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How useful is Forecasting (fortune-telling)
Oavde
post Posted: Mar 2 2005, 02:39 PM
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Woah this thread has exploded

I agree with wot spot said, although when I go long on a stock, I expect it to go down lol

My point before was it doesn't matter whether you forecast the movement or not, it is natural that if you expect it to go up you go long, if you expect it to go down you go short, but whether you are right or wrong what ultimately matters is that you

MEASURE the distance to your well decided stop loss and then ONLY BUY as much as you can afford to risk at that loss.

So if you stop loss is just below a support line, 7% below where the buy price is, and you can afford to lose 2% of your entire capital on this trade, then you have to reduce that 7% loss to 2% ie that is around 28% - you can only put 28% of your trading capital into that trade. So if your stop loss gets triggered then you've lost only 2% of your total trading capital. Capiche?

Those figures are for illustration only .. and a whole lot better than spending 100% of your capital on a single trade and having NO stop loss.



 
spot
post Posted: Mar 2 2005, 05:20 AM
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no-one buys or sells without forecasting the most likely direction of price movement.
i do not believe there is anything deterministic about prices - nevertheless i believe you can make some fairly valid projections of price targets.
i have never traded options but a friend of mine used to . he assured me that some players in that market were extremely accurate in their play. he was by nature a bear and he only used to buy puts. the odds against someone making money doing that is 10:1 against. but he was so accurate in his play that one year he took 250k off them.
i remember some years ago trying to figure out the intermediate top of an SP500 contract bull move - i started by looking at the longer term charts then zoomed on to my number using the intraday charts. normally i would wait until after some confirmation of the top but this time i placed my sell at my exact number eg 969.35(whatever it was at the time). several more trades occurred at that number. that was top tick and ATH at the time . slowly the market weakend and for several days there was a limit move during the night which triggered the circuit breakers to stop the market for a time.

when something like that happens to you, it really makes you think. serendipity or valid projection analysis?

certainly you need to estimate a target which you consider the market has a 50% chance of hitting. and determine the minimum stop that should not be hit, if you have picked direction right.
you need these measurements to calculate your reward risk ratio. the bigger the ratio , the bigger bet one should make. hence you are acting rationally and according to your estimate of the odds.
for a time i did play a lot of blackjack using a 3-level count. eventually i was hassled , photographed etc while playing and that was the end of that. when you play that count you are scoring cards dealt either -3,-2, -1, 1,2,3 and keeping a cumulative total which you then divide by your estimate of the number of half packs left in the shoe. any combination of cards dealt to you is referred mentally to a matrix of numbers in your head which then determine your best play according to your calculation of cumulative count divided by the number of half packs left in play. you can count aces with your feet to determine whether or not you should insure when the dealer draws an ace as first card.
the point i'm making is that to make money you must bet more when the odds are in your favour and you can't estimate the odds unless you do some counting and measuring. the beauty of playing blackjack is that you set your bet.
if you don't determine your valid stop and stick to it, how can you determine the reward risk ratio and hence being able to size your bet rationally. all we are doing really is buying and selling probabilities.
i think the biggest hassle some have is not setting a valid stop ie they are not setting their bet as they would if they were playing blackjack or betting on a horse.



 
normc
post Posted: Mar 1 2005, 08:23 PM
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In reply to: Thumper on Tuesday 01/03/05 07:14pm

Your right Thumper, a BGO (blinding glimpse of the obvious). But we mostly move on as if things will continue as they are indefinately. Or until any change is totally clear, which may be too late. What does it mean? Who knows. When will it happen? Who knows. How big will the impact be? Who knows. How long will it last? Who knows.

Not much help am I. I challenge myself with it almost every day, but don't yet lose any sleep over it. When I do, I guess it is time to convert a lot to cash! Thought I'd toss it on the forum every now and then to test the thoughts and stress levels of others.

 
Thumper
post Posted: Mar 1 2005, 07:14 PM
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In reply to: normc on Tuesday 01/03/05 06:40pm

Technically the US markets look jiggered. When it goes a lot of commodoties are going to be affected along with it. (no s**t Sherlock, everyone says).

 
normc
post Posted: Mar 1 2005, 06:40 PM
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This is from a Comsec Research report issued today. Thought it was worth posting in light of discussion on this thread a few days ago about macro market forecasting, as opposed to stock forecasting. I have expressed a view that if the US market falls significantly, and particularly if the US economy slows, it will flow in many ways to other markets, including Australia.

'The consensus expects the US current account deficit to shrink without causing any financial market and FX market volatility. That's unlikely.
This year, the US current account deficit will stay unsustainably wide for structural reasons. That will drive the dollar down further and have a significant impact on the US treasury and stock markets. We are short all US financial assets.'

 
normc
post Posted: Mar 1 2005, 05:24 PM
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In reply to: david_j_c on Tuesday 01/03/05 03:26pm

David,

I think I follow what you are saying. I'll agree with some of your theory, but:

The amount of cash available for investment (not just in the share market, but all areas) is rising all the time. Largest driver is superannuation, which has to go somewhere as it can not be held in cash under the bed. A lot of this cash naturally goes into stock markets, particularly during a bull market. Globally at the moment, property prices remain high at the same time. This gives the potential for leverage from property assets to borrow and invest in the stock market. I think we would be surprised how much this is happening. Finally, with such rampant bull markets (almost globally), so called mum and dad investors increasingly enter the market. Individually not big investors, but collectively a lot of cash. As an aside, it is generally believed that once the 'mum and dad' investors get really excited (largely by the press and investment scheme promoters), it is time to look for exit strategies. When A Current Affair starts to run stories on how easy it is to make money in shares, look out.

Also, these days, money crosses borders easily and particularly for institutions, the world is now their potential market. So, instead of trying to select industries and stocks as most of us do, their first selection is region then country, then industry, with stock being way down the list. Because of this, regions and countries are competing for available funds, not just stocks within one market.

So in a micro sense, on a particular day, the amount of cash available may in theory, be fixed, with competition between companies for it's distribution. In a macro sense, the amount of cash available is almost unlimited. Humour me here, I know that in practice what I am about to say is impossible, but to illustrate my point....If the Australian market was the only one in the world with strong fundamentals for growth and all the rest were looking negative, a lot (theoretically all) of the worlds capital could try to enter the Australian market. A silly proposition I know, but it serves to illustrate my point that the amount of cash available for any single market is far from fixed.

I agree though, that in the long term, fundamentals must be right for a stock to succeed. Don't want to get into a FA v TA argument, but my theory is that TA gives an indication of where to look and helps in the timing of entry and exit points and even potential entry and exit prices. It can not (for me anyway) predict the long term profitability or SP of a company. I think some people can 'trade' successfully on TA alone, but you cannot 'invest' on TA alone. But you can invest on FA alone. I think smart people us a bit of each.

As to why my Category 4 stocks are my worst performers (as a group; individually I have had some beauties). I am just not good enough yet at picking winners. Not sure if I will ever be, but I'll keep trying (with 10% of my funds). What I am trying to do is detect the leading edge of fundamentals. Pick the future winners before most of the market has a whiff. Problem is, most of the potential stocks in this category have little substantial information available, and I am far from an expert in TA. I have never bought or sold on TA alone, but I don't discount that success is possible; as a trader, not an investor. But in the long run, I suspect few succeed (I have seen some 'research' that 95% of such traders eventually end up behind; have no idea if this is right). But for FA on spec stocks, some of the info available is crap and at best incomplete and misleading. But, just look at the list Anne posted on this thread a couple of days ago. Get into 6 of these early (even if you have 6 duds as well) and you are on your way. 6 from that long list must be possible. I just haven't worked out how yet.

So, to bring this long ramble to an end. If you want to make real money over the long term, invest in well managed, profitable stocks in good industries (ie stocks with good fundamentals). If you want some fun and a chance at getting super returns, or want to test some of your 'way out' theories have a go at some specs with a small proportion of your funds. But if you are not treating it as a gamble (selecting with darts), be ready for some time consuming and frustrating research. Getting quality info on these companies is often tough. Last word. If you can't get the info, or don't trust what you have, don't invest, no matter what another poster on this site says!

David, I'm not sure if this is really a response to your post, but my thoughts anyway.

 


david_j_c
post Posted: Mar 1 2005, 03:26 PM
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In reply to: normc on Monday 28/02/05 01:03pm

Norm,

Interested that your worst performing category is 4. My take is that there is no doubt that on average and in the long run fundamentals win through. Which leads me to think: At any time there is a fixed amount of money in the market so when, at that time, you see a stock that has grown up to now because of good fundamentals, where has the share market money in that stock come from? Not from other stocks with good fundamentals, some from stocks with poor fundamentals that the market formerly considered as good. Over time, financial evolution will ensure these players leave the market (if they consistently get it wrong they have nothing left to invest). They will be replaced temporarily with other similar players but by the same process they also won't last long. Whether the gains deriving from good fundamentals outweighs losses from bad fundamentals seems to me an easy question to answer: they do, because we see over time and on average that markets go up. So it seems to me that ultimately the gains must have come from (up to our moment in time) traders. Buying on uptrends when the sp is too high, selling on downtrends when it is too low. The fundamentalists gain by selling at the too-high price, buying at the too-low price. If the trader is really not looking at fundamentals at all then they are really facing a situation best described as chaos as they try to predict the churn of the herd position. The one valuable lesson from formal chaos theory is that even if you know what the rules are (ie you are much better than others at TA or simply understanding the herd) you still can't accurately predict outcomes. And it is not statistical noise (as many analysts think) so statistical techniques don't help much except a bit for descriptions of the past. So if this is correct: on average traders lose (of course some win, but fewer than lose) and the winners are the fundamentalists who get it right (which on average they do in the long run). This seems to fit your personal account of your experiences. Any thoughts on wider applicability?

David

 
xmagx
post Posted: Feb 28 2005, 03:57 PM
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Brilliant thread !

Well done and thanks to all involved. Not only has an enormous amount of effort gone into many of the posts, they are based on many many years of experience and hard, costly lessons. It doesn't get any more real !!

I tend to agree with most. You get out what you put in! Yes it's great to dream of winning the lottery but what are the chances of it coming off ? I prefer to be more realistic by preparing my own lottery ticket based on predictions and assumptions rather than lucky numbers. Sure, things don't always work out to plan. So long as a lesson is learnt, albeit costly, you should be better off for it IMHO.

Personally got involved with shares in my mid teens. Mainly long term investments with the occasional silly trade for dollars so I could follow the hot air money. Had no idea about earnings, pe's, ect. Followed the gut and the local gossip until I realized that I may as well have been throwing darts. Sixteen years of experience latter, although very painful and at stages scaring, I tend to look at all those costly lessons as the price I had to pay if ever I was to be a successful investor. As an example, one of the first stocks I bought was McPherson's. Paid 17 cents at the time and decided to leave it as a long term investment. Of course during this time Crown was all the rave. I resisted temptation for a few weeks before giving in and switching out of MCP at 23 cents and into Crown over the $2 mark. How silly in hindsight! I've switched out of a company on the up with very few shares on issue and into a company that was consistently issuing script with high capital expenditure. Only weeks later I saw MCP around $1.50 from memory. Up around $1.20 for the day!!. Being 16 years of age at the time I had no idea about earnings, market cap, etc as I pointed out. This was one of many simple lessons to be learnt obviously. As kahuna says, If only I knew then what I think I know now!

Forecasts and predictions on fundamentals is where I've found most success personally. Obviously it isn't fool proof either. You can be 100% right in your assumptions and still see a company go into receivership. The market has a way of wheeling and dealing good assets just before huge capital expenditure is set to reward faithful shareholders. No doubt a painful experience in the higher risk end where huge profits are forecasted after substantial expenditure through raisings and placements. The joys of trying to get in on the ground floor !!

Thanks again to all involved! As I've mentioned in the past, better to go down on your own judgement than to go down on the crowds judgement.

Best of luck to all !

Cheers,
xmagx




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All IMHO offcourse .... DYOR
 
kahuna1
post Posted: Feb 28 2005, 01:40 PM
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In reply to: normc on Monday 28/02/05 02:03pm

Hi Normc,

Yep my target of 35% is a bridge too far for SMSF, but like my one for trading returns.

What I am really tring to stress is the opposite.

A real return after tax and inflation of 10% or more over the longer term is excellent.
Like you I cannot stress strongly enough the need for being conservative.
It must not be treated like your trading account.

Not at all suggesting it is a set and forget portfolio.

But then again not a turnover of every month or so for SMSF.
The vast balance of shares I would suggest should be of a nature where you feel they are very low risk or volatility long term growth shares or undervaled assets.
Somewhere between 6 and 9 months average hold.
Some will be shorter but others give you no reason to sell longer term.

Very very important you protect your capital and returns in your SMSF.
Nothing worse than being old and poor.

If one were to be trading for a living, the timeframe depending on your style ... well my own is average around 2-3 weeks. Some do turn out day trades but never my initial aim. However sometimes the share price can go from one extreme to another in a day.

By managing your own super fund, SMSF, without having to pay outrageous management fees one would hope for a performance better than the market. Certainly 10% after tax and inflation is better than that.

With the managed super funds they are forced to try an mimick the average of the market in a lot of cases. Back when I pulled my own, having 10% of funds in a company like NCP/NWS when it was over $40- equiv of the NWS, really seemed senseless. If you were very lucky the fund only had 3-5% but since they attract funds by performance, if they vary too much from the herd on the downside, they will loose funds under management.

Two things I like about SMSF, instead of being 90-100% in shares all the time, I can lower this as previous shares reach price targets. The other very good point you made was very low volatility high yield investments like listed property funds or another I like is infrastructure funds. Not fully invested right now and have around 25% in cash awaiting some sort of pullback in shares I like very much longer term.

I like shooting for the moon and if lucky sometimes get there.
But anything averaging over 10% long term is good. Last year should have been very good. Use the advance of the S+P asx 200 as a yardstick and hope to achieve a return well above that.

35% after tax and inflation is around 25% real return. Anything up here for a conseravtive well spread fund is excellent. However for 2004, it should have been somewhat higher with the ASX 200 rising by just over 33%. Last year was a once in a blue moon advnace.


With both, the biggest enemy is yourself.
Don't go for the risky big payoffs, they really don't pan out. Sometimes sure you are lucky but in the end one comes a cropper and if you have 25% in a complete flop, its all gone.

My own measure is the 5% per month target. Has been somewhat easy last year. Have had very strong views regarding a bunch of stocks and been rewarded even more so with the overall market going up by so much and some sectors I liked bouncing in a big way or hitting all time highs, in some cases both. Sometimes you are blessed, but knowing like the market, myself as a trader sometimes loose touch with the market and decisions returns and profits all fall.

Right now shall enjoy the good, but very mindful of the change which will come at some time when one makes a less than perfect decision. Worse still is a whole set of them.

Good luck





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All views expressed are my own opinions. While I take every care when posting no guarantee to the absolute veracity of the postings is given or implied. Please do your own reseach and consult a professional investment advisor before investing.
 
normc
post Posted: Feb 28 2005, 01:03 PM
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In reply to: kahuna1 on Monday 28/02/05 08:31am

Great info and advice again Mark.

Only thing I'd comment on is your words on SMSF. Here is the part of your post I am commenting on.

'For the super funds and a much more conservative stance a I would suggest a target of say 35% P/A is a good one. This year managed funds have come close, but a few years ago the returns were negative. Super is your retirement money. No spec stocks at all should be used. A minimum of 15 stocks and possibly 20 should be in the portfolio.
Trades should be infrequent, once or twice a year. This is not an active portfolio.
Growth and long term growth stocks should be picked. No holding of more than 7% in any one stock, no matter how much you love it is advised.'

In the long run (which is what is important to super), I think it is pretty difficult to achieve 35% annual growth (particularly after tax and expenses), while maintaining a conservative stance with very infrequent trades. Of course it has been pretty easy to do this over the past 18 to 24 months. Just buy a good spread of blue chips, put them in the bottom draw and go fishing. Job done. But achieving this on the long term over 10, 20, 30 years is tough. Havn't been running my fund for anything like that time, but I doubt I have the skills to achieve 35% growth over this time frame, while taking few risks.

My written investment strategy has 2 key measure for this:

1. Over the long term, achieve total fund returns (including capital gains (losses), income, expenses and tax) of 10% more than CPI increases (ie a real gain of 10%)

2. Achieve total fund returns each year that are equal to or better than the cut off for the top quartile of retail super funds (ie, do better than at least 75% of the big super funds which publish their results)

The first is to ensure I can meet my long term financial needs. The second is to test and ensure it is really worth the time and effort to do it myself. I figure if I can't achieve this, I might as well put my money if a retail fund and go fishing.

Now these are my objectives and I'm not suggesting that they are right for anyone else. Naturally, for the two and a half odd years I've been managing the fund, I've achieved both. But Mr Ed could have done that as well.

Even to achieve these modest (relative to Marks 35% target), I believe I have to actively manage and trade stocks. Not all of them of course. I still have some of the first share I ever bought. I divide my portfolio into very specific categories. Some are conservative and traded infrequently (some never, so far). At the other end, some are actively traded and will have to be even more so, when the bull run comes to an end.

My theory is that to achieve capital preservation, income to support future pensions and superior capital growth, you need to develop the skills of a conservative investor and agressive trader at the same time. To explain this, these are the categories I use to divide my portfolio:

1. Safe (relatively speaking) income earning investments. These include cash; govt bonds (don't have any at the moment); listed interest rate securities, debentures, preference shares, convertable notes etc in solid profitable companies; and shares in solid yield stocks like utilities. Some of thes have little or no capital upside, but others can do very well due to links to increases in price of ordinary shares (convertable notes, some preference shares etc). 30 to 40 % of portfolio.

2. Safe (relatively speaking) growth stocks. These are typically the blue chips and almost all in the ASX 200 (but some exceptions). All are long term profit makers and most pay dividends. 35 to 45 % of portfolio.

3. Speculative Investments. This is where I try to pick good long term prospects. Generally have a history of profitability, but can be a mature start up on the cusp (in my view) of rapid growth. I include turn-around stocks in this category. If well chosen, these can be big winners (ALL and AMP are two that I have held in this category over the past 2 years, both since sold). RAC (now CIX as of today) is a turn around I currently have. Other than RAC, the only non profit making stocks I have a serious holding in, in this category are CST and OPL. Normally not more than 10% and never more than 15% of portfolio.

4. Speculative Traders. This is where I try to pick the big winners and have some fun. Generally hold stocks for a couple of months at most (sometimes a few hours). Occasionally a stock may be retained and moved to category 3. Never more than 10% of portfolio.

Interestingly, but not surprisingly, my worst performance is in category 4. Had some super winners, but the dogs just about eat up the gains. Still believe I need the category in my portfolio. I just have a lot more to learn to manage it better. Category 3 has been very good to me.

A long story, but what I am on about is, if you want the safety and security of category 1 and 2 (and any super fund should be built substantially on these), as well as superior returns over the long term (even my goals, let alone Mark's 35% target), you have to be prepared to drive for big gains in category 3 and 4.

Just my view. I don't believe super is a 'set and forget' investment (know you are not suggesting that Mark).

I started a SMSF thread a few weeks ago. There were some great posts on it for a while, but interest seems to have waned. Other than meeting current financial survival and lifestyle needs, I regard superannuation as the most importand financial planning need we have.

Sorry to ramble, but we all have a passion. This one of mine.


 
 


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