How to become a trader?

Easy for this question. If you know how to use a computer and internet, then, to become a trader, you ONLY need to:

1. Press Long button on screen
2. Press Short button on screen

That is all! Simple, right? At this point, anyone who traded before will certainly say "No".

Yes, trading can seem simple at the surface. It is like a chess: anyone can learn it in 10 minutes, but to win, you have to put in 10 years of work and study.

Trading is harder than most salaried jobs because it requires you to use your brains and to suppress your adrenaline.

Answer, 2/3 of 2/3 of 2/3

Here is the answer for previous post,

1. For market newbie, they may very well choose 2/3 of 2/3 of 100, hence 44.45. Since we all kWillie we want to win, we at least will have to choose 66.67

2. To win over newbie, market professional will choose 2/3 of 66.67, hence 44.45

3. Now, to truly win over everyone, we have to choose 2/3 of 44.45, hence 29.63.

4. What if there are some extremist who believe everyone is rational and choose 0 as their answer? Then you will have to lower your estimate.

5. What if there are more professional in the group? Then you might think in higher level, namely, 2/3 of 29.63.

Which level did you belong to?

2/3 of 2/3 of 2/3 of 2/3 of 2/3 ...

Today I remembered an interesting story I read before. (I can't really recount where did I read this)

Here we have a competition. The rule is simple,
1. Everyone has to choose a number from 0 to 100
2. The person whose answer is closest to 2/3 of average participants' answers is the winner.

Easy? Which number will you choose? This competition is fairly similar to stock market.

I will post the answer tomorrow. Continued.

Research in Motion's Motions

While RIM, company best known for blackberry, was recently severely punished by market participant for announcing a profit decline estimate, it is now gearing up for new venture. It announced recently it will deploy new tablet, Playbook, at automobile. More, yesterday RIM announced it will push Playbook into India market.

While the company was dimmed by Apple's iPad, Blackberry is still welcomed among executives for it's highly encrypted message system. It seems like investors overreact to recent adverse earnings.

Everyone has a niche, RIM too.




Disclosure: this is not a recommendation for stock purchase. Nor does it recommend participation in equity market.

Raise of margin requirement

While the regulators have been advocating a raise on margin will tame the volatility on futures market, in short term, the raise has adverse effect.

First, regulators made their point that higher margin makes futures contract unaffordable, which causes less speculator in the field. But that is only true up until one point. If the ,margin is too high for small player, liquidity will dry up, market will become more volatile. Hedger will suddenly find themselves holding bunch of contract without being able to sell.

Second, in short term, the raise of margin will squeeze the smaller player. People who want to shun margin call will close their losing position, all at once. What happen next? The price move in greater momentum.

Speech

Last year, he said, I will never resign.

Last week, he said, I will resign after we solve the crisis.

Yesterday, he said, I am ready to resign.

That is baffling. Leaving tones of problems haunting the earthquake torn country, he ask himself "Kan" he do it?.

Euro Zone is planning for Greece bond default, finally.

While the politicians had been struggling to avoid the inevitable default of euro member, the day has finally came. According to today Wall Street Journal, politicians are seeking a new financial plan, which will seek 30 billion Euro contribution from private-sector creditors.

One year ago:
We will do anything to stabilize Euro.

1 month ago:
We may consider soft-restructuring.

1 day ago:
Lets ask 30 billion from private creditors.

No confidence vote

Another storm arises in Tokyo. Prime minister Naoto Kan was faced with treat of no confidence vote. While the appeal of the vote was anticipated, the submission of the vote alone signify several problems among the party.

First, some of Kan allies had turned against him. This may weaken an already weak party.

Second, we are able to see the other side of the politician. How can they still have time to draft no confidence vote when tens of thousands of earthquake are suffering? Anyone want to submit no confidence vote to those ministers?

While half of Japan citizens show no interest in changing the leader at this moment, they may want to ask for more concentration among their leaders. Less vote, more results.

Dow closed down 2.2%, May effect?

Yesterday, Dow Jones closed down 2.2% in one day, making yesterday the biggest decline in this year. And this raises fear of double dips depression.

What is the cause? Disappointing economic report? May Sell-and-go-away effect? Or pure randomness?

First, if this is caused by disappointing economic report, why did investors react now? Why didn't investors sell soon after the Japan nuclear disaster? Did previous economic recovery failed to motivate investors. Well, apparently, Mr. Market is very capricious creature. He may overeact or under react all the times. Thus, one possibility for yesterday may be overreaction of investors, magnified by the May effect.

Second explanation is simpler. Yesterday is just another normal day with randomness. It just happened to fall on the tips of the probability bell curve.it is pure happening of chances. No more, no less.

People of millions

How much would you pay for a bodyguard or sp?
It seems that corporate moguls answer 3 millions.

Recent Edgar filing shows that Mr. Dell (founder of Dell) is reimbursing 3 millions dollar of fee related to personal security to the company. While Mr. Dell's management has been widely regarded as honest and efficient, the big spending on security is baffling for investors. A close look at other companies top management spending shows that the average spending is 1 million.

Hey, average citizen spend zero dollar on security and will retire if we have 1 million. Is the gap of top income-earner and average earner widening too much?

Europe domino

While Greece can't shun the topic of restructuring of government debt by now, it still downplay the seriousness of the problem by proposing "soft-restructuring", ie. by asking investors or creditors to wait longer for debt repayment. Is it feasible?

One spark can cause great fire. One creditor opposes, others follow. 

Set aside the debt problem, how Greece are going to find sustainable revenue to fund its growth? Without income, everything is mere paper talk. 

Excluding Greece from Euro zone will signify the incompetence of management, this is by default not an option. Dissolving Euro? Citizens lose confidence in their countries. What else? That leaves us with one option, "real" restructuring. It is time to admit past squandering and correct the problem. Watch out Italy! 

What do you think of using of debt to fund growth? 

Short selling and Japan

Is it morally justified to profit from a natural disaster like Japan earthquake?

Lots of investors shun short selling stock, some even criticize as evil. Corporate CEO hate short seller. Regulators hates it too. But, the root of the problem lies in, is it morally justified to profit from other mischief, if it is not at his expense?

After March 11 earthquake in Japan, mutual fund shorting Japanese stocks tripled in volume. Suddenly, there is a source of profit. However, after watching the interview of the victims on TV, I can’t help but re-think my profits from the market. Even though my action in the market didn’t cause the tsunami, even though I lose all of my profits earned later in FX market due to the intervention of Bank of Japan in Yen market, I still regret.

I think myself don’t “deserve” those money. After all, if I am the victim of earthquake, I won’t be happy to know that someone profit from the earthquake while I lost all of my possession and my family. Do to others as you want done to you.

Later, I donated several times to the charity, 1,000 Yen each time. I decided, should the time reverse, I will donate all of my profits to charity, without hesitation.

Trailing P/E vs Forward P/E

It can't be denied that human being are prone to be over-optimistic over our future. And this is shown too in stock market. Recently, I run into a company in conducting online business in Latin America. It has been doing quite well over past few quarters and is being sold at more than 60 trailing P/E, and 40 forward P/E. Its P/B is 20 times and a large portion of its assets are recorded as goodwill, which means this company constantly overpaid to acquire other company. Sound expensive? Lots of investors don't think so. That explains the forward P/E is substantially lower than trailing P/E.

A glance at the analyst estimate showed us that analysts predict the company to grow around 32% this year (it had  grown 30 % this year).  Here is the problem. Is it OK to extrapolate past performance into the future to justify overpaying for a stock?

Past performance don't guarantee future performance. At a certain point, growing company will reach a plateau. The market will be saturated. Or new company will enter the market and drive down the overall price of the market. In short, a company won't grow infinitely. There is a point where management will find that they can't be the way they used to be. Organization restructuring, cost cutting, new product line, all eat into the company bottom line. We won't know what will happen or how the management will cope with it until it happened.

Thus, if we are naturally poor predictor of future, then what is the use of forward P/E and why are there so many people touting forward P/E?

Today S&P closed up 0.41% as "?"

As I look through the Yahoo finance section news, one thing catches my attention. It goes like this:

Stocks finished the week with modest gains, with the S&P 500 closing up 0.4% ..... Participants digested news that during April consumer spending increased by 0.4%...

I can't help but think that "how did they know the modest rally in S&P has to do with the April consumer spending release? Isn't that possible that there are other factors affecting the stock market? Or it may be just another drab trading day?"It is baffling that financial media today like to add "because" or "as" behind any stock market rally or sneeze, every trading day. 

Stock market is a complex animal. Tonnes of factors affect its price, ranging from economic output to weather situation. To add to the complexity, we are part of of the market. Our decision to buy or sell counts. And so are other participants. More, we are all created equal, so why try to outguess other participants every day?

Analysts may be able to show us our current position in economic cycle, but predicting short term stock market direction is nothing more than speculating. 

What do you think about day trading? Honey or venom? 

3 Rules to wealth

Enough for those get-rich-quick method. Here are 3 simple and yet practical rules to wealth.

1. Save at least 10% of your monthly income.
2. Invest those savings in sound investment.
3. Reinvest earned income in sound investment.


Example:

If you earn $5000 per month, you have to save $500 every month. Every year, you will have $6000 saving.
Invest those saving in an index fund, which gain roughly 10% on average, you will have $6600 after one year.
Repeat the process, you will have more than $100,000 in 10 years.

That is the power of compunding process.