Tag Archives: Trading Places

EVERYTHING You need to understand Markets

Hedge Fund Question:

You are being interviewed by Ackman while the CNBC TV scrolls in the background. Suddenly at trader screams that Valeant is getting hit–THERE ARE more sellers than buyers!   Ugly.

A technical analyst runs into the office yelling that he accidently read the chart upside down–Valeant is a SELL!

Ackman turns to you with a worried expression and asks you to confirm or deny the trader’s statement. What do you say?  You will be thrown from the 20th floor if you get this one wrong.


Is there one price or two prices at any one time in the marketplace?  A transaction occurs at one price but what determines which of the two prices at any one time?


Lesson on Franchises in Cyclical Markets




Money Managers Are Price Chasers

Markets can do ANYTHING in the short-term, so the following is not a prediction that miners will rise in price. However, what comes first–the price rising or the buying? 🙂 Miners chop around in a trading range as money managers flee the sector and now sit with record low allocations to this sector. * How good are money managers (on the whole) picking the right sector to invest in?  I leave it to you to find that out.

Wedgewood Partners: Franchises in Cyclical Market and a Lesson on Diversification

wedgewood partners fourth quarter 2014 client letter Look at pages 12-20 where David Rolfe, the manager, discusses NOV, SLB and CLB–high-quality companies in the cyclical oil sector.

  1. clb_vl
  2. slb_vl
  3. nov_vl

He points out diversification may mean the sources of profitability can be different among companies within a particular sector.  (Refer to Competition Demystified by Bruce Greenwald for a course on this distinction). Note the high revenue conversion to free cash flow (page-14) for those companies compared to other companies in the oil services sector.

Now move on to wedgewood partners first quarter 2015 client letter crude realities.  Note on page 13 how he looks at the oil services market–the structural attribute to focus on is drilling intensity.  Interesting…. Look at pages 18 and 19 for a further discussion on NOV and CLB.

To learn, you might download those company’s recent annual reports and try to figure out their revenue to free cash flow conversion.  Look at what the companies use for maintenance capex.  Note how Core Labs is a free cash flow gusher (Charlie Munger would smile on this).  Core Labs is a different business than SLB and NOV, but is grouped in the same industry/index.  When sellers of ETF sell, they don’t distinguish among companies and therein lies opportunity for us. Yeah!

I do the opposite of this:

**Merrill Lynch Fund Managers Survey May 4, 2015

Today’s chart of the day focuses on sentiment in the basic materials sector. Regular readers of the blog already know that I have been closely following Merrill Lynch’s Fund Manager Survey for years now. This months survey was conducted in a period between 2nd to 9th April 2015 with a total of 177 panellists, with $494 billion of assets under management. The survey should be used as a very good contrarian indicator.

According to the recent survey, global fund manager allocation towards global materials declined sharply in the month of April to net 27% underweight from net 16% underweight the previous month. As we can clearly see from todays chart of the day, sentiment is very depressed right now. Merrill Lynch states that the current allocation is 1.8 standard deviation below its long term average.

Furthermore, the overall commodity and natural resources theme is very much disliked by global money managers. Commodity allocation is unchanged for the third straight month and remains at net 20% underweight. That is 1.2 standard deviations below its long term average and even more interestingly, fund managers remain underweight commodities for the 28th month in the row.

(Source: www.shortsideoflong.com)

Bob, the Suicide Trader, A Lesson in Ego

Part 1 (Bob, Suicide Trader)  Scroll down http://blog.marketpsych.com/2012/10/resentment-investing-soros-emotional.html

Part 2 (Bob, Suicide Trader) http://blog.marketpsych.com/2012/11/hurricane-psychology-buying-pessimism.html

Moral: Don’t let your ego crush you.

My Experience

John Chew: I was once a pit trader at the Open Board of Trade in Chicago (MidAM, today)

Yes, that type of pit. I remember the other traders nicknames like Little Man (the guy was 6′ 4″ and 310 pounds), Dog Face, Pretty Boy, Ice Man (He traded 1,000 lots of Bonds or $100 million of US 30-years bonds at a crack), and Sun Tan (An Albino).

Never will I forget when an older trader clutching his chest, crumpled into the center of the trading pit while having a heart attack. No one moved to help, they were too busy trading. In fact, side bets immediately went up for $500–was he or wasn’t he going to make it out of the pits alive.  “For God’s sake, is anyone going to call for an ambulance?” a female trading clerk screamed.

I knew one trader (Joey D) who took $4,000 up to $370,000 in six months during the 1988 bull market in soybeans. He used leverage upon leverage and caught a massive bull run. He was going to get married but the trend changed. Joey D knew enough to take losses but buying rallies and selling dips in a choppy market is a losing strategy, but momentum trading had been imprinted upon him during the massive rally in beans.

As his account dwindled, his self-worth declined perhaps even faster. As he said to me, “If the account goes to $0, then I will be worth $0. Got any way to commit suicide painlessly? I sat at the bar explaining that it was only money; take a break and besides, killing oneself ain’t easy. Joey said that he couldn’t pay for the wedding; he would have to postpone; his fiance left him three weeks later–“I guess adversity wasn’t her thing,” Joey lamented.

Joey D’s fears began to mount until he finally blew out and had to leave trading for himself. His last day as a pit trader (local) all the other traders gave him a wide berth like he had leprosy since most traders are superstitious. I asked him how he felt and he said, “You know, I have never felt so free and relieved in my life. I feared this and I feared that. My fiance left, but perhaps that was a good thing. Who needs a gold-digger? The sun still came up, the birds still chirp and the Cubs are playing today at Wrigley. Most of my problems were all in my head.

Joey left to work as a broker before two years later returning to a successful career. Hope you are well Joey D.


Complete Video Clips Course on Trading, Value Investing and Corporate Finance

My father established our relationship when I was seven years old. He looked at me and said, “You know, I brought you in this world, and I can take you out. And it don’t make no difference to me, I’ll make another one look just like you.” –Bill Cosby

A Reader asks,”How can I learn about Wall Street and investing?”

My reply: Review and study the clips below–you will gain more than sitting in a classroom all day.

How auction markets work:http://www.youtube.com/watch?v=TSZKDkLgzhk

How investors think: http://www.youtube.com/watch?v=4zakyg3thfY

Price versus value: http://www.youtube.com/watch?v=jLo7tHDHgOc

Activist Investing and Corporate Finance: http://www.youtube.com/watch?v=p7rvupKipmY  Danny Devito:”I am not your best friend, I am your ONLY friend.”

How Wall Street REALLY works:


Act as if: http://www.youtube.com/watch?v=oTFU9c9MrkE&feature=related

Making the sale:http://www.youtube.com/watch?v=TXBgEpUlPVg&feature=related

Learn how to negotiate:http://www.youtube.com/watch?v=xT5iqTgypVs

Really study the above to gain the wisdom to retire rich: http://www.youtube.com/watch?v=mmMS9nvi6eg&feature=related

or go to traditional college and begin your career here: http://www.youtube.com/watch?v=rJB0CzlzSwY or work here:http://www.youtube.com/watch?v=bYhXeirfMp8&feature=related

WHY even go to college? http://www.jamesaltucher.com/2012/03/did-obama-really-say-he-wants-everyone-to-go-to-college/

It is your choice–YOU decide!  Let me know what happens.

Another Reader’s Question: Any Suggestions on How to Learn How to Invest?

Index investing outperforms active management year after year.–Jim Rogers

Reader: How Do I learn how to invest? Suggestions?

My reply follows in three parts: What NOT to do, traditional advice, and what I suggest.

What NOT to do

Here is what you should NOT do when learning how to invest.

Ignore the difference between price and value: http://www.youtube.com/watch?v=pMz_sPs11HU

Sit all day watching CNBC so you can be “up on the economy and markets.” http://video.cnbc.com/gallery/?video=3000034368

Buy whatever Cramer recommends:http://www.youtube.com/watch?v=gUkbdjetlY8 but wait until the price pops higher so you can be sure.  You remember the adage: “Only buy what goes up, and if it don’t go up, don’t buy it.”  If you can find the most popular companies mentioned relentlessly in the news wait until the price has been rising for a several months, then buy. Price is everything. Be part of a group. Ignore any conflicting information in your investments because you won’t be successful being negative. After any purchase, ask friends what they think of the stock. Choose someone randomly and ask them why you own the stocks you have in your portfolio. If they don’t answer, yell at them for their stupidity.

After losses, blame anyone but yourself. Buy as many stock-tip newsletters as you can afford, so you don’t miss anything. If the story sounds good, then buy the stock.  Read Barron’s to supplement what you hear on CNBC and buy what the experts think–just do it quickly. Avoid becoming confused by reading the 10-K, proxy, annual reports, product and customer information and/or credit reports. Do what the charts say. Attend expensive training and trading schools like http://www.tradingacademy.com/stamford/ (Click on Video)

Or http://www.wallst-training.com/

You will make so much money that spending $10,000 for a two-day course will be a great “investment.”

Spend as much time learning about Macaulay Duration, efficient frontiers, and predicting the markets as you can. Live by the saying, “Often wrong, but never in doubt.”

Traditional advice in order of preference:

  1. http://www.aier.org/product/how-invest-wisely-2010 A non-profit research organization on economics and personal investing in Great Barrington, Ma. A good source of independent research for individual investors. Recommended that you view their store on investing materials.
  2. http://news.morningstar.com/classroom2/home.asp?colId=397&CN=COM This site has a series of classes to teach you the simple basics. Not bad for beginners.
  3. American Association of Individual Investors: http://www.aaii.com/
  4. http://www.fool.com/how-to-invest/index.aspx?source=ifltnvpnv0000001
  5. http://finance.yahoo.com/education/begin_investing/article/101181/Advice_for_a_Novice

What I suggest

Any advice I give is from my perspective so what works or worked for me may not fit your personality, goals and situation. With that caveat let me suggest:

First, read the classics: The Intelligent Investor by Ben Graham, Rev. Edition by Zweig. Get a feel for how Graham approaches investing. Next read, Margin of Safety by Seth Klarman (in Value Vault) as a further reinforcement of the value investing approach. You can then read, The Interpretation for Financial Statements by Graham in the Value Vault to give you a basic background for reading 10-Ks.

You will need to read Warren Buffett’s letters to shareholders several times to grasp all the points he is making. A good book, The Essays of Warren Buffett here:http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446119organizes his letters into subjects for easier reading. Or go to http://www.berkshirehathaway.com/letters/letters.html

Second, pick an industry with a simple product that you can understand with a few industry participants and pretend to write a story on the industry. Take the carbonated beverage or beer industry–the product is simple and there are fewer than a dozen major companies in either industry.  Read the 135-year history of Coca-Cola, read a book or two about Pepsi. Then take five years of annual reports and proxies from Cott beverages, Pepsi, and Coke and read them.

Third, figure out what their returns on capital are, sales trends, profit margins and company risks. Would you want to buy one of these businesses? At what price? Why are certain companies doing better or worse than their competitors? Have their market shares changed much over the years? Can they raise prices?

You will need to spend about two or three months reading about 30 minutes each day but you will become fairly knowledgeable about beverages. If you don’t like my idea for beverages then choose an industry/business that YOU are really interested in.

Finally, read through Security Analysis by Ben Graham (6th Edition). Note your interest in the readings. If sitting alone for hours is agony or pawing through Security Analysis is unbearable, then that will tell you volumes. Don’t worry if you haven’t the personality or interest to be a self-directed investor, just know your limitations and respect them.

If you struggle with financial statements, take a free internet course on accounting or take a course at a community college. There are plenty of programmed texts so you can learn on your own.

Learn Austrian economics–see prior post on studying financial history here: http://wp.me/p1PgpH-wN.

If you are very ambitious, get a subscription to Grants at http://www.grantspub.com. Then download all the issues since 1983, read all the books mentioned in the issues and try to understand the investment merits or lack thereof in the companies mentioned. You will learn more than going to business school.

Read the commentary in the Value Investors Club at http://www.valueinvestorsclub.com/value2

Learn how investors view various investments. Try to reverse engineer the company recommendation by looking at the original financial statements.

I hope this helps.  Let me know how your journey progresses.