Wednesday, 31 May 2017

Colombo Stock Exchange Trade Summary 31-May-2017

Quote for the day

"Success is more permanent when you achieve it without destroying your principles." - Walter Cronkite

Tuesday, 30 May 2017

Colombo Stock Exchange Trade Summary 30-May-2017

Quote for the day

"The strong do what they have to do and the weak accept what they have to accept." - Thucydides

Monday, 29 May 2017

Colombo Stock Exchange Trade Summary 29-May-2017

Quote for the day

"We all have dreams. But in order to make dreams come into reality, it takes an awful lot of determination, dedication, self-discipline, and effort." - Jesse Owens

Sunday, 28 May 2017

12 Dumb Things New Traders Do

There are some common mistakes that the majority of traders make as they dive into trading before they have really studied what does and does not work. All new traders will find many of these things familiar. Some of us had to fight our natural impulses hard to overcome these bad habits.

A Dozen Dumb Things that New Traders Do

1. Being a stubborn bear in a bull market. Continuing to sell short inside a strong uptrend not only causes the loss of money as a market makes higher highs but you miss out on the easy profits made buy simply holding positions or buying the dips.

2. Being a stubborn bull in a bear market. Some markets are under distribution and keep making lower lows. If a market is not in an established uptrend or trading range then it can go lower if support does not hold. A stop loss gets you out of a downtrend.

3. Risking your entire trading account on one trade. You should never risk your whole trading account and trading career on one trade. Safety comes in trading a small size so every trade is just one of the next one hundred trades not your whole future on the line. 

4. This is a poor choice financially and emotionally. It is also a sign of arrogance believing you can predict a non-existent future.

5. Trading an account that is so small that you can’t even overcome commission costs. If you begin trading with an under capitalized account the odds of success are tiny. You have to have enough capital to manage risk with different positions and commission costs should be such a small percent of your trading capital that they do not even matter.

6. Trading your opinions instead of the chart action. The market does not care about your opinion. The successful traders that I have studied used proven systematic processes to trade not subjective opinions.

7. Think that some trading guru has a crystal ball and follow with complete faith in their market calls. No one knows what the market will do next. You need to be following actual price trends to make profits not rely on predictions from prophets.

8. Keep doing the same type of bad losing trades over and over and expecting profitable results. All trades must be made inside a quantified system that has been historical back tested for profitability.

9. Trading randomly instead of systematically. A trade made outside a defined system is just random in nature. All trades should occur with signals that can be repeated.
Trading with no edge. If you do not know what your edge is that will make you profitable you should not be trading.

10. Think that trading is easy money. Trading is the hardest easy money you will ever make. The hard work happens before the actual trading.

11. Let their emotions move strongly based on a single trade. You have to trade like a professional business person not an emotional gambler.

12. Judge their ability to be a successful trader in just one market environment. You must have a strategy to lock in bull market profits and trading signals for all types of market environments.

Quote for the day

"Unintelligent people always look for a scapegoat." - Ernest Bevin

Saturday, 27 May 2017

Quote for the day

"Always assume your opponent to be smarter than you." - Walther Rathenau

Friday, 26 May 2017

Colombo Stock Exchange Trade Summary 26-May-2017

Quote for the day

"Being happy doesn't mean that everything is perfect. It means that you've decided to look beyond the imperfections." - Gerard Way

Thursday, 25 May 2017

Colombo Stock Exchange Trade Summary 25-May-2017

Quote for the day

"We usually learn to wait only when we have no longer anything to wait for." - Marie von Ebner-Eschenbach

Wednesday, 24 May 2017

Colombo Stock Exchange Trade Summary 24-May-2017

Quote for the day

"Failure is instructive. The person who really thinks learns quite as much from his failures as from his successes." - John Dewey

Tuesday, 23 May 2017

Colombo Stock Exchange Trade Summary 23-May-2017

Quote for the day

"Blessed is he who has learned to admire but not envy, to follow but not imitate, to praise but not flatter, and to lead but not manipulate." - William Arthur Ward

Monday, 22 May 2017

Colombo Stock Exchange Trade Summary 22-May-2017

Quote for the day

"Too many people are thinking of security instead of opportunity. They seem to be more afraid of life than death." - James F. Byrnes

Sunday, 21 May 2017

Biggest Failures That Can Teach Us Important Lessons

Failure is the mother of success. This may sound cliched, but when you look at the real examples below, you’ll be convinced…

Quote for the day

"Wisdom is the quality that keeps you from getting into situations where you need it." - Doug Larson

Saturday, 20 May 2017

7 Steps To Become More Disciplined In Your Trading

In this short article, I would reveal a few steps (7 to be precise), which aim to make you become a more disciplined trader. It is hard to teach discipline and it is learnt best on your own by making numerous mistakes and not repeating them. Despite that reason, I would try to give seven steps in order to become a more disciplined trader.

Step 1– Have a trading plan in place. Backtest your trading plan. The basic idea behind backtesting is developing confidence and strong understanding of the trading strategy that you are trading. One you are convinced in your trading, whether it is resembling my style of trading or another one, you would be able to step on.

Step 2– You should assume total responsibility for everything that is going to happen to you. You should be really looking it from all angles. Try to imagine extreme scenarios, as well. Like, if someone runs off with your money or a broker rips you off, assume that you were somehow involved in creating that situation. Although that sounds a bit too strong, you would be better prepared for negative things that might happen to you. When you do that and correct your role in what happens, you would have a better chance to stay in the game. Even more- if you stop committing the same mistakes over and over again, you have a great chance to be successful.

Step 3– Find your weaknesses and work on them. Once you find them- eliminate them. If it helps you, develop a diary and write all of your daily trades. Figure out what is going wrong and how you can improve by not repeating the same mistakes again.

Step 4– This step again reiterates all of the things that might go wrong. Determine in advance how you would respond to that situation. In this way, you would be prepared for the unexpected. It is not coincidental I am putting so much emphasis on mistakes- they do happen; things go wrong all of the time and if you don’t have a good plan, it can all tumble down. You don’t want this to happen, so plan, plan, plan!

Step 5– Analyse yourself on a daily basis. You are the most important asset in your trading business, so logically, you should spend most time trying to analyse your actions. Parts of the analysis should include analysing your feelings; also, major things that are going on in your life outside trading. The more you are aware of those issues (and write about them preferably in your diary), the less control they will have over your life and your trading as a result.

Step 6– Determine what could go wrong in the beginning of every trading day. Make it like your early morning ritual. Try to think in terms of what could go wrong and how you will react to that. Like an athlete, your role is to do an extensive mental rehearsal and try to see all different scenarios. This will greatly improve your performance over time and could even place the line between losing and winning. Do this every morning before you start your trading day.

Step 7– The last step in my opinion should be a recap. After every trading session you should be doing a daily debriefing. Ask yourself the question: Did I follow my rules? If your answer is yes, pat yourself on the back. If you lost money, but you still followed your rules, pat yourself on the back. It is better to lose money on some days following your rules than make money breaking them. The point here is to be consistent and consistency is reached through persistence and great discipline.

So, traders… keep improving and don’t let the bad days change your goal. It is important to know where to stop and always remember that the best opportunities are the ones that you wait most for them.

Triangle of Success

Image result for triangle of success

Quote for the day

"A person often meets his destiny on the road he took to avoid it." - Jean de La Fontaine

Friday, 19 May 2017

Colombo Stock Exchange Trade Summary 19-May-2017

Quote for the day

"The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking." - Albert Einstein

Thursday, 18 May 2017

Colombo Stock Exchange Trade Summary 18-May-2017

Quote for the day

"Nobody will use other people's experience, nor have any of his own till it is too late to use it." - Nathaniel Hawthorne

Wednesday, 17 May 2017

Tuesday, 16 May 2017

Colombo Stock Exchange Trade Summary 16-May-2017

Quote for the day

"To rectify past blunders is impossible, but we might profit by the experience of them." - George Washington

Monday, 15 May 2017

Colombo Stock Exchange Trade Summary 15-May-2017

Quote for the day

"The law of harvest is to reap more than you sow. Sow an act, and you reap a habit. Sow a habit and you reap a character. Sow a character and you reap a destiny." - James Allen

Sunday, 14 May 2017

Think Like a Billionaire: How to Get Rich Even If You Don't Have Much Now

By Jenny Marchal

Have you ever wondered why some people are rich and some poor? You may think it’s the luck of the draw – the family you were born into, the country you live in, the abundance or lack of good jobs. Yes, these can be factors, but the difference between being rich or poor primarily boils down to one thing.

Are you continually poor and struggling to find enough money, looking at rich people and finding it unfair? Or even someone with a good amount of money and wondering why some people struggle to get the money they want when you find it quite easy?

Abundance Mindset vs. Lack Mindset: the Strong Predictor of Your Future Wealth

Instead of blaming conditions and circumstances as to why some people are rich and some people are poor, consider your state of mind – or rather what type of mindset you have.

Our beliefs are very powerful and can steer our lives in the direction of what we firmly think about. If all you’ve experienced is being poor, then you are likely to continue to have a belief that you will remain poor. On the other end of the spectrum, if you’ve always been rich, you’re more likely to have a belief that you will stay being rich.

It’s all about whether you have an abundance mindset or a lack mindset but what are the differences between these two powerful mindsets when it comes to our money situation?

10 Key Differences In Behaviour and Mindset Between Rich and Poor

Here I’ll discuss the key differences between an abundance mindset and a lack mindset and how this affects your success with money.

1. Skepticism vs. Trust

Poor people tend to have a more skeptical view of things. They have a belief that people are out to get their money or rip them off. Do you find you constantly think “I’m not paying that much!” believing that a company is being greedy by pricing something that high? This mindset is coming from a space of lack – lack of money and grudgingly parting with what ‘little’ you have. The focus is primarily on lack.

Rich people are more likely to have a more trusting viewpoint on many subjects. They are more trusting of people, non-skeptical of people’s motives and parting with money. Yes, this is easy if you have more money, but it’s down to the abundance mindset and not focusing on losing something but rather gaining regarding what you’re buying.
2. Problems vs. Solutions

Poor people generally have a negative mindset when it comes to all areas of life – not just money. They look for the problems rather than the solutions and use these to blame for their circumstances e.g. where they live, the government, not enough jobs, or just other people and their actions. Excuses about why they’re not successful i.e. creating problems, not solutions, is a common mindset.

Rich people, even if they grow up with negative circumstances, are more likely to see it as a chance to take responsibility and do something about it. They accept that life throws obstacles in the way but it’s up to them to find a solution and not turn it into a reason not to succeed.

3. ‘They’ vs. ‘We’ Mentality

When working in a job, poor people are more likely to separate themselves from the job or company they work for. Creating a ‘them and us’ perspective means you’re essentially not taking responsibility for your role and your role in the company as a whole. When a complaint arises that a service is taking too long, it’s easy to say “it’s because they don’t employ enough staff” being quick to blame and separate from responsibility.

When you have a ‘we’ mentality in a job role, you are showing investment and commitment. It’s about showing your belief in something or someone which spreads trust and investment from others. Would you rather give a tip to a waiter who apologized on behalf of the restaurant or someone separating themselves from the problem who began pushing the blame onto the middle-management?
4. Assumptions vs. Questions

Making assumptions can be very harmful and keep you in a lacking state of mind. Poor people are more likely to give up because of these assumptions e.g. thinking “I doubt there are going to be any good jobs in this area, so there’s no point in looking” is immediately cutting yourself off from possible opportunities. Lack of questioning and research keeps you in the same poor situations.

On the other hand, the habit of questioning will give you more opportunity to succeed. Thinking ‘what if’ is very common in people who are rich and successful – “what if I ask around about possible jobs?”, “what if I just send an email to the recruiting department in case they have an opening?”. They see possible potential in everything rather than shutting it down with negative assumptions.

5. Money Importance vs. Time Importance

Poor people will believe their life will ultimately be better if they work more hours for more money. But they are trading precious time they’ll never get back for a few extra dollars. Their focus is more on lack of money and having to compensate through extra work rather than focusing on the quality of time they have.

Rich people are more likely to focus on the importance of time over money. They see experiences as important to their quality of life and worry less about earning that extra paycheck. Their jobs are more centred around enjoyment of what they do rather than focusing primarily on the money they’re earning.
6. Criticising vs. Gratitude

Complaining and criticising is a common trait in the mindset of someone who’s poor. This has most likely come from embedded beliefs passed down from generations – seeing the majority of things as wrong rather than right. They are more likely to see things from a negative perspective rather than a positive one.

An attitude of gratitude is a healthy mindset that promotes abundance. Counting your blessings and not taking anything for granted brings more of what you appreciate into your life – including money. This is a common mindset of successful people in all areas of their life.

7. Competition vs. Creation

Poor people are more in competition. This means they see what other people are doing and emulate them. The problem with this is that they never think of a different way of doing something, creating the lack of growth and outside-the-box thinking that brings success.

Successful people see themselves as able to accomplish without comparison or competition with others. They look for different ways of doing and achieving a goal rather than follow what others are doing. This means they are less likely to cut themselves off from getting what they need.

8. Amateur Advice vs. Expert Advice

Seeking advice to help yourself is a good thing, but people who are unsuccessful tend to take free or cheap advice from unqualified peers at face value and rarely question or challenge it. The downfall of this is, they’re completely trusting what could be wrong or unhelpful advice meaning it could lead them down the wrong path.

Rich or successful people are likely to seek out expert advice and aren’t afraid to spend money on getting the best there is if it means gaining more success. Expert advice means a thorough, wider variety of options and is seen as more of an investment rather than an expense if it means being on the road to achieving success.

9. The Cheapest Way vs. The Best Way

Similar to the above point, poor people have a mindset of always trying to find the cheapest deal. Take buying clothes as an example – always heading to the cheap, bargain section and buying a few items may seem like you’re saving money but most of the time you may not even end up wearing the clothes. Making these decisions from a mindset of lack can end up costing you more.

Rich people will invest more and make more conscious decisions about what they’re buying – not necessarily for the cost but the longevity and investment in what they’re buying. They will more likely buy an expensive item of clothing knowing it will get good use than waste money on deals.

10. Distraction vs. Thinking

People who spend a lot of time being distracted by watching TV or other forms of digital entertainment are taking away their time to invest in growth and critical thinking that could lead to becoming more successful. They are less likely to read books or enrol into courses opting to find distraction instead.

The abundance mindset is shaped by little distraction and rather by getting involved in activities that better yourself and help you see different perspectives. Knowledge is power and taking control to understand yourself, your abilities and your capabilities rather than get distracted will give you more opportunity to develop the abundance mindset and gain success.

So, it doesn’t matter where you’re starting regarding the amount of money you have; it’s about your attitude and mindset. A mindset and perspective of lack will only bring you more of the same so why not turn that around? Get into the habit of thinking from a space of abundance and see how it changes, not just your money situation, but your life as a whole.

Quote for the day

"The mistakes we make as investors is when the market's going up, we think it's going to go up forever. When the market goes down, we think it's going to go down forever. Neither of those things actually happen. Doesn't do anything forever. It's by the moment." - John C. Bogle

Saturday, 13 May 2017

Characteristics of Critical Thinkers and How to Be One

By Craig J Todd

Studies show that critical thinking leads to increased creativity, enhanced work performance, and a lowering of negative life experiences.

And these are just some of the benefits of critical thinking.

Aristotle said it well: “It is the mark of an educated mind to be able to entertain a thought without accepting it.”

What Exactly Is Critical Thinking?

Critical thinking covers a wide variety of thought processes.

To help you understand what critical thinking is, take a look at the list below:

  • Analysing.
  • Evaluating.
  • Interpreting.
  • Problem solving.
  • Questioning.

These traits are common forms of critical thinking.

As an example, imagine that you were seeking a new job or career, and had just started to look at advertised vacancies. In order to choose the most suitable vacancies, you would spend time looking at where the jobs were based, what skills and experience were required, and how much the roles were paying.

All the above actions would be classed as critical thinking. You used analysis, evaluation and (most likely) questioning.

As a further example of critical thinking, consider the way that attorneys work. Firstly, they examine the evidence. Then, they use critical thinking in order to create a plan to win their case (or to settle out of court).

What Are the Recognisable Signs of Critical Thinkers?

Now that you understand what critical thinking is about, I’m sure you’re curious to know how to recognise the signs of critical thinkers.

Let’s take a look…

One major giveaway of critical thinkers is the fact that they tend to be highly successful. This success can be academic, personal or professional. But you can be sure, that whenever you see people achieving big results – they’ll definitely be critical thinkers.

Here are some further signs of critical thinkers:

  • They are creative, innovative individuals.
  • They are fascinated by how things work.
  • They get their news and views from a wide variety of sources.
  • They are always asking questions.
  • They have levelheaded conversations with people they disagree with.
Critical thinkers are successful in life because they are able to analyse issues from different perspectives. This allows them to come up with (and decide) on the best solutions.

If you’re failing to reach your goals in life – then you should definitely begin boosting your critical-thinking skills.

Discover 7 Ways to Help You Master Critical Thinking

1. Learn how to question things.

To become adept at critical thinking, you must learn to question things. This includes questioning statements from authority figures, general assumptions, and even your own beliefs. Try asking yourself these questions: “Do I believe everything I was taught at school?” “Are my beliefs really my own? “Does my government lie to me?”
2. Think for yourself.

Stop accepting everything you are told, and begin thinking for yourself. For example, a guitar teacher may have taught you how to play guitar in a certain way, but can you now improve on that way? By thinking for yourself, you’ll unleash your creativity and boost your self-confidence.

3. Evaluate evidence.

Evidence can be a great way to find answers to issues you may be experiencing. However, don’t just take evidence at face value. Instead, evaluate all evidence by asking: “Who gathered it, how was this done, and why?” These probing questions will enable you to quickly identify evidence that is sound – and evidence that you should steer clear of.

4. Become aware of your personal biases.

If you’re honest with yourself, most times you probably think you’re right. While this may be the case, when making decisions, you must put aside any personal biases or beliefs. Critical thinking needs to look at different perspectives and points of view before reaching a conclusion. I know it’s hard to think outside of your personal biases, but for the sake of your success in life – you must try to do so.

5. Consider motive.

Like a great detective, you must become skilled at uncovering motive. For example, think of a time that a company offered you a free product to try. All you needed to do was give some basic personal details to them. Unfortunately, as well as receiving the free product, you rapidly became bombarded with promotional emails, letters and phone calls. In hindsight, you’ll have become aware of the company’s motive. They didn’t care about sending you a freebie – they just wanted to capture and sell on your personal information.

6. Break big issues into small pieces.

Big picture thinking is all the rage nowadays, but it’s not always the best way to reach decisions. If you need to deal with a major problem such as losing your job, then you can become quickly overwhelmed by events. This stress and anxiety could lead to inaction on your part. Just what you don’t need at this vital time. Instead, break down the issue into smaller components. These might include: getting the best payout from your employer, ensuring that all your bills are covered, seeking new work opportunities. Big problems seem much less scary when you break them down into small pieces.

7. Keep it simple.

Are you familiar with a line of reasoning known as Occam’s razor?2 In case you’re not, I’ll summarise it for you now. Occam’s razor can be described as the simplest answer is most often correct. Frequently, we look for complex answers – when the truth may be staring us right in the face. The following scenario will give you a good example of Occam’s razor in action…. A loud bang is heard inside an office that is close to a busy highway. Some staff think it may be a bomb, others suggest that it’s just a truck backfiring. I’ll let you decide which one of these is the most likely cause of the noise.

Use critical thinking every time that you need to make an important decision. People will notice the difference in your actions. And before long, you’ll be achieving more success than you ever thought was possible.

Quote for the day

"Impatience can cause wise people to do foolish things." - Janette Oke

Friday, 12 May 2017

Colombo Stock Exchange Trade Summary 12-May-2017

Quote for the day

"I cannot always control what goes on outside. But I can always control what goes on inside." - Wayne Dyer

Thursday, 11 May 2017

Quote for the day

"Science is organised knowledge. Wisdom is organised life." - Immanuel Kant

Wednesday, 10 May 2017

Quote for the day

"If you want to know the past, look at your present. If you want to know the future, look at your present." - Gautama Buddha

Monday, 8 May 2017

Colombo Stock Exchange Trade Summary 08-May-2017

Quote for the day

"Patience, persistence and perspiration make an unbeatable combination for success." - Napoleon Hill

Sunday, 7 May 2017

These 2 Four-Letter Words Are the True Secret of Success

Whether you like it or not.

By Jeff Haden

Everyone wants to be successful. Of course, your definition of success can and should be different -- because success should mean something different to each of us -- but still: We all want to succeed at whatever we choose to do. (Otherwise, why do it?)

But whenever I write about how success is often based on outworking other people -- both in terms of effort and in terms of hours spent -- I get indignant emails from readers.

"What about work-life balance?" some ask. "Work smarter, not harder," others say.

Yeah, well, no way. You can't have it both ways.

On the one hand, we celebrate people who have worked incredibly hard and achieved incredible success. They're icons.

Take successful entrepreneurs.

Bill Gates evidently never slept, never changed clothes, never did anything but code and maneuver and strategize. In an industry filled with incredibly smart people--where smart was and is commonplace--he rose to the top by also working incredibly hard.

Mark Cuban didn't take a vacation for seven years while he started his first company.

Elon Musk says, "You just have to put in 80- to 100-hour weeks every week. If other people are putting in 40-hour workweeks and you're putting in 100-hour workweeks, then, even if you're doing the same thing, you know that you will achieve in four months what it takes them a year to achieve."

In fact, the common theme of almost every tale of entrepreneurial success is a person who worked countless 18- to 24-hour days. Replace the names and their stories sound almost identical.

Even Tim Ferriss, the lord of the four-hour-workweek manor, stays incredibly busy with all his projects. (Of course, to Tim it doesn't feel like work.)

Or take successful people in other professions. Jeffrey Immelt, the CEO of GE, worked 100-hour weeks for 24 years. In a company filled with incredibly driven people -- where incredible drive is commonplace -- he rose to the top by also working incredibly hard. Tim Cook of Apple still wants to be first in, last out.

Or take sports. Forget practice and conditioning and everything else; Peyton Manning probably spent more time just watching film than the rest of us spend at work. In a sport filled with incredibly talented athletes -- where incredible athletic talent is commonplace --he'll be in the Hall of Fame because he also worked incredibly hard.

Hard work has clearly paid off for all of them. Yet somehow people think hard work won't work for them.

Maybe that's because of the whole "work smarter" thing?

Successful people already work smarter. They don't work mindlessly or inefficiently or ineffectively.

Where success is concerned, working smarter is a given. Extremely successful people work smarter and they work harder.

Their effort is heroic, their payoff is often legendary, and we celebrate them for it.

"Wait," you say. "Luck plays a big part in success. So does timing. So do a lot of other factors."

You're right.

But you can't control luck. You can't always control timing. You can't always control all those other factors.

What can you always control? How hard you work.

Again, everyone defines success differently, as well everyone should. (Before you go virtual-postal and say your personal definition of success has everything to do with balance and personal relationships and nothing to do with mastering the business world, read this. I'm totally with you.)

But if you happen to define success by traditional measures like professional achievement and fortune and fame, hard work is the great equalizer.

You may not be smarter than everyone else. You may not be as talented. You may not have the same great connections, the same great environment, or the same great education.

If you're on the downside of advantage, you may have none of those things.

But you can always rely on your courage, your effort, and your perseverance. You can always substitute effort for skill and experience, secure in the knowledge that, over time, incredible effort will absolutely breed skill and experience.

You can always, always, always work harder than everyone else.

Want to be different? Hard work can be your immediate difference.

Make hard work your favourite words, whether at work or at home or in your marriage or wherever your definition of success takes you.

That way you'll never have to look back and wonder what you might have accomplished if only you had tried harder.

Quote for the day

"You are a success when you have made friends with your past, are focused on the present, and are optimistic about your future." - Zig Ziglar

Saturday, 6 May 2017

Common Money Beliefs

Take the quiz! Answer the following questions and then tally up your score to find out which money persona best describes you! Have a look!

Common Money Beliefs #Infographic

Quote for the day

"The value of experience is not in seeing much, but in seeing wisely." - William Osler

Friday, 5 May 2017

Colombo Stock Exchange Trade Summary 05-May-2017

Quote for the day

"Be ready when opportunity comes...Luck is the time when preparation and opportunity meet." - Roy D. Chapin, Jr.

Thursday, 4 May 2017

Colombo Stock Exchange Trade Summary 04-May-2017

Quote for the day

"You don't have to control your thoughts; you just have to stop letting them control you." - Dan Millman

Wednesday, 3 May 2017

Colombo Stock Exchange Trade Summary 03-May-2017

Quote for the day

"All truly wise thoughts have been thought already thousands of times; but to make them truly ours, we must think them over again honestly, until they take root in our personal experience." - Johann Wolfgang von Goethe

Tuesday, 2 May 2017

Monday, 1 May 2017

Liquidity: The Most Important Fundamental

I’m sure you’ve heard analysts, financial pundits, and other babbling heads yabber on and on about how these markets don’t reflect the “fundamentals”.

They’ve ranted non-stop about how the fundamentals prove that a bear market is around the corner.

They’ve raved about valuations being stretched and how stocks will collapse any day now…

If you’ve been taking investment advice from these doomsdayers, then please accept my condolences for your portfolio loss.

These broken clocks should heed the words of Mark Twain: Denial ain’t just a river in Egypt.

No, denial is not just a river in Egypt, it’s also the perpetual state most market participants live in.

Now I’m not bashing the usefulness of what are commonly thought of as fundamentals. Things like earnings per share, book value, and revenue growth are indeed important.

What I’m saying is that these are only a few pieces of a much larger puzzle.

The dictionary defines the word fundamental as, “a central or primary rule or principle on which something is based.”

If there’s one “central or primary rule” on which all fundamentals are based, it’s liquidity. Liquidity is the Mac-Daddy of fundamental inputs. And not surprisingly, it’s the least known and understood.

Here’s one of the greatest of all time, Stanley Druckenmiller, on the importance of liquidity (emphasis mine):

Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.

So what is liquidity exactly?

In simple terms, liquidity is demand, which is the willingness of consumers to purchase goods and other assets. This demand is driven by the tightening and easing of credit.

What we usually think of as money (the stuff we use to buy things) is comprised of both hard cash + credit. The amount of hard cash in the system is relatively stable. But credit is extremely elastic because it can be created by any two willing parties. It’s this flexibility that makes it the main factor in driving liquidity/demand.

The majority of credit, and therefore money, is created outside the traditional banking sector and government. Most is created between businesses and customers. When businesses purchase wholesale supplies on credit; money is created. When you open a Best Buy credit card to purchase that new flat screen TV; money is created. And when you purchase stocks on margin from your broker; money is created.

The logic is simple. The more liquidity and credit in the system, the more demand, which in turn pushes markets higher.

Which leads us to our next question: What are the largest levers that affect the amount of credit, money, and liquidity in the system?

The answer to that is interest rates. These are set by both central banks and the private market.

The primary rate set by central banks is the largest factor in determining the cost of money. And the cost of money in turn determines liquidity/demand in the system.

When the cost of money is low (low interest rates) more demand is created in two ways: 

[1] it makes sense to exchange lower yielding assets for riskier, higher yielding ones and 

[2] more people are willing to borrow and spend (money is created) because credit is cheaper.

This affects the stock market in two ways: 

[1] share prices rise as investors trade up to riskier assets and 

[2] companies’ total sales increase because of higher consumer demand caused by cheaper credit. 

Liquidity affects both the denominator (earnings) and numerator (price per share) in stock valuations as it drives markets higher.

You may be asking yourself, “well, if the primary rates set by central banks are this important, then will markets stay forever inflated as long as they keep rates low?”

No, they won’t.

Though central bank rates are the largest influence on demand and the cost of money, they are not the only influence.

The private sector assigns its own rates based off the central bank rate, but also includes an additional premium (or spread) that fluctuates according to the credit risks they see in the market.

For instance, even though the Fed Funds rate has remained near zero over the last two years, interest rates on high-yield loans (the primary lending market to the energy sector) ballooned during the recent oil collapse because of increased perceived risks. Money tightened and became more expensive as liquidity became constrained in that sector. This type of liquidity tightening is what causes markets to fall, regardless of whether the primary rate is low or not.

The way liquidity ebbs and flows directly affects market narratives.

The 2008 financial crisis occurred because central banks cranked up liquidity to jumpstart the economy after the 2000 tech bust. All this extra money got dumped into housing. That’s how the bullish real estate narrative was born. Eventually a bubble formed and later popped as liquidity dried up.

And of course the central bank’s response was to ease even more. They’ve now kept the liquidity spigots blasting longer than any other time in history. As long as liquidity conditions stay positive, we can expect the bulls to keep running.

Like Druck said “It’s liquidity that moves markets.” Bull markets, bear markets, everything.

Knowing how to gauge liquidity is the number one thing you can do protect your capital and profit.

To learn more about gauging liquidity, download our investment handbook here.

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"If you really believe in what you're doing, work hard, take nothing personally, and if something blocks your route, find another. Never give up." - Laurie Notaro