Investment attitudes have changed greatly since I broke into the investment world in 1961. In those days, everyone was a conviction investor. You bought a stock because it was a great stock and you believed in the company. As long as you believed in the company, you held on to the stock. After all, why would you sell a stock in a company that you believed in just because it was temporarily declining in value? If you were right about the stock, it would turn around and head upward in due course. You were by definition a long-term investor. After all, great stocks remain great stocks for years. They don't become dogs five minutes after you buy them. Today the conviction investor with his long-term holding pattern is an endangered species.
The day trader, the momentum player and the trend chaser have replaced him. By definition, these players are short-term stockholders. Their iron conviction is not that you should buy great stocks and hold them. But that you should only buy stocks that are going up. After all, if the stock is not going up why would you want to own it no matter how great it is? And if the stock is going down how great can it be? I can remember when I thought this was so wise that it should be carved into the sides of mountains in granite.
It took me years of painful losses to learn the error of my ways. When you have been around for a while, you learn a very inconvenient fact. Stocks rarely go up more than 15%-20% without having a correction and that correction can eat up 50% or more of the prior advance. Indeed, it often eats up the whole prior advance and more.
This results in the trend chasers dilemma. After all, he is not a conviction investor. The only reason he bought the stock was that it was going up. How does he keep his profits from turning into losses? The answer is a sell discipline. It is called a stop-loss order. The stop-loss order is an automatic sell order that your broker executes to sell your position if your stock falls to a predetermined sell point. Depending on what the trend chasers tolerance for losses is it will almost always be set at one of three selling points. It will be set at either 5%,7.5% or 10% below the current market price. Setting the loss at 10% is the most common sell discipline by far.
The sad truth of the matter is that trend chasers don't do nearly as well as advertised. The reason is that the market refuses to cooperate with their stop-loss orders. You see, "the boys" have a pretty good idea of where the stop-loss orders have been placed. Their favorite game is to blow the trend chasers out of their positions by hammering the stock down 15%-20%.This false decline that they have created blows all the trend chasers out of the water. As soon as they stop selling the stock returns to its old trend line this time with "the boys" on board. This is called "painting the tape." The trend chasers just never wise up. It is truly remarkable how many times they can have their head handed to them on a silver platter and they can never figure it out. Then again most of them are punch drunk from all the 10% losses they are being hit with.
To get an idea of just how flawed the short-term trading strategies of the day-trader, and momentum player are let's see what happens when we apply it to some of today's super stocks.
Let's start our analysis with Research In Motion, largely because I have just read Fortune Magazine's article on the 100 fastest growing companies not just in the United States but in the world. Research In Motion is ranked number one with a three-year average annual earnings per share growth rate of 84%. During the last five years, this stock with its titanic growth rate has risen from $20 a share to $75 a share. An increase of 3.75 times. A $10,000 investment in the company would have grown to $37,500. During this run, it had 9 declines of 10% or more. Three declines of 10%, one decline of 20%, one decline of 22%, two declines of 25%, one decline of 32% and one horrific decline of 70%.
Our next high-powered dream stock is Google, a darling of the momentum players with fantastic relative strength. If there is any stock that would make trend chasing work this is the stock. In the roughly five years that Google has been listed, it has risen from $85 a share to it s current price of $469 or an increase of 5.52 times. A buy and hold investment of $10,000 in this stock would have risen in value to $55,200. Of those lucky and wise investors who bought the stock when it was issued at $85 I would estimate that only about 5% still own the stock and all of them are buy and hold, conviction investors. There are no trend chasers who still own the stock. How do I know this, by following the price action of the stock? In the five years that it has been traded, This super stock in spite of its fantastic relative strength has had an amazing 15 declines of 10% or more. It has had 6 declines or 10%, two declines of 12% and one decline of 15%,17%, 19%, 22%, 27%, 30% and 40%.
Apple is another high flier of repute. In the last five years the stock has risen from $17 to $174 currently. A rise of 10.24 times. A buy and hold investment of $10,000 would have risen to $102,400. During this time, it has had 14 declines of greater than 10%. Apple's declines are as follows: one decline of 10% and 11%, two declines of 12%, one decline of 14% and 15%, two declines of 16%, two declines of 20%, two declines of 26% and one horrific decline of 40% and 45%.
Our last jewel is Amazon in the last five years this stock has gone from $38 to $84 an increase of 2.21 times, which would turn an investment of $10,000 into $22,100. This stock has also had 14 declines of 10% or more. I was surprised at the consistency in the number of declines for each stock. I was expecting more deviation. Amazon has had five declines of 12%, one decline of 14%, 20%, 22%, 24% and two declines of 27%, and one decline of 35%, 38% and 42%.
Now let us examine the S&P 500 index. I think it did the job it was created to do. Diversification worked. There were only four declines of more than 10% in the five year period. There was one decline of 11%, 18%, 22% and 32%. In addition, all of these declines occurred after September 2008 when the market crashed.
People have very delusional expectations of what kind of return they can expect with these super growth stocks. I reached that conclusion close to forty years ago and have been a conviction investor of contrarian-value plays ever since.
If you can stand the pain, I am sure that buy and hold is the best strategy for growth investors. However, I doubt if more than 5% of buy and hold investors can stand the pain and zero percent of trend chasers. What invariably happens is that the trend chasers are repeatedly blown out of their positions with 10% losses each time.
When you stop to think about it how many 10% losses can you take?
Fred Carch is the author of Forty Years A Speculator.
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Thursday, September 17, 2009
"The Recession May Not Be Over With But The Bear Market Is" by Fred Carach
With every passing day, it is becoming more and more apparent that the bottom of the bear market occurred on March 9, 2009 when the Dow bottomed at 6547. Since that day, it has been rallying strongly. There are two very strong reasons for believing that the bear market is over. To begin this is a very old bear market.
The crash that began when the Dow reached its peak at 14,164 on October 9, 2007 is now 20 months old. The average bear market lasts 18.5 months and has an average decline of 36%. At its March 9 bottom the Dow had fallen a horrific 54% and the S&P had fallen an even more horrific 57%.
As market declines go this is the second worst market decline since 1885, a period of 124 years. Only the Great Depression decline of of 1932 was worse. It declined an amazing 89% from the 1929 peak to the 1932 low. Since 1885 their have only been nine bear markets that have exceeded 40%.
Market declines of greater than 40%
August 1896 bottom down 44%
November 1903 bottom down 44%
November 1907 bottom down 47%
August 1921 bottom down 44%
July 1932 bottom down 89%
April 1938 bottom down 46%
April 1942 bottom down 51%
December 1974 bottom down 44%
March 2009 bottom down 54%
When you look at the figures, you realize how extraordinary and brutal this crash has been. If you do not believe that, the March bottom was the low then for all practical purposes you have to believe that we are heading for a second great depression.
I just do not see how this is possible. There are just too many safety nets that have been built into the system that did not exist in the 1930s. In the 1930s, there was no FDIC insurance on bank deposits and 5,000 banks failed which crushed the economy. The Federal Reserve Board did almost nothing and did not lower interest rates, which the economy desperately needed. When people lost their jobs there was no buffer, all spending stopped.
Without spending the economy hit a brick wall. There was no unemployment insurance and there was no social security as there is today, which allows people to keep on spending even during a severe recession like this one. Lastly, there was no activist government that was willing to spend whatever it takes to keep the economy running.
Fred Carch is the author of Forty Years A Speculator.
The crash that began when the Dow reached its peak at 14,164 on October 9, 2007 is now 20 months old. The average bear market lasts 18.5 months and has an average decline of 36%. At its March 9 bottom the Dow had fallen a horrific 54% and the S&P had fallen an even more horrific 57%.
As market declines go this is the second worst market decline since 1885, a period of 124 years. Only the Great Depression decline of of 1932 was worse. It declined an amazing 89% from the 1929 peak to the 1932 low. Since 1885 their have only been nine bear markets that have exceeded 40%.
Market declines of greater than 40%
August 1896 bottom down 44%
November 1903 bottom down 44%
November 1907 bottom down 47%
August 1921 bottom down 44%
July 1932 bottom down 89%
April 1938 bottom down 46%
April 1942 bottom down 51%
December 1974 bottom down 44%
March 2009 bottom down 54%
When you look at the figures, you realize how extraordinary and brutal this crash has been. If you do not believe that, the March bottom was the low then for all practical purposes you have to believe that we are heading for a second great depression.
I just do not see how this is possible. There are just too many safety nets that have been built into the system that did not exist in the 1930s. In the 1930s, there was no FDIC insurance on bank deposits and 5,000 banks failed which crushed the economy. The Federal Reserve Board did almost nothing and did not lower interest rates, which the economy desperately needed. When people lost their jobs there was no buffer, all spending stopped.
Without spending the economy hit a brick wall. There was no unemployment insurance and there was no social security as there is today, which allows people to keep on spending even during a severe recession like this one. Lastly, there was no activist government that was willing to spend whatever it takes to keep the economy running.
Fred Carch is the author of Forty Years A Speculator.
"The Case Against Day Trading" by Fred Carach
Things have not been going well for the day traders for quite some time. Indeed probably since the stock market Internet bubble blew up in 1999. Vast numbers of them have departed the scene since then having been whipsawed one time too many. The strange thing is that for every departure there is a replacement and sometimes two replacements or more. The lure of easy money is strong indeed. The overwhelming majority of these rookies are going to be blown out of the water in short order.
This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.
The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.
My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.
All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.
After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.
The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.
In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.
There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.
If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.
Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.
Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com
This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.
The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.
My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.
All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.
After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.
The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.
In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.
There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.
If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.
Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.
Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com
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