Don't Fall For This: "It's Down So Much… I Can't Go Wrong" By Dr. Steve Sjuggerud
Tuesday, January 3, 2012
I hope you don't fail my basic "Financial IQ Test."
Unfortunately, most people do.
It's just one question. And it's incredibly simple to understand. It should be incredibly simple to change, too.
Let me explain…
When I started out in 1993 as a stockbroker, I quickly learned that customers loved to "bottom fish."
Doctors and lawyers didn't want to buy the ideas I recommended… They wanted to buy stocks that had fallen a lot in price. "It's down so much, I can't go wrong," they'd say.
These customers had no idea what a horrible strategy that was… And at the time, I didn't have any statistical proof of how bad the idea was. All I knew is that it didn't work – I saw that firsthand.
But today, I have the proof for you… And it is undeniable.
"If you're looking for a great way to underperform the market, look no further," James O'Shaughnessy writes in his excellent book, What Works on Wall Street.
O'Shaughnessy sliced and diced the stock market in his book, sizing up nearly every possible way to make money in stocks – usually going back over 80 years. And he found that buying what has fallen the most is one of the worst strategies. O'Shaughnessy's conclusion is:
"Unless FINANCIAL RUIN is your goal, avoid the biggest losers."
Here's what O'Shaughnessy did:
He put all stocks into 10 different groups, based on their trailing six-month performance. The top-performing 10% of stocks over the previous six months was Group One, and the bottom 10% of performers was Group Ten.
Here's what he found:
1. $10,000 invested in Group One, using new rankings every six months, would have turned into $572,831,563 from 1927 to 2009.
2. $10,000 invested in Group Ten, with new rankings every six months, would have turned into $292,547 over the same time.
Which would you prefer? More than $572 million? Or less than $300,000?
If you'd bought the winners over the preceding six months (the top 10% of performers), you'd have made more than half a billion dollars.
If you'd "bottom-fished" and bought the losers over the last six months (the bottom 10% of performers), you'd have made about 0.05% as much.
In short, you'd have made a fortune doing the opposite of what the doctors and lawyers did.
Longtime DailyWealth readers know I like buying what's cheap and hated. But you also know I wait for an uptrend. I believe it's the most important part of the picture. And O'Shaughnessy proved it.
His study shows that buying what was already "up" proved incredibly successful…
"Over six-month and 12-month periods, winners generally continue to win and losers general continue to lose," O'Shaughnessy writes.
The results by group form an almost perfect "stair-step" downward… Group One compounded your wealth at 14% a year. And Group Ten compounded your wealth at 4% a year. ("Buy and hold" for all stocks was 10% a year.)
Whenever I hear an investor say his main strategy is to buy what has fallen a lot recently, he fails this Financial IQ Test. This person has just proven he has no idea what actually works.
All I'm concerned about is what actually works. And what works is buying what was up, not down. Simply buying what was up over the previous six months turned $10,000 into over $500 million. Doing the opposite performed far worse than the stock market (with much more volatility, too).
Please don't trade like my old doctor and lawyer customers. Don't fail this Financial IQ Test. Don't buy what's down as a strategy. It not only doesn't work… it fails miserably.
Don't go shopping for "deals" in what's fallen the most over the last six to 12 months. The historical record is painful. It doesn't work. Instead, do the opposite.
Do what works… History shows you'll be well-rewarded if you do.
Source: Daily Wealth
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School of Hard Knocks 02 (Jan 10 - Jan 13)
Re: School of Hard Knocks 02 (Jan 10 - Dec 12)
by winston » Tue Jan 03, 2012 9:01 pm
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
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Recession: Memories & Lessons
by winston » Wed Jan 11, 2012 8:30 am
I'm a Loser… Here's How I'll Change in 2012 By Dr. Steve Sjuggerud
Tuesday, January 10, 2012
The most shocking lesson I learned when I started really studying successful traders was this:
The best traders and investors are actually losers… They're only "right" about 40% of the time.
I was stunned when I first read this.
It made me realize that we weren't taught anything at all in school about what makes successful investors successful… Instead, we were just taught the "theories" of making money through investing, which mostly weren't related to the truth about making money.
Each year, I'm wrong in many investment ideas. But that's alright with me… I know the very best investors are, too.
The thing is, it's how you handle those losers that matters. That's exactly what separates the very best investors from the very worst.
I do two things each year to get better…
1. I expect to make money in a position. But I know not every position will work out. So for each of my losers in a year, I try to figure out what went wrong… I try to figure out what I missed so that won't happen again.
2. I always set myself up to keep my losers small and my winners big. Think about it this way… Let's say a trader places three trades: Two trades end up as small losers, down 5%. The other trade is a big winner, up 50%. Is this trader a winner or a loser?
He was wrong 67% of the time. But the gain on the winner was big. And the losses on the losers were small. So his overall return on those three trades wasn't bad at all: about 13%. This trader's ratio is good. I always want to improve the ratio of the gains on my winning trades versus the losses on my losing trades.
Let's look at each of these closely…
For No. 1, when I look back at my 2011 loser, I see I made the same basic mistake over and over again… I was trying to "force" a bull market when it simply wasn't there. My investing mantra is to buy what's "cheap, hated, and in the start of an uptrend." But the legitimate uptrends were hard to come by in 2011. I would buy in – and then I'd get stopped out.
The lesson for me is, be more patient!
It might make headlines to "call the bottom" in something and get it right. But it's safer and smarter to be patient, let your thesis start to unfold first, and then put your money down. I need to do more of that in 2012.
When it comes to No. 2, I want to keep the losers small and let the winners ride.
In 2011, I did a great job letting my winners ride. I don't have trouble with this at this point in my career. But I can improve on my losers… I was too confident. I set my worst-case exit point too wide – as wide as 50% in some cases. So I ended up getting "stopped out" of a few positions with losses close to 40%.
My reasoning was sound… I want to have three times the upside potential as the downside risk I'm taking. So if I'm taking 50% of downside risk, I expect to earn at least 150% on the upside. But the "beatings" I took were simply unacceptable.
One way to "fix" that problem is to start using a tighter stop loss when I first buy a stock, in addition to using a trailing stop as shares move higher.
In college, nobody ever talked about things like how to successfully exit a position, winning percentages (which are below 50% even for great investors), and how to manage winners versus losers. But this is incredibly important stuff.
I urge you to do what I do…
1. Look at all your losers and think about what you can do to do better next time.
2. Think about how you can improve your ratio of gains on winning trades versus losses on losing trades.
It is not just the fundamentals of the trade that matter. It is how you trade it. A winning trade is made up of a good buy AND a good sell.
Are you evaluating your buys and sells each year and thinking about how you can do better? If not, how do you expect to improve?
I've been doing this for two decades. It takes constant refinement. You've got to do it. Get to it…
Source: Daily Wealth
Tuesday, January 10, 2012
The most shocking lesson I learned when I started really studying successful traders was this:
The best traders and investors are actually losers… They're only "right" about 40% of the time.
I was stunned when I first read this.
It made me realize that we weren't taught anything at all in school about what makes successful investors successful… Instead, we were just taught the "theories" of making money through investing, which mostly weren't related to the truth about making money.
Each year, I'm wrong in many investment ideas. But that's alright with me… I know the very best investors are, too.
The thing is, it's how you handle those losers that matters. That's exactly what separates the very best investors from the very worst.
I do two things each year to get better…
1. I expect to make money in a position. But I know not every position will work out. So for each of my losers in a year, I try to figure out what went wrong… I try to figure out what I missed so that won't happen again.
2. I always set myself up to keep my losers small and my winners big. Think about it this way… Let's say a trader places three trades: Two trades end up as small losers, down 5%. The other trade is a big winner, up 50%. Is this trader a winner or a loser?
He was wrong 67% of the time. But the gain on the winner was big. And the losses on the losers were small. So his overall return on those three trades wasn't bad at all: about 13%. This trader's ratio is good. I always want to improve the ratio of the gains on my winning trades versus the losses on my losing trades.
Let's look at each of these closely…
For No. 1, when I look back at my 2011 loser, I see I made the same basic mistake over and over again… I was trying to "force" a bull market when it simply wasn't there. My investing mantra is to buy what's "cheap, hated, and in the start of an uptrend." But the legitimate uptrends were hard to come by in 2011. I would buy in – and then I'd get stopped out.
The lesson for me is, be more patient!
It might make headlines to "call the bottom" in something and get it right. But it's safer and smarter to be patient, let your thesis start to unfold first, and then put your money down. I need to do more of that in 2012.
When it comes to No. 2, I want to keep the losers small and let the winners ride.
In 2011, I did a great job letting my winners ride. I don't have trouble with this at this point in my career. But I can improve on my losers… I was too confident. I set my worst-case exit point too wide – as wide as 50% in some cases. So I ended up getting "stopped out" of a few positions with losses close to 40%.
My reasoning was sound… I want to have three times the upside potential as the downside risk I'm taking. So if I'm taking 50% of downside risk, I expect to earn at least 150% on the upside. But the "beatings" I took were simply unacceptable.
One way to "fix" that problem is to start using a tighter stop loss when I first buy a stock, in addition to using a trailing stop as shares move higher.
In college, nobody ever talked about things like how to successfully exit a position, winning percentages (which are below 50% even for great investors), and how to manage winners versus losers. But this is incredibly important stuff.
I urge you to do what I do…
1. Look at all your losers and think about what you can do to do better next time.
2. Think about how you can improve your ratio of gains on winning trades versus losses on losing trades.
It is not just the fundamentals of the trade that matter. It is how you trade it. A winning trade is made up of a good buy AND a good sell.
Are you evaluating your buys and sells each year and thinking about how you can do better? If not, how do you expect to improve?
I've been doing this for two decades. It takes constant refinement. You've got to do it. Get to it…
Source: Daily Wealth
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
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Re: Memories & Lessons
by winston » Sat Jan 14, 2012 10:07 pm
5 Common Investing Mistakes to Avoid in 2012 By Erik Carter
Here are 5 common investing mistakes to avoid this year:
Relying on past performance
If you study past performance, you'll discover that it actually has a pretty bad past performance itself of predicting winners.
For example, growth stocks and tech stocks in particular were all the rage in the 90s. They had a great track record of double-digit returns over several years. This was supposed to be the "new economy" in which old-fashioned concepts like profits and earnings weren't as important as clicks on a dot com site.
Unfortunately for many investors, those double digit returns turned into double digit losses in 2000-2002.
The same can be said for star mutual fund managers. Bill Miller, manager of the Legg Mason Value Trust, accomplished an impressive feat of beating the S&P 500 index for 15 years in a row from 1991-2005. Who wouldn't want to invest in a fund with a track record like that?
After 2005, Miller went on to under-perform in 5 out of the next 6 years and eventually turned over management of the fund to his co-manager. Do you think more people were invested in his fund before the 15-yr run or after?
This doesn't just apply to the stock market. We all remember what happened to real estate prices over the last decade.
More recently, investors have been pouring money into areas that have been performing well like bonds and gold. We'll see how that story turns out too.
Here are 5 common investing mistakes to avoid this year:
Relying on past performance
If you study past performance, you'll discover that it actually has a pretty bad past performance itself of predicting winners.
For example, growth stocks and tech stocks in particular were all the rage in the 90s. They had a great track record of double-digit returns over several years. This was supposed to be the "new economy" in which old-fashioned concepts like profits and earnings weren't as important as clicks on a dot com site.
Unfortunately for many investors, those double digit returns turned into double digit losses in 2000-2002.
The same can be said for star mutual fund managers. Bill Miller, manager of the Legg Mason Value Trust, accomplished an impressive feat of beating the S&P 500 index for 15 years in a row from 1991-2005. Who wouldn't want to invest in a fund with a track record like that?
After 2005, Miller went on to under-perform in 5 out of the next 6 years and eventually turned over management of the fund to his co-manager. Do you think more people were invested in his fund before the 15-yr run or after?
This doesn't just apply to the stock market. We all remember what happened to real estate prices over the last decade.
More recently, investors have been pouring money into areas that have been performing well like bonds and gold. We'll see how that story turns out too.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
- Posts: 112698
- Joined: Wed May 07, 2008 9:28 am
Re: Memories & Lessons
by winston » Sat Jan 14, 2012 10:08 pm
Continue ...
Trying to time the market
Instead of looking to the past, how about looking into the future? In theory, this would give us spectacular results and make us the richest people on the planet. In practice, it's a lot easier said than done.
That's not to say that a lot of people won't try to make money selling us on the idea that they can predict what stocks will do from one year to the next.
The problem is that they're doing that because they're likely to make more money by selling that idea than actually following it themselves.
Otherwise we'd all know their name by now. (The person who's name we all probably know, Warren Buffett, was quoted as saying "Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.")
Trying to time the market
Instead of looking to the past, how about looking into the future? In theory, this would give us spectacular results and make us the richest people on the planet. In practice, it's a lot easier said than done.
That's not to say that a lot of people won't try to make money selling us on the idea that they can predict what stocks will do from one year to the next.
The problem is that they're doing that because they're likely to make more money by selling that idea than actually following it themselves.
Otherwise we'd all know their name by now. (The person who's name we all probably know, Warren Buffett, was quoted as saying "Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.")
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
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Re: Memories & Lessons
by winston » Sat Jan 14, 2012 10:12 pm
Continue ...
Putting all your eggs in one basket
Warren Buffett also said that diversification is a protection against ignorance but he neglected to mention that when it comes to investing, we're all a little ignorant because none of us knows the future.
Even Buffett makes mistakes from time to time.
Diversification can prevent us from losing all our eggs when that proverbial basket breaks.
Diversification actually comes in 2 parts:-
The first is diversifying between asset classes, which means having a mix of stocks, bonds, cash, and perhaps some alternative investments like real estate and commodities, that matches your goals and tolerance for risk.
Instead, we have a tendency to invest aggressively in stocks after stocks have been going up and move to cash after stock prices come back down. This can result in buying stocks while they're relatively high and selling them when they're relatively low.
While we don't know what stocks or bonds will do from one year to another, we do know that stocks generally outperform bonds over long periods of time (meaning decades not just 5 years) but that they do that with more ups and downs along the way.
Basically, the longer the time your money will be invested and the less likely you are to bail out when the market inevitably has one of its many downturns, the more you can afford to invest in stocks vs. bonds. This allocation should only change as your time horizon, goals, or risk tolerance changes.
The second but no less important part of diversification is diversifying within an asset classes. The biggest mistake people make here is having too much (more than 10-15% of their portfolio) in their company stock.
Keep in mind that any individual stock can go down even if the stock market as a whole is going up. In fact, a stock can go to zero (remember a company called Enron?) while it would take a catastrophic event (think nuclear annihilation or an asteroid hitting the earth) for the same to happen to the stock market as a whole.
That's why it makes much more sense to buy a portfolio of at least 20 stocks or use mutual funds or ETFs for instant diversification.
Putting all your eggs in one basket
Warren Buffett also said that diversification is a protection against ignorance but he neglected to mention that when it comes to investing, we're all a little ignorant because none of us knows the future.
Even Buffett makes mistakes from time to time.
Diversification can prevent us from losing all our eggs when that proverbial basket breaks.
Diversification actually comes in 2 parts:-
The first is diversifying between asset classes, which means having a mix of stocks, bonds, cash, and perhaps some alternative investments like real estate and commodities, that matches your goals and tolerance for risk.
Instead, we have a tendency to invest aggressively in stocks after stocks have been going up and move to cash after stock prices come back down. This can result in buying stocks while they're relatively high and selling them when they're relatively low.
While we don't know what stocks or bonds will do from one year to another, we do know that stocks generally outperform bonds over long periods of time (meaning decades not just 5 years) but that they do that with more ups and downs along the way.
Basically, the longer the time your money will be invested and the less likely you are to bail out when the market inevitably has one of its many downturns, the more you can afford to invest in stocks vs. bonds. This allocation should only change as your time horizon, goals, or risk tolerance changes.
The second but no less important part of diversification is diversifying within an asset classes. The biggest mistake people make here is having too much (more than 10-15% of their portfolio) in their company stock.
Keep in mind that any individual stock can go down even if the stock market as a whole is going up. In fact, a stock can go to zero (remember a company called Enron?) while it would take a catastrophic event (think nuclear annihilation or an asteroid hitting the earth) for the same to happen to the stock market as a whole.
That's why it makes much more sense to buy a portfolio of at least 20 stocks or use mutual funds or ETFs for instant diversification.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
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Re: Memories & Lessons
by winston » Sat Jan 14, 2012 10:14 pm
Continue ...
Ignoring costs
Let's say you've decided to invest 60% in stocks and 40% in bonds because you have a long time horizon and you're a moderate investor. You've decided to invest in mutual funds to diversify. Which mutual funds should you pick?
One place we might look is a fund's Morningstar rating. The problem is that the rating is essentially past performance and remember, you can't buy past performance.
One study looked at 248 stock funds with 5-star ratings from Morningstar in 1999 and how they performed over the next ten years. Just 4 of the funds still had that rating at the end of the period and most of them typically did worse than the average fund in their category.
Two factors that have a huge impact on future returns are fees and turnover. When comparing funds that invest in similar things, the lower these costs the better the returns tend to be.
Even Morningstar admitted that low fund fees are a better indicator of future performance than their own star system. Turnover is another expense in the form of hidden transaction costs and less hidden taxes.
The funds with the lowest of these costs tend to be index funds, since they simply track an index and don't have all the costs involved with active management. As a result, they generally end up outperforming actively managed funds.
Ignoring costs
Let's say you've decided to invest 60% in stocks and 40% in bonds because you have a long time horizon and you're a moderate investor. You've decided to invest in mutual funds to diversify. Which mutual funds should you pick?
One place we might look is a fund's Morningstar rating. The problem is that the rating is essentially past performance and remember, you can't buy past performance.
One study looked at 248 stock funds with 5-star ratings from Morningstar in 1999 and how they performed over the next ten years. Just 4 of the funds still had that rating at the end of the period and most of them typically did worse than the average fund in their category.
Two factors that have a huge impact on future returns are fees and turnover. When comparing funds that invest in similar things, the lower these costs the better the returns tend to be.
Even Morningstar admitted that low fund fees are a better indicator of future performance than their own star system. Turnover is another expense in the form of hidden transaction costs and less hidden taxes.
The funds with the lowest of these costs tend to be index funds, since they simply track an index and don't have all the costs involved with active management. As a result, they generally end up outperforming actively managed funds.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
- Posts: 112698
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Re: Memories & Lessons
by winston » Sat Jan 14, 2012 10:15 pm
Continue ...
Expecting a smooth ride
You can have the right asset allocation and pick all the lowest cost funds and still lose money in a year like 2008.
The important thing is to stick to your strategy and re-balance.
If your target allocation is 60% stocks and 40% bonds but is now 40% stocks and 60% bonds, you'll need to move some of that money out of bonds and into stocks to bring the proportions back in line. This will force you to buy stocks while they're relatively low and thus "on sale."
In 2009 and 2010, you would have done the opposite and moved money out of stocks and into bonds to bring them back into line after their gains. It's like pocketing some gambling winnings after a lucky streak.
After 2011, you'll want to move some money back into stocks even though the stock market was essentially flat because bonds were up about 4%. To quote Warren Buffett again, "Be fearful when others are greedy. Be greedy when others are fearful."
So what kind of year will 2012 be? Will a stronger economy cause stocks to surge higher? Will the crisis in Europe hurt the U.S. stock market?
Will ancient Mayan predictions of a global spiritual transformation or end of the world be proven correct? Who knows? In any case, the fundamentals of investing remain the same.
http://sg.finance.yahoo.com/news/5-comm ... 30855.html
Expecting a smooth ride
You can have the right asset allocation and pick all the lowest cost funds and still lose money in a year like 2008.
The important thing is to stick to your strategy and re-balance.
If your target allocation is 60% stocks and 40% bonds but is now 40% stocks and 60% bonds, you'll need to move some of that money out of bonds and into stocks to bring the proportions back in line. This will force you to buy stocks while they're relatively low and thus "on sale."
In 2009 and 2010, you would have done the opposite and moved money out of stocks and into bonds to bring them back into line after their gains. It's like pocketing some gambling winnings after a lucky streak.
After 2011, you'll want to move some money back into stocks even though the stock market was essentially flat because bonds were up about 4%. To quote Warren Buffett again, "Be fearful when others are greedy. Be greedy when others are fearful."
So what kind of year will 2012 be? Will a stronger economy cause stocks to surge higher? Will the crisis in Europe hurt the U.S. stock market?
Will ancient Mayan predictions of a global spiritual transformation or end of the world be proven correct? Who knows? In any case, the fundamentals of investing remain the same.
http://sg.finance.yahoo.com/news/5-comm ... 30855.html
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
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Re: Memories & Lessons
by winston » Tue Jan 17, 2012 12:31 pm
Some friends and I were discussing our investment track records, over the past few decades.
It looks like those that did not understand the financial markets did much better. That's because they invested their money in businesses eg. restaurants and properties, while avoiding paper assets.
Those who think they knew the financial markets had patchy records. Almost everyone was caught on Black Monday, AFC, 911 and lately in 2008..
What's interesting is that those who have avoided paper assets, now wants to invest in paper assets and those who think they knew the markets, now wants to invest in businesses and properties
It looks like those that did not understand the financial markets did much better. That's because they invested their money in businesses eg. restaurants and properties, while avoiding paper assets.
Those who think they knew the financial markets had patchy records. Almost everyone was caught on Black Monday, AFC, 911 and lately in 2008..
What's interesting is that those who have avoided paper assets, now wants to invest in paper assets and those who think they knew the markets, now wants to invest in businesses and properties
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112698
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Re: Memories & Lessons
by Musicwhiz » Tue Jan 17, 2012 12:47 pm
winston wrote:Some friends and I were discussing our investment track records, over the past few decades.
It looks like those that did not understand the financial markets did much better. That's because they invested their money in businesses eg. restaurants and properties, while avoiding paper assets.
Those who think they knew the financial markets had patchy records. Almost everyone was caught on Black Monday, AFC, 911 and lately in 2008..
What's interesting is that those who have avoided paper assets now wants to invest in paper assets and those who think they knew the markets now wants to invest in businesses and properties
Are there any who bought paper assets and yet managed to make money?
Please visit my value investing blog at http://sgmusicwhiz.blogspot.com
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Musicwhiz - Boss' Right Hand Person
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Re: Memories & Lessons
by winston » Tue Jan 17, 2012 1:01 pm
Dont know. And you dont really want to probe too much into other people's assets or track records ...
My own lesson from the discussion, is that you need to know what you are investing in. Those guys who bought businesses and properties, did timed their investments very well ...
Technically speaking, you can say that they had a wide margin of safety, which is also required if you invest in paper assets
My own lesson from the discussion, is that you need to know what you are investing in. Those guys who bought businesses and properties, did timed their investments very well ...
Technically speaking, you can say that they had a wide margin of safety, which is also required if you invest in paper assets
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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winston - Billionaire Boss
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