"We must accept finite disappointment, but never lose infinite hope." - Martin Luther King, Jr.
Sunday 31 May 2020
Pessimistic Vs Optimistic Investing Attitudes
One major thing that all the investors must learn is that attitude really matters. In fact, in investing it is simply amazing how much difference an attitude can make!
There is a basic and consistent feature among investors that are successful: Positive Attitude!
An investor with a positive (optimistic) attitude is more likely to make money than one with a negative (pessimistic) attitude.
An investor with a pessimistic attitude is more likely to give up hope and abandon a successful system and invest on emotions.
He is more likely to focus on bad investments rather than good ones.
He is more likely to think he is always right, rather than learn from others.
He is more likely to lose money, given the same recommendations than someone who has a positive attitude.
He is more likely to be mad or upset or stressed out at the end of the day and more likely to bring that back the next morning.
On the other hand, the investor with an optimistic attitude realizes that not all choices are winners, that over the long run, with patience and discipline, he will make money.
He sets aside his pride and lets himself learn valuable investing lessons.
He understands that everyone makes mistakes, including himself and realizes that if you learn from a mistake, it can be a good thing.
He is more likely to make money, given the same recommendations than someone who has a negative attitude.
He is more likely to be happy at the end of each day, and more likely to start investing with a positive attitude the next day.
These cycles continue on and on and on ...
That is why most successful people are optimists and most unsuccessful people are pessimists.
Investors must learn the value of this quality and always look on the bright side of life!
Source:http://www.greekshares.com
There is a basic and consistent feature among investors that are successful: Positive Attitude!
An investor with a positive (optimistic) attitude is more likely to make money than one with a negative (pessimistic) attitude.
An investor with a pessimistic attitude is more likely to give up hope and abandon a successful system and invest on emotions.
He is more likely to focus on bad investments rather than good ones.
He is more likely to think he is always right, rather than learn from others.
He is more likely to lose money, given the same recommendations than someone who has a positive attitude.
He is more likely to be mad or upset or stressed out at the end of the day and more likely to bring that back the next morning.
On the other hand, the investor with an optimistic attitude realizes that not all choices are winners, that over the long run, with patience and discipline, he will make money.
He sets aside his pride and lets himself learn valuable investing lessons.
He understands that everyone makes mistakes, including himself and realizes that if you learn from a mistake, it can be a good thing.
He is more likely to make money, given the same recommendations than someone who has a negative attitude.
He is more likely to be happy at the end of each day, and more likely to start investing with a positive attitude the next day.
These cycles continue on and on and on ...
That is why most successful people are optimists and most unsuccessful people are pessimists.
Investors must learn the value of this quality and always look on the bright side of life!
Source:http://www.greekshares.comSaturday 30 May 2020
Quote for the day
"The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way." - Robert Kiyosaki
Friday 29 May 2020
Quote for the day
"Success is achieved by developing our strengths, not by eliminating our weaknesses." - Marilyn vos Savant
5 Traits of a Good Investment Opportunity
By Murray Newlands
Long-term Viability
If you look at a company and do not see yourself owning stock in it for the next ten years, then you should stay away from investing in the company. Most of the money made in business investments comes from owning stock in the company for quite a while and leaving it alone until the dollar value rises and reinvesting your dividends versus rapidly buying and selling your stock in a business.
Market Cap For The Business
Comparing the market cap of the business that you are looking to invest in to similarly priced businesses will help you determine whether or not the stocks are going to be worth what you are paying for them. For example, if a business has a lower profit than another in its class regarding size and product but is charging more for its stock, then the stock is not worth it to buy.
Good Business Stats
You can want to invest in a company for its vision or branding as much as you would like, but if there aren't good profits, price, or management, you are likely throwing your money down a sinkhole. That being said, if your investment opportunity has good profits, price, and management, but you cannot get behind the business as a whole, you should limit your investment until it has had some time to bring you returns; if you do not feel 100% about your investment, there is probably a reason why, and you need to work that out before you throw all of your investment money into it.
Company Is Buying Back Shares
While you may think that this is a sign of a business that is not doing well at first glance, businesses that buy back their shares are doing so in an effort to increase the wealth of their current and longstanding shareholders, which is a more lucrative investment opportunity; a larger share of the pie means a larger share in the profits, without you having to invest more upfront.
Easy To Understand Business Model
When a business is run simply, there is not much to draw the eye, however, it also means that the business is more likely to be stable and have a good growth curve behind it. This is because a simple business model does not require a lot of learning in order to implement, and new stores can be opened easier as a result of it. More stores means more customers and coverage, which means more profits... you get the idea.
Before you invest in a company, look for these five traits to make sure it's a viable opportunity.
There are more and more investment opportunities opening themselves up to potential investors, but not all of them are good investment opportunities; in fact, with the more opportunities that open up, the more likely you are to find an investment opportunity that will bleed you dry before you find one that will line your purse. The following are five things to look for when finding an investment opportunity; if the opportunity has most of these things or all of them, you are looking at one that is likely to add to your wealth instead of taking it from you.
There are more and more investment opportunities opening themselves up to potential investors, but not all of them are good investment opportunities; in fact, with the more opportunities that open up, the more likely you are to find an investment opportunity that will bleed you dry before you find one that will line your purse. The following are five things to look for when finding an investment opportunity; if the opportunity has most of these things or all of them, you are looking at one that is likely to add to your wealth instead of taking it from you.
Long-term Viability
If you look at a company and do not see yourself owning stock in it for the next ten years, then you should stay away from investing in the company. Most of the money made in business investments comes from owning stock in the company for quite a while and leaving it alone until the dollar value rises and reinvesting your dividends versus rapidly buying and selling your stock in a business.
Market Cap For The Business
Comparing the market cap of the business that you are looking to invest in to similarly priced businesses will help you determine whether or not the stocks are going to be worth what you are paying for them. For example, if a business has a lower profit than another in its class regarding size and product but is charging more for its stock, then the stock is not worth it to buy.
Good Business Stats
You can want to invest in a company for its vision or branding as much as you would like, but if there aren't good profits, price, or management, you are likely throwing your money down a sinkhole. That being said, if your investment opportunity has good profits, price, and management, but you cannot get behind the business as a whole, you should limit your investment until it has had some time to bring you returns; if you do not feel 100% about your investment, there is probably a reason why, and you need to work that out before you throw all of your investment money into it.
Company Is Buying Back Shares
While you may think that this is a sign of a business that is not doing well at first glance, businesses that buy back their shares are doing so in an effort to increase the wealth of their current and longstanding shareholders, which is a more lucrative investment opportunity; a larger share of the pie means a larger share in the profits, without you having to invest more upfront.
Easy To Understand Business Model
When a business is run simply, there is not much to draw the eye, however, it also means that the business is more likely to be stable and have a good growth curve behind it. This is because a simple business model does not require a lot of learning in order to implement, and new stores can be opened easier as a result of it. More stores means more customers and coverage, which means more profits... you get the idea.
http://www.inc.com
Thursday 28 May 2020
Ari Kiev – The 10 Cardinal Rules Of Trading
By Oliver
The 10 cardinal rules of trading from Ari Kiev’s book: ‘Trading To Win – The Psychology of Mastering the Markets’
The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behaviour.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
Source: www.tischendorf.com/
The 10 cardinal rules of trading from Ari Kiev’s book: ‘Trading To Win – The Psychology of Mastering the Markets’
The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behaviour.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
Source: www.tischendorf.com/
Quote for the day
"Promise me you'll always remember: You're braver than you believe, and stronger than you seem, and smarter than you think." - A. A. Milne
Wednesday 27 May 2020
Quote for the day
"When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you." - Dr. Seuss
The Sentiment Cycle – An interesting perspective
“The Market is a mechanism for messing as many people about as it can, as often as possible”.
Sounds a bit cynical, but I believe a firm knowledge of the sentiment cycle and an understanding of where we are within the cycle could help us guard against being messed about and give us a clue as to where we're heading (like a ‘roadmap’).
Justin Mamis sums up nicely what the Sentiment Cycle represents “What we have is essentially a graphical representation of the manic depressive moods typically experienced by market participants as a function of time and price in one complete sentiment loop.”
See the chart above, taken from Mamis’ “The Nature of Risk” book.
Before we go any further, let’s take a quick glance at the different phases and the market psychology behind them.
Returning Confidence
By the time confidence is fully restored the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.
Buying the Dip (the big dip)
A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.
Enthusiasm
At this stage all economic data still supports the idea of higher prices. Traders that didn’t get involved in the last dip-buying opportunity now have hard evidence that it worked before. All of the traders that wanted to be long, are long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stock transfers hands, from smart money to stupid money…. Strong to weak.
Disbelief
Traders start to get that gut wrenching feeling that something may be changing but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or Moving Averages.
Overt Warning/Panic
Typically there’d be a catalyst here (i.e. big banks like Lehman brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200 day Moving Average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little/no chance of any recovery.
Discouragement and Aversion
Prices have been rattling off for some time now, as the general public start shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.
Wall of Worry
Certain market sectors will now start to bottom out as everyone that wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left, so despite the bad news flow markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.
Aversion to Denial
Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.
This brings us back to ‘Returning Confidence’.
Edited article from http://www.futurestechs.co.uk
Tuesday 26 May 2020
Quote for the day
"Thoughtless risks are destructive, of course, but perhaps even more wasteful is thoughtless caution which prompts inaction and promotes failure to seize opportunity." - Gary Blair
Monday 25 May 2020
Quote for the day
"The biggest risk is not taking any risk... In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg
Sunday 24 May 2020
Quote for the day
"Forget the mistakes of the past and press on to the greater achievements of the future." - Christian D. Larson
Reasons to Invest in the Stock Market
By Ken Little
Get Started on the Cheap
Investing in stocks is a well-worn path to making money work harder, but you don’t have to fork over thousands of dollars to get your feet wet. You can begin by setting aside the few dollars you would normally spend on a daily latte and investing the monthly total in stocks. It’s a virtually painless way to use your earnings in service of your future.
If you’re a new investor with only a few dollars to spare, putting your money in an index fund is often a good way to begin. Or you can try your hand with dividend reinvestment plans, or DRIPs, which are offered by hundreds of major companies and don't require much money, effort, or experience.
Once you own at least one share or fractional share of stock in a company that offers a DRIP, you can sign up for the DRIP and skip paying broker commissions by buying additional shares directly from the company or its agent. Any dividends earned by your stock are automatically reinvested in more shares or fractional shares, which ideally earn dividends of their own. This means that over a period of years, your stock holdings and earnings have the ability to compound or grow at an accelerating rate without your having to shell out more money or keep tabs on your investment.
Outrun Inflation
Inflation is not your friend when you’re trying to save for a major outlay, like buying a house or financing a comfortable retirement. Consider that the historical inflation rate in the United States hovers at around 3 percent. Then think about how this could eat into the purchasing power of money that's sitting in a certificate of deposit (CD) or savings account. It would have to earn at least 3 percent just to keep up with inflation, and even high-yield savings accounts don't offer much over 2 percent.
You can usually earn a higher rate of interest on CDs than savings accounts—and you might even be able to keep up with or slightly surpass the historical inflation rate. But your money is tied up for the term of the CD, which may range from 30 days to 10 years. And in the event you have to withdraw your money before the term ends, you'll be socked with an early withdrawal penalty, which will further erode your earnings.
Grow Your Wealth
If you decide to invest in stocks to grow your wealth, understand that there’s no guarantee of how your stocks will perform. Still, it’s not necessary to buy stock in the next Amazon or Apple to earn a respectable return: Consider that the stock market has averaged a 10 percent annual return on investments since 1926, as measured by the S&P 500. This is in spite of the stock market's volatility, its tendency to change rapidly, which from time to time culminates in a historic crash characterized by a sudden double-digit decline in value.
Diversify Your Investments
Diversifying your investments by including some stocks, along with your bonds (and other fixed-income securities), CDs, and savings or money market accounts, can help protect you from the inherent volatility of the financial markets. Oftentimes, when the stock market is down, the bond market is up and vice versa. What this boils down to is that you can better control volatility where you're concerned by spreading your money around; in other words, don't put all your money in only one type of investment.
The Market Isn’t Out to Get You
The stock market is clueless where you and your plans are concerned. It doesn’t have any agenda, and it couldn't care less about yours. Despite what you may have gleaned from late-night infomercials or unsolicited emails, there are no magic formulas for investing success. The rich and famous don't have any well-guarded secrets up their sleeves, and there are no secret passwords or handshakes. In truth, there's little standing between you and successful investing, except a little research and a solid understanding of the basics such as how stock prices are set and how to apply the principle of "buy low and sell high."
You Don't Have to Be a Brainiac
A seasoned investor might have an advantage over you as you're getting started, but you don't have to be a math whiz, rich, or another Warren Buffett to invest in the stock market. Compared to investing in a franchise or creating your own business from the ground up, the requirements for investing in the stock market are modest. They include researching the companies you're considering investing in (e.g., reading their annual reports, which you can often find by poking around their websites), regularly setting aside some money to invest, and understanding fifth-grade math, including addition, subtraction, multiplication, division, and working with fractions and decimals.
Take Time to Get Your Footing
There’s no need to rush out right now and invest in the stock market. First, do your homework, be realistic about your goals and expectations, and figure out how to use the information that's available to you to your best advantage.
Get a better handle on the market by play buying and selling for a while as preliminary training to see how you do before you jump into the market. And keep in mind that although the stock market may seem unforgiving at times, investing can also be an interesting and possibly lucrative endeavor.
Source: https://www.thebalance.com/
It's pretty much impossible to predict the moves of the stock market, but amidst the unpredictability, the benefits of investing in stocks remain unchanged. What has changed—or needs to change—is the investing public’s perception of the stock market and its associated risks. In addition to investing some of your available cash in a savings account, consider the reasons why stocks continue to be a viable investment and why you should invest in the stock market whether you're a fledgling or a more-experienced investor.
Get Started on the Cheap
Investing in stocks is a well-worn path to making money work harder, but you don’t have to fork over thousands of dollars to get your feet wet. You can begin by setting aside the few dollars you would normally spend on a daily latte and investing the monthly total in stocks. It’s a virtually painless way to use your earnings in service of your future.
If you’re a new investor with only a few dollars to spare, putting your money in an index fund is often a good way to begin. Or you can try your hand with dividend reinvestment plans, or DRIPs, which are offered by hundreds of major companies and don't require much money, effort, or experience.
Once you own at least one share or fractional share of stock in a company that offers a DRIP, you can sign up for the DRIP and skip paying broker commissions by buying additional shares directly from the company or its agent. Any dividends earned by your stock are automatically reinvested in more shares or fractional shares, which ideally earn dividends of their own. This means that over a period of years, your stock holdings and earnings have the ability to compound or grow at an accelerating rate without your having to shell out more money or keep tabs on your investment.
Outrun Inflation
Inflation is not your friend when you’re trying to save for a major outlay, like buying a house or financing a comfortable retirement. Consider that the historical inflation rate in the United States hovers at around 3 percent. Then think about how this could eat into the purchasing power of money that's sitting in a certificate of deposit (CD) or savings account. It would have to earn at least 3 percent just to keep up with inflation, and even high-yield savings accounts don't offer much over 2 percent.
You can usually earn a higher rate of interest on CDs than savings accounts—and you might even be able to keep up with or slightly surpass the historical inflation rate. But your money is tied up for the term of the CD, which may range from 30 days to 10 years. And in the event you have to withdraw your money before the term ends, you'll be socked with an early withdrawal penalty, which will further erode your earnings.
Grow Your Wealth
If you decide to invest in stocks to grow your wealth, understand that there’s no guarantee of how your stocks will perform. Still, it’s not necessary to buy stock in the next Amazon or Apple to earn a respectable return: Consider that the stock market has averaged a 10 percent annual return on investments since 1926, as measured by the S&P 500. This is in spite of the stock market's volatility, its tendency to change rapidly, which from time to time culminates in a historic crash characterized by a sudden double-digit decline in value.
Diversify Your Investments
Diversifying your investments by including some stocks, along with your bonds (and other fixed-income securities), CDs, and savings or money market accounts, can help protect you from the inherent volatility of the financial markets. Oftentimes, when the stock market is down, the bond market is up and vice versa. What this boils down to is that you can better control volatility where you're concerned by spreading your money around; in other words, don't put all your money in only one type of investment.
The Market Isn’t Out to Get You
The stock market is clueless where you and your plans are concerned. It doesn’t have any agenda, and it couldn't care less about yours. Despite what you may have gleaned from late-night infomercials or unsolicited emails, there are no magic formulas for investing success. The rich and famous don't have any well-guarded secrets up their sleeves, and there are no secret passwords or handshakes. In truth, there's little standing between you and successful investing, except a little research and a solid understanding of the basics such as how stock prices are set and how to apply the principle of "buy low and sell high."
You Don't Have to Be a Brainiac
A seasoned investor might have an advantage over you as you're getting started, but you don't have to be a math whiz, rich, or another Warren Buffett to invest in the stock market. Compared to investing in a franchise or creating your own business from the ground up, the requirements for investing in the stock market are modest. They include researching the companies you're considering investing in (e.g., reading their annual reports, which you can often find by poking around their websites), regularly setting aside some money to invest, and understanding fifth-grade math, including addition, subtraction, multiplication, division, and working with fractions and decimals.
Take Time to Get Your Footing
There’s no need to rush out right now and invest in the stock market. First, do your homework, be realistic about your goals and expectations, and figure out how to use the information that's available to you to your best advantage.
Get a better handle on the market by play buying and selling for a while as preliminary training to see how you do before you jump into the market. And keep in mind that although the stock market may seem unforgiving at times, investing can also be an interesting and possibly lucrative endeavor.
Saturday 23 May 2020
Quote for the day
"Losers make promises they often break. Winners make commitments they always keep." - Denis Waitley
Dickson G. Watts ‘Speculation As A Fine Art’ – A Speculator’s Essential Qualities
The book ‘Speculation As A Fine Art’ by Dickson G. Watts is very short and only 45 pages long. Most of the book consists of quotes contained in the second part entitled ‘Thoughts on Life’. Dickson G. Watts was the president of the New York Cotton Exchange from 1878 to 1880 and that the last 85 years (that’s a while back) have changed a lot of things, but the rules of speculation set forth by Mr. Watts are still very effective in today’s market.
His list of ‘Essential Qualities of the Speculator’ and ‘Laws Absolute” show the timeless value of his insight:
His list of ‘Essential Qualities of the Speculator’ and ‘Laws Absolute” show the timeless value of his insight:
Friday 22 May 2020
How Many People Die Each Day
Every day, we see a varying number of fatalities resulting from the COVID-19 pandemic on our screens. However, experts claim that numbers, especially death tolls can be difficult to apprehend as morality rate from other diseases and accidents are very common at a global level.
In fact, figures from Our World in Data shows that nearly 150,000 people die per day worldwide. Moreover, the report suggested that most deaths (48,742) are a result of cardiovascular disorder. Fatalities from cancer follow on the second number with around 26,000 deaths per day while deaths from respiratory infections, dementia, and digestive problems are also common.
Interestingly, deaths from terrorist attacks and natural disasters accumulated to very few deaths when compared to other causes.
Total Daily Deaths by Country
When calculated on a national level, China and India see more than 25,000 deaths per day due to their large populations. However, Russia sees over 34.7 daily deaths per million people each day and has the highest deaths proportional to its population.
The COVID-19 Deaths
Keeping these numbers in mind, it is hard to calculate the exact number of fatalities from the coronavirus. Nevertheless, it is clear that the daily deaths from COVID-19 have reached rates of 50% or higher than the historical average for periods of time.
And we can expect further destruction with time.
In the Infographic below, let’s take a look at the number of deaths each day from different diseases on a global level.
Source: https://www.visualistan.com/
In fact, figures from Our World in Data shows that nearly 150,000 people die per day worldwide. Moreover, the report suggested that most deaths (48,742) are a result of cardiovascular disorder. Fatalities from cancer follow on the second number with around 26,000 deaths per day while deaths from respiratory infections, dementia, and digestive problems are also common.
Interestingly, deaths from terrorist attacks and natural disasters accumulated to very few deaths when compared to other causes.
Total Daily Deaths by Country
When calculated on a national level, China and India see more than 25,000 deaths per day due to their large populations. However, Russia sees over 34.7 daily deaths per million people each day and has the highest deaths proportional to its population.
The COVID-19 Deaths
Keeping these numbers in mind, it is hard to calculate the exact number of fatalities from the coronavirus. Nevertheless, it is clear that the daily deaths from COVID-19 have reached rates of 50% or higher than the historical average for periods of time.
And we can expect further destruction with time.
In the Infographic below, let’s take a look at the number of deaths each day from different diseases on a global level.
Quote for the day
"The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success." - Brian Tracy
16 Proven Personality Traits of Successful Investors
The financial media is peppered with how much money this hedge fund manager makes and how expensive an art collection that professional investor owns is. While it’s interesting to follow the investor gossip, these public snapshots of generally private investment gurus are really useful for another reason: an up-close and personal window into the personality traits of successful investors.
Dissecting the psychological makeup of master investors isn’t just guesswork — there’s been a ton of research into what behaviours top investors use to make their money.
The Big Five Personality Traits of Successful Investors
In 1970, Lewis Goldberg set out to create a sort of encyclopedia of personality characteristics. Out of over 1000 traits, he was able to create 5 buckets of positive personality traits: emotional stability, extraversion, openness, agreeableness, and conscientiousness. It’s a good framework to use as we look at how these traits impact investing.
First, some quick definitions of these traits:
Emotional Stability: Relaxed and calm
Extraversion: Social, feels comfortable in presence of others
Openness: Open to new ideas, perspectives
Agreeableness: Works well with others, values cooperation
Conscientiousness: Employs sell discipline, follows rules
The Traits of Great Investors
In turn, these “Big 5” traits were recently studied by MarkeyPysch (a firm that studies this kind of stuff) and broken down to examine exactly which personality traits are shared by top investors.
In a paper published last year, the research firm ranked these five traits for how well they performed, the size of losses they caused, and how likely they are to cause investor misbehaviour.
Here’s a list of the top 16 traits of top investors:
1. Open and agreeable to new ideas: Top investors are open to learning new things, objective in their analysis, and collaborate with their teams to find investment candidates.
2. Go with the flow, carefully: Long term investors learn how to let their winners run and cut their mistakes quickly. Investors who are resistant to change typically report suffering larger losses.
3. Not exactly thrill seeking, but not cowards either: Good investors aren’t gamblers at heart. They are brave face of uncertainty and plan a course of action. Top investors don’t shirk from decision-making.
4. Resilient: Top investors embrace life. Their optimism makes them resilient investors — even in the face of setbacks. They roll with the punches, even when the rules of the investing game change in front of them. This lowers risk, too.
5. Social individualists: Best performing investors are OK in social settings but they don’t necessarily seek out yes-men friends. They want to think objectively and go against the crowd.
6. Disciplined, but not to a fault: They follow a plan of action and stay consistent. But ultimately, they’re open to being convinced of a different plan of action, at any time. There’s no silliness or acting on a whim here.
7. What pressure?: When money is on the line, people make bad decisions. Investors who perform well stay cool and calm under this stress. By not procrastinating or acting impulsively, good investors make decisions quickly and avoid bad losses.
9. Avoids crowds: Crowded trades are the ones you find pundits on TV yapping about. By the time, these talking heads learn of the trades, top investors are long gone. They avoid stocks that are everyone’s favourites.
10. Doesn’t chase hot stocks: Good investors don’t typically chase after hot investment ideas — they’re patient and wait for stocks to come to them. Investors who like trend following or blindly subscribe to expert advice report larger losses when it all hits the fan.
11. Self-aware: Investing isn’t about ignoring your emotions. Interestingly, investors who aren’t aware of their own emotions are more susceptible to bigger losses. Good investors sense danger in their guts, process it, and make a decision with their brains. That feedback loop appears important for risk management.
12. Eats humble pie: Many investing legends are massively wealthy, yet they maintain a certain level of humility that’s essential to winning at the investing game. Overconfidence blinds good decision making, kills returns and makes us open to big losses.
13. Keeps fingers off the buying button: Market Pysch’s research shows that extraverts are more likely to buy stocks as they surge upwards as well as buy them on dips.
14. Stays out of the herd: Too many times we get sucked into doing what others are doing; Herding is a bad recipe for investing success. In an effort to blend in and keep social dissonance low, agreeable investors sometimes mistakenly buy high and sell low.
15. Keeps emotions in check: Emotional investors sell quickly when stocks go up. Locking in profits is never a bad thing but it appears to be the culprit for emotional investors’ lower overall performance.
16. Doesn’t seek to confirm, disproves instead: Confirmation bias — our human need to find evidence to support our own ideas — may be at work when emotional investors buy more stock when it drops. Buying more when a stock goes down (dollar cost averaging) lowers our entry point but it ignores why the stock dropped. Good investors re-examine constantly.
This type of study — examining the traits of top investors — is important because so many books and experts sell their “infallible investing systems” (buy this stock and you’ll profit 1000% in 3 days!). Of course, that’s hogwash — but, understanding the psychological makeup of profitable investors, we now have a blueprint of exactly who these investors are and how we can learn from them. That’s good — real good.
Dissecting the psychological makeup of master investors isn’t just guesswork — there’s been a ton of research into what behaviours top investors use to make their money.
The Big Five Personality Traits of Successful Investors
In 1970, Lewis Goldberg set out to create a sort of encyclopedia of personality characteristics. Out of over 1000 traits, he was able to create 5 buckets of positive personality traits: emotional stability, extraversion, openness, agreeableness, and conscientiousness. It’s a good framework to use as we look at how these traits impact investing.
First, some quick definitions of these traits:
Emotional Stability: Relaxed and calm
Extraversion: Social, feels comfortable in presence of others
Openness: Open to new ideas, perspectives
Agreeableness: Works well with others, values cooperation
Conscientiousness: Employs sell discipline, follows rules
The Traits of Great Investors
In turn, these “Big 5” traits were recently studied by MarkeyPysch (a firm that studies this kind of stuff) and broken down to examine exactly which personality traits are shared by top investors.
In a paper published last year, the research firm ranked these five traits for how well they performed, the size of losses they caused, and how likely they are to cause investor misbehaviour.
Here’s a list of the top 16 traits of top investors:
1. Open and agreeable to new ideas: Top investors are open to learning new things, objective in their analysis, and collaborate with their teams to find investment candidates.
2. Go with the flow, carefully: Long term investors learn how to let their winners run and cut their mistakes quickly. Investors who are resistant to change typically report suffering larger losses.
3. Not exactly thrill seeking, but not cowards either: Good investors aren’t gamblers at heart. They are brave face of uncertainty and plan a course of action. Top investors don’t shirk from decision-making.
4. Resilient: Top investors embrace life. Their optimism makes them resilient investors — even in the face of setbacks. They roll with the punches, even when the rules of the investing game change in front of them. This lowers risk, too.
5. Social individualists: Best performing investors are OK in social settings but they don’t necessarily seek out yes-men friends. They want to think objectively and go against the crowd.
6. Disciplined, but not to a fault: They follow a plan of action and stay consistent. But ultimately, they’re open to being convinced of a different plan of action, at any time. There’s no silliness or acting on a whim here.
7. What pressure?: When money is on the line, people make bad decisions. Investors who perform well stay cool and calm under this stress. By not procrastinating or acting impulsively, good investors make decisions quickly and avoid bad losses.
8. Eyes on the exits: Investors should be confident of their ideas but best performers have contingency plans before they make their moves. If something doesn’t work, they exit quickly and move on.
9. Avoids crowds: Crowded trades are the ones you find pundits on TV yapping about. By the time, these talking heads learn of the trades, top investors are long gone. They avoid stocks that are everyone’s favourites.
10. Doesn’t chase hot stocks: Good investors don’t typically chase after hot investment ideas — they’re patient and wait for stocks to come to them. Investors who like trend following or blindly subscribe to expert advice report larger losses when it all hits the fan.
11. Self-aware: Investing isn’t about ignoring your emotions. Interestingly, investors who aren’t aware of their own emotions are more susceptible to bigger losses. Good investors sense danger in their guts, process it, and make a decision with their brains. That feedback loop appears important for risk management.
12. Eats humble pie: Many investing legends are massively wealthy, yet they maintain a certain level of humility that’s essential to winning at the investing game. Overconfidence blinds good decision making, kills returns and makes us open to big losses.
13. Keeps fingers off the buying button: Market Pysch’s research shows that extraverts are more likely to buy stocks as they surge upwards as well as buy them on dips.
14. Stays out of the herd: Too many times we get sucked into doing what others are doing; Herding is a bad recipe for investing success. In an effort to blend in and keep social dissonance low, agreeable investors sometimes mistakenly buy high and sell low.
15. Keeps emotions in check: Emotional investors sell quickly when stocks go up. Locking in profits is never a bad thing but it appears to be the culprit for emotional investors’ lower overall performance.
16. Doesn’t seek to confirm, disproves instead: Confirmation bias — our human need to find evidence to support our own ideas — may be at work when emotional investors buy more stock when it drops. Buying more when a stock goes down (dollar cost averaging) lowers our entry point but it ignores why the stock dropped. Good investors re-examine constantly.
This type of study — examining the traits of top investors — is important because so many books and experts sell their “infallible investing systems” (buy this stock and you’ll profit 1000% in 3 days!). Of course, that’s hogwash — but, understanding the psychological makeup of profitable investors, we now have a blueprint of exactly who these investors are and how we can learn from them. That’s good — real good.
Source: http://library.wallstreetsurvivor.com/
Thursday 21 May 2020
Quote for the day
"Risks must be taken because the greatest hazard in life is to risk nothing." - Leo Buscaglia
The Four Pillars To Trading Success
The four pillars of success:
Know yourself
Traders need to know what type of trading will fit their personality and risk tolerance. Some traders are patient and make excellent trend followers others enjoy the action of day trading. Some want to spend all day in front of the screen others do better to simply trade the open and close. One trader may be able to handle a 20% drawdown in pursuit of out sized returns while others may quit trading at the first 10% drawdown. It is crucial that we know or strengths and weaknesses as traders and do more of what we are good at and less of what we are bad at. We need to find that trading method that we have complete confidence in for robustness and faith in ourselves for following its trading plan.
Know your market
We need to do our homework on the market we are trading. We need to know its historically price patterns and volatility. We need to have understanding of whether it tends to trend or stay range bound. What our markets recent daily trading range is and the long term historical high resistance and support levels along with the recent support and resistance levels on the chart. We need to be a historian of our markets price action.
Know your strategy
Being a master of our specific trading strategy and time frame can be an edge over other traders. It is much more profitable to focus our time, research and energy on one strategy. Successful traders usually are not a ‘Jack of all Trades’ but instead the master of one. It is dangerous to drift from one strategy to another, a day trader holding overnight or a trend follower to start day trading usually leads to losses. It is better to follow our trading plan through all market environments which may involve doing nothing and waiting through some of them.
“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” – Bruce Lee
Know your limits
We have to know how much ‘heat’ in trading we can handle before our stress overtakes our trading plan. Traders have to build up to larger and larger position sizes, sizing up too quickly can lead to uncontrollable fear and greed that clouds good judgement. We can not put ourselves in situations where our ego has to prove we are right to an audience of other traders, family, or friends. There is more to life than trading it is important that traders diversify their lives and not forget why we do this. Health, family, friends, and recreation are just as important to a trader as the work. If we know why we are trading the ‘why’ can generate the passion we need to get to the ‘how’ and keep us going through setbacks.
Know yourself
Traders need to know what type of trading will fit their personality and risk tolerance. Some traders are patient and make excellent trend followers others enjoy the action of day trading. Some want to spend all day in front of the screen others do better to simply trade the open and close. One trader may be able to handle a 20% drawdown in pursuit of out sized returns while others may quit trading at the first 10% drawdown. It is crucial that we know or strengths and weaknesses as traders and do more of what we are good at and less of what we are bad at. We need to find that trading method that we have complete confidence in for robustness and faith in ourselves for following its trading plan.
Know your market
We need to do our homework on the market we are trading. We need to know its historically price patterns and volatility. We need to have understanding of whether it tends to trend or stay range bound. What our markets recent daily trading range is and the long term historical high resistance and support levels along with the recent support and resistance levels on the chart. We need to be a historian of our markets price action.
Know your strategy
Being a master of our specific trading strategy and time frame can be an edge over other traders. It is much more profitable to focus our time, research and energy on one strategy. Successful traders usually are not a ‘Jack of all Trades’ but instead the master of one. It is dangerous to drift from one strategy to another, a day trader holding overnight or a trend follower to start day trading usually leads to losses. It is better to follow our trading plan through all market environments which may involve doing nothing and waiting through some of them.
“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” – Bruce Lee
Know your limits
We have to know how much ‘heat’ in trading we can handle before our stress overtakes our trading plan. Traders have to build up to larger and larger position sizes, sizing up too quickly can lead to uncontrollable fear and greed that clouds good judgement. We can not put ourselves in situations where our ego has to prove we are right to an audience of other traders, family, or friends. There is more to life than trading it is important that traders diversify their lives and not forget why we do this. Health, family, friends, and recreation are just as important to a trader as the work. If we know why we are trading the ‘why’ can generate the passion we need to get to the ‘how’ and keep us going through setbacks.
www.newtraderu.com
Wednesday 20 May 2020
Quote for the day
"Risk management is a more realistic term than safety. It implies that hazards are ever-present, that they must be identified, analyzed, evaluated and controlled or rationally accepted." - Jerome F. Lederer
Linda Bradford Raschke – 50 Time Tested Classic Stock Trading Rules
1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don't take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn't so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don't let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn't do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don't know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray – jump!
49. Lose your opinion – not your money.
50. Assimilate into your very bones a set of trading rules that works for you.
Source: http://www.tischendorf.com
Tuesday 19 May 2020
Quote for the day
"The men who have done big things are those who were not afraid to attempt big things, who were not afraid to risk failure in order to gain success." - B. C. Forbes
15 Fundamentals To Win Stock Market Battle
Gerald Loeb was a founding partner of E.F. Hutton, a renowned and successful Wall Street trader, and the author of the books 'The Battle For Investment Survival' and 'The Battle For Stock Market Profits'.
Mr. Loeb promoted a contrarian view of the market as too risky to hold stocks for the long term in direct contrast to many of his generation.
At the time, many considered Loeb’s comments heresy to the buy and hold doctrine so common among many in the industry. While Loeb never had the opportunity to trade in an environment now ruled by quants, algorithmic trading and massive government intervention, his wisdom and insight is still applicable in today’s environment. After all, the more things change, the more they always stay the same!
Based on his two books, here are 15 fundamentals Loeb argues that you need to understand to win the battle not only against yourself, but also against the market:
01. What everyone else knows is not worth knowing.
02. Stocks are always way overvalued in a bull market and way undervalued in a bear market.
03. The best stocks will always seem overpriced to the majority of investors.
04. Expectation, not the news itself, is what moves the market.
05. Three basis elements should be considered when evaluating a stock – 1) quality (fundamentals, liquidity, management), 2) price, and 3) trend (the most important).
06. Stocks act like human beings and go through the same stages and phases as people do, including infancy, growth, maturity, and decline. The key in trading is to be able to recognize which stage the stock is in and to take advantage of that opportunity.
07. Pyramid your buys – start with an initial position and then add to it only if the trade moves in your favor.
08. The more experienced and successful you become, the less you should diversify.
09. Traders must always resist the urge and temptation to change their strategies for each and every different market cycle.
10. To succeed in trading you must 1) aim high, 2) control the risks, 3) be unafraid to keep uninvested reserves and 4) be patient.
11. Successful traders are intelligent, they understand human psychology, they practice pure objectivity, and they have natural quickness.
12. You must always trade with the actions of the market and not simply by how you might think the market should trade.
13. Knowledge through experience is one trait that separates successful stock market speculators from everyone else.
14. The stock market is more an art than a science and far more complex than most people understand.
15. Always sell when you start patting yourself on the back for being smarter than the market.
In reflecting upon these 15 fundamentals, ask yourself the following question:
Mr. Loeb promoted a contrarian view of the market as too risky to hold stocks for the long term in direct contrast to many of his generation.
At the time, many considered Loeb’s comments heresy to the buy and hold doctrine so common among many in the industry. While Loeb never had the opportunity to trade in an environment now ruled by quants, algorithmic trading and massive government intervention, his wisdom and insight is still applicable in today’s environment. After all, the more things change, the more they always stay the same!
Based on his two books, here are 15 fundamentals Loeb argues that you need to understand to win the battle not only against yourself, but also against the market:
01. What everyone else knows is not worth knowing.
02. Stocks are always way overvalued in a bull market and way undervalued in a bear market.
03. The best stocks will always seem overpriced to the majority of investors.
04. Expectation, not the news itself, is what moves the market.
05. Three basis elements should be considered when evaluating a stock – 1) quality (fundamentals, liquidity, management), 2) price, and 3) trend (the most important).
06. Stocks act like human beings and go through the same stages and phases as people do, including infancy, growth, maturity, and decline. The key in trading is to be able to recognize which stage the stock is in and to take advantage of that opportunity.
07. Pyramid your buys – start with an initial position and then add to it only if the trade moves in your favor.
08. The more experienced and successful you become, the less you should diversify.
09. Traders must always resist the urge and temptation to change their strategies for each and every different market cycle.
10. To succeed in trading you must 1) aim high, 2) control the risks, 3) be unafraid to keep uninvested reserves and 4) be patient.
11. Successful traders are intelligent, they understand human psychology, they practice pure objectivity, and they have natural quickness.
12. You must always trade with the actions of the market and not simply by how you might think the market should trade.
13. Knowledge through experience is one trait that separates successful stock market speculators from everyone else.
14. The stock market is more an art than a science and far more complex than most people understand.
15. Always sell when you start patting yourself on the back for being smarter than the market.
In reflecting upon these 15 fundamentals, ask yourself the following question:
Among all of these fundamentals, which of these do you disagree with and/or do not reflect your personal experience so far?
In doing so, I want you to consider that not only could you be wrong in that view, but that knowledge of the difference may help you to explore a new path to improving your performance.
http://www.anirudhsethireport.com
http://www.anirudhsethireport.com
Monday 18 May 2020
Quote for the day
"People should watch out for three things: avoid a major addiction, don't get so deeply into debt that it controls your life, and don't start a family before you're ready to settle down." - James Taylor
Bollinger Bands - 22 Rules
Bollinger Bands are available on most charting software.
They have become popular primarily because they answer a question every investors needs to know: Are prices high or low?
What are Bollinger Bands?
Bollinger Bands were created by John Bollinger, CFA, CMT and published in 1983. They were developed in an effort to create fully-adaptive trading bands.
Bollinger Bands are curves drawn in and around the price structure on a chart that provide a relative definition of high and low. Prices near the upper band are high prices,while prices nrear the lower band are low.
The base of bands is a moving average that is descriptive of the intermediate-term trend. This average is known as the middle band,and its default length is 20 periods.The width of the bands is determined by a measure of volatility,called standard deviation. the data for the volatility calculation is the same data that was used for the moving average. The upper and lower bands are drawn at a default distance of two standard deviations from the average.
These are the standard Bollinger Band Formulas:
Upper Band = Middle Band + 2 Standard Deviations
Middle Band = 20 - Period Moving Average
Lower Band = Middle Band - 2 Standard Deviations
Learning how to use Bollinger bands effectively cannot be fully explained in this article. However the following rules serve as a good starting point.
1. Bollinger Bands provide a relative definition of high and low. By definition price is high at the upper band and low at the lower band.
2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
4. If more than one indicator is used the indicators should not be directly related to one another. For example, a momentum indicator might complement a volume indicator successfully, but two momentum indicators aren't better than one.
5. Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.
6. Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.
7. In trending markets price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
8. Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)
9. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the width of the bands are just that, defaults. The actual parameters needed for any given market/task may be different.
10. The average deployed as the middle Bollinger Band should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.
11. For consistent price containment: If the average is lengthened the number of standard deviations needs to be increased; from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10 periods.
12. Traditional Bollinger Bands are based upon a simple moving average. This is because a simple average is used in the standard deviation calculation and we wish to be logically consistent.
13. Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large price changes exiting the back of the calculation window. Exponential averages must be used for BOTH the middle band and in the calculation of standard deviation.
14. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The distribution of security prices is non-normal and the typical sample size in most deployments of Bollinger Bands is too small for statistical significance. (In practice we typically find 90%, not 95%, of the data inside Bollinger Bands with the default parameters)
15. %b tells us where we are in relation to the Bollinger Bands. The position within the bands is calculated using an adaptation of the formula for Stochastics
16. %b has many uses; among the more important are identification of divergences, pattern recognition and the coding of trading systems using Bollinger Bands.
17. Indicators can be normalized with %b, eliminating fixed thresholds in the process. To do this plot 50-period or longer Bollinger Bands on an indicator and then calculate %b of the indicator.
18. BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the middle band. Using the default parameters BandWidth is four times the coefficient of variation.
19. BandWidth has many uses. Its most popular use is to identify "The Squeeze", but is also useful in identifying trend changes...
20. Bollinger Bands can be used on most financial time series, including equities, indices, foreign exchange, commodities, futures, options and bonds.
21. Bollinger Bands can be used on bars of any length, 5 minutes, one hour, daily, weekly, etc. The key is that the bars must contain enough activity to give a robust picture of the price-formation mechanism at work.
22. Bollinger Bands do not provide continuous advice; rather they help identify set ups where the odds may be in your favour.
A note from John Bollinger:
One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. These rules covering the use of Bollinger Bands were assembled in response to questions often asked by users and our experience over 25 years of using the bands. While there are many ways to use Bollinger Bands, these rules should serve as a good beginning point.
Source: Edited Articles from
http://www.bollingerbands.com - Where you can learn more about Bollinger Bands.
(If time permit watch the webinar)
They have become popular primarily because they answer a question every investors needs to know: Are prices high or low?
What are Bollinger Bands?
Bollinger Bands were created by John Bollinger, CFA, CMT and published in 1983. They were developed in an effort to create fully-adaptive trading bands.
Bollinger Bands are curves drawn in and around the price structure on a chart that provide a relative definition of high and low. Prices near the upper band are high prices,while prices nrear the lower band are low.
The base of bands is a moving average that is descriptive of the intermediate-term trend. This average is known as the middle band,and its default length is 20 periods.The width of the bands is determined by a measure of volatility,called standard deviation. the data for the volatility calculation is the same data that was used for the moving average. The upper and lower bands are drawn at a default distance of two standard deviations from the average.
These are the standard Bollinger Band Formulas:
Upper Band = Middle Band + 2 Standard Deviations
Middle Band = 20 - Period Moving Average
Lower Band = Middle Band - 2 Standard Deviations
Learning how to use Bollinger bands effectively cannot be fully explained in this article. However the following rules serve as a good starting point.
1. Bollinger Bands provide a relative definition of high and low. By definition price is high at the upper band and low at the lower band.
2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
4. If more than one indicator is used the indicators should not be directly related to one another. For example, a momentum indicator might complement a volume indicator successfully, but two momentum indicators aren't better than one.
5. Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.
6. Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.
7. In trending markets price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
8. Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)
9. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the width of the bands are just that, defaults. The actual parameters needed for any given market/task may be different.
10. The average deployed as the middle Bollinger Band should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.
11. For consistent price containment: If the average is lengthened the number of standard deviations needs to be increased; from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10 periods.
12. Traditional Bollinger Bands are based upon a simple moving average. This is because a simple average is used in the standard deviation calculation and we wish to be logically consistent.
13. Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large price changes exiting the back of the calculation window. Exponential averages must be used for BOTH the middle band and in the calculation of standard deviation.
14. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The distribution of security prices is non-normal and the typical sample size in most deployments of Bollinger Bands is too small for statistical significance. (In practice we typically find 90%, not 95%, of the data inside Bollinger Bands with the default parameters)
15. %b tells us where we are in relation to the Bollinger Bands. The position within the bands is calculated using an adaptation of the formula for Stochastics
16. %b has many uses; among the more important are identification of divergences, pattern recognition and the coding of trading systems using Bollinger Bands.
17. Indicators can be normalized with %b, eliminating fixed thresholds in the process. To do this plot 50-period or longer Bollinger Bands on an indicator and then calculate %b of the indicator.
18. BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the middle band. Using the default parameters BandWidth is four times the coefficient of variation.
19. BandWidth has many uses. Its most popular use is to identify "The Squeeze", but is also useful in identifying trend changes...
20. Bollinger Bands can be used on most financial time series, including equities, indices, foreign exchange, commodities, futures, options and bonds.
21. Bollinger Bands can be used on bars of any length, 5 minutes, one hour, daily, weekly, etc. The key is that the bars must contain enough activity to give a robust picture of the price-formation mechanism at work.
22. Bollinger Bands do not provide continuous advice; rather they help identify set ups where the odds may be in your favour.
A note from John Bollinger:
One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. These rules covering the use of Bollinger Bands were assembled in response to questions often asked by users and our experience over 25 years of using the bands. While there are many ways to use Bollinger Bands, these rules should serve as a good beginning point.
Source: Edited Articles from
http://www.bollingerbands.com - Where you can learn more about Bollinger Bands.
(If time permit watch the webinar)
Sunday 17 May 2020
Quote for the day
"Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved." - Helen Keller
Ten Types of Trading Animals:Which Are You?
The Bear - This trading animal believes the market will be going down and plays the short side. Bears think that a market is going to be very red.
The Bull - This trading animal is very optimistic that the market will be green. Bulls love to buy and believe their screen will be full of green.
The Whale - This trading animal can move prices when it buys and sells. The whale has to faze into positions and out of them so it does not make big enough waves to attract piggy backers. A lot of money can be made trading along side the right whale.
The Pig - This trading animal likes to trade big and often. The problem is that the pig does not know how to exit a winning trade he usually has too big of a target, too big of a position size, and too big of a time frame.
The Shark - This trading animal is just about making money, it gets into trades, makes money and gets out. It has little interest in big complicated theories or esoteric methods. The shark keeps it simple it makes money then moves on to the next opportunity.
The Chicken - This trading animal has trouble trading with much size, or even taking good entries, the chicken is too worried about losing money. Fear keeps the chicken from trading.
The Rabbit - This trading animal trades on a time frame of minutes. The rabbit is just trying to scalp profits during the day. The rabbit wants no overnight risk just the opportunity to make some quick profits during the day.
The Sheep - This trading animal usually is part of a flock. The sheep likes to be on the side of the majority and follow a guru. The sheep hates to think but loves to follow. The sheep is usually the last one into an uptrend and the last one out of a downtrend. They do not want to develop a trading method of their own they want to piggyback someone elses.
The Wolf - The wolf loves to trade on the opposite side of the sheep. This animal loves to trade at the market turning points. Selling short an overextended market or buying when there is “blood on the streets.” The wolf loves to sell out-of-the-money options with terrible odds to gamblers. The wolf is always trying to get on the opposite side of the suckers, the gamblers, and the sheep.
The Turtle - The turtle is slow to buy, slow to sell, and trades on the long term time frame. This trading animal looks to be on the right side of the big trend and try to trade the least amount possible to make as much as possible. Turtles don't really care about the live action and are more concerned about the end of day result and the weekly chart primarily.
http://newtraderu.com/
The Bull - This trading animal is very optimistic that the market will be green. Bulls love to buy and believe their screen will be full of green.
The Whale - This trading animal can move prices when it buys and sells. The whale has to faze into positions and out of them so it does not make big enough waves to attract piggy backers. A lot of money can be made trading along side the right whale.
The Pig - This trading animal likes to trade big and often. The problem is that the pig does not know how to exit a winning trade he usually has too big of a target, too big of a position size, and too big of a time frame.
The Shark - This trading animal is just about making money, it gets into trades, makes money and gets out. It has little interest in big complicated theories or esoteric methods. The shark keeps it simple it makes money then moves on to the next opportunity.
The Chicken - This trading animal has trouble trading with much size, or even taking good entries, the chicken is too worried about losing money. Fear keeps the chicken from trading.
The Rabbit - This trading animal trades on a time frame of minutes. The rabbit is just trying to scalp profits during the day. The rabbit wants no overnight risk just the opportunity to make some quick profits during the day.
The Sheep - This trading animal usually is part of a flock. The sheep likes to be on the side of the majority and follow a guru. The sheep hates to think but loves to follow. The sheep is usually the last one into an uptrend and the last one out of a downtrend. They do not want to develop a trading method of their own they want to piggyback someone elses.
The Wolf - The wolf loves to trade on the opposite side of the sheep. This animal loves to trade at the market turning points. Selling short an overextended market or buying when there is “blood on the streets.” The wolf loves to sell out-of-the-money options with terrible odds to gamblers. The wolf is always trying to get on the opposite side of the suckers, the gamblers, and the sheep.
The Turtle - The turtle is slow to buy, slow to sell, and trades on the long term time frame. This trading animal looks to be on the right side of the big trend and try to trade the least amount possible to make as much as possible. Turtles don't really care about the live action and are more concerned about the end of day result and the weekly chart primarily.
http://newtraderu.com/
Saturday 16 May 2020
Quote for the day
"Every single thing that has ever happened in your life is preparing you for a moment that is yet to come." - John Spence
The 7 Deadly Trading Sins
Here are the seven sins that traders commit that put them in the unprofitable purgatory of the markets.
1. Sloth: The belief that trading is easy money new traders to be lazy and not put in the work at first to develop their own trading system and plan before trading. Work is required to learn how to trade and work in watching markets for your signals is not an option. Lazy trading is bad trading.
2. Lust: The lust for material things causes traders to spend profits instead of compounding their capital. The goal of a trader should first be freedom and financial security not Lamborghinis and mansions.
4. Wrath: Revenge trading is a path to doing more of the wrong thing. Being mad at a market that does not know you exist is illogical and irrational and leads to bad decisions.
5. Greed: The fastest way to go broke in trading is by trying to get rich quick. The desire to get rich quick leads to bad decisions when speed to profits is the number one priority over common sense.
6. Envy: Worrying about what other traders or investors are doing or how much markets you do not trade are trending is a waste of mental effort. Focus on your own system and process to keep your own edge.
7. Gluttony: Trading too big, chasing a trend that is already extended, and over trading are all signs of doing a lot where less is much more healthy for your trading.
“But it is not a game for the stupid, the mentally, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” – Jesse Livermore
Go and sin no more.
1. Sloth: The belief that trading is easy money new traders to be lazy and not put in the work at first to develop their own trading system and plan before trading. Work is required to learn how to trade and work in watching markets for your signals is not an option. Lazy trading is bad trading.
2. Lust: The lust for material things causes traders to spend profits instead of compounding their capital. The goal of a trader should first be freedom and financial security not Lamborghinis and mansions.
3. Pride: The inability to admit you are wrong in a trade can turn a small loss into a big loss.
4. Wrath: Revenge trading is a path to doing more of the wrong thing. Being mad at a market that does not know you exist is illogical and irrational and leads to bad decisions.
5. Greed: The fastest way to go broke in trading is by trying to get rich quick. The desire to get rich quick leads to bad decisions when speed to profits is the number one priority over common sense.
6. Envy: Worrying about what other traders or investors are doing or how much markets you do not trade are trending is a waste of mental effort. Focus on your own system and process to keep your own edge.
7. Gluttony: Trading too big, chasing a trend that is already extended, and over trading are all signs of doing a lot where less is much more healthy for your trading.
“But it is not a game for the stupid, the mentally, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” – Jesse Livermore
Go and sin no more.
Source: www.newtraderu.com
Friday 15 May 2020
30 Trading Rules From Tyler Bollhorn Of Stockscores
1. Buying a weak stock is like betting on a slow horse. It is retarded.
2. Stocks are only cheap if they are going higher after you buy them.
3. Never trust a person more than the market. People lie, the market does not.
4. Controlling losers is a must; let your winners run out of control.
5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7. Emotional traders want to give the disciplined their money.
8. Trends have counter trends to shake the weak hands out of the market.
9. The market is usually efficient and can not be beat. Exploit inefficiencies.
10. To beat the market, you must have an edge.
11. Being wrong is a necessary part of trading profitably. Admit when you are wrong.
12. If you do what everyone is doing you will be average, so goes the definition.
13. Information is only valuable if no one knows about it.
14. Lower your risk till you sleep like a baby.
15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
16. Trades that make a lot of intellectual sense are likely to be losers.
17. You do not have to be right more than you are wrong to make money in the market.
18. Don’t worry about the trades that you miss, there will always be another.
19. Fear is more powerful than greed and so down trends are sharper than up trends. 20. Analyze the people, not the stock.
21. Trading is a dictators game; you can not trade by committee.
22. The best traders are the ones who do not care about the money.
23. Do not think you are smarter than the market, you are not.
24. For most traders, profits are short term loans from the market.
25. The stock market can not be predicted, we can only play the probabilities.
26. The farther price is from a linear trend, the more likely it is to correct.
27. Learn from your losses, you paid for them.
28. The market is cruel, it gives the test first and the lesson afterward.
29. Trading is simple but it is not easy.
30. The easiest time to make money is when there is a trend.
http://www.tischendorf.com
Quote for the day
"Ability is what you're capable of doing. Motivation determines what you do. Attitude determines how well you do it." - Lou Holtz
Thursday 14 May 2020
Quote for the day
"Some changes look negative on the surface but you will soon realize that space is being created in your life for something new to emerge." - Eckhart Tolle
Wednesday 13 May 2020
Winner vs Loser
The Winner is always part of the answer.
The Loser is always part of the problem.
The Winner always has a program.
The Loser always has an excuse.
The Winner says, "Let me do it for you."
The Loser says, "That's not my job."
The Winner sees an answer for every problem.
The Loser sees a problem for every answer.
The Winner sees a green near every sand trap
The Loser sees two or three sand traps near every green.
The Winner says, "It may be difficult but it's possible."
The Loser says, "It might be possible but it's too difficult."
Be a Winner.
By Vince Lombardi
The Loser is always part of the problem.
The Winner always has a program.
The Loser always has an excuse.
The Winner says, "Let me do it for you."
The Loser says, "That's not my job."
The Winner sees an answer for every problem.
The Loser sees a problem for every answer.
The Winner sees a green near every sand trap
The Loser sees two or three sand traps near every green.
The Winner says, "It may be difficult but it's possible."
The Loser says, "It might be possible but it's too difficult."
Be a Winner.
By Vince Lombardi
Quote for the day
"I believe that being successful means having a balance of success stories across the many areas of your life. You can't truly be considered successful in your business life if your home life is in shambles." - Zig Ziglar
Tuesday 12 May 2020
10 Questions to Ask Before Purchasing a Stock - Investment Checklist!
Most Important questions to ask before purchasing a stock: Picking a winning stock that can give consistent returns for many years requires a lot of analysis and research. However, you can simplify the research process if you have an investment checklist.
Having a reliable checklist for picking stocks can reduce the chances of missing an important detail that you should have studied before investing in the stock. As Charlie Munger, Vice-Chairman of Berkshire Hathaway has famously quoted:
1. What does the company do?
What are the products/services that the company offers? Do you understand the company’s business model? How does the company actually make money? What are the top/best-selling products of the company?
2. Who runs the company?
Who are the promoters/owners of the company? It the company a family-owned or professionally managed one? Who is managing the company? What are the credentials/background of CEO, MD, Board of directors and the management team? What is the shareholding pattern of the company?
3. Is the company profitable?
How much profits did the company generated in the last few years? How are the company’s gross, operating and net profit and what is the profit margin at each level? Is the profit of the company growing over time or stagnant/declining?
4. Does the company have a sustainable competitive advantage?
Does the company have a moat like intangible assets, customer switching cost, network effect, cost advantages or any other sustainable competitive advantage that can keep the competitors away from eating their profits?
5. How was the past performance of the company?
How is the company’s financials in the past few years? What’s the trend in the company’s income statement and cash flow statement? How are the sales, EBITDA, Cash from operating activities, free cash flow and other financial metrics over the past few years?
6. How strong is the company’s balance sheet?
Are the assets of the company growing over time? How much is the liability of the company? Is the company’s shareholder equity increasing? How much cash does the company have on the asset side? How much is the company’s Intangible assets, Inventories, Receivables, Payables and more? Does the company invest in its Research & Development, especially in a few sectors like Technology, Pharmaceutical, etc?
7. Was the management involved in past fraud or scams?
Was the company’s promoters or management involved in any past scam? Does the company has any history of cheating the shareholders or any past penalty by SEBI?
Closing Thoughts:
Although getting a recommendation or investing where friend/colleague suggested may land you into a few profitable deals. But if you want to make consistent returns from the market (and not just being lucky), you need to build your own trustable investing strategy.
It’s true that picking a winning stock required a tremendous amount of research. However, having an investment checklist of questions to ask before investing in stock significantly reduce the chances of investing in fundamentally weak stocks. Moreover, you can easily eliminate over 90% of the companies that don’t meet your checklist.
I hope the questions discussed in this post is helpful to you. If I missed any additional important to ask before purchasing stock in this investment checklist, feel free to mention below in the comment box.
That’s all. Have a great day and Happy Investing!
Source: www.tradebrains.in/
Having a reliable checklist for picking stocks can reduce the chances of missing an important detail that you should have studied before investing in the stock. As Charlie Munger, Vice-Chairman of Berkshire Hathaway has famously quoted:
“No wise pilot, no matter how great his talent and experience, fails to use a checklist.” - Charlie Munger
In this post, we are going to discuss ten key questions to ask before purchasing a stock by every stock investor. Let’s get started.
Quick Note: Although there are hundreds of points to check while picking a stock to invest, however, most of them can be categorized among the ten questions listed below. Anyways, by no means, I claim that this is the best checklist for picking stocks. My suggestion would be to study the investment checklist given below, improvise and make your own list of questions. Further, for simplicity, I’ve not included financial ratios.
In this post, we are going to discuss ten key questions to ask before purchasing a stock by every stock investor. Let’s get started.
Quick Note: Although there are hundreds of points to check while picking a stock to invest, however, most of them can be categorized among the ten questions listed below. Anyways, by no means, I claim that this is the best checklist for picking stocks. My suggestion would be to study the investment checklist given below, improvise and make your own list of questions. Further, for simplicity, I’ve not included financial ratios.
Here are the ten key questions that every investor should ask before investing in a stock.
1. What does the company do?
What are the products/services that the company offers? Do you understand the company’s business model? How does the company actually make money? What are the top/best-selling products of the company?
2. Who runs the company?
Who are the promoters/owners of the company? It the company a family-owned or professionally managed one? Who is managing the company? What are the credentials/background of CEO, MD, Board of directors and the management team? What is the shareholding pattern of the company?
3. Is the company profitable?
How much profits did the company generated in the last few years? How are the company’s gross, operating and net profit and what is the profit margin at each level? Is the profit of the company growing over time or stagnant/declining?
4. Does the company have a sustainable competitive advantage?
Does the company have a moat like intangible assets, customer switching cost, network effect, cost advantages or any other sustainable competitive advantage that can keep the competitors away from eating their profits?
5. How was the past performance of the company?
How is the company’s financials in the past few years? What’s the trend in the company’s income statement and cash flow statement? How are the sales, EBITDA, Cash from operating activities, free cash flow and other financial metrics over the past few years?
6. How strong is the company’s balance sheet?
Are the assets of the company growing over time? How much is the liability of the company? Is the company’s shareholder equity increasing? How much cash does the company have on the asset side? How much is the company’s Intangible assets, Inventories, Receivables, Payables and more? Does the company invest in its Research & Development, especially in a few sectors like Technology, Pharmaceutical, etc?
7. Was the management involved in past fraud or scams?
Was the company’s promoters or management involved in any past scam? Does the company has any history of cheating the shareholders or any past penalty by SEBI?
8. Who are the key competitors?
Who are the direct and indirect competitors of the company? What is the market share of the company vs the competitors in the industry? What this company is doing differently compared to its competitors? Are there any global competitors or the possibility of global leaders entering the same market anytime soon?
9. How much debt the company has?
How much short-term and long-term debt the company has? Does the company generate enough profits or Free cash flow to cover the debt in the upcoming years? Have the promoters pledged any of their shares?
Who are the direct and indirect competitors of the company? What is the market share of the company vs the competitors in the industry? What this company is doing differently compared to its competitors? Are there any global competitors or the possibility of global leaders entering the same market anytime soon?
9. How much debt the company has?
How much short-term and long-term debt the company has? Does the company generate enough profits or Free cash flow to cover the debt in the upcoming years? Have the promoters pledged any of their shares?
10. How is the stock valued?
What is the true intrinsic value of the company? Is the company currently over-valued, under-valued or decently valued? Is the company relatively undervalued compared to the competitors and industry? What is the calculated intrinsic value by different valuation method? How much is the margin of safety? Will you be overpaying if you buy the stock right now?
What is the true intrinsic value of the company? Is the company currently over-valued, under-valued or decently valued? Is the company relatively undervalued compared to the competitors and industry? What is the calculated intrinsic value by different valuation method? How much is the margin of safety? Will you be overpaying if you buy the stock right now?
Closing Thoughts:
Although getting a recommendation or investing where friend/colleague suggested may land you into a few profitable deals. But if you want to make consistent returns from the market (and not just being lucky), you need to build your own trustable investing strategy.
It’s true that picking a winning stock required a tremendous amount of research. However, having an investment checklist of questions to ask before investing in stock significantly reduce the chances of investing in fundamentally weak stocks. Moreover, you can easily eliminate over 90% of the companies that don’t meet your checklist.
I hope the questions discussed in this post is helpful to you. If I missed any additional important to ask before purchasing stock in this investment checklist, feel free to mention below in the comment box.
That’s all. Have a great day and Happy Investing!
Quote for the day
"Winners have simply formed the habit of doing things losers don't like to do." - Albert L. Gray
Monday 11 May 2020
Quote for the day
"There is a great difference between worry and concern. A worried person sees a problem, and a concerned person solves a problem." - Harold Stephens
Sunday 10 May 2020
How to Calculate Total Stock Returns
By Matthew Frankel, CFP
Total returns can help compare the performance of investments that pay different dividend yields and were held for different lengths of time.
Many investors focus their attention on how a stock's price changes over time. However, when you're talking about dividend-paying stocks, that doesn't even begin to tell the entire story. For example, if I tell you that Verizon was trading for roughly $54 per share three years ago, and today it's trading around $61 per share, it may sound like investors who bought the stock made $7 per share over the three-year period.
However, if I then tell you that over the past three years, Verizon also paid its shareholders a total of $7 per share in dividends, that changes the story a little. Instead of the $7 capital gain per share, which translates to about 13%, investors actually made twice that much when taking dividends paid into account.
Total return takes both capital gains and dividends into account, in order to provide a complete picture of how a stock performed over a specified time period. This can be extremely useful for evaluating investment returns among dividend-paying stocks, and for comparing the performance of dividend-paying stocks to those without any dividends or other distributions. It can also help compare investment results when stocks were held for different lengths of time.
What are total returns?
Simply put, an investment's total return is its overall return from all sources, such as capital gains, dividends, and other distributions to shareholders. As a basic example, a stock that paid a 5% dividend yield relative to its purchase price, and which also increased in value by 5% over the first year you owned it, would have produced a total return of 10% over the one-year time period.
Total returns can be calculated as a dollar amount, or as a percentage. In other words, you can say that a stock's total return was $8 per share over a certain one-year period, or you could say that its total return was 11%. The best way to express total return depends on the context you're using it for, as we'll see throughout the rest of this discussion.
Total return can also be expressed on an overall basis, or over specified time intervals. If you held a stock for several years, it might be useful to know its overall total return during your holding period. Alternatively, knowing your total return on an annualized basis could help compare the results of that investment with others you own, or with the stock market as a whole.
We'll get into the actual calculation methods and some examples in later sections.
Why is total return important?
Total return allows you to see the big picture of how well (or poorly) an investment is actually doing -- not just how its share price is performing. Many stock investments in particular are designed to produce a combination of income and capital gains, so total return combines these two types of investment returns into a single metric.
Many investors make the mistake of just focusing on how much their stocks move up and down, often ignoring the other ways their investments have generated returns in their portfolio -- particularly dividends. Similarly, many income-focused investors often judge their investments primarily on the dividends they pay, and don't pay enough attention to share-price movements. Total return can be highly useful when assessing the performance of your investments, and comparing their performance to each other, or to the overall stock market.
Important terms investors should know
In order to truly understand total returns and how to use them effectively, there are a few other investment terms and concepts you should know as well. Plus, knowing these will help make you a more well-rounded investor. Just to name a few:
Annualized return
Investment return expressed on a yearly basis. For instance, if you have one investment that produced a 20% total return in three years and another that produced a 35% total return in five years, it can be difficult at first glance to determine which was the better investment. We'll get into the calculation of annualized total returns later, but the point is that it can be a more apples-to-apples comparison to see investment returns expressed on an annualized, or yearly, basis, especially if they were held for different time periods.
Compound returns
A compound return (or compound interest) means a return that is paid on the principal and any accumulated returns that have already been paid. Annualized total return is a form of a compound return. As a simplified example to illustrate compound returns, consider an investment that generates a 10% annualized total return. If you invest $1,000, you can expect to have $1,100 by the end of the first year. For the second year, however, the 10% would be added to the $1,100, not to the original $1,000. So, you'd end up with $1,210 at the end of the second year.
Dividend reinvestment/DRIP
To maximize the total returns of a long-term investment, dividend reinvestment is an essential step. This means that when your stocks pay you dividends, you use those dividend payments to buy additional shares of the same stock. With most brokers, you can enroll your stocks in a dividend reinvestment plan, or DRIP, that will do this automatically and without any additional trading commissions. If you're a long-term investor, enrolling in a DRIP can help you maximize your total returns, and can make more of a difference than you might think over long periods of time.
Internal rate of return (IRR)
Internal rate of return, or IRR, is similar in concept to total return, but it involves a more complicated calculation. Aside from its complexity, the biggest difference between IRR and total return is that IRR is a forward-looking metric, incorporating things like projected dividends or distributions, future profitability, and more. This is more commonly used when talking about real estate investments, but it can be applied to stocks as well when trying to project long-term returns from different prospective investments.
Unrealized vs. realized capital gains
An unrealized capital gain refers to a stock or other investment that has gone up in value since you bought it, but that you still own. In other words, if you paid $5,000 for a stock investment and it is now worth $6,000, you can't spend that $1,000 of profit until you sell. Once you sell an appreciated investment, it is then referred to as a realized capital gain. This is an important concept in the context of total returns.
How to calculate total return for a stock investment
Now we'll go through the process of calculating total returns. There are a few different ways to calculate total return, depending on the exact form of the metric you're looking for, but the good news is that none of them are particularly complex.
To determine an investment's overall total return, follow these steps:
First, you need to determine how much capital gains it has produced since you bought it. For instance, if you paid $50 for a stock and it's now trading for $60, your capital gain is $10 per share.
Then, you need to add up the dividends and other distributions the investment has paid over your entire holding period. Adding this figure to your capital gains will tell you the investment's total return, as a dollar amount.
The bottom line on total return
Total return is a great metric to add to your investment knowledge. Some investments are designed to produce a great deal of capital appreciation, while others are intended to produce income. Total return combines these two types of investment performance into a single metric.
Knowing how to calculate and apply total return can help you evaluate the overall performance of different stocks, compare different potential investments, and understand the value of dividend reinvestment, just to name a few things.
Source: www.fool.com
Total returns can help compare the performance of investments that pay different dividend yields and were held for different lengths of time.
Many investors focus their attention on how a stock's price changes over time. However, when you're talking about dividend-paying stocks, that doesn't even begin to tell the entire story. For example, if I tell you that Verizon was trading for roughly $54 per share three years ago, and today it's trading around $61 per share, it may sound like investors who bought the stock made $7 per share over the three-year period.
However, if I then tell you that over the past three years, Verizon also paid its shareholders a total of $7 per share in dividends, that changes the story a little. Instead of the $7 capital gain per share, which translates to about 13%, investors actually made twice that much when taking dividends paid into account.
Total return takes both capital gains and dividends into account, in order to provide a complete picture of how a stock performed over a specified time period. This can be extremely useful for evaluating investment returns among dividend-paying stocks, and for comparing the performance of dividend-paying stocks to those without any dividends or other distributions. It can also help compare investment results when stocks were held for different lengths of time.
What are total returns?
Simply put, an investment's total return is its overall return from all sources, such as capital gains, dividends, and other distributions to shareholders. As a basic example, a stock that paid a 5% dividend yield relative to its purchase price, and which also increased in value by 5% over the first year you owned it, would have produced a total return of 10% over the one-year time period.
Total returns can be calculated as a dollar amount, or as a percentage. In other words, you can say that a stock's total return was $8 per share over a certain one-year period, or you could say that its total return was 11%. The best way to express total return depends on the context you're using it for, as we'll see throughout the rest of this discussion.
Total return can also be expressed on an overall basis, or over specified time intervals. If you held a stock for several years, it might be useful to know its overall total return during your holding period. Alternatively, knowing your total return on an annualized basis could help compare the results of that investment with others you own, or with the stock market as a whole.
We'll get into the actual calculation methods and some examples in later sections.
Why is total return important?
Total return allows you to see the big picture of how well (or poorly) an investment is actually doing -- not just how its share price is performing. Many stock investments in particular are designed to produce a combination of income and capital gains, so total return combines these two types of investment returns into a single metric.
Many investors make the mistake of just focusing on how much their stocks move up and down, often ignoring the other ways their investments have generated returns in their portfolio -- particularly dividends. Similarly, many income-focused investors often judge their investments primarily on the dividends they pay, and don't pay enough attention to share-price movements. Total return can be highly useful when assessing the performance of your investments, and comparing their performance to each other, or to the overall stock market.
Important terms investors should know
In order to truly understand total returns and how to use them effectively, there are a few other investment terms and concepts you should know as well. Plus, knowing these will help make you a more well-rounded investor. Just to name a few:
Annualized return
Investment return expressed on a yearly basis. For instance, if you have one investment that produced a 20% total return in three years and another that produced a 35% total return in five years, it can be difficult at first glance to determine which was the better investment. We'll get into the calculation of annualized total returns later, but the point is that it can be a more apples-to-apples comparison to see investment returns expressed on an annualized, or yearly, basis, especially if they were held for different time periods.
Simple returns
There are two ways to express investment returns over time -- simple and compound. A simple return (or simple interest) is a rate of return that is based on the principal, or original investment amount, year after year. This is often used in the context of fixed-income (bond) investments. For example, if a bond costs $1,000 and yields 5%, that is a form of simple return -- in other words, 5% of the original cost, or $50, will be paid to the bondholder every year until maturity.
There are two ways to express investment returns over time -- simple and compound. A simple return (or simple interest) is a rate of return that is based on the principal, or original investment amount, year after year. This is often used in the context of fixed-income (bond) investments. For example, if a bond costs $1,000 and yields 5%, that is a form of simple return -- in other words, 5% of the original cost, or $50, will be paid to the bondholder every year until maturity.
Compound returns
A compound return (or compound interest) means a return that is paid on the principal and any accumulated returns that have already been paid. Annualized total return is a form of a compound return. As a simplified example to illustrate compound returns, consider an investment that generates a 10% annualized total return. If you invest $1,000, you can expect to have $1,100 by the end of the first year. For the second year, however, the 10% would be added to the $1,100, not to the original $1,000. So, you'd end up with $1,210 at the end of the second year.
Compounding frequency
The most often-used method of calculating total returns is with annual compounding, and that's what the formula I'm about to discuss in the next section will do. However, other compounding intervals are possible when computing returns and interest charges in finance. For example, your bank probably compounds your interest daily or monthly on your savings account, and other intervals like quarterly, weekly, or semiannual compounding are also possible. Just to give you an idea of how this works, a $1,000 investment that generates 10% total returns compounded on a semiannual basis would be worth $1,050 after six months. After another six months, a 5% (half of the annual return) gain would be added, which would make it $1,102.50.
The most often-used method of calculating total returns is with annual compounding, and that's what the formula I'm about to discuss in the next section will do. However, other compounding intervals are possible when computing returns and interest charges in finance. For example, your bank probably compounds your interest daily or monthly on your savings account, and other intervals like quarterly, weekly, or semiannual compounding are also possible. Just to give you an idea of how this works, a $1,000 investment that generates 10% total returns compounded on a semiannual basis would be worth $1,050 after six months. After another six months, a 5% (half of the annual return) gain would be added, which would make it $1,102.50.
Dividend reinvestment/DRIP
To maximize the total returns of a long-term investment, dividend reinvestment is an essential step. This means that when your stocks pay you dividends, you use those dividend payments to buy additional shares of the same stock. With most brokers, you can enroll your stocks in a dividend reinvestment plan, or DRIP, that will do this automatically and without any additional trading commissions. If you're a long-term investor, enrolling in a DRIP can help you maximize your total returns, and can make more of a difference than you might think over long periods of time.
Internal rate of return (IRR)
Internal rate of return, or IRR, is similar in concept to total return, but it involves a more complicated calculation. Aside from its complexity, the biggest difference between IRR and total return is that IRR is a forward-looking metric, incorporating things like projected dividends or distributions, future profitability, and more. This is more commonly used when talking about real estate investments, but it can be applied to stocks as well when trying to project long-term returns from different prospective investments.
Expected total return
Expected total return is the same calculation as total return but using future assumptions instead of actual investment results. For example, if you predict that a stock trading for $30 will rise to $33 over the next year while paying $2 in dividends, your expected total return is $5 per share or 16.7%. Obviously, nobody has a crystal ball that can predict stock performance and an investment's past performance doesn't guarantee its future results. That said, projections can still be a valuable tool when analyzing opportunities, so using the information you have to calculate expected total return can help you get an idea of the future potential of certain investment opportunities.
Expected total return is the same calculation as total return but using future assumptions instead of actual investment results. For example, if you predict that a stock trading for $30 will rise to $33 over the next year while paying $2 in dividends, your expected total return is $5 per share or 16.7%. Obviously, nobody has a crystal ball that can predict stock performance and an investment's past performance doesn't guarantee its future results. That said, projections can still be a valuable tool when analyzing opportunities, so using the information you have to calculate expected total return can help you get an idea of the future potential of certain investment opportunities.
Risk-adjusted return
This uses the risk-free rate of return and investment volatility in order to take an investment's risk level into account when calculating returns. A basic investment goal is to maximize the amount of return produced by investments relative to the total risk. In other words, a lower return by a low-risk investment can be a better risk-adjusted return than a superior return produced by a higher-risk investment. One popular way to assess risk-adjusted returns is with a metric called the Sharpe ratio, a not-too-complicated metric that subtracts the risk-free rate of return from an investment's actual return, and then divides by the standard deviation (volatility) of that return.
This uses the risk-free rate of return and investment volatility in order to take an investment's risk level into account when calculating returns. A basic investment goal is to maximize the amount of return produced by investments relative to the total risk. In other words, a lower return by a low-risk investment can be a better risk-adjusted return than a superior return produced by a higher-risk investment. One popular way to assess risk-adjusted returns is with a metric called the Sharpe ratio, a not-too-complicated metric that subtracts the risk-free rate of return from an investment's actual return, and then divides by the standard deviation (volatility) of that return.
Unrealized vs. realized capital gains
An unrealized capital gain refers to a stock or other investment that has gone up in value since you bought it, but that you still own. In other words, if you paid $5,000 for a stock investment and it is now worth $6,000, you can't spend that $1,000 of profit until you sell. Once you sell an appreciated investment, it is then referred to as a realized capital gain. This is an important concept in the context of total returns.
How to calculate total return for a stock investment
Now we'll go through the process of calculating total returns. There are a few different ways to calculate total return, depending on the exact form of the metric you're looking for, but the good news is that none of them are particularly complex.
To determine an investment's overall total return, follow these steps:
First, you need to determine how much capital gains it has produced since you bought it. For instance, if you paid $50 for a stock and it's now trading for $60, your capital gain is $10 per share.
Then, you need to add up the dividends and other distributions the investment has paid over your entire holding period. Adding this figure to your capital gains will tell you the investment's total return, as a dollar amount.
Third, to express total return as a percentage, which is generally more useful, simply take the dollar amount of total return you calculated, divide by the price you paid for the investment, and multiply the result by 100.
Finally, to annualize the total return, you'll need a bit more complicated math. Take the percentage total return you found in the previous step (written as a decimal) and add 1. Then, raise this to the power of 1 divided by the number of years you held the investment. Finally, subtract 1. In mathematical form, this looks like:
This formula assumes annual compounding, which keeps the calculation as uncomplicated as possible. There are other ways to do it, such as continuous or monthly compounding, but for the purposes of calculating and comparing investment returns, this method is generally sufficient.
A real-world example
That last part may sound a bit confusing, especially when it comes to calculating annualized total returns, so let's take a look at a step-by-step real-world example.
Let's say that you bought shares of Bank of America stock on Jan. 2, 2017, and sold them on Jan. 2, 2019, and you want to determine your total return on your investment.
Before we start, here's the information you need to know:
This formula assumes annual compounding, which keeps the calculation as uncomplicated as possible. There are other ways to do it, such as continuous or monthly compounding, but for the purposes of calculating and comparing investment returns, this method is generally sufficient.A real-world example
That last part may sound a bit confusing, especially when it comes to calculating annualized total returns, so let's take a look at a step-by-step real-world example.
Let's say that you bought shares of Bank of America stock on Jan. 2, 2017, and sold them on Jan. 2, 2019, and you want to determine your total return on your investment.
Before we start, here's the information you need to know:
You bought shares for $22.60.
Two years later, you sold those shares for $25.50.
Over the two-year holding period, Bank of America paid eight quarterly dividends, which added up to $0.92.
Now let's go through the three total return calculations I discussed in the last section.
First, your overall total return. Your capital gain on each share was $25.50 minus $22.60, or $2.90 per share. Adding the $0.92 in dividends you received shows a total return of $3.82 per share on your investment.
Second, to convert this total return to a percentage, you need to divide the $3.82 total return by the purchase price for each share, or $22.60, and then multiply by 100. This gives you a total return of 16.9% over two years.
Finally, if you want to know what your annualized total return was, you need to use the formula from the last section. When you do that, here's how the calculation should look, in percentage form:
Total return with reinvested dividends
Now, it's worth mentioning that if you're reinvesting your dividends as you go -- which I absolutely recommend long-term investors do -- the calculation gets a bit more complicated. Essentially, each of the reinvestments becomes its own return calculation, including the capital gains generated from the newly purchased shares.
It's difficult to calculate total returns with reinvested dividends using the previously discussed method. After all, you'll buy new shares at whatever price they're trading for as of the dividend payment date, and you'll end up with more shares than you started with, and then those shares will begin to pay you dividends as well. So what's the solution?
The total return calculation with reinvested dividends can be simplified by looking at the investment on an overall value (as opposed to a per-share) basis.
Consider our Bank of America example from the previous section. Let's say that you invested $10,000 in the stock, and that after two years of reinvesting your dividends, your investment is now worth $11,750 -- a 17.5% total return (or 0.175 in decimal form).
Using our formula for annualized total return, we see that your total return with reinvested dividends is:
So by reinvesting your dividends, you achieved a slightly better total return than you would have by simply collecting the dividends paid by the stock.
How to use total return calculations in your investment strategy
There are a few practical uses for the concept of total return. As I've mentioned, total return is a good way to compare the performance of various investments over time. For example, let's say that you own five stocks in your portfolio, and that you've invested $1,000 in each one. Some don't pay dividends at all, and those that do pay varying amounts.
At first glance, it can be difficult to determine which of these stocks was the best performer over any multiyear period, especially if you don't automatically reinvest your dividends and just receive the payments in cash in your brokerage account. This is where total return comes in -- it can give you a single number that sums up the performance of each investment.
From a strategy perspective, it can be useful to evaluate expected total returns from your investments when making decisions. As a personal example, I'm a big fan of real estate investment trusts, or REITs, which are specifically designed to be total return investments with a nice combination of income and capital gain. By assessing one of these stock's track record of total returns, and seeing whether the company's business composition has changed, I can compare total return potential when screening prospective investments.
Two years later, you sold those shares for $25.50.
Over the two-year holding period, Bank of America paid eight quarterly dividends, which added up to $0.92.
Now let's go through the three total return calculations I discussed in the last section.
First, your overall total return. Your capital gain on each share was $25.50 minus $22.60, or $2.90 per share. Adding the $0.92 in dividends you received shows a total return of $3.82 per share on your investment.
Second, to convert this total return to a percentage, you need to divide the $3.82 total return by the purchase price for each share, or $22.60, and then multiply by 100. This gives you a total return of 16.9% over two years.
Finally, if you want to know what your annualized total return was, you need to use the formula from the last section. When you do that, here's how the calculation should look, in percentage form:
Total return with reinvested dividends
Now, it's worth mentioning that if you're reinvesting your dividends as you go -- which I absolutely recommend long-term investors do -- the calculation gets a bit more complicated. Essentially, each of the reinvestments becomes its own return calculation, including the capital gains generated from the newly purchased shares.
It's difficult to calculate total returns with reinvested dividends using the previously discussed method. After all, you'll buy new shares at whatever price they're trading for as of the dividend payment date, and you'll end up with more shares than you started with, and then those shares will begin to pay you dividends as well. So what's the solution?
The total return calculation with reinvested dividends can be simplified by looking at the investment on an overall value (as opposed to a per-share) basis.
Consider our Bank of America example from the previous section. Let's say that you invested $10,000 in the stock, and that after two years of reinvesting your dividends, your investment is now worth $11,750 -- a 17.5% total return (or 0.175 in decimal form).
Using our formula for annualized total return, we see that your total return with reinvested dividends is:
So by reinvesting your dividends, you achieved a slightly better total return than you would have by simply collecting the dividends paid by the stock.
How to use total return calculations in your investment strategy
There are a few practical uses for the concept of total return. As I've mentioned, total return is a good way to compare the performance of various investments over time. For example, let's say that you own five stocks in your portfolio, and that you've invested $1,000 in each one. Some don't pay dividends at all, and those that do pay varying amounts.
At first glance, it can be difficult to determine which of these stocks was the best performer over any multiyear period, especially if you don't automatically reinvest your dividends and just receive the payments in cash in your brokerage account. This is where total return comes in -- it can give you a single number that sums up the performance of each investment.
From a strategy perspective, it can be useful to evaluate expected total returns from your investments when making decisions. As a personal example, I'm a big fan of real estate investment trusts, or REITs, which are specifically designed to be total return investments with a nice combination of income and capital gain. By assessing one of these stock's track record of total returns, and seeing whether the company's business composition has changed, I can compare total return potential when screening prospective investments.
The bottom line on total return
Total return is a great metric to add to your investment knowledge. Some investments are designed to produce a great deal of capital appreciation, while others are intended to produce income. Total return combines these two types of investment performance into a single metric.
Knowing how to calculate and apply total return can help you evaluate the overall performance of different stocks, compare different potential investments, and understand the value of dividend reinvestment, just to name a few things.
Source: www.fool.com
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