Sluggish Market & Ant Theory

[barjon]

Barjon,

I cannot argue with the first paragraph as that seems to sum up the exit strategies for FA and TA with a broad brush.

Fair value is a subjective issue and I would go as far as to say that if we were to place information about a company in front of 10 different FA traders, they would come up with a range of price levels that they could justify. In my case, I would say that those that you listed (relative to peer group, prevailing average value in the market) are certainly part of it; then I would look at cash flow, PE ratio, sales, debts, assets, products, prospects etc. It all seems tedious and long winded but it is fairly basic and straightforward stuff (much like a good chartist at work) that leads to a determination of what I feel the shares are worth at the time. The important factor being what they are worth to me. I have enough patience to wait until the market price reflects that but contrary to what some may believe it is not a must that the price be hit before the position is exited, any number of things can change the original assessment.

Lion

ok - since we've agreed that exit strategies (won't use the emotive sl word ) do share the same characteristics albeit from a different basecamp, I wonder if we could go one step further and that is that I wonder if the gulf between the two camps is primarily set by timescale?

Further back, rudeboy asked what use was FA in daytrading. Not a great deal I would suggest, other than on results days when the fundamentalist could be expecting results that wildly outstrip market expectations. I could ask what use is TA in long term investing. Not a great deal I would suggest, other than in broad entry timing ( I am assuming not even a fundamentalist would enter blind in a raging bear market as soon as the "undervalued" bell rings).

So isn't there a transitional crossover between short term and long term in relation to the relative merits of FA and TA?

Short term TA fa through to Long term FAta

Alternatively it could be argued that the debate that has raged has really been investing vs trading but that's a different story .

good trading (or investing)

jon

 

[charliechan]

You may believe what you want and that is your entitlement but remember that "assumption is the mother of all ****ups".

There are many things one could be doing with one's capital whilst it is locked up in a position (profitable or losing) but what is the guarantee the trader has that by seeking greener pastures one is not going from bad to worse or digging a deeper hole? Would this not apply to FA and TA exponents? This is probably one of the major causes of losses in the markets and most of us overlook it. How many times have you closed a trade because it is marginally against you and put the funds to work elsewhere only to find that the original trade would have been profitable and the latter is now showing a loss? That is one of the reasons I advocate having patience (regardless of your method) because it is pointless exiting trades unless the reasons for entry have altered.

It is precisely for reasons like this that I have a longer term horizon than the average trader besides, you argue as if the TA traders using longer term charts do not have the same policy as I. There are TA traders here that use 500 point stops on the DOW, are they stupid, losers, inept, praying or scared to take losses? Certainly not, it is their method of trading and it works for them.

i cant fault that

 

[dbphoenix]

Who is talking about belief or religion?.

Well, you are. Belief, faith, hope . . . Clearly, you don't see that, but there it is.

 

[charliechan]

Last time i looked this thread was not entitled First Steps so what is the relevance of statements to novices about ?
This is not a methodology for novices , or traders who are poorly capitalised...that should be self evident because of the approach to diversifity of risk and timeframe.. I might also say it isn't also for those 90% of fundies who think P/E stands for Practically Everything I need to know about fundamental analysis ..but don't blame the methodology blame the practitioner who took the superficial route to accumulating the knowledge necessary to employ the methodology..

Charlie...for clarity there is a stop..let me capitalise that ..THERE IS A STOP..it is fundamentally based so the earlier comments about no stop were misleading..it is simply that fundies probably don't see it in those terms ,but from a practical point of view it is there...when Mr D wakes up in New Zealand from his slumber he might be kind to confirm that..

Charlie...from a set of accounts calculating 'fair value' you can also calculate parameters that would constitute over valued and under valued so you can calculate risk ..are you starting to get it ..at this point i know you don't know much about accounts so i will have to ask you to trust me on this...DBP this also means beliefs do not come into it..it's about numbers and only numbers and that is for me it's weakness ,,but we'll leave that for now

Charlie ,now let's take your statement about other opportunities and the value lost in tying up money that basically is not going anywhere...yes this is called opportunity cost..problem ...how do you value it ? You can only do it on the basis of your methodology and that brings us full circle because your methodology requires you to stay in the trade until the 'fair value' tells you not to and in that case opportunity is actually discounted into your performance figures ..hence any argument about opportunity cost is irrelevant...it's like telling a short term TA guy not to enter every time his set up triggers because 30% of them will misfire so save your money and only enter the 70% that may win..you can't do it because your methodology requires you to enter the trade and stay in it until youe exit is triggered...hope that is clear

cheers chump - much clearer.

although by the time fundamentals have changed, the all important price variable could be anywhere.

the key problem here is that people forget that price actually seldom reflects 'value' how ever you wish to define it, and the relationship is guaranteed to be misleading as possible. market engineers make sure of this.

economists refer to this as elasticity i believe.

 

[charliechan]

Bloody hell,
First day I sleep in all hell unleashed..........................

cheers d998

sleeping in?

guess it must be your day off from flipping burgers then!!

 

[ducati998]

mark

There are some very interesting points in your post, and I will come back to them. They are really where the thread needs to go.

chump

You enter a trade without a stop 'loss' ,but your approach will use a stop to exit based upon a change to your calculated fair value and dare I say that that stop to exit could also be a stop loss...so if your fair value calc never found profit in the trade and at some future time your 'fair value' calc no longer held then you would exit ...is this right ? and yes if that is so I can also understand why you have not lost money for two years because a change to 'fair value' is unlikely to be a tomorrow event.

This is in essence correct.

The issues are asset allocation , time and temperament or I think it is....when these are in line the 'normal' concept of stop loss does not apply in the way many short term traders define it hence the apparent diverse views we have got here...nontheless I think it misleading to say there is no stop loss..there is one ,but the basis is 'fair value' hence the timeframe is going to be long if it applies at all !

There are many other ways of protecting your principal...........one is via the selling of premium , and this will recoup principal in an ongoing manner.
It also is additive to the ultimate profit if there subsequently turns out to be one.

pratbh

Most of the other members are silently watching you being constantly hassled, heckled and bullied, but that doesn't mean they are supporting it. Whatever you do, don't lose your calm and don't at the heat of the moment use angry words that can then be used against you.

Thanks for the support....................cool & calm

fetteredchinos

Ducs, if you mean Reefcap, it is actually back online..i presume you post as Ducatti999 on there?

That is correct. I was ducati998, but got zapped, reincarnated as a 999

dbp

Well, well................

Now there is an undeniably true statement. Going over it again was also pointless in '00 and '01, and a great many people -- who are no longer in the market -- lost a great deal of money.

It's all well and good to claim that one hasn't lost any money during the last two years. When did the market turn? March/April two years ago. As they say, never confuse brains with a bull market (or bear market rally, if you prefer).

It's not something I want to get into again. Not my money. Don't care. As the French say, every pot must sit on its own bottom.

I suggest that telling a new trader that all he has to do is determine "fair value", then "sit back and wait", while not necessarily being "criminal", does leave that new trader vulnerable to considerable loss. Just ask those who trusted The Motley Fools.

Making assumptions again. The key point is to buy when the business is healthy, but the stock is grossly undervalued by the market. That is simply one methodology.

Buying bankrupts is an incredibly safe way to buy assets cheap..........+ you have the additional safety of the Judge and trustees telling you exactly what will happen.

Arbitrage is riskfree.............100% guaranteed why would you have a stoploss?



charliechan

but we must still remember that the market can do anything at anytime. this is a key cornerstone about the reality of markets.

And herein lies the fundamental difference. As a Fundamental trader, the market holds no fear for me, it's daily quotations are merely an invitation to buy or sell at my convenience.
It does not dictate what I should or shouldn't do.
I take my calculation of a securities value from the facts..........not from an emotional, hyper-active such as the market is.

Hence, technical traders, who are however not trading on a valuation, but on momentum, must see things differently.

Have you never wondered why some support level held, while another support level, identical in all respects failed?

The reason is that one support level represented value, and was supported by value hounds, the other was merely a technical support, and hence meaningless.

am no accountant, but even i know there are several ways (accounting models) a company or government can use to publish their reports. ie they can chose how they decide to display their information in order to attract investment funds.

And there are many ways of discovering the ruses that are used.That lies within the skill of the analyst. A bad analyst will get caught, a good one will not. With an example like Enron, there were many analysts calling it a dog all the way in it's run up. Principally the people that got hurt the most were Enron employees.

The fundamentals signalled Enron as a dog far in advance because there were just so many anomalies within the cashflows, that it never looked like a real business. This to any analyst worth his salt, is enough to stay well away.

ta is the vision - you see what price is up to.

Price in a vacuum however tells you nothing.
To trade momentum, however, I agree it is not necessary to know anything of the value, you are seeking to profit from short-term fluctuations.

fa is the hearing - you hear the roumors they want you to hear.

And here is your bias coming out.
FA is not about rumours. It is about collecting the facts, and through an analysis, seeing if the business is healthy and profitable............if it is at what price can you buy it?

If I offered you a brand new Porshe for $1000...........would you buy it?
You would think........con.
You'd inspect it.
If after all your checks, not stolen, etc...........would you buy it?

That is value investing.

barjon

How do you define "fair value"?

There are a number of ways.
One very quick example is in Chap11 the Judge will tell you.

You have all got hung up on a single way of making money.............that is buy a stock long and hang on.............this is a long way from reality.

ok - since we've agreed that exit strategies (won't use the emotive sl word ) do share the same characteristics albeit from a different basecamp, I wonder if we could go one step further and that is that I wonder if the gulf between the two camps is primarily set by timescale?

While time can be a component, and is very important, it is not the foundation of managing the risk.

cheers d998

 

[neil]

Duck
Better have a nap after all that writing and before your next burger flipping shift

 

[dbphoenix]

cheers chump - much clearer.

although by the time fundamentals have changed, the all important price variable could be anywhere.

the key problem here is that people forget that price actually seldom reflects 'value' how ever you wish to define it, and the relationship is guaranteed to be misleading as possible. market engineers make sure of this.

economists refer to this as elasticity i believe.

This is a key point, and one which the "Fools" in general, and the "Gorilla" traders in particular had considerable difficulty with. They believed that there was some connection between the "value" of the company and the "value" of the stock. They learned the hard way that this is not the case.

And War Of The Worlds is SPECTACULARLY good.

 

[ducati998]

dbp

This is a key point, and one which the "Fools" in general, and the "Gorilla" traders in particular had considerable difficulty with. They believed that there was some connection between the "value" of the company and the "value" of the stock. They learned the hard way that this is not the case.

They I believe subscribe to a variation of economic moats, ROE, and discounted cash flows.
This is most certainly one way of approaching Fundamentals.
Not the one that I either advocate nor use.

As they say the proof is in the pudding.
I have live trades posted. I stand by them. The outcome will prove me right or wrong.

On the other hand, we have all the armchair experts.
The favorite refrain being.....................hey ducky........go flip some burgers.

Show me the money boys....................Money talks, bull****, that just walks

cheers d998

 

[dbphoenix]

As they say the proof is in the pudding.
I have live trades posted. I stand by them. The outcome will prove me right or wrong.

Not necessarily. Unless you've posted all of them. And who's to know? And who cares? None of this has anything to do with the points I've made. Take them or leave them. Probably, in your case, leave them.

Why people find it necessary to make these choices is beyond me. Choosing only FA or TA to the exclusion of the other and trading only one timeframe is the mark of an immature trader.

 

[LION63]

Lion

ok - since we've agreed that exit strategies (won't use the emotive sl word ) do share the same characteristics albeit from a different basecamp, I wonder if we could go one step further and that is that I wonder if the gulf between the two camps is primarily set by timescale?

Further back, rudeboy asked what use was FA in daytrading. Not a great deal I would suggest, other than on results days when the fundamentalist could be expecting results that wildly outstrip market expectations. I could ask what use is TA in long term investing. Not a great deal I would suggest, other than in broad entry timing ( I am assuming not even a fundamentalist would enter blind in a raging bear market as soon as the "undervalued" bell rings).

So isn't there a transitional crossover between short term and long term in relation to the relative merits of FA and TA?

Barjon

One of the gulfs between the two camps is due to timescale but there are a few others that set them apart. It is always assumed that FA based trades are very long in nature but they are not, in some cases they hardly last a few weeks.

Fundamental analysis would not be of much use on a day trading basis unless employed around announcements. However, because the trade would be opened before the market close on the day before the announcement, it is no longer a day trade in the real sense of it. The other way it is employed with a fair degree of success is where the individual continuously trades a share on a daily basis (more or less) until the share attains fair value, I have seen a number of traders do this fairly successfully over the years.

Technical analysis can be used for longer term trades as well; as you know, there are people that work off charts that have daily candles and they are quite successful at it.

The major difference that can be observed between the two camps is that TA is speculative in nature hence the need for a stop loss being part of the method. - The DOW might hit 10350 and if it does it will go to 10550, on the other hand, if it fails to hold 10320 then the next stop is 10250. How does that differ from someone saying the following - If the horse manages to stay out of trouble coming round the final bend it will romp home, but if it is boxed in it will not be able to make up the lost ground and the favourite will win?

 

[LION63]

Not necessarily. Unless you've posted all of them. And who's to know? And who cares? None of this has anything to do with the points I've made. Take them or leave them. Probably, in your case, leave them.

Why people find it necessary to make these choices is beyond me. Choosing only FA or TA to the exclusion of the other and trading only one timeframe is the mark of an immature trader.

Kindly tell us what points you may be reffering to because we cannot see any.

Why do you feel that traders have to combine different methods in order to trade the markets? Why must they use multiple time frames? More importantly, do you really feel that because you employ more than one method and trade different time frames that that makes you a judge of other traders and places you in a position to classify others as "immature trader"? Are we really expected to take this jibe from a man who had to tell us he was off to the cinema and then returned to tell us he was watching a really mature film? Hello.......

 

[dbphoenix]

You're absolutely right. But the new version of Mourning Becomes Electra starring Nicky Hilton hasn't been released yet . . .

 

[ducati998]

dbp

Not necessarily. Unless you've posted all of them. And who's to know? And who cares? None of this has anything to do with the points I've made. Take them or leave them. Probably, in your case, leave them.

Posted all of them, of course not, as I said most couldn't follow the trades in which case there is no point in posting them. But this point was already made.

The points you seem to be making are regarding the Motley Fools, viz. Tom Gardner et al.
Those points were addressed.

They I believe subscribe to a variation of economic moats, ROE, and discounted cash flows. This is most certainly one way of approaching Fundamentals. Not the one that I either advocate nor use.

Now you must have seen it, because it was right above the quote that you have used.
Possibly you just didn't like the answer, or there were other points that you made?

As to "who cares" obviously you care, otherwise you wouldn't have bothered making the point.
I care. I care quite a lot, because, yourself included, we have a lot of armchair experts, all claiming this, that etc.

You like to lecture as much as I do. I demonstrate with live examples. Where are yours?
dbp...........SHOW ME THE MONEY, baby

Why people find it necessary to make these choices is beyond me. Choosing only FA or TA to the exclusion of the other and trading only one timeframe is the mark of an immature trader.

Really. How so? ( in regards to timeframe I agree, but then no-one has advocated 1 timeframe have they )

cheers d998

 

[dbphoenix]

Not really, no . . .

 

[RUDEBOY]

All this said is fine? Or maybe not so fine? But! Would anybody here agree that markets can sometimes be at a more 'obvious' stage? Portfolios? Should they be 'absolute' or 'rolling/varied'? FA or TA, if we have 'mastered' one of them or both, should we not be able to apply them to 'more or less' any instrument? Should we not be looking for the 'obvious' in every trade? Do some people think that a day trader has to trade every day, and trade the same instrument? Any thoughts?

 

[chump]

Mr D,
You have complained in the past about other posters not sticking to a factual argument..so why not take your own medicine and refrain from the non subtle attacks "show me the money"..all this tells me is you just got up and downed too much caffeine..it's not adding to the discussion in other words...

Getting back on topic and trying to draw a few strands together now here are some thoughts..

you suggest we are mostly focussing on the long term nature of FA etc...true but this is for the most part because of the way you have dripfed this discussion and on certain issues you have not explained clearly your approach and in fact you're still not doing that...

I'll try to pull this together and if I am wrong simply say so...

Fundies first of all you have a stoploss...Mr D you've agreed this in a post above so let's stick with it..calling it an exit strategy is just semantics...you would however maintain that where it differs is that unlike a lot of TA or Quants it is not derived from a chart and is not simply a fixed sum amount that might be a quant approach...fair enough ? ..I wouldn't disagree if that was the case...so what is it derived from...your fundamental data ..OK ? ...let's not discuss the merits or otherwise as to the validity of that data (screwy accounts etc) ,because I don't think it is relevant at this point and perhaps not at all...

Now let's talk about those ants again within the framework established above... let's look at those piles of food and lets think of the ants in terms of moneyflow..

What I think you are suggesting is that your methodology of 'fair value' (and it's stop loss )
are based upon fundamental triggers that go off when your system identifies that the moneyflow is inefficient..if this is the case you will be out of the market when the moneyflow is efficient ?..and this brings us to ....subjectivity and time

Calculating 'fair value' is already admitted to be a subjective excercise that we might think of as being the 'artful' part of your trading system....how's this doing so far ? but like any art it is not perfect ...it can go wrong which brings us to time and ....the following point...

coming again to the point raised by DBP focussing on essentially 'opportunity cost' of money and time...you are not concerned about these for reasons I have already stated ,but I will recap.....
that is like a good little trader you have tested your 'fair value' system..you know what it returns..you accept that return and within that return the 'opportunity cost' is already discounted...how's this going ?
Again coming back to that point I really do think that point of 'opportunity cost' is a bit of a red herring..every system has this feature discounted into it..really ..think about it and if you disagree let's start a separate discussion...

Ok, if you are in agreement at this point the crux of this discussion will hang on the statistical connection of performance that joins fundamental based 'fair value' as system that accurately identifies inefficient moneyflow ...do we agree on this ?
Now at this point I would like to ask you this question..what makes you think that inefficient moneyflow can only be detected via fundamental data ? and please in answering that question give a full and factually based answer that we can refer to on a statistical basis...

I won't accept a quote that 90% of traders etc fail because they use TA or charts etc..that's nonsense ...while I might accept that 90% of traders fail I would have to counterargue that they are made up of all sorts of different proponents from FA ,TA and Quants etc ..in other words they are simply players who failed not because of their methodology ,but because of their lack of a plan that incorporated a winning system...

No, I think you would have to show me some stats that says your FA system has a performance return that exceeds any other winning system that is TA or Quant based ... if you can do that then we have to accept that FA based 'fair value' is the 'best' methodology for identifying inefficient moneyflow..however this still would not answer my question would it ? ..because I did not ask which was the 'best' methodology...I asked you to show me that it was the "only" methodology that could do this ...so I now look forward to seeing your statistically based answer

 

[RUDEBOY]

People decide price! Thats the bottom line! So where does that leave the contrarian?

 

[RUDEBOY]

'Fair value'?......'efficient price'?......'money flow'? I LIKE IT!

 

[chump]

Rude,
Price is part of the fundamental data ...the why of it is simple greed and fear..more than that you don''t need to know , except of course what are the statistical pingers that set off those emotions... and if you had left it my next argument to Mr D was going to be based on that very issue ...