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The stock market

SayWhat

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Hi all

Currently I'm studying about the stock market as I'm planning to start investing. I've read a few books and am still learning but I would some useful information and tips from others how they choose their stocks and this to be a thread where we could advice each other.
 

Tenacity

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There's various strategies you can use for investing in Stocks, it depends on what your objectives are. Are you looking for long term, relatively conservative, low growth investments? Are you looking for shorter term and relatively high rate of return potential investments?

Once you make that decision, you have to determine do YOU want to be the one managing the investments or do you want to pay someone else to do it? One involves A LOT OF study and hands-on, while the other requires that you give u a portion of your return in fees/points.
 

dasein

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My first career was a stockbroker, and did that for 9 years. As tenacity says, picking stocks is very hard work. When I was actively trading accounts, I spent 3-4 hours a day just screening. Here are a couple of things.

1. If you are looking to invest for growth, just buy an index fund and spend the 3-4 hours a day you would have spent trading knowledgeably doing some kind of work that will allow you to put more in the fund. You will beat almost all traders in this way. Never ever forget to factor opportunity cost into your investing or any other life choices... don't repeat my mistakes. You did 5 hours of work and made $100 trading today? Well that's mediocre at best, esp if the index fund went up $100 too without the opportunity cost. Don't even consider diversifying from your index fund until you have 20-50k in the fund. Diversification before that is a lie told to suckers to gin up commissions. Too boring? Well, fair enough.

If you have an ego, and are considering investment as something to prove, glamorous, sexy, or being right, do not read further. Stick with the index fund. If you see it as just another kind of work with rules and routine that must be followed day in day out, and can be a grind, maybe read on... but probably still stick with the index fund.

2. Is your reading comprehension and logical reasoning in the top 5 percentile? IQ 1.5 or more standard deviations above the norm? If not, you are at a huge, crippling disadvantage out of the gate. This can be overcome though... with even more hard work, to equal the people who came up with the "killer idea" you just had today a year ago.

3. You must commit to never "taking a tip" or picking a deal outside your process. Stories are for suckers. Your process must include top down (market>sector>industry>comparables in the context of the economy and derivatives markets) and bottom up (momentum, technical, volume, fundamentals, disclosure docs, management, products, deals, litigation) analysis of every possibility, fundamental and technical, reading piles of disclosure documents, news releases, derivative trading levels, and also the background economy... every day. You are like a miner with a gold pan sifting through ALL the dirt to find that little grain of gold, and the grain you are after is something that is inefficiently priced for one reason or another (99% of it is priced correctly). Everyone else is looking for the same grain, and some people are even trying to trick you with fool's gold. After the long hours of work doing that and running your models, you may have 3 possibilities, 1 or none. Most days none. Don't do that every day and you are effectively tossing coins and betting red/black on a roulette wheel. Maybe you'll get lucky, but you probably should have just done the index fund. Personal money management is more important than the right pick %, it works just like poker and chips in many ways. The biggest mistake of newbies is busting out due to poor money management and wanting to push things too fast.

4. Adam Smith "The Money Game," (forgot author) "Extraordinary Popular Delusions and the Madness of Crowds," everything Peter Bernstein ever wrote, Martin Pring "Market Momentum," everything free on the CBOE, CBOT, CME websites even if you aren't doing options and futures, you must understand them thoroughly. (Understanding the options market is the best way IMO to learn the fundamental principles, math and risk management... just don't start off speculation there). Also learn to read and use freeedgar. Just a few things to read. You better LOVE to read. I read 150 books a year for fun in addition to the 500 or so pages of documents I read every day for work. You don't have to be that hardcore, but if you start yawning in the middle of a 10K? Go with the index fund.

I plan on getting back into it one day, but it will be far more work than what I do now... practicing corporate law. It's fun as hell though, better conversation than horse races or sports betting to boot. If you don't enjoy the daily grind of it, seriously, pick the index fund and you will near certainly do better.
 

Bible_Belt

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I didn't know you were a broker, Dasein. I was, too, although for a short time. I just missed the day trading boom of the 90s. I came in on the tail end of it. I was able to get a couple jobs trading and make at least a little money before I had three consecutive employers go out of business. Decimalization and the rise of computer trading killed day trading. There is still money to be made in trading, but it's not intraday. That pushes the small money traders like me out of trading. For overnight positions, I can only margin 2:1. I had 10:1 intraday on my own money and as much as 100:1 on the firm's money for intraday trading. That let me have a lot of fun with just a little bit of cash. My million dollar firm account probably had less than $10k of real money behind it.

A friend of mine trades a system for a doctor and his friends. They buy stocks priced $5-10, which are hitting 52-week highs but used to trade for a much higher amount in the previous 2-4 years. It's very simple, but they do ok. It resembles my past day trading systems in that you buy stocks on their highs, with the expectation they will keep going and set new highs. I have never been a bottom-picker. I was taught by a guy who traded for a firm in South Florida called Schonfeld. They were the early 90's pioneers of day trading, back in the days of Harvey Houtkin and the SOES bandits.
 

Tictac

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If you haven't read Siegal's "Stocks for the Long Run" and
Malkiel's "Random Walk Down Wall Street", do so now.

Then read Swensen's "Unconventional Success".

Any and everything else is nearly all bullsh*t.
 

dasein

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Bible_Belt said:
A friend of mine trades a system for a doctor and his friends. They buy stocks priced $5-10, which are hitting 52-week highs but used to trade for a much higher amount in the previous 2-4 years. It's very simple, but they do ok.
You are truly a Renaissance man, BB. I started with a penny stock firm straight out of college in 87 based on a plate telling me the guys were making big money. Didn't stick around once I realized it was a scam, though the money was great, I didn't want to end up in jail. Ended up working at Merrill twice, Fidelity for awhile, a huge bank that is now defunct and solo for awhile. It was a fun way to spend 20s, early 30s but I was partying and didn't have the discipline to hit the big time.

My favorite big model is also simple, I call it "dancing with the elephants" and it is based on finding sound fundamental trades with nascent momentum like your friend's system, but also requiring that they have some factors that were precluding them from institutional parameters and screens that have recently been removed. In essence, trades that were invisible to elephants yesterday, or even repellent, but something has changed to bring them on to institutional radar.

For example, a reverse split will instantly remove a stock from most screens, because reverse splits are associated with a failing company swirling the toilet. Some few healthy companies, though, reverse split for the very purpose of getting a higher stock price and fitting more institutional parameters (as a rule, institutions can't buy $5 stocks because the volume they need to buy moves the price too much both in and especially out). It takes a certain period, could be 6 mo to a year, for the stench of the reverse split to fade and during that time, the stock may develop screaming fundamentals with little activity. Volume and price early breakouts signal that the reverse split stigma is fading, and the stock is moving onto more screens. I am looking for a 30 day to 2 month hold on that, 20%+ appreciation in that time, and then out. This is an OLD example, and no idea if it still holds, so not giving any investment advice here, OP. THE ONLY CERTAINTY IS CHANGE. The rule here is "look for something the elephants think is bad that is actually very good" and apply that rule to status quo.

Anyway, there are many other ways to dance with the elephants, to try to anticipate what big money will do, keeping in mind that big money pools tend to think alike in their screening and models, there is nothing new under the sun. Part of your research has to be to LEARN everything you possibly can about big money, mutual funds, pensions, government pools, large hedge funds, and see the big money environment AT A POINT IN TIME, as an organic whole like a creature. Once you have 5-10 models like this uncovering prospective trades, you will have each of them spitting out a deal every now and then. IMO, few trades are better, doing lots of trades is for day traders, not my style, I'm not good at working the B/A and would make a lousy specialist or floor trader, more of a big picture guy, but everyone is different. I would seek to have 3-5 open deals at any given time, with the cheapest possible hedges in place such as way out of the money puts on the industry index and/or market as a whole.

But remember, OP and others CHANGE CHANGE CHANGE. There is no static black box, or if there is, I'm not smart enough to find it. When you hear about trading methods, KISS, every level of complexity leads to greater chance of error IME. Simple principles. Adjust to the status quo, and doing that takes IMMENSE work.

One other thing is that EMT is becoming more and more discredited daily. Not sure that Malkiel is still the best thing to read, however good to know generally.

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

Some more reading, everything on heuristics you can get your hands on, Kahneman and Tversky, Gigerenzer. Knowledge of current cognitive science can help you dance with the elephants better. One tip for general research is add "pdf" to your searches. Once you get a study, it will list all the other studies. Then search those titles including "pdf" in the search terms and you can pull up the latest cognitive research very quickly for free. Cut paste from the pdfs as you read into a word document to create 1-2 pg summaries of only the meat of the study. One other layman book along these lines is "The Invisible Gorilla." If I were learning trading stocks for the first time, I'd spend just as much time on modern cognitive and neuroscience as actual investment books.

Before I forget, one other model I am going to finish one day will be called the "sosuave" model, and will try to isolate overpriced companies with failing fundamentals with a history of heavy affirmative action and promotion, especially of women, companies with an airy-fairy gynocratic Peter Principle social activism culture, outsized, expensive and glitzy marketing overlaying less substance and depth of management, in industries with less burdened competitors selling superior products. Should be good for a laugh at least, and I wager it will return solid to boot.

sorry for the rambly post, just typing as things come to mind.
 

Bible_Belt

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Tictac said:
If you haven't read Siegal's "Stocks for the Long Run" and
Malkiel's "Random Walk Down Wall Street", do so now.

Then read Swensen's "Unconventional Success".

Any and everything else is nearly all bullsh*t.
Random Walk Theory is what's bvllsh!t. It basically says that there's no such thing as trading, and any stock pick is a random guess.

I made a living off those "random guesses" for years. I knew a lot of traders who did, some of them made millions.

Just because most people suck at trading doesn't mean that trading doesn't exist. That's like saying that since I can't throw a baseball 100mph, then there is no such thing as a 100mph fastball. It must be just an illusion, because I can't do it.
 

synergy1

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Think of the stock market as ownership of companies - not as prices of pieces of paper. As a business owner, you want to ensure that the company is in sound financial condition ( much like a person with no debt would be), and is earning money in a predictable manner ( much like someone with a good job would be). Quickly disassociate the markets manic depressive movements with the tenants of sound businesses. The market is there to guide you, not instruct you.

To get into the market, start by learning the basics. Investopedia has a lot of simple definitions to help you understand some of the jargon. One thing I wish I did next was understand GAAP accounting and the principals behind the standards. You don't need to be a master of the income statement, balance sheet, or cash flow statements , but doing your research will be much easier if you do. Move onto some introductory texts like Peter Lynch's "One up on Wall Street". Again, Appreciate that stocks are shares of a business, and deserve the same attention in regards to due diligence that buying any type business would have. If you do not want to put in the time to really understand it ( believe me ,its not easy), than do as others have suggested and get a low cost index fund. Odds are you will outperform individual stock picks.

Here are some good books to read to get the idea: Intelligent investor, One up on Wall Street, and a more advanced one called "Contrarian Investment Strategies". The last book gives excellent insight into the crowd mentality that moves the market , and underpins the notion of long term investing and why it statistically is more profitable than shorter term equivalent.
 
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