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Stockbrokers as spin doctors

by Bruno Deshayes on 14 Jul 2016 permalink
Pump and dump strategies and other shenanigans were rife before the advent of discount online brokers. As the saying goes "it's never a bad time to take a commission".

Marketing and spin is taking a whole life of its own if you can spread a rumour and have enough bystanders repeat and embellish the story for you.

Can those good old times survive or has the internet killed the opportunity for brokers to dispense investing therapy? So what made a juicy good story? How easily could greedy investors (gamblers ?) be caught?

Since inside knowledge can be turned into a trading advantage there is an in-built collusion of interest between those who know of some impending market data and those who are eager to trade that information before it becomes common knowledge.

Full service stockbrokers were notorious to cultivate a following of people who wanted to be in on a good trade. For some unknown reason it always became a bad trade. Stock manipulation is more transparent now since any good online trading platform allows you to see the course of trades entered in the market. In the past a broker could interfere with the market of an illiquid stock by withholding either buy or sell orders to cause the asking price to temporarily rise or fall on demand. Then he could place the trades of his "preferred" customers at a more advantageous price. An electronic market has blown out those cosy arrangements.

Insider_trading is a hot issue and authorities play a cat and mouse game to unravel after the facts the actions of operators ever so clever at covering their tracks. After the stock market crash of 2007 authorities had to be seen as doing something. There is even an academic who claims to have written some software to identify suspicious insider trades!

A report by the Australian Institute of Criminology reveals that as long as you don't get caught the practice is too tempting to be passed by.

But life goes on and judging by the stockbroker fraud blog there is still plenty of action going around.

Bottom line: with a fast electronic market the goal post has shifted and there is more transparency. At the same time new opportunities are being created but we will only find out about them when they have been exposed and can no longer be exploited.

One notorious IPO which surprised all the pundits was Google who handled their float themselves. In fact the original Google IPO site is still around. But if you missed out on buying GOOG shares on NASDAQ at $85 on August 19, 2004 which fetched $500 in 2010 don't despair the next hot tip is now the Facebook IPO site

Why is trading such a mind game?

by Bruno Deshayes on 23 Jun 2016 permalink
One buys at the current price, one sells at the same current price. A transaction takes place: Can they be both right?

If they are both entering the market one with a long position and one with a short position obviously they have two opposite views as to what the market might do next.

So this is the game of bluff that goes on in our trading exchanges (casinos?) Has investing turned into a game of poker?

How long are you prepared to wait until you bring the bacon home? Are you rationalizing a bad trade by saying you are in it for the long term? Shouldn't that capital be used to ride on a profitable trade instead?

How far in the red are you prepared to let the market go before you call it quits? Do you have a stop in place? Are you thinking about moving it away to take more risk? Can someone see all the stop orders in place and manipulate the market to hit them all and make a quick profit when the stock returns to where it was?

"You have to be in it to win it!" Sometimes you wish you were not into anything at all. Does your trading keep you awake at night? Does your partner know what you are doing?

Do you have enough integrity to monitor your own trading performance? Do you keep a log of all your past trades and the assumption you made at the time you entered each trade? I mean do you set an entry point, an exit point and a stop point BEFORE you place a trade? That is the only way to find out if your method is profitable or not. If it is then you know how long the longest string of losing trades was. You also know that each trade you took brought home x dollars in profit.

In that case instead of fretting and if you keep to your strategy - each new trade in the long run should simply fit into your law of averages - bringing home x dollars of profit. This is simply what you earned for the risk you took, for your participation in bringing liquidity into the market...

You know all that good stuff - so why is it not working for you? The reason might be that you are cheating, have become impatient and are breaking your own rules. That's easy to fix - get back to your own discipline. Don't confuse speculation with gambling.

There is still another reason why things might go astray: the market may have changed just like tides and equinoxes do - you have to redo your analysis all over again.

Tale of the Farmer and the Share Trader

by Bruno Deshayes on 19 May 2016 permalink
Are you in the market? If not, why not? Have you sown your seeds in order to reap a harvest? One thing we know for sure: No seeds in the ground is tantamount to a zero return. So what is it about agriculture that makes a good pattern for long term investing?

First you have to be in the race to win the prize. No matter what adverse conditions prevail the farmer always plants a crop because conditions can change and do change over time. Compare that with fidgety investors staying on the sidelines waiting for that perfect entry point. We know you cannot pick the tops or bottoms of the market. You can only find that out three months later looking back at the charts. By then it is useless information apart from setting a precedent for the next support/resistance level.

Later as soon as the seedlings emerge the farmer waters them with tender loving care. But some investors are so paranoid that they protect their position with a stop too close. Sure enough they get bumped off at the first retracement to re-test the last support level. That would be like a farmer pulling up a plant off the ground to check how the roots are doing.

Lastly plants do grow in the wild without the help of anybody. The farmer knows that time is on his side. The process that was started will eventually reach fulfilment. The seasoned investor also knows that time is on his side. The economy keeps going and going simply because consumers keep consuming what producers keep producing. Yes peaks and troughs follow their erratic ways but there is also an upward bias in the market that will reward those who stay for the long haul.

But what about you? Have you sown your field? Are you in the market? If not, why not? Maybe you heard so many horror stories of people who lost their life savings that you don't know who to believe. Obviously you do not have yet a positive personal experience to fall back on.

What if you could look over the shoulder of a successful trader, gaze at the trading log and ascertain the overall performance?

Find out more at Trading Pal

Why Investing is Not a Get Rich Quick Scheme

by Bruno Deshayes on 05 May 2016 permalink
You wouldn't pull out a seed you just buried in a pot to see how the roots are doing. You keep watering it with tender loving care. Then the first stem and green leaf show up to confirm it is working. You should do the same when you put your money out to work.

There are many parallels to be drawn between investing and agriculture. The same principles apply to both.

Returns are a function of time
Regardless of the prevailing mood people still need to buy food, petrol for their car, clothes to wear, etc... Invest in those industries because there will always be a demand for these products.

Impatience is your downfall
How many times have you heard of someone pulling out of the market with a loss in a panic attack? Six months later the price of their stock finished 20% higher than their purchase price.

Risk is part of the equation
The knowledge of the future does not belong to us. But one thing we know. If you don't plant seeds there is no harvest. If you're not in the market there are no profits. In fact you could say that the only reason you ought to make a profit is for your ability to handle risk. By buying shares you provide liquidity into the market and allow businesses to raise capital.

Invest in an industry where you are knowledgeable
A farmer doesn't pick a crop at random but knows the intimate details of each plant he grows. Likewise you need to know the drivers behind a company. You need to have contacts with people who work there to corroborate whatever news or rumour is doing the rounds.

Do not confuse investing with speculating
In fact there is a fine line between speculating and gambling. It is manageable to pick a reliable trend over weeks and months but if you go hour by hour like a day trader you are in a fog.

Take responsibility for your investments
Do not hand over your life savings to some manager to do the work for you. That's the only way you will learn something out of the experience. The one who has built the expertise deserves the profit - not the bystander.

Go for companies that pay dividends
Capital growth is good but if the business is sound they should pass on some of the profits without you having to sell your shares. Check the track record on dividend payouts and compare companies with each other in that regard.

Cast your bread upon the waters, for after many days you will find it again.

Gamblers, Speculators and Investors

by Bruno Deshayes on 28 Apr 2016 permalink
Gamblers rarely see themselves as gamblers nor would they want their spouse to know what they are really doing. If there are some winners in the market there must also be some losers and I am afraid gamblers make the bulk of it. They compound their misfortune by trading with borrowed money rather than some set-aside capital they can afford to loose if it comes to that. They are attracted to the market for all the wrong motives and supply the grapevine with reasons why you should not be trading. They have no discipline no patience and no accountability. They have no notion of a calculated risk and do not take a break to regather themselves after a loss. Instead they try to make up for it by trading double the original quantity. Their demise is deserved. They suffer from a psychological addiction which blinds them to the consequences of bankruptcy to themselves and their family if they still have one.

Speculators are savvy traders who have a nosy interest in the market. They like to uncover profitable patterns and only trust what they have observed after some long and meticulous research. They use math and charting to document their findings but unlike specialists who know it all but never trade speculators take trades every day as a matter of personal discipline. They learn to take losses in their stride knowing that the next gain is just around the corner if they keep trading and maintain their safeguards. Speculators tend to trade commodities, forex and indices which cannot be manipulated by a single large player. Speculators are predominantly short term and use technical analysis.

Investors are in for the long term and use mainly fundamental analysis. They have a vested interest and inside knowledge of a given industry. They know the main players in the game and keep themselves informed of anything that might impact their industry. Investors tend to trade stocks of all capitalisation. They might know that so and so has been appointed to the board of directors of some unnoticed company and vote with an order for a bundle of shares. Investors are experts at sifting through information. In fact recent scandals have highlighted the fact that what you know and what you do with that information can make you a fortune. Insider trading is hard to quantify, hard to prosecute and hard to expose. Retail investors are in danger of being duped by insiders and recriminations are the norm at company annual general meetings. Share options and the plethora of new weird and wonderful share issues muddy the waters for newcomers.

Find out more at Trading Pal

Capital raising for the masses

by Bruno Deshayes on 21 Apr 2016 permalink
Crowd funding is a new phenomenon in cyberspace at the cross-roads of social media and equity markets.

Raising funds for a small business was an anathema. You either borrowed funds from your bank manager or a local solicitor. Today people seek funding for all sorts of ventures like a music festival, a movie, a video game, a technical innovation.

There are two funding models: All Or Nothing and Keep It All. In the first all monies are returned to investors if the targeted amount is not reached by the deadline. In the later, the onus is on the entrepreneur to return funds to investors or carry on the project with whatever was raised.

The promoting website is the only one with a stable business model if you allow me to be circumspect. They don't offer any endorsements or guarantees as to what gets promoted on their pages but they levy a percentage tax on all donations transacted through them.

The amazing thing is that you see lots of hype about fashion, entertainment, technology but few brick and mortar businesses like your local garage, an independent corner store or a cheese manufacturer.

So what does the future holds? The monopoly of long established equity markets is under threat. The recent annual report of the ASX (Australian Stock Exchange) makes sober reading in the face of CFD trading (contracts for difference) and the growth of dark pools and HFT (high frequency trading).

So it looks like the big players are going to do their own thing anyway. They are a law unto themselves, transcending national boundaries and regulators.

When you have a business idea you would go for seed money or angel funding. As opposed to venture capital these involve much smaller amounts (up to $50,000) and seek active participation in the new start-up business. Many are searching high and low for the next facebook to emerge and you have to kiss many frogs to find Prince Charming.

The emphasis is not on creating employment for those who need it the most. Instead it is for going after the latest fads. A new app for mobile phones which will be so compelling that its distribution will reach a viral effect. It is free to download to gain instant market share and carries a payload of advertisements for all those who will join on the band wagon. It does not offer any intrinsic value until users realise that they have been duped and the cycle repeats itself.

Stock market versus real estate

by Bruno Deshayes on 23 Mar 2016 permalink
You can't live in a portfolio of shares and you can't sell just your bathroom to raise some extra cash. What are the pros and cons of those two forms of investment?

You never know the price of a property until someone is willing to buy it and someone else is willing to sell it at the same price. Equities are very liquid because there is a market quoting current prices for each trading day.

Borrowing to buy shares is risky while borrowing to buy property is virtually the norm.

Real estate is very much an all or nothing proposition. You buy a house and you sell the whole of it. Besides capital gain you can rent the property and it ties you to the duration of the lease. Some clever operators had the idea of getting people to invest in a pool of properties by holding a number of units while others have a time-share arrangement in a holiday condominium. Those arrangements end up having the drawbacks of both investment types and none of the advantages.

Shares allow you to build up a position over time taking a small risk at first because your holding is only a few shares (the broker's commission compounds but then you could use CFDs instead). Shares that you hold over time generate income by way of dividends.

People who are skilled as a tradesperson look for properties they can repair and maintain in order to add value. In real estate the location is crucial. Proximity to schools, public transport, shopping centers is built into the price. What maybe a good family home for you may turn out to be a disaster as a rental property.

You would think a farmer close to a urban centre has the option to subdivide his land into residential blocks and make a huge profit. That's the theory but in practice it is a 10 or 20 years plan and will require going around corrupt local authorities.

If you plan to buy land, build a house on it, sell it and repeat the process as an investment strategy this is a full time occupation - not a dabbling investing past-time. The building trade is notorious to attract unsavoury operators and local authorities are sure to change the rules with more and more regulations - not less!

Two big assumptions maybe falling apart with property: ongoing capital gain and cheap credit through a competitive banking sector. The recent crash has shown that like everything else inflated house prices will have to come down to earth while the few banking institutions left will tighten their credit assessment.

Property transaction costs are huge (conveyancing, local council duties, agent's fees) but online brokers have brought commissions to a bare minimum.

It seems people are either comfortable playing the property game or researching stocks with good growth potential but rarely do you find folks who have the mindset to actually do both.

Do you believe in superannuation?

by Bruno Deshayes on 22 Mar 2016 permalink
The only people who still do are those who derive their fees from it and the government who legislate in order to raise taxes and avoid paying pensions.

The abysmal birth rate in western countries is a time bomb for superannuation. Hear it loud and clear: there won't be enough working people in twenty year to support an aging population.

Legislation has created a whole industry of fund managers - vultures circling around our nest eggs. The government itself can't help reaching into it for its own purposes. It's such an attractive magnet. Not content with inheritance tax - why not taxing people well before their die (in case they live so long, there won't be anything left to tax...)

Superannuation and retirement are modern ideas - by products of our consumer society. The premise that if you keep quiet and obey the rules all your life you can buy at the store anything that tickles your fancy and have the rest of your retirement to enjoy it. Hogwash! Those days are over...

The superannuation crunch is a consequence of the family break-up. In the past people had respect for their elders. People didn't move too far from each other. Housing wasn't a problem. People were content with the basic necessities being met. People had time to read books, play music, teach children, mind grandchildren, cook for each other and store-up for a rainy day.

Today people live longer but what is their quality of life? Even if you have the money to travel the world - what will you do when you get home? Watch the same movies of your trip over and over again? Why are people bored? Because they are disconnected from each other.

Women pay exorbitant child-minding fees when grandparents would love to mind grandchildren if our housing would allow extended families to live by each other.

Government interference with superannuation means that you lose control of how your savings are managed. Maybe one of the best options is still real-estate. Having one or two extra dwellings and living on the rent you collect will ensure your income is indexed with inflation.

Cyberspace and the benefits of a global village have been a big lie. People still congregate in urban centres because bosses don't trust people working from home. Commuting puts pressure on housing prices. Everything is centralised in large monopolies. Small towns are dying as young people seek work elsewhere. But isn't that where the sea change exodus is taking place?

Only trade money you can afford to lose

by Bruno Deshayes on 19 Mar 2016 permalink
Share trading forex or commodities trading is mainly a game of bluff. You can only take a trade if you find someone else willing to buy when you want to sell or sell when you want to buy.

It stands to reason that you can't be both right. One will end up with a profit and the other with a loss.

At the end of the day you save face by trading anonymously. You probably would never trade again if you saw the professional rubbing his hands after making an easy win at your expense.

The market loves to backtrack over the values reached in the preceding days and it's a game of who blinks first. You can be prudent and go home with a small loss or you can be bold and hold on for sheer perseverance only to be punished with a much bigger loss.

That's where all the psychology comes in. The market rewards you for taking a risk but your risk taking ability depends on your present situation. Are you under stress to make ends meet? That's' the worst situation to trade with a clear head. Are you going through separation or divorce? Please do not trade now. Have you just lost your job? Smell the roses but do not turn yourself into an overnight portfolio manager...

The more desperate you are to pull money out of the market the more likely you are of being fleeced. There is a fine line between trading and gambling. You are crossing that line when

* You place more than 2% of your capital on a single trade. (Instruments that move in unison count as one trade here).

* You have done no specific research and trade on a hunch.

* You do not use technical analysis to indicate objectively when the market changes from rising to falling.

* You do not set a stop loss and a limit target before placing the trade.

* You hide your trading from your spouse.

* You dash off at work to the bathroom to check your stocks on your iPhone.

* You pray to the god of the markets that this stupid stock should turnaround now.

* You double your position to get even with that wild beast and recover your losses before it reaches back your entry point.

* You have visions at night of yourself placing a bomb in the basement of the exchange.

* You take up smoking and upgrade to a supersize meal at the fast food outlet.



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Bruno Deshayes

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