Kawalan Emosi dan Psikologi Pelabur dalam Meramal Pasaran Saham – NIK ZAFRI

Nota/Penafian : Artikel ini adalah pendapat peribadi penulis sebagai berkongsi pengalaman kembali (setelah jatuh) membuat pelaburan di pasaran saham.

Kita sering melihat rancangan, segmen berita, wawancara dan lain-lain yang memaparkan perangkaan yang menunjukkan pembetulan dalam pasaran (market correction) tetapi adakah ini satu perkara yang penting perlu kita ketahui?

Saya melihat perubahan mendadak dalam cara kebanyakan penganalisa atau peramal pasaran mencuba sedaya-upaya untuk meramal pasaran saham. Apabila saya meneliti setiap komen, analisa, ramalan yang diberikan – kebanyakannya (bukan semua) – tidak pasti dan sifat ‘playsafe’ atau ‘tunggu dan lihat’ – menjadikan semua pendapat yang diberikan hanyalah teori semata-mata.

Izinkan saya berkongsi sedikit pandangan holistik saya mengenai pasaran saham dan kenapa saya bertanggapan bahawa percubaan untuk meramal pergerakan pasaran saham kadangkala membazir masa dan sumber.

Pertama – kenaikan dan penurunan pasaran saham. Ini kerana pasaran adalah di mana ‘pembeli dan ‘penjual’ bergabung.  Apabila terdapat ramai ‘penjual’ dari ‘pembeli’, maka harga akan turun.  (apabila 'pembeli' ramai dari 'penjual', maka harga saham akan melambung tinggi)

Sebabnya : Dari pengalaman saya sendiri, saya melihat, kadangkala pelabur lebih dipengaruhi perasaan berbanding dengan logik. Apabila bertindak mengikut perasaan, maka pasaran akan menjadi tidak stabil. Maka sebarang ramalan akan menjadi buntu. Sebaliknya jika pelabur bertindak secara logik, maka pasaran juga berpotensi menjadi stabil.

Kedua - Menghabiskan masa terlalu lama di hadapan skrin untuk meramal pergerakan pasaran saham kadang-kadang boleh dianggap sebagai ‘membazir masa’. Adalah lebih baik, kita tumpukan 80% dari masa berkenaan dengan membaca bahan-bahan yang menambahkan pengetahuan pelaburan dan 20% diberikan terhadap skrin.

Ketiga - Pelabur berpengalaman akan tahu bahawa trend sering menunjukkan bahawa bulan Ogos, September (terutamanya September) atau Oktober, akan berlaku sesuatu yang mampu mengubah pergerakan saham, antara lain ialah : 

• Peperangan (terutamanya peperangan yang berlaku secara mengejut)
• kesan asimetrik yang berasal dari luar negara (negara yang dipanggil ‘negara maju’) yang mengalami hutang negara yang sangat besar atau kadar faedah Rizab Persekutuan menjadi terlalu tinggi)
• kadar pengangguran yang sangat tinggi (tandanya : apabila pembayaran gratuiti atau bonus pada 2-3 bulan sebelumnya ‘terlalu tinggi’)
• kenaikan sumber tenaga secara mendadak, seperti petroleum dan diesel (minyak mentah termasuk minyak tanah) - apa yang ganjil ialah fenomena ini diikuti dengan kenaikan bahanapi yang lain seperti arangbatu, hidro dll TERMASUK alternatif seperti minyak sawit dan tenaga solar (saya pun hairan kenapa? - tetapi saya seperti bersedia untuk menghadapi suasana berkenaan)
• kenaikan harga barang makanan secara tiba-tiba, (tidak semestinya kenaikan barangan terkawal seperti gula dan minyak masak sahaja)
• kenaikan kos sara hidup (Contohnya kenaikan nilai hartanah selaras dengan kedatangan pelabur asing)
• nilai projek contohnya pembinaan yang dijalankan terlalu tinggi dari kebiasaan (mungkin pelabur terkejut, jika saya katakan bahawa, nilai projek yang tinggi BUKAN disebabkan oleh kenaikan harga bahan binaan tetapi kerana faktor dalaman seperti pembaziran, kerosakan yang tinggi tanpa kawalan, kemalangan di tempat kerja dan juga rasuah!)

Dan banyak lagi tanda-tanda lain – ada juga trend yang berlaku secara domestik (dalam negara) dan bukan berasal di peringkat antarabangsa.

Hal-hal yang disebutkan di atas juga menyebabkan pasaran menjadi ‘volatile’. Maka pelabur kadangkala banyak bergantung kepada maklumat dalam internet dan tidak lagi memeriksa kesahihan maklumat berkenaan. 

Kadangkala ada maklumat yang bermotifkan spekulasi untuk memanipulasikan psikologi pelabur bagi menjual atau membeli (berawaslah)

Pendekata, tidak ada sebarang pelaburan yang boleh dikategorikan sebagai ‘sempurna’.  Ianya bergantung kepada proses dan kebarangkalian.

Sebenarnya, salah satu faktor kejayaan saya sendiri (secara peribadi) ialah semua sumber yang pernah saya pelajari atau rujuk perlu digabungkan dengan pengalaman saya sendiri. Dengan kata lain, saya sendiri mencipta teknik pelaburan yang tersendiri dan tidak terlalu bergantung kepada bahan-bahan yang ‘bersepah’ di internet atau mengharapkan analisa dan ramalan pasaran pakar.

Apa yang penting kepada saya ialah meninggikan kebarangkalian untuk mengambil tindakan yang betul (kerana saya juga tidak kebal dari melakukan kesilapan). Tindakan yang betul ‘berulangkali’ akan meninggikan lagi kebarangkalian untuk saya meraih keuntungan berbanding berulangkali tindakan yang silap akan meninggikan kebarangkalian saya mengalami kerugian yang besar.

Jika diperhatikan betul-betul, semuanya bergerak dalam satu kitaran. Ada yang naik dan ada yang turun (begitulah sebaliknya)

Setiap kali adanya ‘bullish’, maka ianya akan diikuti dengan ‘bearish’. Begitulah sebaliknya.

Setiap kali berlakunya pembetulan (correction), maka akan datang pemulihan (recovery)

Walaubagaimanapun, bukan perkara yang senang untuk meramal dan mengawal pasaran saham. Ramai yang kecewa apabila perkara ini berlaku.

Tetapi yang pasti, pasaran saham adalah peluang keemasan untuk menjana pendapatan sekiranya pelabur menggunakan teknik dan strategi pelaburan yang ‘matang’ (persediaan untuk ‘untung dan rugi’ dalam pelaburan)

Jangan terlalu beranggapan bahawa pasaran saham merupakan cara ‘rahsia’ untuk menjadikan anda seorang yang kaya kerana ‘cita-cita’ itu kadangkala akan menjadi ‘illusi’ dan anda pasti kecewa melihat hasilnya. Jika anda beranggapan begini, maka anda juga menjadikan diri anda sebagai ‘spekulator’ dan anda setaraf dengan mereka yang berjudi atau menikam loteri.

Pasaran saham bukan tempat spekulasi atau perjudian – ianya adalah perniagaan yang mempunyai ‘untung dan rugi’ dan bukannya ‘untung’ semata-mata atau ‘rugi semata-mata'

APA YANG PERLU DILAKUKAN UNTUK MENYELESAIKAN MASALAH EKONOMI? - NIK ZAFRI

Bagaimana untuk memuaskan kehendak yang tidak berakhir dengan sumber yang terhad?

• Apa yang baik perlu diutamakan berdasarkan kehendak dan bagaimana pembekalan dan bantuan dapat memuaskan kehendak yang tidak bernoktah

• Kenalpasti jenis dan perbezaan kehendak manusia, utamakan kehendak dan susun produktiviti bagi memuaskan sebanyak mungkin kehendak yang termampu.

• Tentukan apa yang hendak dikeluarkan atau berikan dahulu apa yang patut untuk memuaskan permintaan

• Pastikan ianya selaras dengan belanjawan dan kuasa membeli yang berbeza-beza

• Modal dan barangan adalah sama penting. Selaraskan antara keduanya.

• Pengeluaran akan lebih cekap jika sumber diuruskan dengan baik.

• Maksimumkan gunatenaga kerja tidak kira jawatan, jenis kerja, corak kerja dll.

• Sistem percukaian yang tidak dirancang boleh menjadi penyebab kepada agihan kekayaan yang tidak seimbang.

• Wujudkan suasana untuk sektor pengeluaran menjadi lebih kompetitif dan meraih keuntungan menerusi penstrukturan semula cukai dan subsidi di mana perlu.

• Lindungi ekonomi dari pengaruh luar yang negatif menyusup masuk dengan pengaruh dasar-dasar yang boleh merosakkan ekonomi.

• Strukturkan kembali cukai untuk industri terpilih seperti besi, pengangkutan, simen dsb.

• Penekanan terhadap R & D adalah lebih baik dari pengeluaran produk yang tidak berguna dalam pasaran - dikeluarkan pula dalam keadaan tergesa-gesa.

• Sektor Perbankan dan Kewangan yang tidak teratur akan menjadi sebab inflasi dan kemelesetan. Kawalan terhadap pinjaman/pembiayaan lebih penting dalam saat-saat kritikal dan bukannya menaikkan kadar faedah atau menstrukturkan kembali pinjaman yang sediada.

• Mereka yang menyewa rumah perlu menukar sewa rumah yang banyak dibayar kepada pembelian rumah. Jadikan deposit sebagai pendahuluan. (Mungkin cadangan ini agak keterlaluan tetapi rasanya boleh dipertimbangkan)

• Hentikan atau kurangkan penjualan aset kepada orang atau negara asing.

• Hentikan atau kurangkan liberalisasi kewangan kepada pelabur asing. Terdapat laporan, ada di antara mereka bertanding secara tidak sihat sehingga merugikan industri tempatan.

• Kurangkan perbelanjaan di luar kawalan terutamanya ke atas program dan inisiatif yang dibiaya oleh pinjaman luar.

• Adakan dasar untuk mengurangkan penggunaan barangan impot

• Lihat bagaimana negara lain berjaya membangunkan kekuatan industri dan cuba ambil contoh

• Kawal imbangan defisit perdagangan. Kurangkan aliran keluar wang yang tidak kembali kepada kita. Wang yang tidak kembali boleh menyebabkan negara luar membeli syarikat-syarikat terbaik di negara kita.

• Semak kembali perjanjian-perjanjian perdagangan atau memorandum-memorandum persefahaman kita dengan negara asing. Kadangkala terdapat undang-undang perdagangan luar yang tidak selaras dengan undang-undang kita menyebabkan perdagangan kita tidak konsisten dan tidak begitu adil.

• Perdagangan bebas kadangkala menjadi satu permasalahan. Ianya perlu digantikan dengan perdagangan lebih pintar supaya ekonomi kita tidak mudah dimanipulasikan oleh pihak asing

• Pengeluaran dalam negara kita lebih menguntungkan dari mencari kepakaran pengeluaran dari luar.

• Pastikan kita tidak kehilangan industri percetakan, automotif, hiburan, besi, elektronik, pakaian dll kerana ini sedikit sebanyak boleh mengancam keselamatan negara dan standard kehidupan

• Pastikan syarikat-syarikat yang disenaraikan dalam Bursa Malaysia betul-betul mendatangkan keuntungan kepada pelabur - bukan hanya dalam beberapa hari selepas disenaraikan.

RUMOURS VS FACTS, SPECULATION VS ANALYSIS

I've heard stories about most major banking and financial Institutions are having special meetings to revise and reformulate monetary policies.

I do agree with these actions as the stock market may rise again PROVIDED the best monetary policies are introduced into the marketplace.

One thing for certain, investors are digesting rumours rather than facts, speculation rather than analysis - people just don't have the patience to wait nowadays. Many have told me that this is going to be short term but that 'short term' are dominating the market with making strange shapes. One news from the US...say unemployment rate, then it would finally affect the whole world.

One thing for certain, there are still investors taking risks waiting for 'the right time to sell' - even minimum gains is good enough but many seem to find strength in weakness (opportunity to buy/profit taking) where efforts to strengthen of holdings in equities are seen. Despite its sluggish performance, surprisingly USD may get better - lowest interest rates offerings, plans of liquidity etc.

Well, as for me, besides than unit trust, I'm also looking into GLC's bonds at the moment. Will be back soon..

The Star Global Malaysians Forum - Posted: 05 May 2006 at 8:23pm

A quick coffee break.

1) TIPS ON HOW TO BECOME RICH INVESTING IN THE STOCK MARKET
http://www.visoracle.com/market/stocks.html

How to become rich in the stock market?
Don't be the Investor!

Millions of people are lured into buying stocks, based on promises by the - what it likes to call itself - financial industry. These promises are disguised as only a few outstanding success strategies. Let us start with what everyone considers to be the more dumb ones:

Watch TV or read the newspaper and simply go with the flow, do what other do, buy some arbitrary stocks and wait for the big money.
Have a friend who recommends something or whose gains makes oneself jealous, and be eventually talked into investing or trading.

Here are the ones, which seem to be much smarter:

Use charts, find patterns and calculate precise entry points to have an edge.

React to news and price changes quicker than quicksilver and have a speed advantage.

Be a fundamentalist, analyse and examine every data that comes out of a company, and then buy only cheap at a reasonable price.

Make global judgements about the economy and hit the right turning point for a general entry into the market to elegantly avoid analysing details of pea size.

Buy the broader market with index funds, based on the idea that overall the stock market reflects the ongoing advance in the world and thus stock indices are doing well longterm.

Delegate the work of making investment decisions to a professional, who, because being a professional, should outsmart the market.

Most people adhere not only to a single pure form of these strategies. They rotate between them, they try different flavors of them, they mix things up, they even start an investment with one strategy and close it with another. Or they start trading and end up with an investment. But important here is, that the latter behaviors seem to have all good arguments. The former types of "investors" are in one sense rare - if conducting a statistical inquiry, most participants would think of themselves belonging to the smarter group and would find their reasons and reasoning of why and what they are doing among the latter strategies. That is why it is generally believed that investing in the stock market will make people wealthy.

Now let's consider a different view of the stock market, a table with six players.

In the middle we have Mr. Doe, the private investor, left to him sits Mr. Clever who is a professional fund manager and at the right of him is Mr. Smart, a professional money manager for individual clients. On the other side of the table we have Mr. Broker, Mr. Market-Maker and Mr. Company. They all are doing what the market does - they are exchanging stock shares and bank notes, putting them on the table and taking them away at times. Let us concentrate on the money only, after all the money is the only thing that counts. Neither has the table a hole through which money could vanish, nor does money rain onto it. All money put onto or withdrawn from the table has to go through the player's hands. Let's have a look at Mr. Broker first

Busy Mr. Broker only sells and always wins

He charges a fee for simply forwarding an order from Mr. Doe, Mr. Smart and Mr. Clever to someone else. All that without risk and pain, and after doing so he pockets the fee - he takes it from the table. He can't make a loss, so with a bunch of marketing tricks he animates everyone to give him as fast as possible a new order. Important here is, what he does with regard to the table. He never puts money onto it, he only takes money away.

Mr. Market-Maker is known to be in a good trading position

He is the one who takes the other side of a trade and makes a mostly riskless business with the spread, a difference between buy and sell price. Furthermore he has state of the art equipment, which he watches like a hawk all day in a big room with other's doing the same, hoping that many hawkish eyeballs are seeing more than single prey's ones. But that's not all, he is known to be in a strong trading position, too. He works for a big company with much money, which other traders fear, so he is able to drive prices up and down, enticing euphoric Doe into high prices and shaking out trembling Doe with a loss at low prices. He initiates breakouts, which Doe falsely interprets as signals. Doing so he himself buys low and sells high. Some badmouthing tongues even argue that Mr. Market-Maker makes money with illegal insider information, front running or stock pumping. Not enough with that, he is supposed to create up- and downgrades, something like home made news, just to influence supply and demand of a stock to force its price to a level where he can sell or buy with more profit or a smaller loss. Overall Mr. Market-Maker seldom makes a loss, on average, he always wins. To make it short, he too takes only away money from the table.

For Mr. Company the stock market is a real gold mine

He has a special seat, with a big sign above it, on which is written - on his side so that especially Mr. Doe can't see it - "capital source". The other side of this sign could be labelled "capital drain", but that would lower the mood, so it only says "welcome". Mr. Company comes to the table right away from the printing press, with a big chunk of newly created stock certificates - paper, which he dumps on the table while cashing in tons of money. Will he ever give this money back? Hehe, stupid question, no he won't. The alternative for him is to borrow money by emitting bonds, which he obviously thinks of being more expensive in this case than selling paper. After all in the bond market he would have to give back what he borrowed after paying interest for it.

In very few cases his company survives and prospers. Then - in the far distant future - it is expected to pay back something to the table. Mr. Company can ignore such an expectation for a long time or even for the whole lifetime of the company, there is no law requiring him to fulfil it. But he can do so by paying a marginal dividend or by buying directly back some shares from the table, preferably when stock prices are low. That looks good and may cost him no money at all, because there are some nice ways to offset such payments.

First, while making these payments, he can do a secondary offering. Mr. Company simply comes back to the table and dumps again a chunk of paper on it. Sounds primitive? No problem, he can mask the operation a bit.

He does it just a bit before or after the phase of payments, preferably when stock prices are high. Buying back low and dumping high is a profitable business on its own.

Or he creates sort of options by printing the additional word "warrant" or "convertible" on the paper. That means that he starts two dumping actions, one now for the option paper and one later in the future for exchanging the option paper for the original paper, cashing in twice.
Even better he splits off a part of his company, declares it being a new one and sells paper with a new company name printed on it.
If he is lazy, he simply distributes paper with the old name to the employees of his company. He can pay smaller salaries this way. Employees get shares proportional to their importance, meaning that he gets the biggest share, because he considers himself of being most important. Instead of one big, many smaller chunks are now dumped on the table.

There is another rare and very special case how money comes back from Mr. Company, a cash paid take over. Another Mr. C arrives at the table and buys with real cash all paper of Mr. Company from Doe, Smart and Clever back. But usually this other Mr. C got the whole money from the table firsthand, so this way nothing really comes back.

Actually Mr. Company is supported by two other persons behind the scenes. Mr. Investment-Banker helps carrying Mr. Company's paper chunk to the table. With much trumpeting he praises its quality as an investment. If Doe, Clever and Smart are nonetheless skeptical, Mr. Market-Maker, with his many tricks, makes the new stock's price going up. Then Mr. Doe loses all doubts and shoves the tons of money over the table to Mr. Company. Mr. Investment-Banker's risk is that he projects too big a chunk of paper for the table, so that he has to push the missing tons of money to Mr. Company, but that happens rarely. Mostly Mr. Investment-Banker just gets his fixed percentage of the tons of money from Mr. Company. Seen as an entity both will of course always drain money from the table during the paper dumping action.

Mr. Company's second supporter, Mr. Venture-Capitalist, got beforehand his own chunk privately from Mr. Company in exchange for money, hoping that Mr. Company raises the seed and is invited by Mr. Investment-Banker to the table eventually. He may even get a chunk from Mr. Company later when the stock is already on stage, typically for a better than the price at the table. In both cases he hopes that he can sell his chunk for a profit, which may or may not come true, but at the table he will never do anything else than dumping his paper and raking in money.

So we have three gentleman at the table taking away money. Some do it gently but constantly, some more raid-like.

Finally Mr. TaxMan appears every now and then, grabbing some money from the table and out of the trouser pockets of the participants and grins. Of course he never puts money onto the table either.

What about Doe, Smart and Clever? Well, they are fighting for who has to put the least amount of money on the table to feed the other side. We know that Clever and Smart are acting on behalf of Doe. They get a riskless payment from Doe for this fight, so it is not really that important for them whether they lose more or less.

It looks as if poor Mr. Doe is the real loser in this game. Interestingly Mr. Doe has a different perception of this.

But I already made a nice gain in the stock market !?
This seems to be a paradox. Yet it is none. The table view of the stock market is a totalized one, a view which cares only for averages. Of course there can be many individual Does having made their profit in the market, but on average Doe is the big loser. There can be a market maker, who suffered a big loss, which he never recovered, because he went broke. Yes, there even can be a company caring for its shareholders buying back stock shares and paying dividends with every free cash it earns doing its business, not offsetting these payments with tricks Mr. Doe is not aware of.

A second point of confusion is what happens away from the table. Mr. Market-Maker or Mr. Broker may have to pay a hefty monthly bill for their equipment, salaries and rent, so that they only break even. Mr. Venture-Capitalist may enthusiastically invest in any nonsense idea he hears of, so that he overall makes a loss. Mr. Company may have the wrong concept, not enough talent or too much competition, causing him to burn all money and go broke. He may be a genius, resulting in ever growing earnings of his company. All that is not important for the table model of the stock market. Even a rising price of a paper on the table doesn't matter. It looks like Doe, Smart and Clever are winning in this case, but alas, high prices are only tempting Mr. Company to dump the next chunk of paper. The only question that counts, is

Does the money flow through a player's hand from or to the table ?
The futures market is called by many a zero-sum game, because for every contract traded, there is a buyer and a seller and what one wins must be paid by the other. There is the proposition that the stock market is a positive-sum game, because over a long term, let's say some decades, stock market indices went up. Well, the table model suggests that the opposite is true. For Doe, Smart and Clever it is a negative-sum game. How can that be? Over time problematic index stocks get replaced by fresh ones with brighter future perspectives, so indices are distorted. But the main reason is simply, that all the owners of stock own paper but not money. If they all wanted to exchange their paper into money to get what the ever rising indices promise, these indices would drop to zero immediately. The stock market is basically a pyramid scheme, which implodes eventually, sometimes self induced, sometimes triggered by external events. More often it implodes only partly for some stocks or temporarily and so that not all stocks recover. That may be one reason why all this is so hard to believe.

Back to the beginning to the more smarter strategies how to beat the market. Will they not allow you to make money in the stock market? Doe, Smart and Clever are essentially fighting for a positive piece of a negative cake. So you nearly have to be a wizard to succeed. At least you have to be very good in your niche. This innocent little sentence contains what I consider to be

The first and most important secret to make money in the stock market
You are destined to lose. If you aim to be a wizard and turn your fate around, you have to have a niche, a specific system in which every part fits to every other. Every particle which doesn't fit, drastically lowers your chance of success. Amazingly you are yourself one particle of the system, your strategy must fit to your personal psychology, you must feel comfortable to follow it. It is possible to combine and refine above mentioned smart strategies, but never stop searching for the grain of sand that blocks the gear. Think about the tricks of Mr. Market-Maker, Mr. Broker and Mr. Company and design your private investment or trading system around their traps. You have to trade or invest not only wisely, you have to do it differently.

The red hot trading system and the proven safe investment strategy
for which you may have been searching so long, are exactly the wrong way. You have to avoid everything prefabricated or you are perfect food for the sharks out there. Using a published system out of the box will always put you in a predictable crowd. You may even be riding a Trojan horse, originally designed by one of your enemies. Moreover it will not really fit to you, and it probably has other grains of sand in the gear. But beware, just mixing popular trading or investment system elements crudely into another system, disregarding the traps, will only add some big stones to the grains of sand. A better idea is to let existing strategies inspire you. Have a look at their elements from the perspective of the sharks, combine fitting ones and think through the whole. Before I wish you good luck, which you will need for surviving in the stock market, let me emphasize here again: If playing a negative-sum game against sharks and random, you at least must not be predictable, as the mathematics of game theory shows. You have to create your own very personal and specific system.

2) TRADING THE COMMODITIES AND FUTURES MARKETS
http://www.visoracle.com/market/futures.html

Trading the commodities and futures markets:
A survival game Markets

Everyone who plays with the idea to speculate with commodities or futures, should step back now, take a deep breather and reevaluate this plan. These markets are a game of professionals - and I am inclined to add here - for the likes of them. Numerous studies have shown, that for most private traders (more than 90%) this is a losing game. Being a classic zero sum game overall, there must be someone who wins, and that someone is a minority of professionals.

The slippery churning of brokers, dealers and floor traders. Fees and spreads have to be paid in all financial markets to buy or sell something, but open outcry markets have a tendency to make prices run away in the wrong direction for orders from outsiders that seek to be filled. It remains an unanswered question whether the pure specialist system of listed stocks like the old NYSE, the competing market maker system of NASDAQ, either one combined with a competing electronic order book or the open outcry market is the fairest market. Pit traders like to accuse specialists of having too much power to manipulate their prices. They conceal that specialists have the obligation to make an orderly market with guarantees for reasonable fills. Taking into account that open outcry traders tend to behave coherently, there is no big difference to the specialist's power. Both, but even more the pit traders, resist to compete against a computerized market like an ECN or outright refuse to trade off-floor through a computer system, which would put them on par with other market participants.

Contrarian trading - the advantage of the producer

Price movements especially of futures markets are noisy. There are random fluctuations and self-induced starts or breakouts, which later prove to be non-substantial. This is the fundament for an anti cyclical trading strategy - buy low and sell high, or the other way round. As studies have shown, hedgers, companies or entities which sell what they produce or buy what they need for producing, are the big winners of the commodities and more general the futures markets. They often have a better insider knowledge about what is going on in their market than anyone else. Adding to that, they have the advantage that they are hedging - they actually only need to conduct one side of the trade, either they buy or they sell. This gives them the ability to calculate their trade in the light of their main business, which essentially caps their risk. Also, being better capitalized, they can afford to be longer term oriented.

For the private trader or speculator the contrarian system could prove disastrous. What if the price move turns out to be substantial and results in a trend or at least a new level of price? Combine the counter cyclical market entry with a stop loss? This would be a self contradicting system. A trading strategy which is incoherent is most likely invalid as a system. Having no stop loss is of course even worse. That's how amateurs go broke even in the stock market, which lacks (short or margin operations aside) the infinite risk practically created by leverage in the futures market.

Sometimes producers choose to go with what they see as an emerging trend or what they anticipate to become an enduring new supply and demand situation, so of course they are not bound to the countertrend method, but the long term contrarian trading strategy is only appropriate for them. To emphasize it again, as studies show, they are the big winners.

Following the trend - holy grail or well known secret of trading futures?

The third group of winners in the futures markets are so called commodity trade advisors (CTA), hedge fund managers and some well capitalized and experienced individual speculators. They are primary - as long as they make money - procyclical. They try to buy high and sell higher or vice versa. Is it this easy? No, even the most successful traders of this group suffer severe setbacks, they just won't tell it you. However, they have some advantages over the ordinary speculator. They are bigger in size, they use sophisticated statistical methods to create mechanical trading systems that actually do make money, they know about the importance of good money management and they are generally more experienced.

Creating breakouts of ranges or starts and turns of a trend

The naive way to start trading trends might go like this: Take a chart book, spot some trends and get the impression, that one just had to enter the market here and leave it there to become rich. Well, that's hindsight! To get early on a trend and to ride it as long as possible is easy in hindsight, but hard in reality. First, you have to enter a trend. You are looking for a starting point. That's where the malaise begins. There are strong market players, who produce breakouts of ranges, restarts and turns of trends, because they know many will stumble after them in expectation of a new forming or ongoing trend. If the "trend" turns out to be short lived, they can get out with a profit, because they entered the market at the best levels. Guess what, who pays the bill? Mostly the small private trader, but often enough the professional trend followers, too. That's why the rate of failure among them is much higher than these professionals are ready to admit. Who plays this pattern of buying low, pushing the price through a resistance or turning a trend around in order to hopefully initiating the next round of directional movement? Probably both - producers and trend followers, they just have to have enough capital. The futures markets are exceptionally prone to false breakouts and trends have wilder swings, tempting speculators to leave early or enter late - possibly with a loss. Just have a look at charts, and compare them with the stock market. But be cautious, this is easier said than done - the human mind is a pattern recognizing machine - it will always find the patterns it is looking for.

Using statistics to develop a mechanical trading system

One way to circumvent this problem of an optimistic mind finding occasions not only occasionally is to compile a trading system into an algorithm, which is then followed by a computer without being distorted by sentiments and psychological effects and without making mistakes by lacking discipline. But first one has to identify an edge, which is statistical sound. This means that you can use statistics to crystallize a system, which - so to speak metaphorically - meanders around all pitfalls, all the edges winning players have. Of course there is not much space for winners left, and that's why even professional system traders often lose, too.

The typical private trader has really a disadvantage in this area, he is just not sophisticated enough. He might buy complete systems or programs, which can evaluate trading systems, test them and optimize them, but mostly he is not aware of the mathematics, which are behind all this. Over-optimization or curve fitting is one cardinal sin, second guessing of trading signals another one. The typical trader tends to mix up signals of his system with discretionary decisions or tries to change the system every next time. Emotions have discipline in headlock and chaotic behavior is the result - the opposite of a trading system.

Summary of a zero sum game

Brokers charge a fee and have a riskless income. Floor traders slip away and cut out small but constant gains. Producers milk the markets big with contrarian trading. Deep pockets initiate false movements and let others stumble into their losses. The only chance are trends, but they are rare, and they are carved out by statistically sophisticated system traders or producers with better fundamental foresight. The private trader has to make the sum of the zero sum game become zero. He is there to feed the sharks.

Making things worse: Bad money management

An additional reason why so many novices are losing in this game is the lack of proper money management. To put it simple, they are overtrading. Newcomers intuitively often misinterpret the margin they have to pay as their bet size, and that's why they are overtrading grossly. Usually they are out of the game very soon. But even making bet sizes only slightly too big will make your losses overcompensating your gains on average and your capital will decline over time. This holds true even if you have an edge. Bad money management destroys your advantage - if you have one at all. The reason is mathematics. To make a simple example assume that you have no edge, but put on trades with a very big bet size. A typical gain of 50% of your capital has statistically the same probability as a typical loss of 50%. But to recoup the loss you must win 100%! Even optimistic advantages will get converted into their negative counterpart by what I call the relative-absolute effect.

3) OPTIONS
http://www.visoracle.com/market/options.html

The biggest piece of the cake and options trading

Real life will often give you only a tiny piece of the cake, while you know of others, who got a much bigger one. Are you hungry and want to know, why your piece is so small? A good example for studying this phenomenon is the attempt to become rich by trading the options market. An option is something which you can buy and sell, thus it is possible to trade it, and which gives you the right to do something later in the future. In case of the stock options market, an option gives you the right to buy or sell a stock at a specific price on a specific date in the future. Important is, that this specific price is fixed, it doesn't depend on the stock's price at that future date. The price you have to pay to buy an option is determined by the market - people who are trying to figure what it could be worth to possess this option and who are bidding or asking for a price to buy or sell it.

Trading options is like buying a ticket in a lottery

Let's say there is a stock which trades at 50$, and an option to buy this stock in 3 month for 100$. Why should one want to buy the stock for 100$ when it sells now for 50$ you might ask. Well, because there is a small chance that in 3 month it is worth e.g. 150$, which would cause a value of 50$ for the buy option then. Of course it is much more likely that the stock will be trading for fewer than 100$ in 3 month, and that would make the option worthless - it would expire and simply vanish. Because of this asymmetry of chances the price of the option now is small, for instance 1$. If the stock really tripled from $50 to $150 in 3 month, the option would increase its value from $1 to $50 following the price ups and downs of its master. In a nutshell, options are things whose prices are fluctuating wildly and which have the potential to soar to a multiple of what one paid for them, but mostly they expire worthless. Options are speculating vehicles par excellence.

The zero sum game

It is not only possible to buy an option, you can sell one, too. Imagine you have some stocks in your account, and you are betting that the price will not go from 50 to 100$ in the next three month. Then you can sell the buy option to some speculator and pocket 1$. In this case you literally have created the buy option. If you are wrong with your bet, you will have to hand over your stocks in 3 month for 100$ each, less than what you would have earned in the market then. The interesting point here is, that for every option buyer there is a seller, every amount one wins has to be paid by some other market participant who loses. This is what ivory tower theoreticians of the financial industry like to call a zero sum game.

The winner takes it all

Prices go up and down, the arithmetic balance of gains and losses is zero and the media tell us mostly about winners and only sometimes about losers. All this leads many to think of a game with chances of at least 50:50 for their personal success or failure. But, let's remember, most options expire worthless and only few are gaining hugely. Simply spoken, it is very likely that you are a loser at the end of the game. Let's assume 10000 people are playing this zero sum game in an option market set up only for them. No one can outsmart the other, all have the same information and skills, so effectively everything is driven by random. Adding all their losses and gains together will always show a balance of zero. But, the longer this game is played, the more the capital is concentrated on very few of the 10000 people. Who the lucky ones are may change, but the concentration increases all the time, statistically. In other words, the probability that a single individual is a loser steadily moves towards 100 percent. This effect works the stronger, the more speculative one operates. So, buying options "out of the money" (like the example described above) makes you very quickly poor, but trading them or buying options "in the money" and even the opposite, selling them, is ruled by this effect, too.

Beyond the financial markets

In fact, in many other areas of life the, what I call it, relative-absolute-effect converts dreams of becoming rich or successful into their oppositional materializations. Relative dynamics are perceived and treated as being absolute. The option market is just a very good example for this fallacy. Whenever there is a jackpot to win, you can be sure that chances are good, that you walk home from the casino as a loser. If you start playing with a given capital, it is likely that you end up with nothing. The mere effect of concentration will cause this, so it is not necessary that the game or system itself is unfair, which it nonetheless mostly is. But not only the world of roulette, lotteries and trading is affected - the effect of concentration is universal. Life itself is sort of a game, some become rich during playing it. Earning interest and leaving the inheritance to the heirs, would make in a few generations most people poor as a church mouse and very few super rich, if there were no taxes. Our daily struggle to make a living presents itself quite similar. Most people get only a fraction of the huge salaries few others earn, which extends from individual employees to whole countries. Growth processes happen on logarithmic scales. If a manager gets a salary increase, the difference could be alternatively used to pay 10 new employees. In the third world you could probably employ a whole village with the money. Will the manager work equivalently harder after the salary increase? Evolution is another example. Small advantages of a species over other ones in the same niche, are considered to cause the others to die out after several generations. This is an increase to the maximal possible concentration of the winner - the best adapted species, as biologists would put it.

Mixing up maximum, mean and median

If you want to succeed or have to survive in some area, look at the mechanisms that are at work and try to find out whether relative or absolute changes take place. If the system is closed and no resources can flow in from the outside - the cake has to be divided as it is, and the law of logarithmic growth rules - there is some sort of jackpot, be careful, don't be too speculative. Furthermore you shouldn't have to rely on such a system as a substantial investment. It doesn't help you that you theoretically could win the jackpot, when you realistically get near to nothing. You are a human being, you need an absolute amount of energy and resources to live - not a theoretical chance for something relative big. Look at what most people in that system get - the median, and keep in mind that not only the biggest piece of the cake, but also the arithmetic mean - the zero sum in the example of trading options, is an illusion.

The best system for trading options - don't do it

To complete this article for option traders let me mention shortly another aspect of the market. In theory the option markets, be it stock or future options, are really a zero sum game, but real life is far from that. The modern hunter of our financial world is the market maker, and he will assure with all sorts of tricks that the zero is greatly negative. Characteristic of the options market is a very high spread, the difference between buy and sell price at the same time, which the market maker cashes in. Really outstanding is the ability of a market maker to raise the price of an option more than proportionally, when everyone wants to buy it, i.e. when the underlying stock gives a trade signal. You think you will work with a stop loss? In the moment of an adverse price movement of the stock, when you want to sell your option, these legal criminals now exaggerate the option's price drop! All in all these tricks are the second reason to keep your money and mind away from this hunting ground of the sharks.

4) SWINGTREND
http://www.visoracle.com/swingtrend

Swingtrend - trading system elements for your personal market strategy
Why a personal system? One conclusion of the Stock Market article is that every prefabricated trading system is doomed to fail. Almost every trading system you can buy as a book, course or software guides you either directly into the pitfalls of financial sharks or not enough degrees of freedom are pinpointing a too specific system. Used by too many traders the sense of the market will adapt to it and exploit their naive followers. Instead the smart trader should consider to assemble his very personal trading system. Always have in mind what trading edge other market participants have, what methods and techniques they use, and build your trading system around their traps.

Build your own trading or investing system by putting together elements of existing ones! Important is, that all pieces of the puzzle fit together and fit to you, because you are part of the puzzle. Trading is psychology! You have to feel comfortable executing your strategy. Otherwise you will be overriding your system, change it often and let your confusion dissipate almost working system rules to chaos. Browse through this collection of trading systems and ideas that have at least a grain of truth in them, but don't expect to find the complete money machine.

5) TRADING SECRETS UNLEASHED!! <--- my favourite -
a) Arbitrage Virtual

http://www.visoracle.com/swingtrend/arbitrage.html

Virtual arbitrage trading system

BUY RULE

Buy the futures when they are trading at a 0.5% discount to the cash market.

SELL RULE

Sell the futures when they are trading at a 0.5% premium to the cash market.

If the futures are at a premium to the cash, they can be considered expensive and should be sold. If they are at a discount, they are cheap and can be bought.

The choice of 0.5% as a measure of excessive premium or discount is arbitrary, the system works just as well if you use 0.1% or 1%.

It is not necessary, to put on a directly hedging trade in the opposite direction at the same time. The invisible hand, the magician of all stochastic outcome, makes this trading method work.

b) Automatic Exit
http://www.visoracle.com/swingtrend/automatic.html

The automatic 2.5 percent trading system is about an automatical exit when the stock hits either a 2.5% gain or a 2.5% loss. The entry signal can be a breakout of a trading range, a swing back after a downturn, a news event, a crossing of moving averages, the break of a line of resistance or support or whatever cyclical signal you may imagine. But it can be a counter cyclical entry signal too, like a line of support or resistance which seems to hold.

After entering the market in what seems to be an asymmetrical chance which skews the ubiquitous symmetry of chances of 50:50 in your favor, you simply would enter 2 sell orders 2.5% above and below the entry price. The exact percentage can be adjusted to the particular stock or market.

Interestingly the offset hasn't necessarily to be the same in both directions. E.g. 4% above and 5% below may work too. This way the higher sell point can be adjusted to match a line of resistance and the lower sell point can equal a new signal for breaking the next line of support, which otherwise would be a sell signal triggering a short trade itself.

c) Buy Bargain Stop Hold Long
http://www.visoracle.com/swingtrend/buy-bargain.html

The key to investment success is:

- To buy when share prices are at bargain levels when some catalysator for a possible starting trend like fundamental news shows up
- To take losses quickly when it becomes clear a purchase will not be a winner IMMEDIATELY.
- To hold profitable positions as long as possible.

d) Coiled Spring Range Breakout Stop
http://www.visoracle.com/swingtrend/coiled-spring.html

Taking advantage of the big event and exploding volatility

This trade is put on before some big event known beforehand like economic or FED news, earnings reports etc by placing two orders into the market before the open, one to buy and one to sell. The buy is placed above the sell so when one is filled, the other is left in place to become the stop loss.

The basis behind this range technique is to take advantage of contractions in market volatility to create ideal entry points, which act as coiled springs when the market regains its volatility and breaks out. These contractions frequently are referred to as a volatility squeeze, markets are strongly volatile but experience a day with a small trading range in anticipation of the following day's report or event.

This trade depends upon volatility contractions to execute entries and expansions to execute exits. The contracted volatility, the trading range, acts as a shield against randomly triggering one of your stop orders.

e) Concentration
http://www.visoracle.com/swingtrend/concentration.html

For day trading you have to concentrate on very few stocks, for instance 5 to 10. Of course that does not mean that you can't change this set from day to day. Some day traders have there standard set, some others like to watch the current hot momentum stocks.

On the other hand there are traders who scan all day long the whole
market with watching late breaking news or following daytrading room chat. There are even scanner programs sifting through thousands of stocks trying to catch entry signals all over the board minute for minute.

To take the idea of concentration to an extreme, select only one stock, which has a decent trend and fundamental growth potential and try to get on a long term trend with daytrading techniques, meaning apply a hard entry stop loss and try repeatedly.

f) Concentration And Exchange
http://www.visoracle.com/swingtrend/concentration-0.html

Nobel laureate Paul Samuelson noted that John Maynard Keynes once came up with a similar insight: "Really, you should buy one stock at any one time. The best one going. And when it's no longer that, replace it by the new best."

g) Cut Losses Ride Winners
http://www.visoracle.com/swingtrend/cut-losses.html

"You are working too hard trying to EARN money trading. It doesn't work that way. You STEAL it. You place a bet, and renege on it when you don't like the outcome. When you do like the outcome, you say self-righteously I WANT SOME MORE"

This is probably the best explanation I have heard of "cutting losses and
letting profits ride"

h) Enter Automatically Feel Good
http://www.visoracle.com/swingtrend/enter-automatically.html

When I do a lot of trades I am experiencing minimal adrenaline rush. It is when I only do a few trades that I get really tense, heart pumping etc. One book I read advised the following system:

1. Identify opportunity
2. Take action automatically
3. Feel good about the trade

This is what I do. By trading a lot I am teaching myself to execute automatically. I feel this is critical because I have lost way more money on trades that I identified but failed to enter than on ones I entered and had to stop out

i) Enter High Eckhardt
http://www.visoracle.com/swingtrend/enter-high.html

If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you're finished. For example, let's say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There's a great temptation to reason that now it's too high to buy. If you buy it now you'll have an initiation price that's too high? No, the initiation price simply won't have the kind of significance you suppose it will have after the trade is made. You can't miss these trades. Trading systems force discipline to make sure these trades are not missed.

Suppose two traders, A and B, who are alike in most respects except the amount of money they have. Suppose A has 10% less money but he initiates a trade first. He gets in earlier than B. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn't know what his initiation price is.

William Eckhardt

j) Longterm Leaps
http://www.visoracle.com/swingtrend/longterm.html

Our long term investing strategy is simple. Find the stocks that will dominate their markets and invest for the long term.

The Hager System is simplicity in action. Buy the long term portfolio stocks we select and combine those selections with he LEAPS portfolios we feature.

The best part of all is that all the leverage comes without resorting to the risk of using margin. Whether you want to add a little or a lot of this supercharged LEAPS performance is really up to you.

While the Hager System itself is simplicity in action, it's knowing which stocks to put into the system that is key to it's success.

Fred Hager
fredhager.com

k) Long Time Switching
http://www.visoracle.com/swingtrend/long-time.html

Investors who held the Nasdaq Composite for just the second six months of each year since the Index's inception have outperformed investors who just bought and hold the index by more than 40 times.

l) Low PE
http://www.visoracle.com/swingtrend/low-pe.html

GeneM: I ran a number of portfolios designed off Graham's simple low p/e and high dividend approach for years. It proved to out perform all the indices year after year. Still the best way to go for the long term equity money IMHO.

m) Moving Average Day Trading
http://www.visoracle.com/swingtrend/moving-average.html

You can make an excellent living trading 300 AMAT or any other high volume highly volatile technology stock in a daytrading account. Just set up moving averages on the 2 min chart and follow them long and short

n) One Pattern For a Living
http://www.visoracle.com/swingtrend/one-pattern.html

Focus

All you need is one pattern to make a living! Learn first to specialize in
doing one thing well.

Linda Bradford Raschke

o) Rebalancing
http://www.visoracle.com/swingtrend/rebalancing.html

There is a simple strategy that has averaged more than 30% annually for more than ten years. No hype, no options or commodities. Just buying 5 large cap stocks and rebalancing your portfolio on a quarterly basis. Can you imagine that?

You can booster this strategy with choosing growth stocks which are leaders in their industries and industries with long term trends. At its best such a secular trend is a fresh one, so that you expect it to last many years to come.

p) Relative Strength
http://www.visoracle.com/swingtrend/relative.html

Buy only a stock that is relatively strong compared to the broader market. Sell when it becomes weaker. Even better, replace it with the strongest one then. What timeframe to use? One month!

q) Risk Chance Gain Loss Asymmetric Behavior
http://www.visoracle.com/swingtrend/risk-chance.html

Traders tend to fall prey to their wish to win. They overestimate the value of having this time a winning trade vs hitting sometimes big.

George Soros: It doesn't matter how often you are right or wrong - it only matters how much you make when you are right, versus how much you lose when you are wrong.

Someone else called this the Babe Ruth Effect. Few home runs can compensate for many strikouts. His lifetime batting average was only 0.342.

Psychologists Tversky and Kahneman: People choose a sure gain over a lottery with an expected better gain, but shun a sure loss over a lottery with a worse expectation.

William Eckhardt: People take profits, but gamble with their losses. Amateurs go broke by taking large losses, professionals by taking small
profits.

Old market wisdom which directly results in only a few big winning trades and many small losses: Ride your winners, cut your losers

Trend Followers who run automated trading systems win only on average 40% of the time.

r) Simple Strong Stock Strategy
http://www.visoracle.com/swingtrend/simple-strong.html

The simple things are always what work best, look for a trend and a pullback, or look for the strongest stock when the market pulls back.

s) Stoploss Trade Management
http://www.visoracle.com/swingtrend/stoploss-0.html

It's so easy to not become a bagholder when you start practicing trade management and limit loss through the use of stops. If you get stopped out, you were on the wrong side of the trade anyway.

You don't want to use stops because you think market makers grab your stops? Wrong, it's just all in your head! The market doesn't care where you want it to be, you have to go with the market.

t) Support Resistance Pivot Swing Break
http://www.visoracle.com/swingtrend/support-resistance.html

Negated swing trading system or entering the break of a wave after a pivot point.

A highly successful trading pattern is to find situations where price is violating a pivot point convincingly, as there are professional traders and automated trading systems out there watching the markets like hawks to find exactly these hot spots of price action. If the price breaks through the line of a just successfully confirmed support or resistance after having started going the other way, serious traders become active. This is one of the big trading signals for said professionals. All experienced traders, be they trading for themselves or for banks, financial institutions or funds, adhere to the concept of support and resistance. If this concept is violated it signals them strongly to do the opposite.

This price violation can come as a breakout after a false breakout at the other side of a trading range or as a disruption of a turning of the wave. You have to do sort of negative swing trading. The moment ordinary swing traders move in, the wave breaks and the trade begins to look not only bad but catastrophic for them, is the signal for the successful trader to bet on the opposite direction. In such situations even market makers, the ones who normally increase market oscillations by driving prices artificially up and then suddenly turn the tides by selling at top prices and ride the wave down and vice versa - all in all a counter cyclic behavior - jump with market orders into such a wave disruption.

One special trick of market makers to get out of a position is to initiate the swing not to ride it up, but to dump a wrongheaded position into its very beginnings. Chances are good that there is some more fundamental reason for them to do so. A disrupted swing can have of course any other cause like e.g. breaking news or a market which has simply more potential for the other direction. The power of this trading pattern lies in the combination of strong thrust and further potential.

There are these scenarios of a safe trade, a trade with a very good win to loss probability ratio. But you need to have discipline in order to enter only the market when price action looks good, when there is a real trading signal, a high probability pattern with an expected gain much bigger than the possible loss and not when you think you need the next trading chance.

u) Technology Trend
http://www.visoracle.com/swingtrend/technology.html

Find the next major technology trend and then find the best company in this trend.

The most successful technology stock investments all have one thing in common:

the companies became big players as the markets they were in became big.

Would Microsoft have been so successful if PCs had cost $10,000 each?What really made Microsoft so successful was the marketplace they came to dominate.

They rode the market's extraordinary growth curve, and exploited their position along the way. Mr. Gates and Mr. Ballmer are great executives, but make no mistake: it was the PC market explosion that made Microsoft the giant it is.

To find the next Microsoft, and that is what it is all about, you should first try to find the next major trend. By thinking on the highest level about where technology is going, and how an individual company will fit in that trend, you stand the best chance of reaping the highest rewards.

v) Warren Buffet Long Term
http://www.visoracle.com/swingtrend/warren-buffet-0.html

Warren Buffet, "In the short term the market acts as a voting machine. In the long term as a weighing machine". More is made in the sitting than in the thinking.
------------------------------
EXTRA! EXTRA! READ ALL ABOUT IT!

This is an interesting article I've been saving for quite some time now..it's kinda like a 'guide' to me. All credits goes to the AUTHOR of course. (Travis Morien)

http://www.travismorien.com/FAQ/intro/speculate.htm

More than at any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly. - Woody Allen

Aus.invest is, by its very name, supposed to be about investment. In practice much of the discussion is about speculation, there is no aus.speculation newsgroup so in that case it is an appropriate forum, but nonetheless it causes plenty of confusion for readers, new and more experienced.

I define a speculator as someone that seeks to buy and sell in order to take advantage of market price fluctuations. An investor is someone who holds on to securities that provide a good income or capital gain by virtue of them being based on something of real and increasing value.

Alternatively, you could say that a speculator is someone that buys something only because they think someone else will pay more for it in the near future, as opposed to an investor, who buys things because analysis confirms that the investment is of high quality and/or good value, and worth holding. A speculator buys things because they believe a less informed person will buy it off them later at a higher price, an investor buys things because they promise both a return on capital invested, as well as a return of capital invested.

Benjamin Graham, a famous investor in his own right and also notable because he is the man that taught Warren Buffett to invest, defined the difference between speculation and investment in this famous passage from his book The Intelligent Investor


"Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers to either buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr Market's daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgement and inclination. He must take cognizance of important price movements, for otherwise his judgement will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed - this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view, such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell."

Another way to define investment related to the way investors value things. If you cannot value something, it is a speculation. This is a broader definition, and tends to exclude most things. The share of any company about which no information is available is speculative, the share of a company that you know enough about to be able to "value" it, even if you can't do so with any great precision, is an investment if the market price is less than or equal to your valuation.

Another quote, from "Graham and Dodd's Security Analysis, 5th edition" by Sidney Cottle, Roger Murray and Frank Block (the modern revised edition of "Security Analysis" originally written by Ben Graham and David Dodd), had this to say about "investors" that buy things without a proper valuation:


"Valuation versus Alternative Procedures for the Analyst:

Assume that a run-of-the-mill common stock is not particularly well suited to a formal valuation because there are too many uncertainties about its future to permit the analyst to estimate its earning power with any degree of confidence. Should analysts reject the valuation technique in such cases and form their opinions about the issue by some other approach? A common stock that cannot be valued with confidence cannot be analysed with confidence. In other words, buying or selling recommendations that cannot be related to a reasonably careful valuation are not based on analysis proper but on what might be called "pseudo-analysis" or "quasi-analysis". In such situations the underlying interest in both the analyst's and the investor's mind is likely to be the probable market action of the stock in some relatively short period in the future. The analytical work done, which may be quite comprehensive, will thus serve as an adjunct to an essentially speculative decision - disguised though it may be under some other name.

Another alternative is to do whatever everyone else is doing, even though the price of a stock appears high; this is the so-called greater fool theory. This theory is applied on the basis that "I know I am a fool to pay such a high price for a stock but I know that a greater fool will come along and pay me an even higher price."

The soundness of a common stock investment, in a single issue or a group of issues, may well depend on the ability of the investor or the analyst-advisor to justify the purchase by a process of formal valuation. In plainer language, a common-stock purchase may not be regarded as a proper constituent of a true investment program unless some rational calculation will show that it is worth at least as much as the price paid for it."

This definition does not mean investors are people who never sell (as many critics of the "buy and hold" philosophy claim), but there are differences between the reasons for an investor sale and a speculative sale. An investor sells when the investment no longer fulfills the criteria that prompted him to buy it in the first place, or if another investment comes along that should provide a superior opportunity to invest. Warren Buffett sells more than 10% of his portfolio every year, so much for the reputation he has for never ever selling a stock. A speculator sells because he anticipates the price is peaking or to realise a profit, usually for reasons unconnected with any notion of "intrinsic value".

"Buy and hold", a doctrine recommended by the majority of investors (in the Graham and Dodd sense of the word), means you buy something with the intention of holding it as long as possible. Therefore, analysis is done on the basis that the business being bought is to be held for quite some time, and there is more of a focus on valuation and the business operations of the company than the price action in the market. The share will be sold if it no longer fulfills the criteria that lead to its purchase in the first place, namely if it becomes so overvalued as to represent a great selling opportunity rather than a great buying opportunity, or if the business deteriorates. Since the characteristics of the business will be reflected in the valuation, overvaluation and business deterioration will be a part of the same phenomenon.

Many critics say that "buy and hold" means buying a stock and holding it for ever, without paying any attention to it. They point to the major companies in the index and note that very few of the companies that were leading lights 100 years ago are still around. Thus, say the critics, buy and hold is foolish. These critics are attacking a "straw man" (Shorter Oxford Dictionary defintion: "an imaginary adversary invented in order to be triumphantly confuted"). I know of no book on "buy and hold" investing that advocates purchasing securities and completely ignoring them, except for those that advocate index funds. Since index funds do change their composition over time as the indexes themselves change, this argument is wholly irrelevant.

Traders, in shares, futures, property, collectibles, bonds or whatever are by their nature speculators, and if they are successful through their skills and superior insights then obviously they are competent speculators. They are out there, traders who make regular profits through an intelligent and structured program of speculation, but they are always wary of risk, in fact the basis of successful speculation is always to manage risk in the most efficient manner possible.

On the other hand, there are the punters who always want a flutter. These are the incompetent speculators. Unaware of the real risks, or perhaps aware in some vague sense of them but simply ignoring them, these people buy hot tips and securities with glamour stories, getting excited about some new venture this security is associated with, and through ownership of the security hoping to make a killing.

Professional speculators are like professional gamblers. There are people out there who play blackjack or poker for a living, taking calculated risks with enormous amounts of money, seeking to maximise their edge with sophisticated techniques and a mind that is well tuned to probabilities and risks vs rewards. Some of them make millions, there is no doubt at all that by playing a game with statistical biases, and seeking over time to take profits from these biases, one can actually make a living from gambling.

On the other hand, the world is full of the social wreckage caused by gambling. The unwise and impatient litter the wayside, though there is no shortage of people willing to take their place. You can only profit from gambling when your probability of winning is greater than the probability of the other side winning, and casinos employ gifted mathematicians to make sure the rules of the game favour the house.

Professional speculators are as far above the public in terms of sheer talent, dedication and intelligence as professional gamblers are above the tipsy chain-smoking denizens of the casino floor.

To become a professional speculator you have to live and breathe the market you want to speculate in. All those people buying collectible china and antiques are up against the true connoisseurs. Those who know the market from the inside, and can spot a rare gem when it comes along, and have the cash needed to buy it, and the body of experience to know exactly what this item is worth (regardless of how aesthetically pleasing or otherwise that it may be).

Professional traders think of little else. Far from the 5-minute-a-day business that is advertised by the guru wannabes that advertise "systems", trading is a lifestyle that can be embraced by only a rare person. Traders become aware of all the pertinent fundamental information, including consensus estimates and bullish/bearish market sentiment.

Professional speculators in mining issues read all the trade journals in mining and probably know a thing or two about how to read the jargon of the analytical chemist in the labs and the geologist breaking rocks, or the meaning of the various exotic electronic sensing devices used today. A technology speculator needs to know a thing or two about science, engineering and electronics as well, so as to keep up with the state-of-the-art and separate the good ideas from the blue sky ideas.

A trader doesn't always try to forecast though. The blackjack player does not need a newsletter writer to tell him what card will be next so he just plays the probabilities and tries to control his risk, usually with some kind of mathematically based money management system. Similarly in stocks and futures, few traders know or care what the market is going to do next. They sit back, do their analysis and try to think in terms of possible upside potential and downside risk, determine where they might enter the market and where they will exit if the market should move the opposite way.

Can you do this? Well sure, there is nothing to stop someone from picking up these kinds of skills, but you won't do that by subscribing to any newsletter, or paying a thousand dollars for some kind of formula or indicator that some guy says will tell you when to buy and sell. Not that there aren't plenty of people who do sell such things though, in investment more than anything else there are plenty of people who demand such a service. Everyone wants to know what the experts think about the future direction of the market, while nothing like it appears in the newspapers, surely someone that works in an investment bank knows what is going on, or a fund manager, or some sort of pro?

To every demand there will rise a supply to meet it. Since there are no genuine and ethical people who can give an easy answer, the void can (and is) only filled with players that exploit the gullibility and ignorance of their customers.

A businessman does not seek advice on how to run his business, except in a general sense or perhaps get an expert with certain management talents who can fix a specific problem. You don't get anyone offering a service though where complete businesses are offered and you are told how to run them and it all takes only a few minutes of time per day once you pay them your money. (Except maybe for franchise businesses, but there is no parallel between a franchise and speculation, so forget it!) To those professional speculators, speculating is their business, their full time job. Most put in considerably more hours into their trading than the average person puts into their job, and unless you really love trading you certainly don't find yourself any better off as a trader.

The reality is that you can make money as a professional speculator, but it is not at all easy. No one can tell you how to do it specifically, they can only give a small amount of guidance while you have to do a huge amount of work. Traders work very hard at their trading, doing enormous amounts of research and keeping track of a huge amount of information. Don't even consider becoming a very serious trader unless that is all you want to do. Most newsletter gurus aren't traders at all, they advise on methods they have developed with only theoretical simulated testing. It is very time consuming writing a newsletter, and even more so trading. As gurus have just as many hours in their day as the rest of us, it is clear that the lifestyle they paint, with their luxury houses and heaps of free time, holidays in exotic locations and massive incomes is entirely incompatible with that of a professional trader. Not that traders haven't written books, there are a few good ones around, but one thing that is for sure is that no genuine trader would have the time to write, edit and publish a weekly newsletter.

Don't give up your day job if you aren't already a trader. You can start out with it by riding a few uptrends on some large cap stocks, despite what they say about trading being hard it doesn't take a genius to buy BHP when it has been steadily rising for a week or two on the back of improving commodity prices, and sell a week later at a 20% profit. If you did that and you really enjoyed it, and I mean REALLY enjoyed the market then maybe you might have the passion.

Traders get out of bed at 6am to see the close of a foreign market and the opening of another one, they read all the journals (not the tip sheets, I mean reputable financial newspapers) and track a number of markets. They watch out for opportunities and they are fast in taking them, and equally fast in getting out if they turn out to be wrong. They don't necessarily use the super-duper software or subscribe to a $1,000 a month data service for NASDAQ day traders, but they are in there anyway, around the newsgroups and reading all the commentary (sometimes so they can go contrarian when strong consensus is obvious).

Why do traders do this? Well of course there is the money, though not as many as you would think make a very high income, they do it because they love doing it. They find the vacillations of the market to be entirely fascinating and immersive, they gain pleasure from seeing the market move with them, but don't take it personally when it doesn't so they get out quickly. They don't trade to live, they live to trade. Far from the glamourous operator pulling up to the curb in a Maclaren F1 sports car to attend a society social event, many traders are reclusive, sometimes a little nutty and definitely obsessed. Trading is their favourite thing in the whole wide world, they would not want to take a yacht to the Bahamas, as that would drag them away from their trading.

Will you be able to buy that kind of intensity? Can a software package that scans the market for some sort of trigger signal provide you with the kind of skill and knowledge to keep up with those guys? Will a $10 a minute hotline to some guru really provide the insights you need? Bear in mind that a real trader would be too busy to talk to you during market hours, and would not welcome a bunch of whining beginners desperate for some tips. Can a few lessons turn you into a virtuoso?

At least with music you don't go broke if you don't play well at first, you have the chance to practice for many years before you get your night in the spotlight. Even paper trading isn't real practice, unless you have real money in the market you will always kid yourself, thinking as hindsight rolls in that in the real thing you would not have taken that trade at all because it was so obvious it wouldn't have worked. No!

On the other hand, investment isn't a particularly hard thing to do. Anyone, regardless of intrinsic talent can do it. The stock market has a certain long term return that beats inflation comfortably. Purchases of a conservative portfolio of leading stocks will provide returns along the same lines as the market, even better (sometimes) you could buy units in an index tracker fund. Purchasing ordinary real estate in an attractive area that has enjoyed consistent gains for decades is also a good investment, and again requires no special skill.

Is investment better than speculation? Well you won't make massive profits in a few days if you are investing, but you make respectable profits in time. Speculators don't always lose money, but the inept ones do. There is nothing inherently superior about either approach, though one thing that is for certain is that only a minute proportion of the population will ever (or could ever) be highly successful speculators, you rely on being much better than 99% of other people and you have to maintain that superiority for as long as you speculate. On the other hand, if every single person in the world was an investor, it would simply mean that wealth would be fairly and equitably shared, with all sharing in the prosperity that can be gained by living in a capitalist society.

I am not against speculation, but when I speculate I do so knowing the difference between speculation and investment. Trouble arises when people confuse the two and look for hot tips to invest. This FAQ should tell you a little bit about how to do better at both of these, but you should never ever think you are an investor if what you are doing is in fact speculation. You can be both, but not at the same time (not with the same stock anyway, though you can have two portfolios if you want to).

There are of course differing definitions of speculation. An efficient market theorist will define investment as holding a large diversified (but otherwise randomly chosen) portfolio that will give returns commensurate with the market as a whole. It defines speculation as any attempt to beat this by analysis of any form, including technical, fundamental or otherwise.

Others define speculation by the knowledgability of the investor, but this is not a very useful definition really. The dictionary defines speculation as attempting to profit from market price appreciations, this is definitely the most useful definition.

You are probably an investor if:

You are buying a portfolio of quality issues at a reasonable price.

You either content yourself with returns that are average for the investment type, or focus on the best value issues of the type for superior returns.

The portfolio is made up of issues with a strong track record, or is managed by people with a strong track record.

You can justify your purchase with reasonable projections of profits that are not out of line with historical returns for ventures of this type.

You buy something because the price has fallen so the yield (dividend, rent or otherwise) has risen to the point that it is superior to alternative investments, and you have substantial reason to believe that the investment won't completely go bust.

You buy because you notice the stock is trading at a price below fundamental valuations.

You sell because of deteriorating fundamentals in the investment, or you need the cash for something meeting your buy criteria even more closely.

Market quotations are there only for your convenience, you may choose to sell if the investment looks absurdly expensive, or to buy when you see the opposite, but other than that you ignore volatility.

You keep a close eye on those who manage your investments (including managers of the company you hold shares in), looking for prudence, logical capital allocation and conservative expansion. You would rather not invest with a high profile celebrity CEO that promises huge growth with a series of rapid takeovers.

Tax efficiency is important, and you take after-tax returns into account when weighing up various options.


You are probably a good speculator if:

You understand the risk and are taking positive measures to limit that risk. In fact risk management is your bread and butter.

You are taking steps to bring about a higher return than average by keeping a close eye on your stocks and constantly riding the ups in price but selling out and waiting for the end to the downs.

Of the many issues you are watching this one seems to have the highest probability of doing well over the time frame of your trading style.

You anticipate a price increase but have a plan in place in case it doesn't.

You track a large amount of information that may have an effect on prices, and get ready to act if this information doesn't seem to be already reflected in the price.

You are well tuned with the pulse of the market you are in, and ready to leave before the herd does.

You buy at the early signs of upturn after the price has fallen, but are ready to close your position rapidly of you turn out to be wrong.

You are mindful of the overall trend in prices.

You buy the best value investment of its type during a boom.

You buy something with the strongest upward price momentum.

You sell because you notice a trend change.

Market quotations are your bread and butter, you want the very latest information and lots of it.

You don't trust anyone else with your money, the stupid cattle on the opposite side of the trade from you don't know what they are missing and all those gurus are just crooks.

Tax effective investments probably don't interest you as they are too long term and you can make more money trading. You don't trust the promoters of these schemes anyway.


You are probably a mug speculator if:

You verbally acknowledge risk but ignore it, allocating a large proportion of your money to this one venture.

Risk management simply amounts to nodding your head saying you realise that there is of course a risk, but doing absolutely nothing to take steps to limit, or even properly identify risk.

You are trying to bring about a very high return by buying something that looks exciting, but you aren't too sure how the business works.

You are buying something because someone you know told you it was good.

You have absolutely no idea what else is out there because you haven't really checked, but this one looks good.

You think it is a sure thing to go up.

You buy something that has fallen a lot because you don't think the price can go any lower.

You find out the price crashed a week after it happens in a conversation with your friend that "understands this sort of thing".

Rene Rivkin says on TV that he "likes it a lot" so you buy it.

You don't understand how people make money in the investment.

You are trying to pick the very bottom to buy, or the exact top to sell.

You will pay anything for an investment because prices are booming.

You buy because it has gone up a lot.

You sell because you want to take a profit.

Rises in the price excite you, but as terrifying as it is to you, you don't take any action during the dips because it is just a "paper loss" and you know it isn't really a loss unless you sell. If it gets back in the black though you'll rapidly sell out and pocket the cash so you won't lose face over it.

You want someone to tell you what to buy next, and even though the last 20 newsletters you subscribed to cost you lots of money, you haven't quite given up on newsletters just yet, you also own the latest and greatest automatic software to free you from all that dull boring analysis.

You buy any investment that promises to save you tax.