The Effective Investor - Franco Busetti

I am reading the book "The Effective Investor" by Franco Busetti at the moment and really enjoying it.

One of the real reasons I am enjoying it, is that it is written for a South African investor, by local investment professionals. You recognise the companies, the challenges (e.g. the Rand) and the strategies in general.

On top of this there is none of this gratuitous "institutional" feel to the comments that I find often makes "investing" aloof.

You can find the book at Kalahari HERE for R350 or you can click on the image and it will take you to the item in their online store.

Feedback on JSE trading course?

Has anybody tried this course from Sharenet out?

One of my family members is keen to find an introductory trading course to learn to trade shares on the JSE but I am not sure what these are like. Feedback?

You should be able to click through to the Sharenet site for more info via the banner below.

Let me know - ta!

Goldman Sachs kicked in the nuts

I remember watching a movie once where a new kid starts a school after being bullied at the old school. Sure enough this geeky looking kid gets bullied on the first day and nobody wants to hang around with the local whipping boy. He goes home and asks his dad (or maybe it was his uncle?) what he should do because he can't go through another year of torment.

The advice he gets is very simple: "It doesn't matter whether it is a sneak attack, you walk up to the biggest bully on the playground and you kick him as hard as you can in the nuts in the most public place. If he drops, your year has been made and you will be the hero of the school".

Judging from the fun and games in the US on Friday, I reckon somebody over at the SEC has adopted a similar kind of strategy to "right-size" banking giant Goldman Sachs.

Much like it doesn't matter whether or not the bully has psychological issues or problems at home, I don't think that the SEC is all that concerned about the merits of their case. They've snuck up on an industry giant which believes it is untouchable and possibly fired the first salvo in a carpet bombing exercise aimed at the investment banking industry.

Will this even dent Goldman Sachs? Probably not - the guys that work there are too clever to even blink.

But for the rest of the industry, a very clear message has been sent.

The start of a genuine correction?
I'm undecided on whether or not markets are expensive and I think it is folly to try and play that game. Personally I probably wouldn't be buying too many shares right now if I was looking to make money in the next 6 to 12 months.

In fact if I had to hazard a guess this little assault on GS could be maybe the right kind of message to market participants that it is now time to step back and reassess the landscape.

How many compliance managers at the various investment banks and brokerages are scurrying around this weekend trying to double check that their systems are in place? How many are going to be advising their traders that the regulators are being a little nosier than expected and maybe they need to pull in any potential troublesome trades / activities?

Another interesting thing which was missed is that the VIX actually rose to its highest level in 12 months on Friday.

While I'm sure it certainly doesn't help (the traders) that regulators are being nosy and digging into the activities of some of the big guns on Wall Street, maybe it is just a sign that there is some downside risk in the near-term?

Day Trading is for suckers

There is a really interesting piece on the Business Insider website written by Henry Blodget which talks about why day traders can never win.

You can read the full article here but here for me was a key quote which needs to be borne in mind:

Most Wall Street traders have skills, information, and tools that day-traders can only dream of. Trading is a zero-sum game: Market moves aside, every dollar won by one trader comes out of the pocket of another trader. Day traders competing against Wall Streeters is the equivalent of a college football team (or Pee Wee team, depending on the day-trader's skill) competing against a pro team. Is it possible to win? Yes. But it's highly unlikely (1 in 100). Wall Street's winnings do have to come from somewhere, though, so Wall Street thanks the day traders for playing.

Blodget's conclusion is right - if you are planning to day trade your way to enormous wealth then think again - you're probably chasing a pie in the sky dream....

That's probably not what you want to hear if you are visiting a day-traders blog but let's cut the bullshit - making trading wealth is incredibly hard.

Part of the problem I think is that too many private day traders want to cast themselves as institutional traders.

• They sit with multiple screens and charting systems open. They want to talk about resistance, break-outs and the double nipple formation.
  
• They feel they have to be "in" or "on" the market the whole time
  
• If they are not moving money they are not really "trading"

If you are planning to get rich quick then go-ahead and trade forex through one of the online platforms with 200 times gearing. 90 out of 100 of you are going to get fried, maybe 5 of you will eke out a living you're probably going to give most of it back and statistically one of you might make one or two big scores and walk away before you give it all back.

If you do believe you have what it takes then consider these steps:

• There is nothing wrong with buying a reliable share portfolio which includes dividend paying, cash generative shares with high returns on equity - profiting from gains made here is just as much "day-trading" as trading in and out of the global currency market every 10 minutes.
  
• If you are going to trade regularly identify one or two core themes and run with them. Don't try and chase every market and every instrument because that is what the news is doing.
• The trend is your friend. It is the oldest trading mantra and for good reason. We all want to call "the top" or "the bottom" of a market but you will go broke going against the trend.
  
• Use a bit of common sense - trading is made out to be more complicated than it really has to be. Buy low - sell high does not mean buying a stock or currency now because it was 1% lower than it was yesterday
• If you are waking up in a cold sweat at two in the morning and rushing to check your portfolio or positions then you are over-commited.
  

I hope that gives you something to ponder?

Risk vs return

Out of sheer curiousity - if I asked you to put R500 down for a R50 return would you do it?

What if I could do it 8 out of 10 times?

I can't make those promises so I am not going to try but I think it is quite interesting exercise to conduct in terms of trader mentality.

Personally I get the sense that a lot of traders would far rather hit one or two spectacular trades but don't keep score of their smaller losses which add up very quickly.

A lot of people have all of these questions about trading vs gambling - my personal opinion - trading is about building wealth. You build wealth by having a score card which reads more wins than losses and you preserve the capital that you generate.

Gambling involves going out and partying it up when you win well and complaining when you lose.

I like this!

Courtesy of PSG Online - I like this as it gives some interesting insight into what it takes to be a good trader...

Winning traders execute and monitor their trades in a peak performance state. They are not worried about past mistakes or future profits. All their attention is focused resolutely on the ongoing trade. But it is hard to focus on your ongoing experience when you are worrying about losses, or some other trading problem. It may sound easy to take losses in stride, and avoid letting them interfere with your ongoing experience, but when you are in a severe drawdown, and worried about how you will get out of it, it is hard to avoid letting it get to you. You may become consumed with guilt and anxiety. It is natural. Your future may actually be at stake. But you cannot trade at your best when you are worried. Somehow you must train your mind to put the losses out of your awareness. One way to train your mind to temporarily forget about losses is to schedule worry time.

The natural human tendency to worry about problems protects us. If we did not worry, we might take dangerous risks, and pay a steep price. But worrying can be a problem for successful trading. If you are the kind of person who worries uncontrollably, it may interfere with your ability to pay attention to executing your trading plan. Not only can it distract you when you try to execute a trade, excessive worrying can prevent you from getting a restful sleep at night, or keep you so uptight that you cannot relax. Without proper rest and relaxation, you will find it difficult to mobilise your psychological resources for optimal trading performance.

Worrying becomes a problem when you do it too often and for no good reason. For example, if you have mounted losses and worry about it, you tend to think the same thoughts over and over again. It does not help much. You are likely to just let it interfere with your ability to make back the money you have lost. You need to put such thoughts out of your mind while you trade. When you worry too much, you feel out of control. One way to regain control is to schedule worry time. The basic idea is to set aside a certain part of the day, say seven o'clock, for example, and only worry for 30 minutes during that time. The goal is to worry only at a specific time for a fixed length of time. When you catch yourself worrying during the day, you can tell yourself to stop with the knowledge that you can worry about whatever is bothering you later. Knowing that you can worry during the "worry session" will help you control your worrying.

It may sound a little simplified, but it works for many people who have trouble controlling their worrying. Try it. See if it works. If you are like most people, you will find that you worry less, and can control it. So do not let worrying interfere with your ability to trade successfully. Worrying seems like a natural response to a setback, but it usually gets you nowhere. Rather than hopelessly worry, it is vital that you take an active problem solving approach. If you can control your worrying by scheduling regular worry sessions, you will be able to recover from a setback fast and return to profitability.

"In a crisis, don't hide behind anything or anybody. They're going to find you anyway." - Bear Bryant

Saturday mumblings

I haven't posted in a while but I've got a couple of observations around trading, wealth management and strategy that have occurred to me which I thought I would stick up here on the blog and see if others had some thoughts.

Trade vs. buy-and-hold
I know many traders turn up their noses at old fashioned buy and hold strategies (not "hold and hope" stuff - quality buy and hold). I was looking at the performance of my two respective portfolios since September 2008 and interestingly my buy and hold (wealth) portfolio has outperformed my day-trading portfolio.

I found that quite interesting considering the volatility in the market at the moment.

Does it mean I am a kak trader? The record says I've made consistent money day-trading so I'd like to think I have some skills but I think it does show that a consistent system aimed at wealth and money management will trump short term trading gains.

Trading personality
Have you ever done a personality test? Do you think there is room for one in your trading strategy?

A mate of mine took this What's Stopping You test run by Global Trader and it came out with some interesting results.

The evaluation basically tests some of your knowledge about financial products and your risk profile which is all good and well. Most interestingly for me - the test looked at his personality and it discovered something of an impulsive streak in him. It's something I agree with and something I've also seen in my own trading. Sometimes you find yourself constantly looking for positions to trade or you find yourself picking out a quick and easy "punt".

In his case, I have regularly seen him drop money when it wasn't necessary to take a position and the test actually highlighted for him a problem with his trading personality. If he wants to punt, he can do it on the horses.

Point being that he was made to think about what he was doing and hopefully it improves his trading strategy.

Nothing wrong with asking an expert
I think there are quite a few traders who want to "do it their way".

By following advice from other traders they feel like they are cheating a bit. I haven't traded much recently and when I have it has been very haphazardly and not been good for the wallet.

I stepped back and took one of the recommended "house" views from one of my service providers and BOOM I was back on the scoreboard within 6 hours.

Sometimes you don't have to go against the grain to pick good positions.

Just some thoughts - use 'em don't use 'em....

Investment Strategies

Was going to provide some commentary on the market action today but I see the Americans are bumping their heads on a 8000 point Dow at the moment so thought it could wait for a bit.

Instead I wanted to throw out a question to our readers around investment strategies.

Basically I have a blend of trading and investment type positions. The investment positions tend to be buy and hold type investments in blue chips and property stocks.

I have some dodgy but potentially interesting small cap positions but the idea of some of the blue chips is to diversify some risk across the portfolio and potentially develop a solid dividend pool behind the trading positions.

The trading positions I guess are self explanatory - pick the positions, if I make a profit then I'll take that off the table and tuck it into some "fire and forget" shares. My current favourites are Reinet and the Foord Compass Debentures (largely for the dividend yield from them).

The others that are always appealing are high yielding preference shares (Standard Bank, African Bank and Grindrod) - why work for the money when others are grafting for you?!

In my case - my investments tend to be a diverse pool of solid companies with long histories - yeah yeah Reinet a pretty new vehicle but long history of management.

However, another guy I know makes his trading profits and then dumps them regularly into Richemont because he likes the fundamentals and the story over the long run.

Other guys I know simply keep putting the profits back onto the table into bigger trades or alternatively going and spoiling themselves (something that might have been considered laughable last year but use-it-or-lose-it seems to be the name of the game these days.)

I guess my question to our readers is - WHAT DO YOU DO WITH THE PROFITS YOU MAKE?