Michael Covel is the author of the internationally bestselling book Trend Following

Dow 36000 Not Soon

August 30, 2004

"Yes, one day the Dow will reach 36,000 and Jim Glassman will be right...one day the sun will burn out too, but the question is when?"
Anonymous

The real question is not really "when" however. The question is: What are you going to do today in the here and now with today's market price? Predicting a price target requires a crystal ball -- a tool that doesn't exist.

Psyching-Out The Market

August 29, 2004

Kathryn Welling brings the great question forward:

"What struck me even at the time was that here were these supposedly very bright guys who insisted on applying a theory to the markets despite plentiful evidence that what the theory said couldn't happen in fact doesoccur with staggering regularity in the markets. Big fat tails swat investors in the fanny with fair frequency. So-called 'six sigma events' aren't really terribly rare, no matter what the equations tell you."
Kathryn M. Welling, Weeden & Co.

Woody Dorsey responds:

"Absolutely. What I wrote about in the book is that it is like the invisible hand comes along once in a while to spank the markets. The inference is that boy, you really should be on your guard because you know these events are going to happen. And when they do, those big fat tails provide the biggest and best opportunities to safely build capital; that's when you take advantage of market opportunities. That's the lesson. Yet [efficient market theorist and University of Chicago Professor] Eugene Fama himself says that the 1987 crash was an aberration--as was 1929. Insists they really didn't matter. But they mattered to a lot of people."
Woody Dorsey, Market Semiotics

Cartoon from CNN

August 28, 2004

Wise Random View

"Most things in life are not like steam engines, but people treat them as if they were. Life in general, and markets in particular, involve large random factors, have complicated stochastic structures, and regularly spring nasty surprises. Their behaviour over short timespans may have so little significance as to be nothing but noise. Extrapolation is impossible or meaningless. Yet try as we might, we continue to see patterns where none exist, misunderstand the role of randomness, seek explanations for chance phenomena, and believe that we know more about the future than we do."
Mark Wainwright
Plus Magazine

Bleed or Blowup?

August 27, 2004

In a recent paper Nassim Nicholas Taleb outlined:

"In some strategies and life situations, it is said, one gambles dollars to win a succession of pennies. In others one risks a succession of pennies to win dollars. While one would think that the second category would be more appealing to investors and economic agents, we have an overwhelming evidence of the popularity of the first. A popular illustration of such asymmetry in returns is evident in the story of the Long Term Capital Management hedge fund. The fund derived steady returns over a dozen quarters then lost all of them in addition to almost all its capital in a single observation - only for the main principals to restart a new, albeit milder, version of the strategy. Is there a systematic bias in favor of such return profiles?"
Nassim Nicholas Taleb

Sellers and Buyers Both Win

August 26, 2004

Do only sellers benefit from exchange?

Skip the Mega-Millions Lotto Dream

“Lottery: A tax on people who are bad at math.”
Anonymous

Fundamental Tales

August 25, 2004

Jennfier Bayot of the New York Times writes in her article titled Older Investors Jittery as U.S. Markets Disappoint:

"...Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he had encountered many investors who were staying on the sidelines because of terrorism fears. "This year still seems to be more about fear than reality," Mr. Paulsen said. "We've had remarkable recovery on many fronts, restoration of profits, re-emergence of jobs, the continuation of low inflation rates and interest rates. But whenever I speak to investors about the economy and the markets, the first question I get is 'What about a terrorist attack?' It's hard to convince people no matter how good the fundamental story is that they should up their equity levels. There's this ghost out there and no amount of G.D.P. growth can overcome it."...Karen Orlin, 56, a corporate lawyer in Boca Raton, Fla., said she had already changed her buying habits and retirement plans because of the stock market's recent fizzle..."I am much more conservative in my expenditures," Ms. Orlin said. "I'm not as much of a consumer as I was five years ago."...As far as her investments are concerned, she said she was less concerned with growing her portfolio of mutual funds than she was with simply maintaining its current value, which she declined to give...Mary Pitts, 70, a retiree in Boynton Beach, Fla., who worked for AT&T, had long planned to give her grandchildren the roughly 500 shares she had amassed in various cable and telecommunications concerns over the years. "I just figured I'd put it away and never touch it," Ms. Pitts said. "I thought my grandkids could have it in 20 years or so." But even with her long-term outlook, she has found the market's recent performance unsettling. And so this month, Ms. Pitts sold all of her shares for $6,000, less than a quarter of the $25,000 that they were once worth..."I just held on too long," Ms. Pitts said. "I had Lucent when it was up at $62 a share. I sold it at $3."

It's almost as if the writers out there take glee in reporting about people with bad trading strategies. They seem to enjoy the constant investor implosions, but they never lift a finger to attempt to fix it. The world's great reporters just keep "reporting" the same ole story. Almost like a Seinfeld episode, their writing is about "nothing".

Your Trading Edge Magazine Review

August 24, 2004

"A most interesting book--definitely a 'must have' on your shelf. Pull out the plastic and get it!...Trend Following is well constructed, well written and an excellent distillation of the research undertaken by the author. Backed up by trading 'legends' like Ed Seykota, it convincingly argues that the most successful trading systems are based on trend following...While you may read the book in bed, especially the first time, it is best read at a desk with a notepad handy. While seeming to come from the perspective of technical analysis it is still a very good book on trading psychology...The book is both a great read and an insightful textbook for all traders and investors."
Garnett Znidaric
Your Trading Edge Magazine
http://www.yte.com.au
Australia

So You Want Stock Tips?

August 23, 2004

NY Times writer Danny Hakim presents a great example of the folly of stock tips:

"Jonathan Mirin says he first heard about Wave Systems from a guy named Jerry. "This company's selling for a dollar a share," Jerry told him. "In a few years, it'll be going for 500." In those days - the late 1990's - Mr. Mirin was a struggling New York actor in his late 20's and a teacher in the public schools. The way he tells it, Jerry was a fellow teacher who told him over a cafeteria lunch one day that he had once been a big-time investor: "Limousines, jets, the whole thing." Yes, he had lost everything in the crash of 1989, but now he was back in the game and had a hot tip to share. "I felt like I had received this tip, and I'd better make the most of it, because I don't travel in circles where I get tips," Mr. Mirin said...Mr. Mirin was not alone...Among the faithful was Joe Trippi, who later managed Howard Dean's presidential campaign..."When it started going up, I figured, well, my theories are confirmed, and my friends would say, 'You know, Jon, everyone's a genius in an up boom cycle,' " he said. "I thought that for Wave to be doing this, someone must know something..."And then when it started going down, it was stubbornness: 'I'm not going to admit that I'm wrong.'"...Founded in 1988, Wave has never reported a profit for even a single quarter, and it has lost more than $260 million. During the bubble, profit-free technology companies often won investors' favor, but they generally could at least boast of substantial revenue. Not Wave. In its latest quarter, it reported revenue of $6,300."

The Trend Following message is boring. It is not flashy. Trend Followers will never have fun and exciting stories to tell at cocktail parties. But isn't that the issue: do you want to impress your buddies or do you want to trade for profit like the great traders of the last 30 years?

Human Needs

August 22, 2004

Brett Steenbarger sent this essay recently:

"Why do we trade? To be sure, trading allows us independence, the opportunity to work for ourselves. Trading also offers the prospects of a lifestyle in which evenings and weekends need not be consumed by work. Some of us crave the competitive aspect of trading, doing fresh battle each day. Others approach trading as a puzzle to be solved, deriving a sense of intellectual achievement. Finally, there is income. A successful trader can make seven figures in a year and many of the traders I work with are living proof of that. So why do they trade? Once you have the money, all of trading's lifestyle advantages could easily be yours. Needs for competition and intellectual stimulation could be met in so many other ways. Why do traders remain traders long after they've won the game? Perhaps we can illuminate this question by asking it of practitioners in other fields. Why do artists continue their craft long after they receive recognition for their paintings, novels, or films? Why do elite Special Forces troops stay in units that test their mettle even after they've earned their coveted badges? A gifted athlete such as Michael Jordan earned plenty of money and honors and, in fact, did retire on a couple of occasions only to return to his game. Why? There is something deep here that speaks to the nature of productive work. People retire from jobs and even careers, but they never abandon their callings. For some, work means something more than earning a living or achieving a lifestyle. Work is their path in life. It is the way they have chosen or perhaps that has chosen them for self-expression and self-development. Suppose the pastor of a large, successful church wrote a book, made significant money, and promptly retired from the clergy and all religious life. What would that say? Surely, we would think, this person's faith could not have been too heartfelt. But why should our productive work mean less to us than the clergy means to a devout pastor? Presumably, the religious life meets deep, important needs for the pastor. Is it really so different for the artist? The athlete? The trader? The great professions are those that serve as personal playing fields. They are the arenas we choose to express and develop ourselves. In mastering a discipline, we cultivate self-mastery. In writing a poem or placing a large trade, we capture in a single act our vision of how we see the world at that moment. The great occupations are great precisely because they are such meaningful playing fields. Long after we've earned fame and fortune, the calling remains to be more than we are, to return to the arena and do battle with our limitations. The profound urge to extend the human grasp is common to all the great callings. To run faster, to capture more beauty, to predict ever better: in no small measure, our work is our pursuit of the godlike, however fleeting. Maybe it is our different images of the godlike that animate our career choices. If my deepest view of godhood is that of a meek and all-forgiving Christ, perhaps I will be drawn to an occupation of service. If my deepest view is more akin to the ancient Greeks, whose gods sent heroes on quests, then my calling may be on a battlefield or a playing field. Either way, in work we find something divine within ourselves. Whether as scientists, monks, or traders, we strive for those moments when we are just a little closer to perfection, a little nearer to immortality. That is why we trade."
Brett Steenbarger

Losers Average Losers

August 20, 2004

Dan Ferris, Editor of a newsletter titled "Extreme Value", writes:

"Amazon.com's initial public offering was 3 million shares at a price of $18 each (presplit). Bill Miller, manager of the Legg Mason Value Trust, bought Amazon's stock at the IPO, back in May 1997. Miller sold that first position, later saying it was, "the dumbest thing we ever did." Miller bought Amazon again at $80 a share in 1999. Amazon's stock price fell apart, just like every other Internet stock. Miller responded by doing the only sensible thing he could do. He bought more. A lot more. As he told Fortune magazine, "We started [buying] again in mid-2000 when the stock was in the $40s, and then we bought it all the way down. Our buying increased as the stock fell. If the stock was $35, we'd buy 50,000 shares; at $25, we'd buy 150,000 shares; and at $14 we'd buy 300,000 to 400,000 shares." Miller says he finished buying "between $7 and $8." Miller's buying strategy goes by a name you might be familiar with, dollar cost averaging. Dollar cost averaging is when you spend the same dollar amount no matter what the stock price is. If you spent $700 for 100 shares last December, that same $700 will buy you about 139 shares at today's prices. If you bought $10,000 worth back then, $10,000 would buy you 39% more shares today, and so on. Today, Amazon is around $37 a share. Miller's average cost for the stock is around $19.69 per share. He paid as much as $82 for some of his shares, and he's still up 88% with the stock 55% below his initial entry price. From his highest price to his lowest price, the stock fell 91%! And he's still up 88%! I doubt many people can say that they've ever made an 88% profit from a stock that fell 91% while they were holding it. Brilliant as Miller's strategy is... the "trend is your friend" crowd reacts to Bill Miller's behavior like an ape in front of an obelisk. Buying stocks that are falling in price? Throwing good money after bad? It's sacrilege!"

How many pure play dot-com survivors were there? 5 or 6 big ones? How many 100's of companies would you have lost all of your money if you were dollar cost averaging? Trend followers refer to "dollar cost averaging" as "losers average losers".

Judge Milton Pollack

August 18, 2004

Milton Pollack, who was appointed a federal judge by President Lyndon Johnson in 1967 and oversaw many notable corporate corruption cases, has died in Manhattan. He was 97. I used a great quote of his in my book:

"Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. Those few lucky winners, who are not before the Court, now hold the monies that the unlucky plaintiffs have lost, fair and square, and they will never return those monies to plaintiffs. Had plaintiffs themselves won the game instead of losing, they would have owed not a single penny of their winnings to those they left to hold the bag (or to defendants)."

Yes, the Judge wasn't much for whiners.

Strategies for a Sideways Market

August 17, 2004

Linda Stern of Reuters recently wrote in a column titled "Strategies for a Sideways Market":

"The bulls and the bears are in this together, scratching their heads and wondering what's going to happen next. Up and down, down and up. As soon as you think you know where the stock market is going, it doesn't...An increasing amount of money has been flowing into fast-trading (and often short-selling) hedge funds that may be whipsawing the market with their staccato trading patterns...What's a small-time investor to do? Perhaps it sounds facile, but the best thing to do with a sideways trending market is "not much." Plain folk who are stashing away money for college, retirement, or that rainy day don't have the computer models that those hedge fund managers are using. Nor do they have the deep pockets to carry them through should their models fail. But they do have one thing going for them: The upward trend of the U.S. stock market. Most investors who stick with their long-term program of regularly investing in a diversified portfolio will be richer in five years regardless of where the market goes on Tuesday ... or Wednesday ... or Thursday...The market will shake itself soon enough. And those slow-steady investors will be ready when it does."

Some commentary on this commentary:

1.) If you actually think you know where the market is headed, you are delusional.

2.) Blaming hedge funds for a sideways market is silly. A sideways market is a sideways market. The concept is not new. There were sideways markets a hundred years ago.

3.) The writer thinks 5 years of buying and holding will solve your problems. Where would you be if you bought the Nasdaq Jan. 1, 2000 and held till today? Would you not be down -60% still? When does the buy and holder of the Nasdaq ever get whole again in this example?

Woody Dorsey Endorsement

August 16, 2004

"Trend Following by Michael Covel explains the wisdom behind the trending function of the markets. The practical application of this philosophy is based on the pervasive logic of price behavior. Market Stories and Market theories will come and go but trends will remain. Follow them...and study this book."

Woody Dorsey
Author of Behavioral Trading and creator of Market Semiotics

Price Down? Don't Sell?

August 15, 2004

TheStreet.com's Arne Alsin offered some very bad advice on August 12, 2004:

"The irrational investor sells shares during periods of price weakness, presumably on the expectation that declining prices are a harbinger of problems to come. That's faulty logic for several reasons: Share prices rarely reflect reality. Asking the market for a full and fair price quote for your shares, each and every day, is asking too much. The principal purpose of the equity market is to provide liquidity, not to accurately price shares. For example, over the last four years, Boeing's market capitalization has fluctuated between $20 billion and $60 billion. That's an outrageous swing in valuation, considering that the underlying business has not changed that much. During this period, Boeing's sales have fluctuated very little, with a weak aerospace business balanced by a strong defense business. It doesn't matter which asset class you're talking about, it never makes sense to accept a price for your asset simply because the offer is lower than it was last week, last month or last quarter. Long-term investors in particular should view current bids for their stocks as largely irrelevant. Once a position is taken, it doesn't matter if the bid increases or decreases...In the aggregate, profitable companies always increase in value over time."

A reader responded with:

"I found "idiotic" as you say...that [this writer says] "share price rarely reflects reality" and the implication that balance sheets and valuations do reflect reality. At what point does price reflect reality? He uses the term "long term" ambiguously and neglects to point out that your time horizon may coincide with a 77 percent meltdown in your equity. Has he forgotten that that 1929 highs were not surpassed until 1954 or that 1969 highs weren't surpassed until 1982? He doesn't point out to the "long-term" investor that we have just finished a secular bull equity market and if history holds true it might be a while before one will recoup the losses from the buy and hold strategy he is touting. If I was retiring in 2000 and the market tanked and I just kept buying all the way down with no idea of when it was going to come back, what do I do now? I guess I just rely on social security to live on. Everyone is entitled to his or her opinion but anyone who uncritically follows this advice deserves whatever befalls them. [A] quote from...Nathaniel Branden come to mind: 'If we stay aware of the fact that we are responsible for our choices, decisions, and actions, we are far more likely to choose, decide, and act in ways that will not later become causes of embarrassment, shame, or regret.'"

TheStreet.com should not be telling people that once you take a position it doesn't matter if it goes up or down. That is poor advice.

Brokers Aren't Advisers

August 14, 2004

Brokers aren't advisers:

"Click on the individual-investor page of Merrill Lynch & Co.'s (MER.) Web site, and you'll be wooed with promises of soup-to-nuts financial advice. Rather than merely peddling stocks, Merrill's brokers offer "a relationship that provides you with a lifetime of solutions."
BusinessWeek

BusinessWeek goes on to point out:

"Sounds enticing -- and a lot like the service offered by independent financial advisers. But there's a crucial difference: Adviser have to meet higher standards designed to protect investors. Not all do, but the rules give investors more legal safeguards. While brokers must recommend investments that are "suitable" to your financial status and goals, advisers have a fiduciary duty to put your interests ahead of their firms'. And advisers can't sell you stock from their own accounts without prior consent, while brokers have to notify clients of such trades only after the fact."
BusinessWeek

I would take it a step further than just talk of "brokers" & "advisors". What is the basis of any advice is the ultimate question.

Trend Definition Insights

August 13, 2004

A recent interchange from Seykota.com:

Question: "...how do I spot when the market is trending to a new level?"

Ed Seykota Answer: "A trend is a general direction in which something moves. To define a trend, pick a historical price, and subtract it from the current price. The difference tells you the direction and magnitude of the trend. A market has no inherent trend. It only has a price, now. A trend is a notion you bring to the market, depending on your own definition of trend."

Don't let Seykota's answer throw you. He is simply reminding the questioner to be precise in his question and to think through all issues carefully.

Chinese Translation Deal Signed

August 12, 2004

A deal to translate the book Trend Following into Simplified Chinese has been signed.

Gentle Reminders

"Winning trades cause joy. Losing trades cause pain and fear. Fear and pain are stronger than joy. Thus, markets (stocks) fall faster than they rise."
Dr. Skip Cave
Dean, FLC School of Business

"The Market discounts all factors (fundamentals) into one single, simple fact: The Price."
Dr. Skip Cave
Dean, FLC School of Business

Bestseller Lists

Trend Following: How Great Traders Make Millions in Up or Down Markets continues to reach a wide audience. Currently it makes bestselling lists at Amazon in several categories:

#13 Bestseller All Investing Books

#2 Bestseller Investing Books: Stocks

#1 Bestseller Investing Books: Options

#1 Bestseller Investing Books: Futures

Seeing Google With the Eyes of Forrest Gump

August 10, 2004

Want to play the Google IPO game? Think twice as you read excerpts from Gary Rivlin's article Seeing Google With the Eyes of Forrest Gump in the New York Times:

Any investor intent on Google might do well to remember Gump. When the makers of the 1994 movie "Forrest Gump" sought a plot device that would render its main character fabulously rich, they cast him as an early investor in what Forrest Gump described as "some kind of fruit company": Apple Computer. By dumb luck, the movie suggested, its guileless hero had amassed so many millions that he could finance a Gump Medical Center, build a Baptist church and allow the family of his fallen friend Bubba to live in luxury. In the real world, though, Apple would hardly make anyone's list of Wall Street's greatest hits, despite its considerable business accomplishments. Like Google today, Apple was a young but profitable company celebrated by the media when it made its stock market premiere in December 1980. But because much of its future potential was already factored into its initial offering price, few other than the company's founders and its venture capitalists can boast they got rich off Apple. Had Forrest Gump bought Apple at the closing price on its first day as a publicly traded company and held it for five years, he would have lost more than 30 percent of his money, said Tim Loughran, a finance professor at the University of Notre Dame who studies initial public offerings. Apple then rebounded, and the stock more than doubled by the time "Gump" was released, in mid-1994, but Forrest Gump would have done better in an index fund. Over time, Professor Loughran said, the company "has gotten absolutely creamed" by the Standard & Poor's benchmark of the top 500 companies. "I always have to laugh at Forrest Gump because they never bothered to check the price," Professor Loughran said. Wall Street has always had child prodigies that arrive rich with promise, dating as far back as R.C.A. in 1920 and peaking in the last decade, when a long list of technology-related companies went public despite their youth. The current case, of course, is Google, the popular Internet search company, which has been expected to go public soon, although various complications seem to be making the timing increasingly uncertain. The company said in a filing with the Securities and Exchange Commission last month that it expected its shares to sell for $108 to $135 each, which would make it the most expensive initial public offering ever per share. "The problem Apple faced, and the problem a lot of these companies that start off with all this promise face, is because they've gotten all this attention, they have a very high price from the start," Professor Loughran said. "In the case of Apple, the market pegged it as a company that would have to hit at least a couple of big home runs just to justify its original offering price." It is as if investors are invited to buy into the future salary potential of a child prodigy - paying a share price that assumes the prodigy will be making $200,000 a year by age 30. Occasionally one of these prodigies lives up to the advance billing. EBay shares, for example, are up nearly twentyfold from the price at the end of their first day of trading back in September 1998. Yet more often than not, according to stock market veterans and those who study the early lives of publicly traded companies, the glamour stocks fall far short of expectations. "It's a continuous cycle that never stops," said Rod Fadem, a stockbroker at Stifel Nicolaus & Company in St. Louis, who has been in the business since 1960. "Every decade produces these companies that everyone goes nuts over. The price goes up, up, up, up, but then the price starts to fall, and everything goes to hell." The Radio Corporation of America, or R.C.A., was perhaps the first such stock, said Jeffrey A. Hirsch, editor of the Stock Trader's Almanac. "Wall Street went gaga over R.C.A.," he said. And for a time, the company enriched those who believed in the commercial potential of radio. The stock soared from $1.50 in 1921 to a high of $549 in 1929. Two years later, shares in R.C.A. were trading at $2. (Of course, few stocks fared well in the early aftermath of the crash of 1929.) In the 1960's, Mr. Fadem said, Wall Street saw many "puff stocks," which he defined as newly minted public offerings sold by issuers as "a fairy tale long on potential and rosy future earnings estimates." Many were technology stocks, including University Computing, which leased time on computer systems; Panacolor, promoted as a Polaroid killer; and Farrington Manufacturing, an optical equipment maker that filed for bankruptcy at the start of 1971. Each, he said, ended up losing a significant amount of money for those brave or foolish enough to invest. "They're basically all the same - except the name," Mr. Fadem said. A ballyhooed new stock that sticks in the mind of Bruce S. Foerster, a 30-year investment veteran, is the beer maker Adolph Coors Company, which went public in 1975. Back then Coors was distributed only in the Western United States, and demand for the beer seemed almost without limit - so much so that Mr. Foerster said "you'd hear about stewardesses selling bootlegged cases for three times the price." "Coors was touted like you wouldn't believe before it actually went public," said Mr. Foerster, who is the chief financial officer of Aurora Capital in Sunshine, Fla., and whose resume includes turns at PaineWebber and Lehman Brothers, where he ran the desk responsible for selling newly issued stocks. "But it never lived up to expectations." Shares of Coors opened at $31 and hit a high of $36 that same year, but then steadily fell, hitting $9.50 a share by 1980. The company's stock did not return to its initial offering price until 1997. Boston Chicken was another hot stock when it made its Wall Street debut. "It had a huge buzz, but it did horrible," said Professor Loughran of Notre Dame. Again, the problem was that much of its future promise was built into its early stock price. The company, which later changed its name to Boston Market, opened at $20 and closed at $48.50 a share the day it went public in 1993 for a market value of $839 million. Those who bought the stock at its first-day closing price and then held it for the next three years, Professor Loughran said, saw their investment increase by 49 percent. But those who held on to the stock for five years saw its worth fall by more than 95 percent, he said. In 1999, McDonald's paid $173.5 million in cash and assumed debts to buy the rights to the Boston Market brand and most of the company's real estate holdings. To be sure, plenty of initial public offerings have delivered enormous payouts. An investment in Microsoft at its first-day closing price of $28 a share in March 1986 would have increased fourteenfold in five years, Professor Loughran said. And an investment of $10,000 in Microsoft at the end of its first day of trading would be worth roughly $3 million today. Microsoft, however, made a relatively quiet debut on Wall Street, as did Intel, which went public in 1971, and Wal-Mart Stores in 1970. "I don't remember any kind of buildup to Microsoft going public," Mr. Foerster said. A lack of fanfare, of course, meant a much lower opening price. Michael Moe, the chief executive of ThinkEquity Partners, a research-oriented investment bank specializing in growth industries, said: "It all comes down to the expectations built into the price of the stock. A company that has all the expectation built into the price has to grow at 40 or 50 or 60 percent annually over the next four or five or six years, and that's exceptionally hard to do." In fact, only 29 publicly traded companies from a pool of more than 10,000 could boast that earnings grew by at least 20 percent each year from 1994 to 1999, said Mat Johnson, who heads ThinkEquity's economic research department. "Investors should really be looking for the next Wal-Mart," Professor Loughran said. "This is a company that didn't start off with a lot of hype; it didn't start off with a huge market cap." Wal-Mart, went public at $16.50 and had a stock market value of $4.95 million at that point. The company, whose shares closed yesterday at $51.37 now has stock market value of $219.3 billion. An investor who spent $1,650 to buy 100 shares at Wal-Mart's public offering and held them and retained the additional shares issued through various splits, now owns stock worth more than $10.5 million. It is precisely the success of a hidden gem like Wal-Mart that fuels the rush to buy shares of a stock that dangles the promise of an enormous payout. "History repeats itself because people don't change," said Mr. Fadem. "They want to make the fast buck, they want to be part of some hot stock that's going to swish up. It's greed at work." At the start of the 1980's, the prodigy stocks that fueled dreams of fast profits tended to be personal computer companies. Besides Apple, there were Commodore Computers and Kaypro, both now out of business. "In the early 1980's you had all these hot PC companies that were like shooting stars," said Fred Hickey, editor of The High-Tech Strategist newsletter in Nashua, N.H., and a longtime technology stock analyst. "One of the leading PC makers at that time, Commodore, went up and up and kept splitting and splitting. It was a wild momentum stock, but it imploded fairly quickly. That rocket ride only lasted a couple of years." Mr. Hickey watched the same phenomenon play out in the early 1990's when a long list of network equipment makers went public. A $10,000 investment in Cisco in March 1990, when the company first went public, would be worth $2.6 million today. But an investor might just as reasonably have chosen Wellfleet Communications or Synoptics Communications instead. Those two companies merged in 1994 to form Bay Networks, which was acquired by Nortel in 1998. "Cisco was just one among many - no better or worse than any of them," Mr. Hickey said. "These were all big movers in their time, but most are now gone. They were bought up by one company then another, and now collectively they're worth nothing." And of course there were the scores of prodigies that made their Wall Street debut in 1998 and 1999. The most precocious of all might have been VA Linux Systems, the seller of computers running Linux, the free software operating system. Stock in the company, which went public in December 1999, rose 698 percent on its first day of trading - a record - to close at $242 a share. The company, which had never made any money, suddenly had a market value of more than $9 billion. By last Friday, shares in the VA Software Corporation, as the still profitless company is now known, closed at $1.76 a share, down more than 99 percent from that first-day high. Asked to comment about his company's stock, VA Software's chairman, Larry M. Augustin, replied, "I think everything that needs to be said has already been said."
Gary Rivlin, New York Times
Seeing Google With the Eyes of Forrest Gump
August 10, 2004

Foundation and Structure

August 09, 2004

Do you have a framework?

A method or system for trading can be likened to a building in that its viability depends on its foundation and structure. Ideally the cornerstones of this building will be purpose, preparation and planning. That is, its important first to define the express purpose of a developing method, and then to adequately prepare yourself to properly develop and implement your plan on a practical basis. The framework of the building is composed of the specific parts of the plan. Defining a purpose for your blueprint, is not as simple as it immediately appears. The most obvious and most commonly expressed purposes are either to pick tops and bottoms or to attempt to measure the trend. But in actual practice, neither one is good enough from the investor's viewpoint. Many an investor has been right on the market and has still gone broke. The reasons are many; one overtrades or overleverages himself, fails to control risk when entering the market, gets out too soon, etc. So in actual practice a trader should attempt to do more than simply pick tops or bottoms, or measure the trend. A higher goal is to specifically limit losses, to allow profits to run, to protect accumulated profits, and finally, to attempt to enhance the probabilities that all this can be accomplished. This goal sounds so simple and straightforward, but anyone associated with today's investment markets can attest that all of this is much easier spoken than accomplished. Preparation is a function of time, study and knowledge. To structure and implement a plan, the trader must acquire the necessary preparation. The participants of the exchanges, who make trading their business, are in a sense your competitors, ready to take advantage (price wise) of your every mistake. They are professionals and to participate with them you too must be professional. Therefore, you must take the necessary time, and study to be a professional. Although experience is primarily a function of time, you can gain years of experience by a detailed study of historical price action. Jesse L. Livermore used to get irritated by the throng of people who would ask him how they could make some quick money in the markets. A professional himself he likened this question to a layman asking an attorney or surgeon, "How can I make some quick money in law or surgery!"
Jesse Thompson
Stocks & Commodities Magazine

Wait Till the Air Clears?

August 07, 2004

Allen Sinai, chief global economist for Decision Economics Inc. offered this market advice in the last 48 hours:

"Our tactical advice until the air clears is to stay out."

How does one determine when the air is clear? And when it is clear, what should you buy or sell?

No Surprise

August 06, 2004

The Nasdaq is trending down:

The trend down seems obvious?

But today the commentary at Yahoo Finance screams:

- "Job Growth Anemic, Markets Stunned"

- "It's a huge disappointment, a big surprise," said Scott Brown, chief economist at Raymond James in St. Petersburg, Fla.

Using the "news" for any one day to explain a "trend" is not rational. Why would anyone say the Nasdaq trend down is a surprise? The move down has not happened in one day. If the market went from 2050 to 1775 in one day then perhaps the word "surprise" would have been appropriate.

Jim Cramer's Fundamentals

August 05, 2004

Consider Jim Cramer's comments from today:

"At first I thought that Ingersoll-Rand must have stopped trading. How could it be down 73 cents on the news that it had increased its dividend gigantically and boosted its buyback aggressively? Weren't those two bits of news, as well as the affirmation that earnings growth is in the mid-40% range, worth two, maybe three bucks to the upside? I started wondering where the thing would open, and I began to kick myself because I had sold the stock right here, at this level, last week, trading it in for Fortune Brands because I was concerned that Ingersoll could top out here. Now the company was announcing unbelievably good news and it was going to travel higher without me. And then I hit up the stock, the actual quote, and saw it wasn't halted; the stock was freely trading: down! That's right -- the market didn't much like this surprise. It yawned and then kept selling the stock as if a 32% boost in the dividend and a gigunda buyback were disappointing! This kind of activity, where great news comes out and the stock goes down, has a name -- that's called bear-market activity. You have that when things on Main Street are quite good and Wall Street can be impressed by nothing."
James J. Cramer
RealMoney.com Columnist
Just Try Not to Lose in This Bear Market
August 5, 2004

Cramer wonders how a stock could drop in price after supposed good news. I wonder how Cramer can say this with a straight face. Why worry about whether a market is a bull or bear? Why not just ride the trend whichever way it goes? News should not drive your trading decisions. Period.

Stocks, Futures & Options Magazine Review

August 03, 2004

"Please read [Trend Following] whether you think you have an interest in trend following or are not quite sure. I guarantee you will be happy that you took the time. It, of course, covers how trend following works, how it's done, and who can do it, and it doesn't beat around the bush with generalities. But, on top of that, it really delves into the human nature of inventors and traders like I've seen few books do well, and that alone will make it worth the read...Once you begin reading the book, if you have a choice, I bet you will put it down only for meals and bathroom breaks. It's that well done...Again, get this book. Covel has hit a homerun with it."
Gail Osten
Stocks, Futures & Options Magazine
September 2004 Book Review

Read complete September 2004 book review of Trend Following.

Hidden Flaws: Behavioral Economics

Hidden Flaws in Strategy (PDF) by Charles Roxburgh offers insights into behavioral economics.

Your Money Style Quiz

August 01, 2004

Your Money Style Quiz: read PDF and take quiz.

Are you a hoarder? Avoider? Or Splurger?