Sunday, 31 March 2013

Quote for the day

"Don't gamble, but watch for unusual circumstances. Excellent investment opportunities come about when superior businesses experience a one time event that depresses the stock price in relation to its intrinsic value." - Warren Buffett

Why Being an Investor is an Ideal Career Path

There are two big decisions that we all make in life; a family life, and a career path. Personally, I think choosing the right career path is just as, or more important, than deciding if you want to get married, start a family, and the what-not. So here’s why I think being an investor is an ideal career path.

Obviously, you get to work for yourself!
I hate working for others. I absolutely hate it, for two reasons.
1 – You’re not being paid what you’re worth. To make a profit, your employer can’t pay it’s employees what they’re really worth. Let’s put it this way. You’re company has 100 workers, and makes $10 million of profit each year. In order to make a profit, they must pay each employee less than $100,000 a year; less than what they’re truly worth. So if you work for yourself, and make $10 million, every single penny of that $10 million goes to you (except for the costs, of course).

2 – You’re fate is in the hands of others! If you work for others, they can decide at a moment’s notice to fire you. They can fire you during a recession, leaving you destitute. They can raise idiots up the corporate ladder, while hard working decent guys like you are stuck. I hate it when others have control over my future. This is my life, and no idiot is going to decide if I succeed or not. If I fail while working for myself as an investor, at least I can say that I tried my best, and failed with honour. But if I fail because my employer has a bone to pick with me, that’s just plain frustrating, because often times there’s nothing you can do about it.

Freedom to work from wherever you want.
The only tools I have as an investor are a couple of investment books, my laptop, InteractiveBrokers (a trading software on my laptop), Metastock, and the internet. I can choose to work from my house, the library, anywhere I want. I can move to China for 6 months and invest in the American markets from there (ahhhhh, the wonders of modern day technology). I can lounge on the beach, and work on my investments. So what happens if you work for someone else? Can you pack up at a moment’s notice? Probably not. So what happens if you run a brick and mortar business? Can you leave whenever you want? Absolutely not! Who’s going to be around to monitor your business? You’re tied to a physical location. But as an investor, you aren’t tied to any one place.]

Freedom to pack up and take a long vacation any time.
As long as I have the money, I can pack up and go on vacation for as long as I want. If I’m feeling to stressed out, I can shut down my investment positions, tell everyone I’m leaving, tour the world for a few months, then come right back to my investments. It’s a wonderful lifestyle, I tell you! If you’re an employee, your boss will probably fire your ass if you leave for more than a month or two. If you’re a small – medium sized business owner, you’re business will shut down if you leave it for more than 2 weeks! But as an investor, you can close up shop and come back whenever you want. Your investment skills will always be with you, and so will your capital.

Investing is an old man’s game.
In my opinion, working as a pure engineer in the tech industry is a terrible idea. Once you hit 40, you’re competing with guys who are in their 20s that can stay awake on 3 hours of sleep each night and work like they’re demented or something. There’s no way you can compete with them. So let’s face the truth. We’ll all be old one day. So why choose a career where you’re golden age is when you’re 20 or 30 something, and after that , go on a long decline? Choose a profession where experience counts, dammit! In the realm of the financial markets, there is nothing new. There will always be panics, fears, exuberance, bubbles, etc. Once you’ve had enough experience, you know first hand how the future for the markets will play out, because market history repeats itself.

You can go long and short, or choose not to have a position at all.
Most professions get wacked by the economic cycle one way or another. Mass layoffs in some industries during recessions, and mass layoffs in other industries in prosperous times. One cannot switch professions all the time; you can’t just jump ship to the hottest industry that’s hiring like crazy whenever you feel like it. As a business owner, you can’t profit from both good and poor economic times. A business is a slow, lumbering ship. You can’t turn 180 degrees at an instant’s notice. You can’t close down your business if you foresee bad economic clouds coming, and reopen when things are all better. But as an investor, you can change from 100% long to 100% short. Or, if you’re confused, you can close down all your positions, and choose to simply conserve cash. As an investor, you get the benefit of DOING NOTHING if you want. If a business does nothing (and doesn’t continue it’s cash flow), it will go bankrupt. If an employee does nothing, he or she will be fired, and likely be incapable of making ends meet at home. But as an investor, you have the benefit of waiting for the right opportunity.

All knowledge can be used.
If you’ve seen the Turtle Trader, you’ll notice that many successful investors didn’t start off as an investor. Many were formers soldiers, plumbers, chess players, soccer players, programmers, etc. Nothing goes unused in the realm of investments.

You develop a clearer view of the world.
A big part of investing, obviously, is knowing what’s going on in this world (which grows your ability to predict the future). You don’t want to be poor Joe down there who works 9-5, lives an oblivious life, and wonders what the hell’s going on when he gets fired and sees screaming EQUITIES ARE DOOMED headlines in the newspapers one day. I call guys like Joe a fool. They are like the masses – just following the herd to their slaughter. You have three choices in life. Be ahead of the trend, go with the trend, and fall behind the trend. Most successful investors go with the trend (although a few are talented enough to go ahead of the trend). These guys won't be killed too badly when some undesirable, unforeseeable future rears its ugly head. But most people (like Joe), are the obvious kind; behind the trend. These are the guys that get killed really, Really badly.

And last, but not least…..
This should be really obvious. If you're good at investing, you can make millions and billions. But then again, if you're not, then find another profession.


Saturday, 30 March 2013

Quote for the day

"At some point in a business cycle one has to get greedy. And the time to get greedy is when everybody’s running for the hills with fear." - Bruce Berkowitz

The Five Phases of the Stock Market Cycle

There are five classic and distinct phases to the stock market cycle that you as an investor need to be aware of to minimize your risk. These are not to be confused with the Economic Cycle. Knowing where you are in these phases can affect your stock picking and equity allocation style. Unfortunately most investors do not take heed of these cycles and fall into the classic traps of investing during the wrong times and selling during the wrong times.

However investors still need to be aware of which phase we are in to ensure they are not taking undue risk in an investment. The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase. Another challenge is that, even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one. But an understanding of cycles is essential if you want to maximize investment or trading returns. Here are the five major components of a market cycle and how you can recognize them:

1. The Accumulation Phase
This phase occurs after the market has bottomed and the innovators (corporate insiders and a few value investors) and early adopters (smart money managers and experienced traders) begin to buy, figuring that the worst is over. Valuations are very attractive. General market sentiment is still bearish. Articles in the media preach doom and gloom, and those who were long through the worst of the bear market have recently capitulated, that is, given up and sold the rest of their holdings in disgust. But in the accumulation phase, prices have flattened and for every seller throwing in the towel, someone is there to pick it up at a healthy discount. Overall market sentiment begins to switch from negative to neutral.

2. The Mark-Up Phase
At this stage, the market has been stable for a while and is beginning to move higher. The early majority are getting on the bandwagon. This group includes technicians who, seeing that the market is putting in higher lows and higher highs, recognize that market direction and sentiment have changed. Media stories begin to discuss the possibility that the worst is over, but unemployment continues to rise, as do reports of lay-off's in many sectors. As this phase matures, more investors jump on the bandwagon as fear of being in the market is supplanted by greed and the fear of being left out.

3. The Greed or Late Majority Phase
During this stage, the late majority jump in and market volumes begin to increase substantially. At this point, valuations climb well beyond historic norms, and logic and reason take a back seat to greed. While the late majority are getting in, the smart money and insiders are unloading. But as prices begin to level off, or as the rise slows down, those laggards who have been sitting on the sidelines see this as a buying opportunity and jump in en masse. Prices make one last parabolic move, known in technical analysis as a selling climax, when the largest gains in the shortest periods often occur. But the cycle is nearing the top of the bubble. Sentiment moves from neutral to bullish to downright euphoric during this phase.

4. The Distribution Phase
In this phase, sellers begin to dominate. This part of the cycle is identified by a period in which the bullish sentiment of the previous phase turns into a mixed sentiment. Prices can often stay locked in a trading range that can last a few weeks or even months. But the distribution phase can come and go quickly.When this phase is over, the market reverses direction. Classic patterns like double and triple tops, as well as head and shoulders top patterns, are examples of movements that occur during the distribution phase. It is here we see market breadth such as our Advance/Decline line, weakening. The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear, interspersed with hope and even greed as the market may at times appear to be taking off again. Valuations are extreme in many issues and value investors have long been sitting on the sidelines. No timing models are flashing BUY signals. Sentiment slowly but surely begins to change, but this transition can happen quickly if accelerated by a strongly negative geopolitical event or extremely bad economic news.

5. Mark-Down Phase
The final phase in the cycle is the most painful for those who still hold positions. Many hang on because their investment has fallen below what they paid for it, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued. It is only when the market has plunged 50% or more that the laggards, many of whom bought during the distribution or early mark-down phase, give up or capitulate. Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent. It is new investors who will buy the depreciated investment during the next accumulation phase and enjoy the next mark-up.

It is important to understand more or less which phase we are in, and the psychology behind each. Your investment strategy may change from one phase to another. Calling the exact beginnings and ends of these phases is difficult. Each phase becomes more dangerous and offers less margin of safety than the next. Many of us stay in the markets after all the timing signals have flashed their SELLS, to extract the last gasp returns of the bull market, but the investment style here is different as you have to have tight stop losses and monitor the markets constantly.

Source: Edited Article from

Thursday, 28 March 2013

Investor interest shifting toward low risk counters.....

The week concluded with firm interest on blue chips with both indices dipping marginally week on week. The All Share Price Index lost 33.2 points to close at 5,735.7 points (-0.6% WoW), while the S&P SL20 index fell 19.1 points to close at 3,293.6 points (-0.6% WoW). The ASI fell mainly on the back of the losses made by Ceylon Tobacco (-2.1% WoW), Bukit Darah (-2.0% WoW), Sampath Bank (-2.6% WoW), Carsons Cumberbatch (-1.1% WoW) and Peoples Leasing & Finance (- 4.4% WoW).

The dip in both indexes during the week can also be attributed to the shift in investor interest from counters with moderate growth prospects towards fundamentally strong blue chip stocks with higher growth prospects. It is notable that Banking and Diversified sectors have emerged as the key growth drivers of the Colombo bourse marked by foreign as well as local interest on key counters such as John Keels Holdings, Commercial Bank, Hatton National Bank and National Development Bank. The relatively higher interest on fundamentally strong counters by both retail and high net worth participants indicates a general change in the level of risk appetite within the market. This demonstrates a shift of investor interest towards low risk and fundamentally strong growth stocks that may serve the purpose of a safe haven investment at a time where the overall direction of the economy is being reassessed by market forces. We are of the view that these significant changes in market behaviour indicates that the Stock Exchange is maturing in terms of its level of responsiveness to general economic conditions.

Commercial Bank backed by both large scale and retail investors emerged as the main contributor to the turnover during the week adding circa 20% to the total turnover. Further, Sampath Bank, John Keels Holdings and National Development Bank together contributed circa 40% to the weekly turnover demonstrating the major involvement by selected large cap counters in raising turnover levels in the Colombo Bourse.

Meanwhile, Bank, Finance & Insurance sector counters attracted heavy investor interest during the week with sector contributing circa 53% to the weekly turnover. On the other hand, Diversified sector driven by the crossings pertaining to John Keels Holdings chipped in with a 16% contribution to the total weekly turnover. Hence Bank, Finance & Insurance sector and Diversified Sector led the investments spree during the week with a cumulative contribution of circa 70% to the total turnover.

Top contributors to the weekly volume were Asia Siyaka Commodities, Commercial Leasing & Finance, PC House, Commercial Bank and Expo Lanka Holdings .The average daily turnover for the week was LKR 1,110.3 mn up 57.5%WoW whilst the average daily volume was 66.3 mn shares.

Significant foreign investor interest was observed over the week with foreign purchases amounting to LKR 1,204.2 mn, whilst foreign sales amounted to LKR 728.1 mn. Market capitalisation stood at LKR 2,205.1 bn, and the YTD performance is 1.6%.

Institutional and foreign participation keeps the bourse alive, whilst retailers remain in the side line

The short week’s trading activities at the Colombo bourse were primarily on a sluggish mode after witnessing a positive momentum during last week. The bench mark index traded within a very narrow range, to wrap up the week in red. Retailers were largely adopting a “wait and see” approach whilst institutional and foreign participation held up the bourse’s performance. John Keells Holdings continued to be the favourite pick of the foreign investors, whilst country’s leading banks too grabbed the attention of high net worth, institutional and foreign investors.

Even though the market activities were lethargic during the week presumably due to the holiday mood creeping in and the increasing treasury yields, foreign activity continued to dominate the market with a weekly net foreign inflow of LKR476mn. It’s noteworthy to mention that the primary reason behind this is that the Colombo bourse continues to remain as an attractive frontier market whilst selected blue chip companies future prospectus remains promising. Further it is noteworthy to mention that Sri Lankan corporate listed debt market has shown signs of revival following the concessions provided for corporate bond investments through 2013 budget proposals. Several Banking, Finance & Insurance sector giants have already taken advantage of this new development while recently Lion Brewery and Softlogic Holdings have revealed their plans to raise LKR3bn and LKR750mn respectively through debenture issues. This would enable firms to borrow at a rate of interest relatively below the AWLR and more closer to AWFDR depending on the credit rating, allowing firms to realign their attention towards long term investments and hence further optimizing the resource allocation of the corporate sector.


Quote for the day

"When everyone believes something is risky, their unwillingness to buy usually reduces it’s price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing since all optimism has been driven out of it’s price." -  Howard Marks

LSL Market Review 28th Mar 2013

On Thursday, profit taking in the wider market and a marked drop on Sampath Bank upon employee’s share options being exercised brought the indices lower. DFCC hit a 52-week high of Rs. 131.50 amidst an overall surge in most banking counters. Banking counters are sought after as investors view them as stable investments with regular dividends.

ASI dipped 9.31 points (0.16%) to close at 5,735.68 and the S&P SL20 index lost 6.30 points (0.19%) to close at 3,293.57. Turnover was Rs. 2,040.4Mn.

Top contributors to turnover were Commercial Bank with Rs. 614.2Mn, Sampath Bank with Rs. 357.6Mn and Asia Siyaka Commodities with Rs. 278.5Mn. Most active counters for the day were Sampath Bank, Nation Lanka Finance and Commercial Bank.

Notable gainers for the day were Infrastructure Development up by 24.4% to close at Rs. 199.00, Dunamis Capital up by 20.0% to close at Rs. 12.00 and SMB Leasing up by 14.3% to close at Rs. 0.80. Notable losers for the day were PCH Holdings down by 10.0% to close at Rs. 5.40, Galadari Hotels down by 6.9% to close at Rs. 12.20 and HNB Assurance down by 6.7% to close at Rs. 47.70.

Cash map for today was 55.14%. Foreign participation was 30.01% of total market turnover whilst net foreign selling was Rs. 33.77Mn.

Wednesday, 27 March 2013

Quote for the day

"Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it." - Dennis Gartman

LSL Market Review 27th Mar 2013

John Keells Holdings and National Development Bank contributed well in terms of gains and turnover. However, drops in other blue-chips had an overall negative effect on the indices. Softlogic Holdings made an announcement it will issue Rs. 750 worth debentures to shore up its balance sheet.

ASI dipped 0.56 points (0.01%) to close at 5,744.99 and the S&P SL20 index lost 1.28 points (0.04%) to close at 3,294.68. Turnover was Rs. 938.0Mn.

Top contributors to turnover were John Keells Holdings with Rs. 335.4Mn, National Development Bank with Rs. 173.7Mn and Aitken Spence with Rs. 52.8Mn. Most active counters for the day were National Development Bank, Pan Asia Bank and Commercial Bank.

Notable gainers for the day were Property Development up by 5.5% to close at Rs. 46.10, Pan Asia Bank up by 3.8% to close at Rs. 19.10 and National Development Bank up by 2.4% to close at Rs. 166.00. Notable losers for the day were Blue Diamonds non-voting down by 6.7% to close at Rs. 1.40, Radiant Gems down by 5.9% to close at Rs. 48.10 and Alliance Insurance down by 5.8% to close at Rs. 800.00.

Cash map for today was 59.57%. Foreign participation was 31.96% of total market turnover whilst net foreign buying was Rs. 408.17Mn.

Tuesday, 26 March 2013

12 Basic Stock Investing Rules Every Successful Investor Should Follow

There are many important things you need to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that I can share with you based on many years of trading experience are enumerated below.

1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.

2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as "the trend always changes rule."

4. If you are looking for "reasons" that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving - not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.

5. Stock markets generally move in advance of news or supportive fundamentals - sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period o ftime to maximize profits. Big money can be made by catching large market moves. Day trading or short term stock investing can capture the shorter moves while waiting for the longer term trend to establish itself.

7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading "system" in itself.

8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.

The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information - and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.

The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.

9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.

If you eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers.

10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years and/or provide third party verification of performance.

Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something - not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.

11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.

You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.

By C.C. Collins who is a respected financial strategist, market timing expert and CEO of
Article Source:

Monday, 25 March 2013

Quote for the day

"The stock market is filled with individuals who know the price of everything, but the value of nothing." -  Philip Fisher

LSL Market Review 25th Mar 2013

Indices dropped on profit taking on retail heavy counters. National Development Bank declared a final dividend of Rs. 10.00 but its share price didn’t show a marked improvement as the current market price had already factored-in its fair value. The share price of Ceylon Tobacco saw a drop during late trading. Yields on treasuries rose in today’s auction which could also contributed to the negative sentiment.

ASI dipped 23.33 points (0.40%) to close at 5,745.55 and the S&P SL20 index lost 16.30 points (0.49%) to close at 3,296.41. Turnover was Rs. 353.4Mn

Top contributors to turnover were Sampath Bank with Rs. 76.4Mn, Asian Hotels & Properties with Rs. 52.6Mn and National Development Bank with Rs. 42.5Mn. Most active counters for the day were National Development Bank, Nation Lanka Finance and Ceylon Grain Elevators.

Notable gainers for the day were Kotagala plantations-rights up by 33.3% to close at Rs. 8.00, Mahaweli Reach Hotel up by 7.7% to close at Rs. 21.00 and Ceylon Grain Elevators up by 6.5% to close at Rs. 50.60. Notable losers for the day were      Citrus Leisure- warrant 19 down by 3.9% to close at Rs. 2.50, Browns Investments down by 2.9% to close at Rs. 3.30 and Asiri Surgical down by 2.1% to close at Rs. 9.40.

Cash map for today was 60.21%. Foreign participation was 15.34% of total market turnover whilst net foreign buying was Rs. 101.61Mn.

Why Being Smart Is Your Biggest Handicap in Investing

"Some people are born smart. 
Some people are born lucky. 
Some people are smart enough to be born lucky."

- Ed Seykota

Are you smart? Did you do well in school? Well, I have news for you…

By being “smart,” you suffer from a huge handicap in becoming a profitable trader…

If intelligence were the key, every finance student who graduated with a PhD from Stanford or MIT who tried his hand at trading would be filthy rich…

And unless they happen to be savvy poker players with a strong dose of practical, hard-earned street smarts, they probably aren't...

Understanding why this is the case can help you make -- or better yet, help you keep -- your hard-earned investment profits in the market...

You've heard this story before...

Picture this...

You are a financial analyst at a top investment bank...

You recently graduated from Harvard Business School and all your friends and family think you’re pretty smart.

After all, you always won all of the spelling bees and math contests that you entered since you were a kid -- and you got great grades in college while most of your peers slacked off...

So you research a red-hot Chinese Internet stock IPO. You speak to the management. You run your complex financial models. You value the company at $14 share.

You write a “BUY” recommendation. This is then distributed to your employer's leading institutional clients, who are responsible for investing tens of billions of dollars in the global financial markets.

After the company is listed, the stock shoots up to $24.00. If anything, your valuation makes you look overly conservative...

Then the stock starts dropping. Within five days, the stock is down to $14, and then falls further to $10.

You run your models. You still come up with the $14 target price.

The stock is now at $8... one third of its peak trading price from just a month ago -- and almost half of your current valuation...

But as an analyst, you “know” the stock is worth $14. You'll do anything to avoid admitting that you're “wrong.”

This story has been repeated thousands of times on Wall Street. In fact, this anecdote recounts the recent fate of RenRen (RENN) -- The “Facebook of China.”

The stock was a hot IPO a month ago, soaring on its first day of trading. Then it promptly fell off the table.

The “Tiny Flaw” in Smart People

Smart people have a tiny little flaw in them that makes them highly unsuitable to be traders and investors…

Consider the results of an experiment conducted by “Trader Vic” Sperandeo… one of the top traders profiled in the original “Market Wizards” book by Jack Schwager.

Having been entrusted with building a trading operation, “Trader Vic” hired and trained 38 traders.

He assembled a diverse group, as he wanted to find out whether there was any correlation between intelligence and trading success...

The results were revealing...

Five of the 38 traders made more money than the others combined...

One of the five who made it was a high school dropout who, according to Sperandeo, “didn’t even know the alphabet.”

One who made no money in five years had an IQ of 188 and was a champion on Jeopardy.

Why? The “smart” traders could never bring themselves to admit that they were wrong.

Many Smart People = Big Problems

Get enough “smart” people together in a room and you can bring the global financial system to the brink of collapse...

That's precisely what happened with Long Term Capital Management (LTCM) in 1998.

LTCM was founded by a top Salomon Brothers trader and two Nobel Prize winners, Robert Merton of Harvard, and Myron Scholes of Stanford.

LTCM was the most successful hedge fund of its day, generating consistent 40% annual returns over several years… compared with the long-term track records of Warren Buffett and George Soros of around 30% at the time.

The LTCM geniuses were much smarter than Soros or Buffett… at least for a while…

The flaw was that LTCM was leveraged between 200 and 300 times (up to almost $500 billion dollars) on a capital base of about $2 billion…

...and the fund collapsed overnight after the devaluation of the Russian ruble in 1998.

Wall Street knew that these guys were the smartest guys in the room...

What they didn't know was that “being smart” was precisely their problem...

In reality, LTCM knew less about managing risk than a good poker player, who knows not to ever go “all in” on any single hand that could wipe him out...

But back to the flaw in smart people…

Smart people LOVE information!

They think information -- and ever more complex financial models -- are the key to making correct investment decisions.

And the more information you have, the better decisions you make.

But here’s the reality:

There’s always more to know...

And the more complex the model, the less “robust” or accurate it is...

The real problem, however, is psychology.

Smart people have a bad case of what trading psychologists call “need-to-understand” bias and “need-to-be-right” bias.

That's why, after making an initial recommendation, they spend most of their energy proving that they were right in the first place...

The Lesson You Should Learn...

So, here is the irony: being a “smart” analyst often makes you the worst trader.

And don’t be overly impressed with an analyst's employer or academic credentials.

George Soros failed his Charted Financial Analyst (CFA) exams twice… and gave up…

Warren Buffett was rejected by Harvard Business School…

Meanwhile, an analyst at a top investment bank may -- unlike George Soros -- pass her CFA exams on the first try.

But that has nothing to do with her ability to manage money, especially if she spends all her energy trying to prove that her analysis deserves an “A” -- the same grade she got on her thesis at Princeton.

More importantly, don’t be too impressed with your own “analysis” either.

Never bet too big on any single idea, no matter how compelling the story... and always have your exits in place…

That is, unless, you were -- as Ed Seykota says: “smart enough to be born lucky.”
Published on 15/06/2011
Nicholas A. Vardy
Editor, The Global Guru

Saturday, 23 March 2013

Quote for the day

“Confidence doesn’t come from being right all the time: it comes from surviving the many occasions of being wrong.” - Brent Steenbarge

10 qualities of a successful stock market trader

Many people take to trading in the mistaken belief that it is the simplest way of making money. Far from it, I believe it is the easiest way of losing money. There is an old Wall Street adage, that "the easiest way of making a small fortune in the markets is having a large fortune". This game is by no means for the faint hearted. And, this battle is not won or lost during trading hours but before the markets open but through a disciplined approach to trading.

1. A successful trader has a trading plan and does his homework diligently
Winning traders diligently maintain charts and keep aside some hours for market analysis. Every evening a winning trader updates his notebook and writes his strategy for the next day. Winning traders have a sense of the market's main trend. They identify the strongest sectors of the market and then the strongest stocks in those sectors. They know the level they are going to enter at and approximate targets for the anticipated move.

For example, I am willing to hold till the market is acting right. Once the market is unable to hold certain levels and breaks crucial supports, I book profits. Again, this depends on the type of market I am dealing with.

In a strong up trend, I want the market to throw me out of a profitable trade.
In a mild up trend, I am a little more cautious and try to book profits at the first sign of weakness.

In a choppy market, not only do I trade the lightest, I book profits while the market is still moving in my direction.

Good technical traders do not worry or debate about the news flow; they go by what the market is doing.

2. A successful trader avoids overtrading
Overtrading is the single biggest malaise of most traders. A disciplined trader is always ready to trade light when the market turns choppy and even not trade if there are no trades on the horizon. For example, I trade full steam only when I see a trending market and reduce my trading stakes when I am not confident of the expected move. I reduce my trade even more if the market is stuck in a choppy mode with very small swings.

A disciplined trader knows when to build positions and step on the gas and when to trade light and he can only make this assessment after he is clear about his analysis of the market and has a trading plan at the beginning of every trading day.

3. A successful trader does not get unnerved by losses
A winning trader is always cautious; he knows each trade is just another trade, so he always uses money management techniques. He never over leverages and always has set-ups and rules which he follows religiously. He takes losses in his stride and tries to understand why the market moved against him. Often you get important trading lessons from your losses.

4. A successful trader tries to capture the large market moves
Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.

Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of drawdowns when you are not in sync with the market. You can never cover a 15-20 per cent drawdown if you keep booking small profits. The best you will do is be at breakeven at the end of the day, which is not the goal of successful trading.

A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise -- and uniformly so in all markets. Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due".

Markets do not generally correct when corrections are "due". The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.

5. A successful trader always keeps learning
You cannot learn trading in a day or even a few weeks, sometimes not even in months. Successful traders keep reading all the new research on technical analysis they can get their hands on. They also read a number of books every month about techniques, about trading psychology and about other successful traders and how they manage their accounts. I often like to think about traders as jehadis; unless there is a fire in the belly, unless there is a strong will and commitment to win, it is impossible to win consistently in the market.

6. A successful trader always tries to make some money with less risky strategies as well
Futures trading, for example, is a very risky business. The best of chartists and the best of traders sometimes fail. Sure, it gives the highest returns but these may not be consistent -- and the drawdowns can be large. Traders should always remember that no matter how good your analysis is, sometimes the market is not willing to oblige. In these times the 4-5 per cent that can be earned in covered calls or futures and cash arbitrage comes in very handy. It improves the long term sustainability of a trader and keeps your profit register ringing. Traders must learn to live with lower risk and lower return at certain times in the market, in order to protect and enlarge their capital.

Disciplined traders have reasonable risk and return expectations and are open to using less risky and less exciting strategies of making money, which helps them tide over rough periods in the markets.

7. A successful trader treats trading as a business and keeps a positive attitude
Trading can be an expensive adventure sport. It should be treated as a business and should be very profit oriented. Successful traders review their performance at regular intervals and try to identify causes of both superior and inferior performance. The focus should be on consistent profits rather than erratic large profits and losses. Also, trading performance should not be made a judgement on an individual; rather, it should be considered a consequence of right or wrong actions. Disciplined traders are able to identify when they are out of sync with the market and need to reduce position size, or keep away altogether.

Successful trading is like dancing in rhythm with the market. Unsuccessful traders often cut down on all other expenses but refuse to see what might be wrong with their trading methods. Denial is a costly attitude in trading. If you see that a particular trade is not working the way you had expected, reduce or eliminate your positions and see what is going on. Most disciplined and successful traders are very humble. Humility is a virtue that traders should learn on their own, else the market makes sure that they do. Ego and an "I can do no wrong" attitude in good times can lead to severe drawdowns in the long term.

Also, bad days in trading should be accepted as cheerfully as the good ones. So disciplined traders maintain composure whether they have made a profit or not on a particular day and avoid mood swings. A good way to do this is to also participate in activities other than trading and let the mind rest so that it is fresh for the next trading day.

8. A successful trader never blames the market
Disciplined traders do not blame the market, the government, the companies or anyone else, conveniently excluding themselves, for their losses. The market gives ample opportunities to traders to make money. It is only the trader's fault if he fails to recognise them. Also, the market has various phases. It is overbought sometimes and oversold at other times. It is trending some of the time and choppy at others. It is for a trader to take maximum advantage of favourable market conditions and keep away from unfavourable ones. With the help of derivatives, it is now possible to make some money in all kinds of markets. So the trader needs to look for opportunities all the time.

To my mind, the important keys to making long term money in trading are:
- Keeping losses small. Remember all losses start small
- Ride as many big moves as possible
- Avoid overtrading.
- Never try to impose your will on the market
It is impossible to practice all of the above perfectly. However, if you can practice all of the above with some degree of success, improvement in trading performance can be dramatic.

9. A disciplined trader keeps a cushion
If new traders are lucky to come into a market during a roaring bull phase, they sometimes think that the market is the best place to put all one's money. But successful and seasoned traders know that if the market starts acting differently in the future, which it surely will, profits will stop pouring in and there might even be periods of losses. So do not commit more than a certain amount to the market at any given point of time. Take profits from your broker whenever you have them in your trading account and stow them away in a separate account. I say this because the market is like a deep and big well. No matter how much money you put in it, it can all vanish. So by having an account where you accumulate profits during good times, it helps you when markets turn unfavourable.

This also makes drawdowns less stressful as you have the cushion of previously earned profits. Trading is about walking a tightrope most times. Make sure you have enough cushion if you fall.

10. A successful trader knows there is no Holy Grail in the market
There is no magical key to the Indian or any other stock market. If there were, investment banks that spend billions of dollars on research would snap it up. Investing software and trading books by themselves can't make you enormously wealthy. They can only give you tools and skills that you can learn to apply. And, finally, there is no free lunch; every trading penny has to be earned. I would recommend that each trader identify his own style, his own patterns, his own horizon and the set-ups that he is most comfortable with and practice them to perfection. You need only to be able to trade very few patterns to make consistent profits in the market.

No gizmos can make a difference to your trading. There are no signals that are always 100 per cent correct, so stop looking for them. Focus, instead, on percentage trades, trying to catch large moves and keeping your methodology simple. What needs constant improving are discipline and your trading psychology. At end of the day, money is not made by how complicated-looking your analysis is but whether it gets you in the right trade at the right time. Over-analysis can, in fact, lead to paralysis and that is death for a trader. If you can't pull the trigger at the right time, then all your analysis and knowledge is a waste.

By Ashwani Gujral
Excerpt from How to Make Money Trading Derivatives by Ashwani Gujral.

Friday, 22 March 2013

Quote for the day

“If stock market experts were so expert, they would be buying stock, not selling advice.” - Norman R. Augustine

Colombo Bourse Sturdy despite local and foreign uncertainties.....

The week concluded on a positive note with both indices ending up in the green. The All Share Price Index rose 64.4 points to close at 5,768.9 points (1.1% WoW), while the S&P SL20 index rose by 50.3 points to close at 3,312.7 points (1.5% WoW). The ASI rose mainly on the back of the gains made by John Keells Holdings (3.3% WoW), Nestle Lanka (3.7% WoW), Hatton National Bank (5.5% WoW), Commercial Leasing & Finance (8.9% WoW) and DFCC Bank (5.8% WoW). 

Indices at the Colombo Bourse continued to sustain its upward momentum during the week with bargain hunters becoming active on mid to large cap counters. This positive momentum was achieved despite the unfavourable market conditions witnessed locally, such as the verdict of the United Nations Human Rights Council (UNHCR) and the hike in the yields of the treasury securities. Moving our attention to world stock markets, European stocks continued to tumble as the region continued to increase the pace of its downturn due to the financial instability witnessed in cash-strapped Cyprus while the latest German manufacturing data showed a contraction for the month of March. Reaffirming this MSCI Europe Index witnessed WoW dip of -1.5% as at Thursday. The US markets also followed its European counterparts and took a breather after the rally witnessed in the previous 2 weeks. Although the US economy has demonstrated signs of recovery, analysts believe that European concerns could continue to wound the US economy going forward. These developments could presumably be one of the reasons for the active foreign participation in the Colombo bourse which has become attractive due to its relatively low correlation with developed markets and its attractive valuations. 

Activities in the Colombo bourse was predominantly dominated by institutional, foreign and high net worth investor interest on mid to large cap counters. Conglomerate John Keells Holdings backed by heavy institutional investor play during the week, propelled itself to become the main turnover generator adding a circa 29% to the total turnover. Premier in the insurance sector Union Assurance also joined the top turnover calibre on the back of a large crossing witnessed in the last trading day. 

Further, Bank, Finance & Insurance sector counters such as Commercial Bank of Ceylon, Hatton National Banka and National Development Bank witnessed institutional and high net worth interest during the week with sector contributing circa of 44% the turnover. Diversified sector also made a healthy contribution of 36% to the total turnover which was primarily energised by the crossings witnessed in John Keells Holdings. Hence Bank, Finance & Insurance sector and Diversified Sector led the turnover during the week with a cumulative contribution of 80% to the total turnover. 

Top contributors to the weekly volume consists of PCH Holdings, PC House, Commercial Leasing & Finance and East West Properties .The average daily turnover for the week was LKR705.1 mn whilst the average daily volume was 27.1mn shares. 

Significant foreign investor interest was observed over the week with foreign purchases amounting to LKR1,404.7 mn, whilst foreign sales amounted to LKR725.7 mn. Market capitalisation stood at LKR2217.8 bn, and the YTD performance is 2.2%.
Source: Asia Wealth Management research

Thursday, 21 March 2013

Quote for the day

“Excellence is about stepping outside the comfort zone, training with a spirit of endeavor, and accepting the inevitability of trials and tribulations.  Progress is built, in effect, upon the foundations of necessary failure.” - Matthew Syed

Market Review 21st Mar 2013

· The All Share Price Index gained 29.0 points to close at 5,763.8 (0.5%) while the S&P SL20 Index rose 13.7 points to close at 3,313.3 (0.4%).

· Total turnover for the day stood at LKR672.4 mn (USD5,300.6 k) vs. 12-months average daily turnover of LKR858.2 mn (USD6,765 k), whilst the volume traded for the day was 36,336 k against the 12-month average daily volume of 37,724 k.

· Top contributors counters towards the turnover for the day were, Hatton National Bank LKR116.0 mn (USD914.8 k, 2.8%), East West Properties  LKR92.8 mn (USD731.5 k, 7.2%), Commercial Bank LKR64.6 mn (USD509.0 k, -), Asian Hotels & properties LKR38.5 mn (USD303.8 k, 1.5%) and PC House LKR31.3 mn (USD246.8 k, 3.3%).

· The Colombo Bourse continued to trend upwards amidst lower turnovers and volumes being recorded over the course of the day. This was despite the hike in the yields of treasury securities and political risk over the verdict of the United Nations Human Rights Council (UNHCR) which took place today. Hatton National Bank was the top contributor towards the day’s turnover accounting for approx. 17% of the day’s turnover.

This was on the back of a crossing which took place on the counter where 500 k shares change hands at a price of LKR 165. Retail interest was witnessed in counters such as Central Investments & Finance, Janashakthi Insurance and Seylan Merchant Bank, East West Properties witnessed a significant crossing over the course of the day where 6 mn shares change hands at a price of LKR 15, which triggered interest in the stock resulting in a 7.2% price appreciation ending the day at LKR 13.40. In addition crossings were also witnessed on the following counters; PC House benefitted from a crossing of approx. 9.85 mn shares at a price of LKR 3.10 and Central Finance witnessed a crossing of approx. 121.4 k shares at a price of LKR 180.

· Foreign purchases amounted to LKR219.4 mn (USD1,729.8 k), whilst foreign sales amounted to LKR119.7 mn (USD944.0 k). This resulted in a net foreign inflow of LKR 99.7 mn being recorded at the end of the day’s trading.

· Market capitalization stood at LKR 2,215.8 bn. YTD performance is 2.1%.

Source: Asia Wealth Management research

Wednesday, 20 March 2013

Quote for the day

“Commitment, perseverance, and discipline are the characteristics that move people beyond desire to action, that differentiate mediocrity from greatness, and that separate greatness from super stardom.” - Doug Hirschhorn,

LSL Market Review 20th Mar 2013

Investors continued to favor Financial Services counters, including leading banks and small cap insurer, Janashakthi and Blue-chip John Keells Holdings in today’s trading session and respective sectors represented 86% of the total market turnover and 57% of the aggregate trading volume. Janashakthi Insurance turned out to be the heavily traded stock amid the most awaited dividend announcement of LKR 1.00 per share with 8% dividend yield and 45% dividend payout. John Keells Holdings and Seylan Bank non-voting were the next best traded stocks and reached 52 week high of LKR 249.70 and LKR 37.50 during the day while recording several off-the floor deals at LKR 250.00 and LKR 36.30 per share respectively.

All Share Index gained 11.96 index points (+0.21%) to close at 5,734.82 and S&P SL 20 Index advanced by 15.77 points (+0.48%) to close at 3,299.56. Market turnover was LKR 539.7mn.
Top contributors to the turnover were John Keells Holdings (LKR 211.9mn), Seylan Bank non-voting (LKR 81.4mn) and National Development Bank (LKR 23.1mn).
Among the top gainers were Kotagala Plantations – rights (up by LKR 2.00, +40%), SMB Leasing (up by LKR 0.10, +33%). On the other hand, Asiri Surgical Hospitals traded excluding dividend today and lost LKR 1.60 (+14%) to close at LKR 9.80.
Foreigners were net buyers (LKR 210mn) for the tenth consecutive day and contributed 24% of the market activity. Cash map for the day was 59.5%.

Tuesday, 19 March 2013

Quote for the day

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading." - Victor Sperandeo

LSL Market Review – 19th Mar 2013

A late rally in blue-chips saw indices driven higher. Nestle reached an all-time high price of Rs. 1,800.00 whilst John Keells Holdings is trading at a higher adjusted price than its pre-split all-time high price. Meanwhile, National Development Bank continued to gain ground today whilst DFCC also gained good ground on thin volumes. John Keells Holdings continued to dominate turnover followed by banking counters.

ASI gained 14.85 points (0.26%) to close at 5,722.86 and the S&P SL20 index gained 13.58 points (0.42%) to close at 3,283.79. Turnover was Rs. 933.7Mn.

Top contributors to turnover were John Keells Holdings with Rs. 444.2Mn, PCH Holdings with Rs. 94.5Mn and Commercial Bank with Rs. 81.0Mn. Most active counters for the day were Nations Trust Bank, Commercial Bank and Hatton National Bank non-voting.

Amongst the top gainers Kotagala Plantations – Rights, Durdans Hospitals non-voting and Nestle Lanka reached 52 week high price levels. Asiri Surgical Hospitals traded heavily and reached 52 Week High as the counter’s XD date falls tomorrow.

Cash map for today was 56.67%. Foreign participation was 37.01% of total market turnover whilst net foreign buying was Rs. 221.8Mn.

Monday, 18 March 2013

Quote for the day

"Behind every adversity is an opportunity. If you lament over the adversity, you will miss the opportunity." – Ajaero Tony Martins

LSL Market Review 18th Mar 2013

Indices gained helped by Hatton National Bank, Commercial Bank, Carson Cumberbatch and Bukit Darah. Ceylon Tobacco Company saw its shares sliding today whilst John Keells Holdings and National Development Bank saw their share prices reaching 52-week highs. Turnover was a paltry site as institutions were having an off-day.

ASI gained 3.48 points (0.06%) to close at 5,708.01 and the S&P SL20 index gained 7.77 points (0.24%) to close at 3,270.21. Turnover was Rs. 309.4Mn.

Top contributors to turnover were John Keells Holdings with Rs. 63.8Mn, Hatton National Bank with Rs. 49.7Mn and Hemas Holdings with Rs. 18.5Mn. Most active counters for the day were Panasian Power, Commercial Bank and Hatton National Bank non-voting.

Notable gainers for the day were Ascot Holdings up by 22.3% to close at Rs. 168.70, Panasian Power up by 7.7% to close at Rs. 2.80 and Amana Takaful up by 6.7% to close at Rs. 1.60. Notable losers for the day were Central Investments & Finance down by 3.6% to close at Rs. 2.70, PC house down by 3.2% to close at Rs. 3.00 and DFCC down by 2.3% to close at Rs. 120.10.

Cash map for today was 46.11%. Foreign participation was 26.96% of total market turnover whilst net foreign selling was Rs. 5.92Mn.

Sunday, 17 March 2013

Quote for the day

"I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I'm not comfortable doing that. Also, markets trend only about 15% of the time; the rest of the time they move sideways." - Paul Tudor Jones

Friday, 15 March 2013

Quote for the day

"For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up." - Warren Buffett

LSL Weekly Market Review 15th Mar 2013

Market opened on a positive note on Monday but the main index dropped after mid-day on retail selling. It’s assumed as a result of retail investors taking a cue from recent upward pressure on interest rates. News of Cargills/CT Holdings securing IFC backing for their bank failed to show a marked gain on their prices. ASI dropped 14.08 points (0.25%) and the S&P SL20 index gained 6.45 points (0.20%). Turnover was Rs. 557.0Mn.

On Tuesday, indices gained on the back of improved buying activity on blue-chips such as John Keells Holdings, Commercial Bank and Ceylon Tobacco Company. National Development Bank rose by around Rs. 3.00 on relatively thin volumes as investors expect a lump sum final dividend. Foreign buying on blue-chips has driven the market from last year’s low levels and we expect this trend to continue in the mid-term. ASI gained 27.01 points (0.48%) and the S&P SL20 index gained 17.90 points (0.55%). Turnover was Rs. 671.6Mn.

Retail selling prevailed on Wednesday although few blue-chips sought by foreigners gained marginally. John Keells Holdings and National Development Bank reached their 52-week highs of Rs. 239.00 and Rs. 157.00. Ceylon Tobacco Company saw another lackluster day with buying interest slowing. Yields on all treasuries rose by 5 basis points each which further illustrate the negative footing of retailers.  ASI lost 18.50 points (0.32%) and the S&P SL20 index lost 11.85 points (0.36%). Turnover was Rs. 447.0Mn.

A late surge in blue-chips helped to recover from mid-day losses on Thursday. John Keells Holdings and National Development Bank continued to improve their 52-week highs to Rs. 239.00 and Rs. 158.50 respectively. Few blue-chips are trading beyond their intrinsic values therefore we advise investors not to get into the herd instinct but stick to value investing. ASI gained 3.16 points (0.06%) and the S&P SL20 index gained 5.79 points (0.18%). Turnover was Rs. 609.2Mn.

Indices closed higher on Friday driven by gains on foreign-favourite blue-chips such as John Keells Holdings, Ceylon Tobacco Company and Commercial Bank. Meanwhile National Development Bank continued to rise on speculation of a large final dividend. However, retail counters seem to be losing interest amongst investors who seem to be looking for steady returns with blue-chips. ASI gained 15.55 points (0.27%) to close at 5,704.53 and the S&P SL20 index gained 21.41 points (0.66%) to close at 3,262.44. Turnover was Rs. 729.9Mn.

Top contributors to turnover were John Keells Holdings with Rs. 269.3Mn, Bukit Darah with Rs. 97.5Mn and National Development bank with Rs.  87.0Mn. Most active counters for the day were PC House which announced a 1:2 rights issue at Rs. 3.00, National Development Bank and John Keells Holdings.

Notable gainers for the day were Citrus Leisure warrant-19 up by 8.3% to close at Rs. 2.60, Ceylon tea Brokers up by 4.1% to close at Rs. 5.10 and Kelani Tyres up by 3.0% to close at Rs. 33.90. Notable losers for the day were PC House down by 12.6% to close at Rs. 3.20, Panasian Power down by 3.7% to close at Rs. 2.60 and Nawaloka down by 3.3% to close at Rs. 2.90.

Cash map for today was 57.53%. Foreign participation was 25.74% of total market turnover whilst net foreign buying was Rs. 335.5Mn.

Dennis Gartman's Trading Rules

1. Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we, trade.

11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!


Thursday, 14 March 2013

Quote for the day

"Good traders get out of a position when they realize they have made a mistake. Great traders are capable of taking the opposite position when they realize their original concept was dead wrong." - Jamie Mai

LSL Market Review – 14th March 2013

A late surge in blue-chips helped to recover from mid-day losses. John Keells Holdings and National Development Bank continued to improve their 52-week highs to Rs. 239.00 and Rs. 158.50 respectively. Few blue-chips are trading beyond their intrinsic values therefore we advise investors not to get into the herd instinct but stick to value investing.

ASI gained 3.16 points (0.06%) to close at 5,688.98 and the S&P SL20 index gained 5.79 points (0.18%) to close at 3,241.03. Turnover was Rs. 609.2Mn.

Top contributors to turnover were John Keells Holdings with Rs. 169.0Mn, Sampath Bank with Rs. 106.2Mn and Odel with Rs. 46.1Mn. Most active counters for the day were PC House, Central Investments & Finance and Free Lanka Capital Holdings.

Notable gainers for the day were Talawakelle plantations up 10.0% to close at Rs. 26.50, Blue Diamonds non-voting up by 6.7% to close at Rs. 1.60 and LOLC up by 5.5% to close at Rs. 58.00. Notable losers for the day were Environmental Resource Investments down by 13.3% to close at Rs. 1.30, Vallibel Power down by 7.1% to close at Rs. 5.20 and Central Investments & Finance down by 6.7% to close at Rs. 2.80.

Cash map for today was 55.55%. Foreign participation was 39.0% of total market turnover whilst net foreign buying was Rs. 261.2Mn.

Company Valuation Toolkit

Basic toolkit of valuation measures. So let's start with the familiar:

P/E Ratio
The price earnings ratio (P/E) is the price of a share divided by its earnings per share (EPS). It is usually described as how many years of earnings are required to pay back the cost of buying a share, assuming no growth.

Another way of looking at the P/E ratio is that it is the reciprocal of earnings yield, which is EPS divided by the share price. If a company has a P/E of 8, its earnings yield is 12.5% (100/8). If it pays out 40% of its earnings each year in dividends, then its dividend yield will be 5.0% (40% x 12.5).

The P/E ratio is a ubiquitous measure of the rating of a share, and the simplest way of comparing two companies. But it is vital to ensure that you are comparing like with like:
• P/Es can be historic (based on latest reported earnings), prospective (based on forecast earnings) or trailing twelve month. If a company has reported interim results then its trailing twelve month P/E will be based on the earnings figure in the latest interims plus the last half of the previous year;
• If companies do not have coterminous year ends (e.g. if one has a year end on 30 June and another 31 December) then you need to compare the historic P/E of one with the trailing twelve month P/E of the other;
• Reported EPS figures can be basic, diluted and adjusted, so there are as many variants of the P/E ratio; 

• It can be safer to calculate the P/E yourself, on a per share basis or on a "whole company" basis as market capitalisation divided by earnings, which gives the same result.

P/E Relative
The P/E relative is simply a company's P/E divided by the market, or sector, average P/E.

So if a company has a P/E of 10 and the sector has an average P/E of 8 then its P/E relative is 125% (10/8), meaning it is rated at a premium of 25%.

Dividend Yield
This is dividend per share divided by the share price. Dividend yield can also be historic, prospective or trailing twelve month, and similar cautions about comparing like with like apply.

Dividend yield is intrinsically linked to earnings yield, and hence P/E ratio, through the payout ratio, the proportion of earnings paid as dividends rather than reinvested in the company.

A company can set the level of its dividend by varying the payout ratio. So dividend yield should always be considered in the context of the dividend cover, or EPS divided by its dividend per share. This shows how comfortably a company can afford to pay its dividend. Dividend cover is the reciprocal of the payout ratio.

PEG Ratio
The PEG ratio is calculated as the P/E ratio divided by the forecast growth in earnings.

It attempts to measure how much investors are paying for the anticipated future growth, and is associated with the "growth at a reasonable price" investment style.

Sometimes it can be helpful to look at some other valuation metrics as well:

Price/Sales Ratio
This is calculated by dividing the share price by revenues per share, or dividing market cap by total revenues.

It can be very illuminating in comparing companies who are direct competitors, and is useful:
• In comparing companies with very different gearing, which distorts P/E ratios; and

• If there are no earning figures, e.g. the company has made losses or is a start-up.

Price/Book Value & Price/Tangible Assets
Price to book is calculated as share price divided by net assets per share (or market cap divided by net assets). It is especially useful in specific sectors such as valuing banks, and gives an indication of how much substance underlies a company's market valuation.

Using only tangible assets is a harsher test of how much the valuation is backed by physical assets and is a useful "make sense" check as well as being associated with certain styles of investing.

Some analysts prefer to compare ratios based on a company's enterprise value (EV), which is its market capitalisation plus its outstanding debt (or long-term debt).

EBITDA is earnings before interest, tax, depreciation and amortisation, and is operating profit (EBIT) with depreciation and amortisation added back.

This ratio is more robust in comparing companies which have very different capital structures and/or depreciation and amortisation policies.

NOPAT is net operating profit after tax. It equals earnings before interest payments are deducted, and so the ratio is analogous to the P/E ratio applied to debt holders and shareholders taken together.

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