1. the stock must have positive net income.
2. the stock sector has to be a promising or hot sector, except retail sector.
3. the stock must be a sector leader.
4. the market cap is between 5B-200B.
5. the revenue growth rate must be greater than 20%.
6. the EPS growth rate must be greater than 20%.
7. the ROE ratio must be greater than 20%.
8. the Debt/Equity ratio must be less than 50.
Monday, October 1, 2018
Thursday, March 12, 2009
Concept
What is an adaptive investing system?
Looking at the historical investment data, we know that the period between 1982 and 2000 was the bull market, the best strategy is to buy and hold. We know also that the period between 1968 and 1981 was bearish market, the buy and hold strategy doesn’t work, while trading may work very well. In addition, there is bear markets for a short period of time during big bull marke cycle. It is clear that a simple fixed methodology doesn’t work as the market constantly changes. In other word, all different solutions, such as buy and hold, trading, active, passive, asset allocation and trend floower, can work only for a specific period of time. Therefor, the the best way is to change your investment strategy to match the market condition. From mathematical point of view, we need to develop an investment system that is adaptive by configuring a few parameters based on market condition.
Background
Adaptive investing is NOT new, which can be found in Internet. However, the idea here is definitely different from the current existing adaptive investing strategy. The existing idea is to allocate different asset classes based on market condition, which is similar to the tactical asset allocation. The adaptive investing here is to buy or sell the same asset class (or type) with different prices based on market condition. This allocation can be defined as price allocation. Most of current investment strategies are based on asset allocation, while the adoptive investing is based on price allocation. Asset allocation can be considered as horizontal allocation, while price allocation can be considered as vertical allocation. For example, using asset allocation, you can hold 25% Canadian equity, 25% US equity and 50% bond. On the other hand, using asset allocation, I’ll buy only gold sector, with 10% buy at price of 15, 20% at price 10, 40$ at price of 5 and so on. Similar to the buy process, I’ll sell it 10% at process of 20, 20% at price of 30, 40% at price of 50 and so on.
The second major difference is that the adaptive investing only buy or sells ETFs, not individual stocks. ETF can be any kinds of ETFs, including Canadian equity ETF XIU, energy sector ETF XEG, Oil commodity ETF USO, and leveraged gold ETF HGU. the reason of not trading individual stock is that individual stock can be ZERO, while ETF can never be ZERO.
Problems to be resolved by the system
Hunting for extreme (H4E) have two issues to be resolved. If the market is not in a extreme situation, in fact, most of time, market is not in a extreme situation, what to do to get profit. Based on H4E, we should not do anything at all; instead, we should wait for extreme and then act upon the situation. However, if you trade the market within a range, then you can make profit as well. One thing in the market is for sure, which is constantly changing, if there is change, then there is money to be made.
As known, even in the extreme situation, market won’t go one way for a long period of time. Market is always with big fluctuations during any primary trend, whether it is bull or bear market. It could be very big emotional challenge when you see your profit lost again and again. We all know that the price doesn’t go lower forever. Regardless of how bearish it is, it always has bounce back for a while, and then go lower again. Why don’t we sell part of position and then buy it back when the price goes lower than sold price with a give amount. This is a good idea to rebalance your emotion and to reduce the pressure as well, which could bring much better return, including this intermediate return from buy and sell, and the final return. The reason being is that you’re not under pressure, as you don't watch your profit coming and going. When price is high, you’re happy as you sell a percentage and take some profit; when price going lower, you buy it back and you’re happy as you see your realized profit. When price goes even lower than your next price target, you’re happy, as you’d like to collect more shares. It is obviously that market changes constantly, whether it is based on collective emotion, fundamental, technical or seasonality. The task of the adaptive investing system is to capture the profit; furthermore, such a system can provide a way to reduce your pressure and emotion challenge.
Input parameters to the system
There are only two parameters: an investment ETF and its market environment. For example, I am very bullish for gold sector. There are more than 1000 ETFs existing in the world. You need to choose a few ETFs to be included in the system, the only criteria is to have a clear judgement of their market environment. It is not necessary to be bullish. 5 market environments are classified as below:
1) Very bullish: described in H4E as extreme
2) Somewhat bullish
3) Sideways
4) Somewhat bearish
5) Very bearish: described in H4E as extreme
Please note that market environment refers to an ETF, not the market in general. For example, when general stock market was bearish from 1968 to 1980, the commodity market was very bullish. When general market, such as DOW right now (march 2009) is bearish, gold is bullish, and oil is bearish.
How to judge market condition is based on your understanding and knowledge of two areas:
Financial history: It is the best defence weapon. The more stories you know, the more comfortable you’ll be. I believe that stock market behaviour never changes, as human being with fear and greed drives market.
Psychology: emotion and sentiment play very important role to determine market price.
How the system works
You can see the detail in the system chapter. Below are the high level pictures:
very bullish
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somewhat bullish
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Sideways
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Looking at the historical investment data, we know that the period between 1982 and 2000 was the bull market, the best strategy is to buy and hold. We know also that the period between 1968 and 1981 was bearish market, the buy and hold strategy doesn’t work, while trading may work very well. In addition, there is bear markets for a short period of time during big bull marke cycle. It is clear that a simple fixed methodology doesn’t work as the market constantly changes. In other word, all different solutions, such as buy and hold, trading, active, passive, asset allocation and trend floower, can work only for a specific period of time. Therefor, the the best way is to change your investment strategy to match the market condition. From mathematical point of view, we need to develop an investment system that is adaptive by configuring a few parameters based on market condition.
Background
Adaptive investing is NOT new, which can be found in Internet. However, the idea here is definitely different from the current existing adaptive investing strategy. The existing idea is to allocate different asset classes based on market condition, which is similar to the tactical asset allocation. The adaptive investing here is to buy or sell the same asset class (or type) with different prices based on market condition. This allocation can be defined as price allocation. Most of current investment strategies are based on asset allocation, while the adoptive investing is based on price allocation. Asset allocation can be considered as horizontal allocation, while price allocation can be considered as vertical allocation. For example, using asset allocation, you can hold 25% Canadian equity, 25% US equity and 50% bond. On the other hand, using asset allocation, I’ll buy only gold sector, with 10% buy at price of 15, 20% at price 10, 40$ at price of 5 and so on. Similar to the buy process, I’ll sell it 10% at process of 20, 20% at price of 30, 40% at price of 50 and so on.
The second major difference is that the adaptive investing only buy or sells ETFs, not individual stocks. ETF can be any kinds of ETFs, including Canadian equity ETF XIU, energy sector ETF XEG, Oil commodity ETF USO, and leveraged gold ETF HGU. the reason of not trading individual stock is that individual stock can be ZERO, while ETF can never be ZERO.
Problems to be resolved by the system
Hunting for extreme (H4E) have two issues to be resolved. If the market is not in a extreme situation, in fact, most of time, market is not in a extreme situation, what to do to get profit. Based on H4E, we should not do anything at all; instead, we should wait for extreme and then act upon the situation. However, if you trade the market within a range, then you can make profit as well. One thing in the market is for sure, which is constantly changing, if there is change, then there is money to be made.
As known, even in the extreme situation, market won’t go one way for a long period of time. Market is always with big fluctuations during any primary trend, whether it is bull or bear market. It could be very big emotional challenge when you see your profit lost again and again. We all know that the price doesn’t go lower forever. Regardless of how bearish it is, it always has bounce back for a while, and then go lower again. Why don’t we sell part of position and then buy it back when the price goes lower than sold price with a give amount. This is a good idea to rebalance your emotion and to reduce the pressure as well, which could bring much better return, including this intermediate return from buy and sell, and the final return. The reason being is that you’re not under pressure, as you don't watch your profit coming and going. When price is high, you’re happy as you sell a percentage and take some profit; when price going lower, you buy it back and you’re happy as you see your realized profit. When price goes even lower than your next price target, you’re happy, as you’d like to collect more shares. It is obviously that market changes constantly, whether it is based on collective emotion, fundamental, technical or seasonality. The task of the adaptive investing system is to capture the profit; furthermore, such a system can provide a way to reduce your pressure and emotion challenge.
Input parameters to the system
There are only two parameters: an investment ETF and its market environment. For example, I am very bullish for gold sector. There are more than 1000 ETFs existing in the world. You need to choose a few ETFs to be included in the system, the only criteria is to have a clear judgement of their market environment. It is not necessary to be bullish. 5 market environments are classified as below:
1) Very bullish: described in H4E as extreme
2) Somewhat bullish
3) Sideways
4) Somewhat bearish
5) Very bearish: described in H4E as extreme
Please note that market environment refers to an ETF, not the market in general. For example, when general stock market was bearish from 1968 to 1980, the commodity market was very bullish. When general market, such as DOW right now (march 2009) is bearish, gold is bullish, and oil is bearish.
How to judge market condition is based on your understanding and knowledge of two areas:
Financial history: It is the best defence weapon. The more stories you know, the more comfortable you’ll be. I believe that stock market behaviour never changes, as human being with fear and greed drives market.
Psychology: emotion and sentiment play very important role to determine market price.
How the system works
You can see the detail in the system chapter. Below are the high level pictures:
very bullish
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somewhat bullish
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Sideways
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Saturday, March 7, 2009
Introduction
Version 1: CFA
After learning portfolio diversification and efficient market theory in CFA for years, I have tried to use all CFA ideas to experiment in the market. I have spent long time to figure out 5 sectors in Toronto market: real estate, financial, energy, gold and information technology, as these 5 sectors have the minimal correlations. Having used dynamic rebalance, I tried to beat the market. The result was pretty much in line with market performance. If you really try to think about such an idea, there is no way that you can beat the market very much, maybe a little bit. The whole idea of CFA is to pretty much use long-term market performance as the reference.
You can hugely improve your model, and still no grantee that you can give a little bit better than the market. Furthermore, if there is bear market, you will definitely lose money, and even you can beat market for example, when market loses is –20%, your loss is –15%.
These two problems cause me to challenge myself whether all these ideas are not right. Bear in mind that many ideas are the main foundations of all investment in the public, many of which were awarded by noble Prize. Current public investment idea is good for public to get market performance without loss big percentage of money, it is the good idea for investment company as well because they charges commission fee. However, such a idea has no way to beat the market and no way to avoid loss when there is bear market. To realize that CFA doesn’t work is a very important breakthrough for me to look into new investment idea.
After checking many books outside CFA, I find that there are many other investment ideas that are not well documented in our learning process, which do present some opinions to challenge the CFA idea. Today, I can frankly tell you that CFA theory doesn't work for you if you want to beat market. If you try to tell people in the professional world that you don’t believe diversification, you may be considered as a crazy person.
Version 2: Correction
Having said that I don’t believe in CFA, I still apply one basic concept from CFA not to invest heavily individual company, as individual company can have very big operation risk that market, or a sector. After reviewing many short term market fluctuations, I find sometimes market crashes so quickly, down a few percent for a few days, then bounce back very quickly as well. Why don’t I capture these sell offs. To maximize advantage of such an idea, you need to have leverage; therefore I have applied option strategy. Usually, most of people use options very aggressive, they buy short term, out of mosey options. They made either very big money, or lose everything. What I have applied is to buy long term, deep in the money strategy, with three times leverage. The main reason to use this strategy is to avoid a downside risk. This strategy gives you time to change your idea, and has minimize the time value. From the beginning of time, I don’t believe in daily trading strategy, I find there is no way for to capture market daily movement. This strategy did yield me some very good return.
There are a few problems with this solution:
How do you know it is correction? Market could continue down and down, such as the NASQ in 2000, real estate in 2006, credit crunch in 2007.
Assume that it is indeed a correction; the question is how can you capture the bottom?
I have formulize some rules there, such as not the first day, not the second day in deep correction, you can start to buy option only from the third day, in addition, the market as whole sector must at least down more than 10%. No matter what you do, you still have a big question in case when it is in deed NOT a correction, you could loss a huge percentage of your money. This problem can destroy your performance by selling option much quicker as you are worry about market could change it quickly. It becomes very challenging.
Version 3: LSC
How to you it is correction, not a market trap? After reviewing many books from money master, I find Jesse Livermore idea shed a light for me. Based on his book, you can realize that he believe in general market, not in individual stock, focus on primary trend, not a daily fluctuation. The whole philosophy is so called “be right and sit tight”. Believe or not, my thought is pretty much in line with him, as I like to trade in general market, not in individual stock, and I like to call doing nothing, or only act when there is real correction. However, what does mean “primary trend”? It has to be relative long-term market outlook. To judge whether market is correction or not is based on long term market outlook. Based on this new think, I find the following idea as LSC approach, or long-term bullish, short term bearish and with an enough consolidation period.
V31. Long term bullish:
Please look at the follows S&P 500 historical data:
. 2000-2004: bearish cycle, -5.0% (as of March 2004)
· 1983-1999: bullish cycle. 12.1%
. 1967-1982: bearish cycle, -3.8%
· 1950-1966: bullish cycle, 9.3%
. 1930-1949: bearish cycle, -1.8%
· 1922-1929: bullish cycle, 19.3%
. 1903-1921: bearish cycle, -4.4%
· 1898-1902: bullish cycle, 11.8%
. 1882-1897: Weak cycle, -1.2%
You may be wondering what to do during bearish stock market; The good news is that commodity is always bullish during stock bearish market. We must be very happy, as there is always bull market at any time. In other word, we can always find the long-term bull market, either stock market or commodity market.
We can simply invest in this identified long-term bullish market.
V32. Short term bearish:
However, it may be not the best solution, as market can’t keep move higher without any setback during this long-term bullish market. For example, Gold bull market start from 2001,
The HUI has achieved about 1000% Rate of return. However, there have been three times up market, and three time down market. Each time market has been corrected three times with the return of -30%. We can find the similar patent in the technology cycle as well.
V33. With a consolidation period
Therefore, the better solution is to enter the market during the setback in the long-term bullish market.
The question is when to enter the market. Different market have different pattern, for example, energy market have relative clear seasonality, and it has always a rally during the wintertime. We need to have enough patience to allow market to have an enough consolidation period.
So the best solution is to enter the market during the setback in the long-term bullish market after an enough consolation period, it has always a rally during the wintertime. We need to have enough patience to allow market to have an enough consolidation period.This idea answers the correction question in some degree. Meanwhile, in order to make sure that we can capture the bottom, I have developed a so called “Fish Net” idea, meaning that setup orders within multiple baskets to be triggered when market is down. However, as you see here, we’re talking about long term is about 17 years, short term about more than one year. In addition you may notice that market sell off happens much quicker than market build up. Why don’t you take advantages of market sell off?
There are still two questions for this solution:
Do we wait for correction when market dramatically shoots up? Such as oil market in summer 2008
Should we touch bear market at all, when market is identified as bear market
Based on the LSC concept, we can only long the market, which is very bad when there is chance to short market, especially when bubble bursts, such as 200 NSDQ, 2005 real estate, 2007 credit crunch. Now it comes idea H4E – Hunting for Extreme
Version 4: H4E - Hunting for Extreme
V41: What is extreme
Market extreme is a period of time when market price is much higher or much lower than market itself, including market bubble and market sells off. A few samples are listed below:
1. Oil price from 50 at the beginning of 2007 to 147 in summer 2008,
2. Credit crunch 2008
3. Real estate bubble 2007
4. NSDQ 2001
5. Chinese market shanghi index from 2000 to 6000 within one year
6. 1997 financial crisis
7. 1987 market crashed in October
V42: Four kinds of extreme
Based on long term and short term framework, there are 4 cases:
1. Long term bullish, short term bearish There is always correction in the bullish market, remember that no matter how bullish the market is, there is always correction, please check the last section for reference.
2. Long term bullish, short term too bullish If you agree with the case 1, then you have to agree with case 2, as the case 1 and case 2 coexist. Actually, market gets much ahead itself.
3. Long term bearish, short term bullish Even it is the bearish market, market sell off can be over done. Market needs to rebalance the sentiment.
4. Long term bearish, short term too bearish
V43: Why extreme happens
Reviewing financial history, you probably wondering why bubble never stops to occur. Bubble is one kind of extreme, you can’t avoid it. The reason is very simple, because we’re human with emotion. What is the market, it is the balance between supply and demand, and the balance between buy and sale. Who decide to buy and sell is people, ourselves with emotion. The whole function is that when market is bullish, it will be pushed much higher than it is supposed to be. When market is bearish, then market will be pushed much lower than it is supposed to be. This is how the market works, not based on efficient market theory. Since people drive the market, extreme has happened and will happen forever because of human nature. The more profit you get, the more opportunistic you are, the more aggressive you will be, The more loss you have, the more pessimistic you are, the less aggressive you will be.
V45: How to identify extreme
This is the main topic to be figured out. One of idea I have is to you don’t need to be smart to spot the extreme. Why? Because everybody talk about the extreme. You can see such news on the first page of main newspaper; you can see it on TV and radio. When market is the stage of bullish extreme, you can see many people get rich so easily. When the market is the stage of bullish extreme, many main companies bankrupt. The next very important topic is to get a set of clear criteria, such as volatility index to quantify it.
V46: How to capture extreme
We should change our attitude to the market to against crowed, once we have identified extreme. First of all, never afraid of working against public opinion. The more profit you get, the more careful you should be. The more loss you get, the more aggressive you should be. 1. BUY: Long term bullish, short term bearish 2. SELL: Long term bullish, short term too bullish 3. SELL: Long term bearish, short term bullish 4. BUY: Long term bearish, short term too bearish
V47:Your weapons
As you see, this investment idea is very difficult to perform, as it requests you to do against the crowd. It is very unaffordable to act the opposite. However, whether comfortable or not is dependable on you. How to make yourself comfortable depends on how good of your understanding and knowledge of following weapons:
1. Financial history: It is the best defense weapon. The more stories you know, the more comfortable you’ll be. I always use Japan stock as sample. Japan index topix from 40000 in 1990 to current 12000 (2008). There is cycle everywhere, not only the market, but also for human life span.
2. Psychology of money master: All successfully money master have very strong mind. Image how difficult for you not to invest in IT in 2000 as warren buffet.
V48: Open questions
How do you really know it is indeed market extreme? 100% is too extreme? Or 200% is extreme? There is no way that you can have an absolute number to decide. For example, DOW, S&P and TSX are down about 25% right now (at the beginning of October 2008), are they in the extreme situation? Whether the answer is yes or no is based on something, for sure 25% is definitely a number, however, this number is not enough to decide. To make the extreme term better defined, we need to add a “relative” to define extreme, or simply called relative extreme.
V49: Relative extreme
Relative extreme is to put the current investment situation on the historical background, or compare the current situation with historical situation. For example, if the current situation is bear market, then we should compare it with 1929 depression, 1970s stagflation, 1987 Long term investment crash, 1997 Asia financial crisis, 1990 Japanese market crashes. If we think market is very bullish, then we should compare 1920s market boom, 1982-2000 market boom, especially NASQ climax. Once we have a clear understanding of where we are now in a middle and long term, which can be considered as market primary trend, then we can figure out whether there is extreme or not. The key is to have one, or many historical cases to compare with current situation.
V410: next?
This concept has a few issues to be resolved:1. What to do if there is no extreme. The good system must be capable of making money in different situations. The extreme is one situation. We need to extend system to go beyond extremes, as most of time when market goes sideways.2. Even in the extreme situation, market won’t go one way for a long period of time. Market is always with big fluctuations during any primary trend, whether it is bull or bear market. It could be very big emotional challenge when you see your profit lost again and again.To resolve these two issues, a new concept call adaptive investing has been formulized.
adaptive investing ...
Saturday, December 13, 2008
Goal
To be successful in the investment is not based on your return, or how much money you make, instead, it is based on your own system. The amount of money you make is your result, while the system is your tool. If you have a right tool, you can make a very good return. From this point of view, the tool is worth much more than the money itself. For the past a few years, I have tried to figure out a system that can consistently beat the market. Therefore, in my mind, how good is my investment is based on how good I have followed my system.
The proposed approach here is to find a system, apply it in the real market and validate whether the system works or not, and then to figure out the problem of the system and improve it, and then try the new improved system again. This process won't be ended until you have achived a good return.
The goal is to discover a system that can beat market consistently, in bull market, in bear market, in depressed market. This document is intended to outline my current investment system so far. Moving forward, it is for sure that the system will be changed and improved. Someday in the future, I know that my system works, at least for me.
The proposed approach here is to find a system, apply it in the real market and validate whether the system works or not, and then to figure out the problem of the system and improve it, and then try the new improved system again. This process won't be ended until you have achived a good return.
The goal is to discover a system that can beat market consistently, in bull market, in bear market, in depressed market. This document is intended to outline my current investment system so far. Moving forward, it is for sure that the system will be changed and improved. Someday in the future, I know that my system works, at least for me.
Never
Never be fully invested
In my mind, cash is a bullet, if you don’t have bullet, then you can’t act in any market. How to have some cash available. The solution is used approach in the fund management based on diversification. It is very good to normal investor to have market return. It is impossible to beat market consistently. I don’t like this approach, as I want to beat market.
Never buy big position at once
Never sell big position at once
Never try to get the exact bottom when you long
Never try to get the exact top when you short
Never issue a order on the fly
Never cut the big loss
Never buy out of money option
Never buy short term option
Never take a small profit
In my mind, cash is a bullet, if you don’t have bullet, then you can’t act in any market. How to have some cash available. The solution is used approach in the fund management based on diversification. It is very good to normal investor to have market return. It is impossible to beat market consistently. I don’t like this approach, as I want to beat market.
Never buy big position at once
Never sell big position at once
Never try to get the exact bottom when you long
Never try to get the exact top when you short
Never issue a order on the fly
Never cut the big loss
Never buy out of money option
Never buy short term option
Never take a small profit
Habits
Preservation of Capital is Always Priority No.1
In the market, sometimes there are many opportunities that can make a lot of money but with big risk, I prefer to lose the chance. For example, currently, the coal and natural gas companies, such as aci and eca, could recovery back once weather will get cold. However, this risk is pretty big in case the weather is not going to be cold. In this case, I don’t purchase any aggressive options for natural gas and coal.
Believes his first priority is always preservation of capital, which is the cornerstone of his investment strategy.
Has only one investment aim –“to make a lot of money.” As a result, often failed to keep it.
Passionately Avoid Risk
The key concept is how to define risk. In term of mathematics, the risk is defined as standard deviation. This is the wrong concept. I think the biggest risk is that you don’t understand your risk position. For example, If the natural gas price is down to $5, then there is no any risk to purchase the natural gas, as the $5 natural gas is even lower than cost to produce. In this case, many companies will reduce the production, then the supply and demand is going to change, and therefore, natural gas price is going to go up.
As a result (of Habit No.1), is risk-averse
Thinks that big profits can be made by taking big risks.
Develop Your Own Unique Investment Philosophy
Warren Buffet: I don’t have that patience and I don’t have that ability to evaluate the business. Plus, I don’t believe buy and hold concept for this period of time.
George Soros: I don’t have deep knowledge of macro economics and therefore can’t get the direction right. In addition, his philosophy is very difficult to understand
Jim Rogers: I believe his commodity theory; however, I am not in the future market with such big long term bet.
Peter Lynch: I like his story with growth stock. I have similar difficult with warren buffet’s
Jesse Livermore: the world greatest trader. I like his story but can’t simulate it as I am not categorizing myself as trader.
Me: Believe that there is always a correction in the market where the price is lower than value. My goal is to take advantage of that correction and leverage is using call option
Has developed his own investment philosophy, which is an expression of his personality, abilities, knowledge, tastes, and objectives. As a result, no two highly successful investors have the same investment philosophy.
Has no investment philosophy, or uses someone else’s.
Develop Your Own, personal System for selecting, Buying, and Selling Investments
Initial prototype has been developed, it is in the test phrase
Has developed – tested – his own personal system for selecting, buying and selling investments.
Has no system. Or has adopted someone else’s without testing and adapting it to his own personality. (When such a system doesn’t work for him, he adopts another one – which doesn’t work for him either)
Buy As Much As You Can
I can intelligent diversification, meaning that we buy sector index, which has maximum profit with minimum risk. This idea is very good for buying options as the premium is relative low but with the same levage.
Doesn’t believe in diversification; always buy as much as he can of an investment that meets his criteria
Lacks the confidence to take a huge position on any one investment.
Focus on After – tax Return
Investment in RRSP, which will take the advantage of tax shelter.
Hates to pay taxes (and other transaction costs) and arrange his affairs to legally minimize his tax bill
Overlooks or neglects the burden that taxes and transaction costs place on long term investment performance.
Only invest in What You Understand
Secular bull market;
Currently, it is energy market and gold market;
Only invest in what he understand
Doesn’t realize that a deep understanding of what he is doing is an essential prerequisite to success. Rarely realize that profitable opportunities exist within his own area of expertise.
Refuse to Make Investment That Do Not Meet Your Criteria
Timing in energy market
Refuse to make investments that do not meet his criteria. Can effortlessly say “No!” to everything else.
Has no criteria, or adopts someone else’s. Can’t say “No!” to his own greed.
Do Your Own Research
Monitor 5 criteria to decide the exit point
Is continually searching for new investment opportunities that meet his criteria and actively engage in hid own research. Likely to listen only to other investors or analysts whom he has profound reasons to respect.
Is looking for the thousand – to –one shot that will put him on easy street. As a result, often follows the “hot tip of the month, always listening to anyone styled as “expert”. Rarely makes deep study of any investment before buying. His research consists of getting the latest “hot” tip from a broker, an advisor – or yesterday’s newspaper.
Have infinite Patience
Patient of doing nothing, when
§ No position in market
§ Position in market with huge loss, or market has no clear direction ($50 in January 2006)
§ Position in market with huge gain
Has the patience when he can’t find an investment that meets his criteria to wait indefinitely until he finds one that does
Feels that he has to be doing something in the market at all times.
Act Instantly
If I decide to buy, then buy it NOW, never setup a order a little lower than market price
Acts instantly when he has made a decision
Procrastinates
Hold a Winning Investment Until there is a predetermined reason to Sell
My sale rule is the reference point, or 15% up from the market bottom
Holds a winning investment until a predetermined reason to exit arises
Rarely has a predetermined rule for taking profits. Often scared a small profit will turn into a loss, so he cashes it in – and regularly missed giant gains
Follow Your System Religiously
Chan
Follow his own system religiously.
Continually “ second-guesses” his system – if he Has one. Shifts criteria and “goalposts” to justify his actions.
Admit You Mistake and Correct Them immediately
Chan
Is aware of his own fallibility. Corrects mistakes the moment they become evident. As a result, rarely suffers more than small losses.
Hangs on to losing investments in the hope he’ll be able to break even. As a result, often suffers huge losses.
Turn Mistakes into Learning Experiences
To summarize what I did right and wrong periodically
Always treats mistakes as learning experience.
Never stays with any one long enough to learn how to improve it. Always looks for an “instant fix”
Pay Your Dues
Writing
His return increase with experience; now seems to spend less time to make more money. Has “paid his dues”
Not aware it is necessary to “Pay your dues” Rarely learns from experience… and tends to repeat the same mistake until he’s cleaned out.
Never Talk about What You’re Doing
Keep learn it for my lifespan
Almost never talks to anyone about what he’s doing. Not interested or concerned with what others think about his investment decisions.
Is always talking about his current investments, “testing” his decisions against others’ opinions rather than against reality.
Know How to Delegate
Balanced approach
Has successfully delegated most if not all of his responsibilities.
Selects investment advisors the same way he make investment decisions
Live Far below Your Means
Yes, I understand the money can be compounded
Live far below his means
Probably lives beyond his means (Most of people do)
It is Not about the Money
?
Invests for stimulation and self-fulfillment – not for money
Is motivated by money; thinks investing is the way to easy riches
Love what you do, not what you Own
Try to test my system to see how can I challenge myself
Is Emotionally involved with (and get his satisfaction from) the process of investing; can walk away from any individual investment
Falls in love with his investments
Live and Breath Investment 24 Hours a Day
Full aware of my investment
Lives and Breathes investment twenty –four hours a day.
Is not fully dedicated to achieving his investment goals (even if he knows what they are)
Put Your Net Worth on the Line
Put my RRSP on the line to try
In the market, sometimes there are many opportunities that can make a lot of money but with big risk, I prefer to lose the chance. For example, currently, the coal and natural gas companies, such as aci and eca, could recovery back once weather will get cold. However, this risk is pretty big in case the weather is not going to be cold. In this case, I don’t purchase any aggressive options for natural gas and coal.
Believes his first priority is always preservation of capital, which is the cornerstone of his investment strategy.
Has only one investment aim –“to make a lot of money.” As a result, often failed to keep it.
Passionately Avoid Risk
The key concept is how to define risk. In term of mathematics, the risk is defined as standard deviation. This is the wrong concept. I think the biggest risk is that you don’t understand your risk position. For example, If the natural gas price is down to $5, then there is no any risk to purchase the natural gas, as the $5 natural gas is even lower than cost to produce. In this case, many companies will reduce the production, then the supply and demand is going to change, and therefore, natural gas price is going to go up.
As a result (of Habit No.1), is risk-averse
Thinks that big profits can be made by taking big risks.
Develop Your Own Unique Investment Philosophy
Warren Buffet: I don’t have that patience and I don’t have that ability to evaluate the business. Plus, I don’t believe buy and hold concept for this period of time.
George Soros: I don’t have deep knowledge of macro economics and therefore can’t get the direction right. In addition, his philosophy is very difficult to understand
Jim Rogers: I believe his commodity theory; however, I am not in the future market with such big long term bet.
Peter Lynch: I like his story with growth stock. I have similar difficult with warren buffet’s
Jesse Livermore: the world greatest trader. I like his story but can’t simulate it as I am not categorizing myself as trader.
Me: Believe that there is always a correction in the market where the price is lower than value. My goal is to take advantage of that correction and leverage is using call option
Has developed his own investment philosophy, which is an expression of his personality, abilities, knowledge, tastes, and objectives. As a result, no two highly successful investors have the same investment philosophy.
Has no investment philosophy, or uses someone else’s.
Develop Your Own, personal System for selecting, Buying, and Selling Investments
Initial prototype has been developed, it is in the test phrase
Has developed – tested – his own personal system for selecting, buying and selling investments.
Has no system. Or has adopted someone else’s without testing and adapting it to his own personality. (When such a system doesn’t work for him, he adopts another one – which doesn’t work for him either)
Buy As Much As You Can
I can intelligent diversification, meaning that we buy sector index, which has maximum profit with minimum risk. This idea is very good for buying options as the premium is relative low but with the same levage.
Doesn’t believe in diversification; always buy as much as he can of an investment that meets his criteria
Lacks the confidence to take a huge position on any one investment.
Focus on After – tax Return
Investment in RRSP, which will take the advantage of tax shelter.
Hates to pay taxes (and other transaction costs) and arrange his affairs to legally minimize his tax bill
Overlooks or neglects the burden that taxes and transaction costs place on long term investment performance.
Only invest in What You Understand
Secular bull market;
Currently, it is energy market and gold market;
Only invest in what he understand
Doesn’t realize that a deep understanding of what he is doing is an essential prerequisite to success. Rarely realize that profitable opportunities exist within his own area of expertise.
Refuse to Make Investment That Do Not Meet Your Criteria
Timing in energy market
Refuse to make investments that do not meet his criteria. Can effortlessly say “No!” to everything else.
Has no criteria, or adopts someone else’s. Can’t say “No!” to his own greed.
Do Your Own Research
Monitor 5 criteria to decide the exit point
Is continually searching for new investment opportunities that meet his criteria and actively engage in hid own research. Likely to listen only to other investors or analysts whom he has profound reasons to respect.
Is looking for the thousand – to –one shot that will put him on easy street. As a result, often follows the “hot tip of the month, always listening to anyone styled as “expert”. Rarely makes deep study of any investment before buying. His research consists of getting the latest “hot” tip from a broker, an advisor – or yesterday’s newspaper.
Have infinite Patience
Patient of doing nothing, when
§ No position in market
§ Position in market with huge loss, or market has no clear direction ($50 in January 2006)
§ Position in market with huge gain
Has the patience when he can’t find an investment that meets his criteria to wait indefinitely until he finds one that does
Feels that he has to be doing something in the market at all times.
Act Instantly
If I decide to buy, then buy it NOW, never setup a order a little lower than market price
Acts instantly when he has made a decision
Procrastinates
Hold a Winning Investment Until there is a predetermined reason to Sell
My sale rule is the reference point, or 15% up from the market bottom
Holds a winning investment until a predetermined reason to exit arises
Rarely has a predetermined rule for taking profits. Often scared a small profit will turn into a loss, so he cashes it in – and regularly missed giant gains
Follow Your System Religiously
Chan
Follow his own system religiously.
Continually “ second-guesses” his system – if he Has one. Shifts criteria and “goalposts” to justify his actions.
Admit You Mistake and Correct Them immediately
Chan
Is aware of his own fallibility. Corrects mistakes the moment they become evident. As a result, rarely suffers more than small losses.
Hangs on to losing investments in the hope he’ll be able to break even. As a result, often suffers huge losses.
Turn Mistakes into Learning Experiences
To summarize what I did right and wrong periodically
Always treats mistakes as learning experience.
Never stays with any one long enough to learn how to improve it. Always looks for an “instant fix”
Pay Your Dues
Writing
His return increase with experience; now seems to spend less time to make more money. Has “paid his dues”
Not aware it is necessary to “Pay your dues” Rarely learns from experience… and tends to repeat the same mistake until he’s cleaned out.
Never Talk about What You’re Doing
Keep learn it for my lifespan
Almost never talks to anyone about what he’s doing. Not interested or concerned with what others think about his investment decisions.
Is always talking about his current investments, “testing” his decisions against others’ opinions rather than against reality.
Know How to Delegate
Balanced approach
Has successfully delegated most if not all of his responsibilities.
Selects investment advisors the same way he make investment decisions
Live Far below Your Means
Yes, I understand the money can be compounded
Live far below his means
Probably lives beyond his means (Most of people do)
It is Not about the Money
?
Invests for stimulation and self-fulfillment – not for money
Is motivated by money; thinks investing is the way to easy riches
Love what you do, not what you Own
Try to test my system to see how can I challenge myself
Is Emotionally involved with (and get his satisfaction from) the process of investing; can walk away from any individual investment
Falls in love with his investments
Live and Breath Investment 24 Hours a Day
Full aware of my investment
Lives and Breathes investment twenty –four hours a day.
Is not fully dedicated to achieving his investment goals (even if he knows what they are)
Put Your Net Worth on the Line
Put my RRSP on the line to try
Systems
What to buy
Any extreme sectors
Sector
Any market, global market (small cap)
Commodity sector
All or part of a business that he understands – and that meets his criteria.
Assets that will change in price if his hypothesis is valid
When to buy it
When extreme happens
Deploy capital before market move
When market is very pessimistic
Anytime before long term trend established
When the price is right
At the right time – which he determines by testing his hypothesis
What price to pay
Basket approach to give better average
?
?
Current price
A price that gives him a margin of safety(i.e., a discount to the business’s estimated value)
The current price
How to buy it
Two times leverage
?
?
?
Pay cash
Futures, forward, contracts, margin, with borrowed money
How much to buy as a percentage of portfolio
As much as I can with 2 time leverage and always leave some cash to take extreme bargain.
?
?
As much as he can. Limits: How much cash he has available, how much stock is on the market- and for how long it’s available at the right price
As much as he can. Limits: rarely exceeds 50% margin (on a total portfolio basis,)
Monitoring progress of investments
Review monthly
Sit tight to get big profit
?
Long term hold (17 yrs)
Does the business still meet his criteria?
Is the hypothesis still valid? Is it progressing as expected? Has it run its course?
When to sell
Based on target price range
?
Based on PE ratio
When the long cycle is over
Stock: when the business no longer meets his criteria. Wholly-owned business: When it’s “broken and we can’t fix it”
When hypotheses has run its course or is no longer valid
Portfolio structure and leverage
2 times leverage
?
?
?
No target structure. Leverage only though insurance float, or borrowing when interest rates are low.
The basic is stocks, fully owned, which becomes security for leverage.
Search strategy
All sectors
Primary trend
Globally
No search, 17 year cycle
Read lots of annual reports; answers the phone.
Monitors political, economics, industry, currency, interest rate and other trends. Looks for linkage s between disparate, unfolding events.
Protection against systematic stocks such as market crashes
?
?
?
Only buys quality businesses he understands at a price that gives him a substantial margin of safety. Buffet-style businesses often expand market share when their competitors are in trouble, so becoming more profitable in the long run.
Judicious use of leverage
Beats a hasty retreat.
Handling mistakes
Avoid mistake
Keep rules
Gets out (stock market investment)
Admits, accepts, and analyzes mistakes to avoid repeating them. Also considers “sins of omission” mistakes.
Get the hell out
Has a detailed strategy for analyzing mistakes so he doesn’t make the same mistake again.
What to do when the system doesn’t work
Continually reviews system to see if it can be improved.
Out of market
Stops;
Seeks flaw in method ( e.g. adopting Fisher’s method) . Continually reviews system to see if it can be improved.
Stops
Continually reviews system to see if it can be improved.
Any extreme sectors
Sector
Any market, global market (small cap)
Commodity sector
All or part of a business that he understands – and that meets his criteria.
Assets that will change in price if his hypothesis is valid
When to buy it
When extreme happens
Deploy capital before market move
When market is very pessimistic
Anytime before long term trend established
When the price is right
At the right time – which he determines by testing his hypothesis
What price to pay
Basket approach to give better average
?
?
Current price
A price that gives him a margin of safety(i.e., a discount to the business’s estimated value)
The current price
How to buy it
Two times leverage
?
?
?
Pay cash
Futures, forward, contracts, margin, with borrowed money
How much to buy as a percentage of portfolio
As much as I can with 2 time leverage and always leave some cash to take extreme bargain.
?
?
As much as he can. Limits: How much cash he has available, how much stock is on the market- and for how long it’s available at the right price
As much as he can. Limits: rarely exceeds 50% margin (on a total portfolio basis,)
Monitoring progress of investments
Review monthly
Sit tight to get big profit
?
Long term hold (17 yrs)
Does the business still meet his criteria?
Is the hypothesis still valid? Is it progressing as expected? Has it run its course?
When to sell
Based on target price range
?
Based on PE ratio
When the long cycle is over
Stock: when the business no longer meets his criteria. Wholly-owned business: When it’s “broken and we can’t fix it”
When hypotheses has run its course or is no longer valid
Portfolio structure and leverage
2 times leverage
?
?
?
No target structure. Leverage only though insurance float, or borrowing when interest rates are low.
The basic is stocks, fully owned, which becomes security for leverage.
Search strategy
All sectors
Primary trend
Globally
No search, 17 year cycle
Read lots of annual reports; answers the phone.
Monitors political, economics, industry, currency, interest rate and other trends. Looks for linkage s between disparate, unfolding events.
Protection against systematic stocks such as market crashes
?
?
?
Only buys quality businesses he understands at a price that gives him a substantial margin of safety. Buffet-style businesses often expand market share when their competitors are in trouble, so becoming more profitable in the long run.
Judicious use of leverage
Beats a hasty retreat.
Handling mistakes
Avoid mistake
Keep rules
Gets out (stock market investment)
Admits, accepts, and analyzes mistakes to avoid repeating them. Also considers “sins of omission” mistakes.
Get the hell out
Has a detailed strategy for analyzing mistakes so he doesn’t make the same mistake again.
What to do when the system doesn’t work
Continually reviews system to see if it can be improved.
Out of market
Stops;
Seeks flaw in method ( e.g. adopting Fisher’s method) . Continually reviews system to see if it can be improved.
Stops
Continually reviews system to see if it can be improved.
Execution
Identify extreme for potential sectors
?
Patiently plan the buy price range and setup all orders ahead of the expected move
Bear in mind that you can never enter the market at lowest point, or highest point; therefore, use price range is the best idea.
? How to determine highest price:
? How to determine lowest price:
Sell part of shares when there is bounce and then buy is back at the price lower than sold price
Patiently plan the sell price range and setup all orders ahead of the expected move
Bear in mind that you can never enter the market at lowest point, or highest point; therefore, use price range is the best idea.
? How to determine highest price:
? How to determine lowest price:
buy part of shares when there is down
Diligently review it out towards the cycle end
Don’t simply take profit. However, remember that you don’t have to try and sell at the top, just somewhere close to it.
?
Patiently plan the buy price range and setup all orders ahead of the expected move
Bear in mind that you can never enter the market at lowest point, or highest point; therefore, use price range is the best idea.
? How to determine highest price:
? How to determine lowest price:
Sell part of shares when there is bounce and then buy is back at the price lower than sold price
Patiently plan the sell price range and setup all orders ahead of the expected move
Bear in mind that you can never enter the market at lowest point, or highest point; therefore, use price range is the best idea.
? How to determine highest price:
? How to determine lowest price:
buy part of shares when there is down
Diligently review it out towards the cycle end
Don’t simply take profit. However, remember that you don’t have to try and sell at the top, just somewhere close to it.
Mentors
Jesse Livermore
World greatest trader and speculator, whose approach is described in the book “Reminiscences of a stock operator”, His approach is “Be right” in general market trend, and “Sit tight” to collect big profit. Day trading is definitely not his style. He is my mentor, as I want to become a speculator.
John Templeton
Market guru, trade at maximum pessimism. He is the topic value hunter, spotted on Japan market in early 60s, shorted NSDQ market. He is my mentor, as I like his flexible approach to be long and short market.
Jim Rogers
Market guru, succeed in 1970s and correctly anticipated current commodity boom. His approach is to ride the big economic cycle. He doesn’t believe in technical analysis and trading. He is my mentor, as I like his approach to ride market cycle.
Robert Shiller
Economist successfully predicted the market and real estate bubble. In which he argued by historical data rather than by his opinion. He is my mentor, as he is first professional that combines economic theory and real world.
Mark Faber
Another market guru, successfully anticipated market crisis in 1987, focuses on very big market picture. He is my mentor, as I like his approach to look at big picture.
Warren Buffet
World greatest value investor, buying great businesses for considerably less that what he thinks they are worth and owning them “forever’. It is impossible for me to find such business and to have such an extreme patience. He is NOT a mentor for me.
Gorge Soros
World greatest currency speculator, he is famously for making huge, leveraged trades in the currency and future market. I don’t have such a guts, or can’t take such pressure. He is NOT a mentor for me.
CFA
A most used approach in the fund management based on diversification. It is very good to normal investor to have market return. It is impossible to beat market consistently. I don’t like this approach, as I want to beat market.
Trend followers
Wide range of traders that mainly follow the technical analysis to beat market. I don’t like it, as I don’t believe in technical analysis.
World greatest trader and speculator, whose approach is described in the book “Reminiscences of a stock operator”, His approach is “Be right” in general market trend, and “Sit tight” to collect big profit. Day trading is definitely not his style. He is my mentor, as I want to become a speculator.
John Templeton
Market guru, trade at maximum pessimism. He is the topic value hunter, spotted on Japan market in early 60s, shorted NSDQ market. He is my mentor, as I like his flexible approach to be long and short market.
Jim Rogers
Market guru, succeed in 1970s and correctly anticipated current commodity boom. His approach is to ride the big economic cycle. He doesn’t believe in technical analysis and trading. He is my mentor, as I like his approach to ride market cycle.
Robert Shiller
Economist successfully predicted the market and real estate bubble. In which he argued by historical data rather than by his opinion. He is my mentor, as he is first professional that combines economic theory and real world.
Mark Faber
Another market guru, successfully anticipated market crisis in 1987, focuses on very big market picture. He is my mentor, as I like his approach to look at big picture.
Warren Buffet
World greatest value investor, buying great businesses for considerably less that what he thinks they are worth and owning them “forever’. It is impossible for me to find such business and to have such an extreme patience. He is NOT a mentor for me.
Gorge Soros
World greatest currency speculator, he is famously for making huge, leveraged trades in the currency and future market. I don’t have such a guts, or can’t take such pressure. He is NOT a mentor for me.
CFA
A most used approach in the fund management based on diversification. It is very good to normal investor to have market return. It is impossible to beat market consistently. I don’t like this approach, as I want to beat market.
Trend followers
Wide range of traders that mainly follow the technical analysis to beat market. I don’t like it, as I don’t believe in technical analysis.
Philosophy
Do nothing
No buy and sell at most of time. The investment-holding period is about 6 month to 1.5 years. Only trade when there is extreme. When there is NO extreme, most of time, we should do anything. Doing nothing may be the most difficult thing to do.
Be right
Make sure that I know where exactly we’re anytime.
Sit tight
Sit tight to let profit to run, and ignore all market fluctuation on the daily basis.
You don’t need to be smart
Trying to be smart to timing the market is very dangerous when the extreme don’t form yet. As we know, market always goes extreme, either too high or to low.
Chan is helpful
You need to be quiet to repeat the same approach again and again until it becomes your instinct at some day.
No buy and sell at most of time. The investment-holding period is about 6 month to 1.5 years. Only trade when there is extreme. When there is NO extreme, most of time, we should do anything. Doing nothing may be the most difficult thing to do.
Be right
Make sure that I know where exactly we’re anytime.
Sit tight
Sit tight to let profit to run, and ignore all market fluctuation on the daily basis.
You don’t need to be smart
Trying to be smart to timing the market is very dangerous when the extreme don’t form yet. As we know, market always goes extreme, either too high or to low.
Chan is helpful
You need to be quiet to repeat the same approach again and again until it becomes your instinct at some day.
Beliefs
Investment is an art
It is about balance between supply and demand, bullish and bearish, optimistic and pessimistic. Because of such a balance involving us, it is impossible to quantify it. You really don’t know where the turn point is, or rebalance of sentiment. We want to repeat the basic belief, which is market goes much higher or much lower when there is extreme. I ask myself why everybody follows crowd, again, because we’re human, we fell much safe when everybody does it. However, if everybody goes the same direction, then everybody either to sell or buy, this is exactly the turn point. Nevertheless, it is impossible to quantify it; you can’t catch the exact bottom and or exact top.
Human nature drives the market
One of the major market forces is the human nature, such as fear, greed. There won’t anything new in the investment. Booms, bulls, burst have been around for centuries and will continue to the future. Human pushed market much higher when market is bullish, and beat market much lower when market is bearish.
There is always cycle
You can’t have always up market, or bearish market. Whether we are talking about the stock markets, real estate, currencies, even our own lives, things tend to move in cycles. There is small cycle in a given big cycle. Getting into right cycle can provide enormous profit.
History is your best defense
If there are four pillars of investment, or investment theory, history, psychology and investment industry. Understanding of history can help spot the extreme.
Still believe in Asia story
19th century: UK / 20 century: US / 21 century is Asia
Current market is bearish stock market. It is commodity cycle.
Behavior finance is much better market efficient theory
It is about balance between supply and demand, bullish and bearish, optimistic and pessimistic. Because of such a balance involving us, it is impossible to quantify it. You really don’t know where the turn point is, or rebalance of sentiment. We want to repeat the basic belief, which is market goes much higher or much lower when there is extreme. I ask myself why everybody follows crowd, again, because we’re human, we fell much safe when everybody does it. However, if everybody goes the same direction, then everybody either to sell or buy, this is exactly the turn point. Nevertheless, it is impossible to quantify it; you can’t catch the exact bottom and or exact top.
Human nature drives the market
One of the major market forces is the human nature, such as fear, greed. There won’t anything new in the investment. Booms, bulls, burst have been around for centuries and will continue to the future. Human pushed market much higher when market is bullish, and beat market much lower when market is bearish.
There is always cycle
You can’t have always up market, or bearish market. Whether we are talking about the stock markets, real estate, currencies, even our own lives, things tend to move in cycles. There is small cycle in a given big cycle. Getting into right cycle can provide enormous profit.
History is your best defense
If there are four pillars of investment, or investment theory, history, psychology and investment industry. Understanding of history can help spot the extreme.
Still believe in Asia story
19th century: UK / 20 century: US / 21 century is Asia
Current market is bearish stock market. It is commodity cycle.
Behavior finance is much better market efficient theory
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