DJIA

[oldtimer]

Everyone can have their own fun. Get what you want out of it. Trade all you want, enjoy paying the commissions. Now if you are special you might not have the transaction costs of the average joe. That's great for those in that position, but the regular guy can seriously erode his profit through constant trading. Diversification may be an excuse for ignorance, but empirical studies show that if you do your homework and diversify correctly, you can well afford to be ignorant.

[Jeff Matthews]

Don't forget, diversifying includes investment outside of the stock market.

[oldtimer]

Correct jeff, your risk tolerance and diversification needs should be reflected in your entire financial picture.

[oldtimer]

Never to my knowledge. We are lucky that our credit union pays out relatively high rates for liquid savings. But to the point mark, any advisor worth even considering working with (if you need one at all) should recommend strongly a regular savings plan and to keep a liquid fund worth anywhere from 3 months to a year's worth of expenses depending on one's situation and comfort level. Plus, any money you might be planning on spending within five years should be in a liquid savings account, not tied up, and not risked for greater return. But you know that.

[oldtimer]

I hear ya mark, the sophistication level of marketing has risen. As for the savings rate, I'm not sure i believe most of that figure. I'm not up on the specifics, but i believe there are some components of people's finances that are not included in the calculation that would be considered as savings to them, or at least a positive for their net worth. The basic economic definition of savings is deferred consumption!

[artto]

Everyone can have their own fun. Get what you want out of it. Trade all you want, enjoy paying the commissions. Now if you are special you might not have the transaction costs of the average joe. That's great for those in that position, but the regular guy can seriously erode his profit through constant trading. Diversification may be an excuse for ignorance, but empirical studies show that if you do your homework and diversify correctly, you can well afford to be ignorant.

The problem with your arguement is two-fold.

"but empirical studies show" ~~~ ballyhoo. Empirical: relying on observation or experience alone often without due regard for system and theory.

While I have absolutely no problem taking into account observation or experience, I do have a problem disregarding system and theory/hypothesis

"if" ~~~~ If my grandma had balls she'd be grandpa. "If you do your homework" and "if you diversify correctly", therein lies the problem. The process I discribed above actually encourages, if not forces me to "do the homework" and to diversify. Diversification is one thing. Knowing exactly where to diversify is another matter. The average arm chair buy & mold investor is lazy. The whole approach and attitude that diversification and long term/inactive investment/trading style will get you through thick and thin is hogwash ~ it's what Wall Street wants you to believe ~ it makes things easier and more profitable for them, while using your money, and returning a small pittance to you.

I don't do this for "fun". I do this to MAKE MONEY. And make far more than average market returns.

If you had taken the time to do some "homework", and more closely examined the tables I posted, you would have figured out which industry groups are the strongest and might have asked an intelligent question like "that's very intereting, how do you find the strongest stocks in those industry groups, what are they and what else, what other kinds of things should I look at?"

You see, the above tables do not inhibit any diversification. In fact they show me exactly which are the strongest areas of the market to be in, the top five industry groups (out of 101). That's plenty of diversification. It's all the diversification you need. And it is diversification amongst the strongest of the strongest.

If you think for one moment that by "doing your homework and diverisfy correctly", that ~ "you can well afford to be ignorant", then I say you are in fact ignorant. No one can "afford" to be ignorant with their money. NO ONE. Those who are, lose. And, if one actually did their homework, and diversified correctly, (do you really know how to do it? hint: check the tables above) you wouldn't be ignorant, and you certainly wouldn't have the ignorant attitude that you could afford to do so.

"The regular guy can seriously erode his profit through constant trading". This is true, but only because the regular guy doesn't have a clue whats going on and where, or why (quite frankly, this is true of most "financial experts" ~ don't forget, they are in the business of selling you something, I am not). Also, from your reply, you seem to have assumed that I trade a lot. I don't. I only make a trade when certain conditions are present and my trading system criteria have been met. During this last downturn I didn't make any trades from 12-07 until recently, selling Apple and Celegene. The other long positions, which are in the top four industry groups that I've been holding, and look ripe to possibly sell soon are ANR, CMP, CWEI, GIFI. Go ahead, take a look those. While the market has been going down, these have been going up, strongly. In fact, these sectors/industry groups are the very reason why the rest of the market has been going down.

BTW, trading commissions are not what they used to be. Commission costs are now so low they contribute very little expense to the trade, unless of course you're trading position sizes so small that you really shouldn't be trading, its an indication you're undercapitalized.

[oldtimer]

Artto, you are reading a little too much into my statement. First of all, if you have done your homework and are truly diversified, then you can't exactly be ignorant, eh? Just a little irony there you missed. Second of all, I assume nothing about your financial picture and habits, but you seem to take the post to be about you. Narcissism anyone? Everyone knows you are not a "regular guy."

Your definition of empirical is the second in a list of definitions. Empirical studies can and have been used not only to form a basis for system and theory, but also as tests to bolster or disprove system and theory. You yourself said you have no problem with that, so there is no reason to narrow the definition to put words in my mouth, or otherwise imply that I subscribe to a narrow empiricist doctrine. []

[artto]

As I understand it, the USA now has a NEGATIVE savings rate. I doubt that's a good thing.

It seems to me, that if you make people become experts at financial risk analysis, it makes them easier "pickin's." Just a thought,

Mark, the "savings rate", as it is now defined, is also hogwash. There are a number of "savings vehicles" such as 401K and IRAs that are not included in the savings rate. IMHO this is wrong. I'm sure it has to do with the the government's accounting issues because of tax deferred and/or exempt "savings" accounts. I consider our IRAs and 401Ks part of my savings. I bet you & and everyone else here does too. None of these types of saving vehicles were available to my parents, for instance.

I guarantee you, that most, not even a significant minority, will never become experts at financial risk. Even if they did, that's just the tip of the iceberg.

And while I'm at it, let me say that I am by no means reccommending that everyone else do what I do, nor the way that I do it. There is a discovery process. And this discovery process takes a long time. It's about your self. You'd be surprised how much you learn about your "self" when you lose a lot money very quickly, and repeatedly. Quite frankly, after what I've gone through to get where I am, I'm sure most people would have given up a long time ago. And I admit, I've had the luxury of a second income which allowed to pursue the career change, otherwise this would have a lot taken longer and been much more difficult. Like Klipschorns, it's not for everyone. But I will tell you one thing, I'm a lot less stressed out than when I was a practicing architect or had my CAD/video imaging business.

[oldtimer]

Artto, just a quick p.s. to my last post. I wan't to cut you a little slack since the post you referenced immediately followed yours. Just a little.[]

[oldtimer]

Mark, you can be in all cash if you want in a 401k. 401k is just a "shell" for tax deferment or in the case of a Roth 401k, tax free withdrawals after age 59 1/2.

The rules the way I see it are expanded rather than juggled. You are right in that it takes more education to properly use the expanded tool set available, which is why so many have made bad decisions.

[artto]

Artto, just a quick p.s. to my last post. I wan't to cut you a little slack since the post you referenced immediately followed yours. Just a little.

Thanks for the heads up. I was just about to rip on you for that very reason.

[oldtimer]

LOL![H]

[artto]

Yes, I understand your comments. 401k though is another stock investment...i.e. loaded with risks and having an obvious down side.

And, you must choose among usually really CRAPPY investments in most 401k. I'm not making any negative comments about people who possess all this luck and skill to be great investors. I am only pointing out that for a lot of people, they would have done much better in the days when you could simply "save" money securely.

I have a sneaking suspicion the rules were juggled here for rather odious reasons.

In most, if not all 401K plans there should be some kind of money market/treasury note fund to choose from. While this is not quite like dealing with an old fashioned S&L savings passbook account (remember those?) it's sometimes better than the stock or bond funds.

You are absolutely right about the crap available in most 401K plans. I was appalled at the offerings in my wife's 401K. And, if you take a closer look, you'll also notice that most of the offerings in 401K plans are not available in the open market. Usually the plan has "mirror" funds that are essentially identical ~ however ~ there's one BIG caveat. A closer look shows that many, if not most, of the open market funds that the plan funds mirror, are in fact closed. That's because the funds have become too large to manage effectively. But the fund managers keep making more and more money because of the continuous inflow of cash from the 401K plans. Most of these guys get paid by the account size, not their performance. They've gone golfing with our money while the fund performance goes down. BTW - this was one of my motivations for taking control of my financial future. I now know how much these people make. And I don't see why I have to work my entire life to save up for what they occassionally make in a day. I'm not going to do that!!!! If they can do it, I can do it. And anyone else can do it. It doesn't require any special skills that can't learned unless you're retarded or something.

I'm with ya on the sneaking suspicions.

[Jeff Matthews]

Alright, Artto. Your strategy peaks my curiosity. Tell me some things:

1. Who calculates the ERS on that spreadsheet and how is it calculated? I'm asking for the specific formula, or if it is way beyond a reasonably business-minded, non techie's head, a specific description in lieu of the formula.

2. You mentioned looking at other factors, such as strongest performing stocks without regard to industry/sector (i.e. I think you said you will look at strong stocks in weak sectors, if they are in fact among the strongest). Tell me why you do this. Also, like the first question, who calculates which are strongest and how is that calculation made?

3. You also mentioned looking at S&P500 trend, volume, market cap etc. You did not indicate what specifically you get from these to evaluate in comparison to your observations I mentioned in questions 1 and 2, above. Why do you do this, too, since you have already looked at the strongest ERS and strongest individuals?

4. Is there some specified interval of time you let pass? Do you just make your adjustments/trades once a quarter or once a month? Is it more sporadic and less regular? If it is sporadic, then what is your criteria? Or do you just rely on something in your "gut" at some point that says "move?"

5. You mentioned going through long periods of losses and a learning curve before finally arriving at your system. So, when did you arrive at the essence of the system you now use? Certainly, nobody beats the market 100% of the time. How about sharing some of your worst experiences where using your system lead you to some bad hits?

I could have some more questions, but these are the main ones. If you don't want to broadcast all this stuff in the open, feel free to PM me. Thanks. FWIW, the reason I ask these is because I have "concluded" stocks and such are not much better than gambling if you don't have inside information. I went in the market for two or three years in a row, my picks all went down (all of them). They stayed down. They are still down - way down. Beside Mid-Cap Equity and Tech/Info funds, I picked MSFT, ARXX, BEAS, INTC, NOK, and ITWO. Granted, they are all in tech, but I figured the big 3 would shelter some risk associated with the smaller players. Nope! Every single one lost 50% or thereabouts in value. Total B.S. I gave up. To this day, I still sit on them. I hardly care to open my statements. Disinterest has been an understatement.

[Jeff Matthews]

Mark, granted there are not rich people around every corner to give examples, but I do know of stories of some I know who have been in the markets for many, many years. Not day-trader types. Just socking money away. Despite all this recent mess, they still have a good outlook. Having played the game for 30-40 years (and longer), they've been through the ups and downs. Over all, they are still very glad they were in it, stayed in it, etc. They are not scared. They are comfortable.

My "shot" at it was not a good one, so it has left me with a bias against. That bias is still in my gut, but at least I have some readiness to learn more about why my bias might be a detractor to a good tool for building wealth. Even without stocks, I feel confident that I will wind up just fine financially. Much has to do with living below our means. We could certainly consume like rich people on our incomes and credit, but instead, we are careful to throw good chunks of our incomes into equity. R/E for now.

[Jeff Matthews]

He may not own the latest gadget, but he can afford to buy one with cash. He underestimates the contentment that comes from money. Not necessarily contentment from the gadget that makes you spend your money and continue to need to make more money...... but the having the money that leaves you with more options to do what you want without having to worry where the next buck will come from. That's a big deal that the article definitely overlooks.

[artto]

Alright, Artto. Your strategy peaks my curiosity. Tell me some things:

1. Who calculates the ERS on that spreadsheet and how is it calculated? I'm asking for the specific formula, or if it is way beyond a reasonably business-minded, non techie's head, a specific description in lieu of the formula.

2. You mentioned looking at other factors, such as strongest performing stocks without regard to industry/sector (i.e. I think you said you will look at strong stocks in weak sectors, if they are in fact among the strongest). Tell me why you do this. Also, like the first question, who calculates which are strongest and how is that calculation made?

3. You also mentioned looking at S&P500 trend, volume, market cap etc. You did not indicate what specifically you get from these to evaluate in comparison to your observations I mentioned in questions 1 and 2, above. Why do you do this, too, since you have already looked at the strongest ERS and strongest individuals?

4. Is there some specified interval of time you let pass? Do you just make your adjustments/trades once a quarter or once a month? Is it more sporadic and less regular? If it is sporadic, then what is your criteria? Or do you just rely on something in your "gut" at some point that says "move?"

5. You mentioned going through long periods of losses and a learning curve before finally arriving at your system. So, when did you arrive at the essence of the system you now use? Certainly, nobody beats the market 100% of the time. How about sharing some of your worst experiences where using your system lead you to some bad hits?

Jeff, my first inclination to answer your questions reminds me of Captain Kirk in the Star Trek movie Wrath of Khan where I believe he and Lieutenant Savik are in the elevator and she asks him how he beat the Kobayshi Maru no win training scenario to which Kirk smiles and says.....................”You may ask”

That being said..................

1. The computer calculates the ERS. The specific formula is protected code. I cannot modify it. I can however alter a number of parameters ~ to fit my trading strategy ~ which takes into account the time frame being used for analysis, how four separate time frames within that time period are “weighted”, and how many time periods (data bars, trading days) are used for the calculations. I can decide what securities or groups of securities/sectors/industries etc are to be included in the analysis, or I can use what is provided by several different data vendors such as Esignal or Reuters. I use Reuters DataLink.

It is certainly not above any reasonably business minded non techie. However I will tell you that I know of a number of people on the software’s user Forum that never got the software to work properly. I’ve had experience doing custom programming for customers using AutoCAD and LANDCADD products when I was a dealer. MetaStock (the core software platform) programming language is very similar to AutoCAD’s AutoLISP, so it wasn’t too difficult for me to work through the process and figure out my mistakes.The other issue is knowing what you are looking for. I think many who initially purchased this MetaStock add-on did not have a clear understanding of what they were supposed to do. It is not a “canned” program. You have to set up the Folders, data, etc the way you need to see it and do some minor programming to direct the software to the data you want to analyze, and of course set the analysis parameters as mentioned above.

2. NO. The process is a bottom-up approach. “IF” you are going to be “long” (buy), you first determine if the broader market is in an uptrend (or downtrend to short (sell). How you define this is up to you ~ it depends on what kind of investor/trader you are ~ what your strategy is. An uptrend for a daytrader is very different from a short term investor. I use 200 & 50 day simple moving averages on the broader indexes such as the S&P500, NYSE, Russell2000, Nasdaq100, etc. I also perform what are called market breadth calculations (which this software also does) every morning on the previous day’s data (downloaded at night - about 3.5 hours) that analyze which securities are advancing (up) & declining (down), new highs & new lows, and up/down volume. Then I run the ERSA calculations, first on the 12 main sectors, then on the 101 industry groups (sub-sectors). They are ranked in strength from 0 to 99, and show the ERS for yesterday’s close, 5 days ago, 10 days ago, etc, with a 99 ranking being the strongest. I simply pick the top five industry groups, take a look at how they compare with the sector analysis, and then run ERSA calculations on the individual securities in those five industry groups. I disregard any that have the highest strength rating but do not meet my market capitalization and volume criteria. This eliminates a lot of the junk. Then, just to be safe, I run the same ERSA calculations on all stocks in the US market which compares the external relative strength of all stocks to each other. I compare and cross reference the strongest stocks in the five strongest industries with the entire market ~ and the best of the best clearly rise to the top. I should also mention that if you really want to add a degree of “safety” you might want to use some sort of pre-screened list of stocks from a credible source such as Investors Business Daily100. I use The Value Line Timeliness100. The above process is reversed for shorting ~ you want to find the weakest of the weakest.

3. I think I covered some of this question in #2 above, but basically, if you’re going to want to “buy”, you don’t want to buy in a down trending market. Dollar cost averaging (D-C-A) in a down trend is for morons. There is something I call the “V-principal” which I won’t get into here but it clearly illustrates why D-C-A is pure Wall Street propaganda and hogwash. You’re buying equities, not non-perishable inventory.

The reason I do the things mentioned in #2 above is because there will always be something that is stronger or weaker than the other regardless of how the overall market is trending. Just because they are ranked “99” doesn’t mean you should just jump in and buy them. If the broader market is trending down, then you can expect 70% or more of all securities to be trending down. The odds of your success are greatly reduced. Take a vacation. OR you can go short at this time (not recommending) OR, you need to look at why the market is trending down, for instance, recently because of energy and commodity prices. These industry groups however have been doing very well, so it’s ok to be long in them during a market down trend, especially if they are part of the cause for the down trend.

4. I am an end-of-day trader. I don’t care what goes on during intraday (usually, LOL). I analyze Stocks on a daily basis. There are some things I look at on monthly charts ~ it helps weed out the noise. Mutual funds I analyze once a week, and also on monthly charts.

Regarding time intervals, that is done differently. That is where the charts come in. There are two methods I use. Previously I had been spending a lot of time developing custom trading systems (at least as far as buy & sell signals go) for each security that I want to put a trade on. This is a very time consuming and tedious process. The strategy takes into account the amount of risk you initially take in a position. It’s called “expectancy”. It also uses a concept called “ICE” ~ Indicator Categorization & Election. It eliminates technical indicator co-linearity by using technical indicators, one each from four different categories or types of indicators such as volume & volatility and weights them through an optimization process. This program takes a long time to figure out how to not over-optimize (curve-fitting) the trading system. It requires some serious number crunching. The other system I’m implementing was put together by an acquaintance of mine & was published in MetaStock Tips & Tricks (MSTT). You WILL be required to do MetaStock programming to implement this. It’s based on Donchian Channels (as are most commercial/institutional trading systems) and uses a 60 day interval of “highest highs” and “lowest lows”. The formulas for this are published, but you’ll have to order the back issues, and implement it yourself which requires advanced experience with MetaStock.

I try to never use my gut on any of this. No matter how “mechanical” one tries to make a trading system, there will always be emotion involved. One philosophy I hold close to my heart is “You can break all the rules you want ~ except your own”. Breaking you own rules is ALWAYS a mistake, regardless of whether you were right or wrong.

5. Ah, now these are great questions!

During the late 90’s I came up with a rather detailed analysis of the trend behavior of individual stocks ~ just my “picks” of course, which was rather simple, like “I think nanotechnology is the new wave of the future and will have an impact in everything”. So I watched nanotech very closely. Fast forward to 2003. I had determined that Nanophase, a company I had watched closely and recorded daily opening, close, high & low price and volume data since the company went public had gone up too much. With all this data in Excel, I KNEW what the most extreme up trend in this stock was. It obviously occurred during the tech boom. Before the bubble burst it had gone up 450%. Now here I was (2003), ready and waiting like a spider to trounce on this thing, not long, but short. Why? We were around the bottom of a big downturn at the time and now NANX is up 500 percent!!!. That’s more than when the bubble burst! It must be time to short this thing. (first mistake) So I did. I took a little heat but then it turned in my favor some more. So I shorted some more (second mistake). And then a funny (well, maybe not so funny) thing happened. The %$#@ thing started moving up ~ strongly, and I didn’t get out (third mistake). Then one day it “gapped up” at open (it opened the next day at a substantially higher price than it closed at the day before). I got what’s known as an “equity call”. It basically means you don’t have enough equity (stocks, cash, whatever) in your account to cover the potential loss so your broker calls you and says “send us some money, now”. If you don’t, they will start liquidating your long positions and send you a bill for the rest if there’s not enough to cover the loss. I covered my position by wiring in more money (fourth mistake). Market opens. POOF!!! It’s gone. I wire more money the next morning( fifth mistake). Market opens. POOF!!! It’s gone again. I’m thinking “How could this possibly happen?” Even during the heady tech bubble it hadn’t gone up this much (now up about 1000%). I finally wound up throwing in the towel but not before it went up 1400% (from its absolute low of course, not where I started shorting it, thankfully). I can remember only one other time in my life I was so enraged.

I stopped trading. I couldn’t figure out how this happened. I thought, “this was nanotech”. It’s different. It doesn’t do what the rest of the market does. It has its own thing going on. Etc, etc. Bu ironically, for the first time I felt like a real trader. Why? Because I was now combing through everything I could, 16 hour Sundays, that kind of thing, trying to figure out where I went wrong.

I went back to school. Luckily at the time there were some “Technical Analysis of the Stock Market” courses offered at our local community college. I took them. I went in there thinking the first weeks would be boring, that I probably already knew the basic stuff. Boy, was I wrong! From day one I was presented with all kinds of things I never knew existed, never heard of anything that was being shown. A very rude awakening indeed. I continued to take some free and paid seminars. By the end of that year I decided to purchase MetaStock and a few plug-ins, and the data service. One look at MetaStock and I knew from my AutoCAD experience this was going to be a good six month learning curve just to get started. If I had to retain a full time job this would have easily taken twice as long.

Trading is a game of odds. Actually, investing is too, but they are different animals. In order to be successful, you do not put the odds in your favor, but instead realize ~ know ~ WHEN the odds are in your favor. I don’t consider it gambling now because of the information I’m armed with and the tools to analyze it in a meaningful way.

And I haven’t even touched on the subject of money management, or more properly called “position sizing”. It’s a very elusive term and you’ll be hard pressed to find anyone who will give you a straight forward anwser of what it is or how it’s done. And that’s because it is, in fact, a very “personal” thing. Again, it’s more about knowing thy self, than knowing anything else. If anything, that’s what the above experience was about. A situation like that tells you a lot about yourself, what you can tolerate, and how much, and why you shouldn’t. A simple coin toss scenario with the odds 2:1 in your favor can demonstrate how easy it is to lose all your money in a MAXIUMUM of 20 trades. If you’re really bad at it, you can accomplish this in just a few trades, or even one trade.

Class dismissed.

[]

[Jeff Matthews]

Yes, it was interesting.

I want to play devil's advocate for a second..... This ERS is a canned formula in software, but you can set some of the parameters. So, being that it the case, how is it that you think that formula will allow you to substantially beat the market consistently? If it is as proven a method as that, it is certainly readily available to all the traders and outlets, etc. It makes me wonder two things: If the other folks in the game - indeed, having it as their jobs - are not "big" on this method, why? If they are "big" on this method, then why isn't the "efficient market" theory dragging down returns back to average?

[oldtimer]

Dumb answer of the day. That depends on if you think the market is near a low or that commodities are near a high. Historically, the stock market leads the economy by 6 to 9 months. So going back that far you see this recession or slower growth or whatever spin you want to put on it was predicted as usual. Historically (big caveat because you know what happens) the stock market is the single best predictor of the economy 6 to 9 months in advance. Now here's another modifying word, usually, the bond market will tip off a stock market trend. Why? Well because interest rates matter. If the bond guys think rates are headed lower they will bid up existing high rate bonds to lock in a good rate. Once this is over the money flows to stocks which benefit from a lower interest rate for their borrowing needs. That's why the credit markets are essential to proper functioning of the economy. I'll stop rambling now and drink some more.

[oldtimer]

One more thought. If the world economy tanks then why would there be increased demand for commodities? A commodities bet is a bet on either increasing demand or global inflation. Enjoy.