the year 2000 just around the corner, they figured that they might as well stick with their existing systems.

I went short the stock at $169. The earnings came out and they were just phenomenal – a complete blowout! I got out sharply higher in after-the-close trading, buying back my position at $187. The trade just didn’t work. The next day the stock opened at $197. So thank God I covered that night in after-hours trading.

Schwager: Any trade stand out as being particularly emotional?

Cohen: I held a 23 percent position in a private company that was bought by XYZ. [Cohen asked me not to use the actual name because of his contacts with the company.] As a result, I ended up with a stock position in XYZ, which I held for four or five years in my personal account without the stock doing much of anything.

XYZ had a subsidiary, which had an Internet Web site for financial commentary. They decided to take this subsidiary public. XYZ stock started to run up in front of the scheduled offering, rallying to $13, which was higher than it had been at any time I held it. I got out, and was happy to do so.

The public offering, which was originally scheduled for December, was delayed and the stock drifted down. A few weeks later, they announced a new offering date in January, and the stock skyrocketed as part of the Internet mania. In two weeks, XYZ went up from $10 to over $30.

I couldn’t stand the idea that after holding the stock for all those years, I got out just before it exploded on the upside. But I was really pissed off because I knew the company. and there was no way the stock was remotely worth more than $30. The subsidiary was going public at $15. If it traded at $100, it would be worth only about $10 to the company. If it traded at $200, it would add only about $20 to the company’s value. The rest of the company was worth maybe $5. So you had a stock, which under the most optimistic circumstances was worth only $15 to $25, trading at over $30.

I started shorting the hell out of the stock. I ended up selling 900,000 shares of stock and a couple of thousand calls. My average sales price was around $35, and the stock went as high as $45. On Friday, the day of the offering, XYZ plummeted. On Friday afternoon I covered the stock at $22, $21, and $20. I bought back the calls, which I had sold at $10 to $15, for $1.

Schwager: This trade worked out phenomenally well. But when you go short, the risk is open-ended. Even here, you said your average price was around $35 and the stock did go as high as $45. What if it kept going higher? At what point would you throw in the towel? Or, if your assessment that the stock was tremendously overvalued remained unchanged, would you just hold it?

Cohen: A basic principle in going short is that there has to be a catalyst. Here, the catalyst was the offering. The offering was on Friday, and I started going short on Tuesday, so that I would be fully positioned by that time. If that offering took place, and the stock didn’t go down, then I probably would have covered. What had made me so angry was that I had sold out my original position.

The catalyst principle is akin to what famed investor Jim Rogers describe as Change. Although in Rogers’ view, he takes a longer term approach and he calls them either Positive Change or Negative Change. 

When managing the Quantum Fund with George Soros in the 1970s, Rogers’ research told him that women began to turn away from overdone makeup or any form of makeup. He noticed a new social trend developing, and this would be negative change for any company still producing and marketing makeup products. Rogers discovered Avon Products, and decided that at over seventy times earnings, it was due for a fall. He shorted at $130, and held it through the entire period where the negative change still applied, covering it a year later under $25.

Both investors above operate with the Catalyst Principle, and if the catalyst for an investment decision is invalid, they would get out of the trade.

“Get Smart … & Make A Fortune” ~ Jim Rogers

Tags

, , , , , , , , ,

Jim Rogers

Here is an interesting piece from legendary investor Jim Rogers, who is renowned for calling general secular market tops and bottoms, and as well as cycles:

“In 1980, the price of a barrel of oil had risen alarmingly, and long lines of frustrated motorists sat fuming at every petrol pump in the United States. Newspaper articles appeared daily that bemoaned the permanent shortages in non-renewable fuels, and every learned expert on Wall Street and in academia was certain that oil had to rise from $40 to $100.

Interest rates had risen alarmingly and investors were in a panic over high inflation and labour unrest. There was a sense that the US was slipping as a world power and that shortages in all sorts of goods were permanent; indeed, that the world was running out of everything.

True, the supply of oil was smaller than the demand for a while in the 1970s. But with the rise in prices had come the inevitable rise in production. There were more drilling rigs, more money pouring into holes in the ground in the Gulf of Mexico, the North Sea and South America, and more young people deciding to study geology as a career. By the mid-1980s, though, the bottom had dropped out of the oil market and prices collapsed.

Even in 1980, the iron law of supply and demand still held, as common sense suggests it must. If there is more of an item for sale than there are buyers, the price goes down; if there is less, the price goes up. There may be time lags, but it always works like this.

The smart investor learns to listen to the popular press with an ear tuned for panic extremes. At market tops, the tune will run: “This time it’s different from all other times. Trees will continue to grow and grow and grow. Buy yourself a tree and watch it reach 50ft, 100ft, 1,000ft. This is an investment you put money in and forget.”

At bottoms, the song will become a dirge. Prices are severely depressed. Every company with any sense is getting out of the market. It has only a marginal future. Words as “disaster” and “doomed” and “dead” will be used to describe such a market, and the alert investor will hear them clearly without a newsletter to advise him or a call from his stockbroker.

It is an old story. Today, news articles trumpet the stock market is the ideal place to increase assets over the long term. Indeed, the Dow Jones index just now is over 6,000. But, 15 to 20 years ago when it was under 1,000, Business Week  ran a cover declaring: “Stocks are dead.”

(Some investors claim they are able to profit by following the opposite tack from Business Week’s covers: they sell when the magazine declares something is a good investment, and buy on the something-is-dead covers.)

In all markets, supply and demand are rising and falling constantly, hurtling from one extreme to the other. To an investor with the right ear and eye, fortunes are waiting to be made.

Is it easy? No. Does it take work? Yes.

How, then, can you time when to buy and when to sell? It is difficult. Note, however, that all large bottoms are alike, whether they be in the wheat, stock or property markets, and that the same is true for tops.

Pick any previous top or bottom, anywhere, any time, from the beginning of time until now. When you study it, the conviction of certainty of all the participants – at the extreme top and the extreme bottom – will be startling.

As well, watch who is going into, and who is getting out of, a business. At bottoms, many who have been in the business for a long, long time will be leaving in droves or “diversifying”.

At tops, those who have little or no experience will crowd in.

As a classic example, US Steel bought Marathon Oil at the top of the oil boom in order to diversify. But it should have stuck to the business it knew and bought mini-mills, which have turned out to be solidly profitable even as oil fell.

As another example: remember all the farmers and labourers who ran west in the gold rush? Often, in earlier stock market tops, many doctors and dentists gave up their practices to enter the financial community.

At the top of the 1980s’ hotel-building boom in China, professors fled the security of the university to work as bellboys. The pay in tourism was so much better and the future so much rosier.

It is learning to listen to the gloom and doom at bottoms and question it, and to the exultation at tops and question this as well, that makes a sharp investor. It does not take esoteric knowledge or an MBA degree or some mystical skill.

Read the newspapers, watch the television news – and think. It did not take a financial genius to see that when US farmers were going broke in the 1980s, and singer Willie Nelson was conducting Farm Aid concerts to raise money for them, that some sort of bottom was establishing itself.

It helps to have a sense of history of the public markets, too, and the library is full of books about their rise and fall, something which is driven by mob psychology. That is, tops and bottoms are creatures of extremes. They rise above all rational expectation and hang there, and they fall farther than common sense suggests.

The smart investor – the one who does not consider himself a financial genius but trains himself to analyze the newspapers and television and to pick tops and bottoms by the extremes in the public’s attitudes – learns to buy fear and panic and to sell greed and hysteria.”

– JIM ROGERS

From: The Book of Investing Wisdom – Edited by Peter Krass

Book Recommendation & Review: Hedge Fund Market Wizards

Tags

, , , , ,

Hedge Fund Market Wizards

“Schwager’s unique ability to illustrate winning strategies and interweave personal backgrounds and emotional highs and lows makes Hedge Fund Market Wizards both a highly entertaining read and learning experience” – Stanley Druckenmiller

From the author of the bestselling and successful Market Wizards series comes another epic volume to complement the entire collection – Hedge Fund Market Wizards!

Jack Schwager is back, and this time, he interviews fund managers who consistently outperformed the market over the span of their careers with exemplary return-to-risk records.

His criteria for selecting the investors featured were:

(i) the managers had superior return / risk track records for significant length periods – usually (but not always) 10 or more years and often much longer

(ii) the managers were open enough to provide valuable advice about trading

(iii) the interviews provided sufficient color to allow for a readable chapter

Hedge Fund Market Wizards covers a wide assortment of fund managers with different trading / investment themes and styles – from Macro to Statistical Arbitrage to traditional Value Investing. Some of them are entirely top-down and fundamentally orientated while some only use technical analysis.

The book is well paced, and the questions are excellent – typical of Schwager’s ability to draw insights from the managers who were interviewed.

Here are the names of the hedge fund managers interviewed:

Colm O’Shea, Ray Dalio, Larry Benedict, Scott Ramsey, Jaffray Woodriff, Edward Thorp, Jamie Mai, Michael Platt, Steve Clark, Martin Taylor, Tom Claugus, Joe Vidich, Kevin Daly, Jimmy Balodimas, Joel Greenblatt

At the end of the book, Schwager distills the important general lessons learnt from the interviews with the market wizards. It provides a succinct summary of the traits that all successful investors possess and practice, despite the seemingly vast differences among the investing styles of all of them.

This book is highly recommended for anyone interested in investing. It is very readable and serves as a timeless classic for those who are on their quest for Alpha. It would delight the amateur trader, excite the finance enthusiast and refresh the veteran investor.

The Time-Tested Maxims of the Templeton Touch

Tags

, , , , , ,

Sir John Templeton

Sir John Marks Templeton was a legendary investor who founded and managed the famous Templeton Growth Fund. He was a mutual-fund titan who pioneered the use of globally diversified mutual funds.

Known as a contrarian and a value investor, Templeton searched worldwide for good bargain stocks. Rejecting technical analysis and being fundamentally orientated, he was also a renowned philanthropist who established the John Templeton Foundation, the Templeton Prize (research in philosophical advancements and spiritual discoveries) and the Templeton College of the University of Oxford.

Here are his maxims and principles, known as the Templeton Touch:

(1) For all long-term investors, there is only one objective – “maximum total real return after taxes.”

(2) Achieving a good record takes much study and work, and is a lot harder than most people think.

(3) It is impossible to produce a superior performance unless you do something different from the majority.

(4) The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

(5) To put “maxim 4” in somewhat different terms, in the stock market the only way to get a bargain is to buy what most investors are selling.

(6) To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude, even while offering the greatest reward.

(7) Bear markets have always been temporary. Share prices turn upward from one to twelve months before the bottom of the business cycle

(8) If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, won’t return for many years.

(9) In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.

(10) In free-enterprise nations, the earnings on stock market indexes fluctuate around the replacement book value of the shares of the index.

(11) If you buy the same securities as other people, you will have the same results as other people.

(12) The time to buy a stock is when the short-term owners have finished their selling, and the time to sell a stock is often when short-term owners have finished their buying.

(13) Share prices fluctuate much more widely than values. Therefore, index funds will never produce the best total return performance.

(14) Too many investors focus on “outlook” and “trends.” Therefore, more profit is made by focusing on value.

(15) If you search worldwide, you will find more bargains and better bargains than by studying only one nation. Also you gain the safety of diversification.

(16) The fluctuation of share prices is roughly proportional to the square root of the price.

(17) The time to sell an asset is when you have found a much better bargain to replace it.

(18) When any method for selecting stocks becomes popular, then switch to unpopular methods. As has been suggested in ‘maxim 3,’ too many investors can spoil any share-selection method or any market-timing formula

(19) Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and skeptical. Long-term top results are achieved only by changing from popular to unpopular types of securities you favor and your methods of selection.

(20) The skill factor in selection is largest for the common-stock part of your investments.

(21) The best performance is produced by a person, not a committee.

(22) If you begin with prayer, you can think more clearly and make fewer stupid mistakes.

If you are interested in reading more about Templeton and his methods, two books might come in handy:

Investing The Templeton Way by Lauren C. Templeton & Scott Phillips, McGraw-Hill, 2008

Templeton’s Way With Money by Jonathan Darvis & Alasdair Nairn, Wiley, 2012

Happy Investing!

Jesse Livermore on: Inside Information

Tags

, , , ,

Jesse-Livermore

Academic Finance have for years been propagating the general idea that Inside Information, though illegal and unethical, could bring in big money on Wall Street and in investing in general. If you happen to know something that others do not (that something is happening to company X that is going to increase shareholder equity thus moving up the stock price), then you will be cashing in on the great move. How valid is this idea? And what do the successful investors out there have to say on it?

Jim Rogers used to famously say that investing on insider information is the fastest way to the poor house and it should not be practiced because it is unethical.

But here is what legendary speculator of the 1920s and 1930s, Jesse Livermore has to say in his book ‘How To Trade In Stocks’ :

“… Now and then someone begins trading because he has a hot inside tip from a friend in the inner councils of a large corporation. Let me here relate a hypothetical case:

You meet your corporation friend at luncheon or at a dinner party. You talk general business for a time. Then you ask him about Great Shakes Corporation. Well, business is fine. It is just turning the corner and the future outlook is brilliant. Yes, the stock is attractive at this time. “A very good buy, indeed,” he will say and perhaps in all sincerity. “Our earnings are going to be excellent, in fact better than for a number of years past. Of course you recall, Jim, what the stock sold for the last time we had a boom.”

You are enthused and lose little time in acquiring shares.

Each statement shows better business than during the last quarter. Extra dividends are declared. The stock moves up and up. And you drift into pleasant paper profit dreams. But in the course of time the company’s business begins slipping dreadfully. You are not appraised of the fact. You only know the price of the stock has tobogganed. You hasten to call your friend.

“Yes,” he will say, “the stock has had quite a break. But it seems to be only temporary. Volume of business is down somewhat. Having learned the fact that the bears are attacking the stock. It’s mostly short selling.”

He may follow along with a lot of other platitudes, concealing the true reason. For he and his associates doubtless own a lot of stock and have been selling as much and as rapidly as the market would take it since those first definite signs of a serious slump in their business appeared. To tell you the truth would simply invite your competition and perhaps the competition of your mutual friends in his selling campaign. It becomes almost a case of self-preservation.

So it is plain to see why your friend, the industrialist on the inside, can easily tell you when to buy. But he cannot and will not tell you when to sell. That would be equivalent almost to treason to his associates.

I urge you always to keep a little notebook with you. Jot down interesting market information: thoughts that may be helpful in the future; ideas that may be re-read from time to time; little personal observations you have made on price movements. On the first page of this little book I suggest you write – no, better yet print it in ink: “BEWARE OF INSIDE INFORMATION…ALL INSIDE INFORMATION!”

It cannot be said too often that in speculation and investment, success comes only to those who work for it. No one is going to hand you a lot of easy money. It is like the story of the penniless tramp. His hunger gave him the audacity to enter a restaurant and order ‘a big, luscious, thick, juicy steak,” and, he added to the old waiter, “tell your boss to make it snappy.” In a moment the waiter ambled back and whined: “De boss say if he had dat steak here he’d eat it himself.” And if there was easy money lying around, no one would be forcing it into your pocket.”