Sunday, 28 February 2021
Quote for the day
"Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature." - Bruce Kovner
Saturday, 27 February 2021
96 Years Ago, This $310-Billion Man Revealed the Secrets To His Success
By Alex Banayan
He’s richer than Bill Gates and Warren Buffett combined. And he started off as a broke Scottish immigrant. I’ve been dreaming of interviewing him for my book. The only problem? He died 96 years ago.
How did Andrew Carnegie, the man with the world’s largest steel empire, rise from no money, no opportunity, and no connections — to the richest man alive?
I’ve spent hundreds of hours researching Carnegie’s success, and here are the 5 best lessons from the man himself.
1. Get Out Of The Shade
One afternoon, a young man walked into Carnegie’s office to interview him about his success. Carnegie could have told the young man about his journey from poverty to riches or about his wild dealings with John Rockefeller. But instead, Carnegie talked about something else.
His optimism.
Carnegie said the most important thing in his life was his “ability to shed trouble and to laugh through life.” He said that seeing life through a lens of positivity was worth more to him than millions of dollars.
“Young people should know that it can be cultivated,” Carnegie said. “The mind, like the body, can be moved from the shade into sunshine.”
And it makes good business sense, too. By not getting weighed down by the negative, Carnegie could keep his focus on the positive, bounce back from failures faster, and see opportunities where other people didn’t know they existed.
Ask yourself: do you sometimes slip into pessimistic thoughts and negative self-talk? Are you missing opportunities because you let your mind fall under “the shade”? How much would your business grow if you taped a note above your desk that reads: “move your mind into the sunshine”?
2. Tell Him to Keep the Ten Thousand
Carnegie and J.P. Morgan were once partners in a business. One day Morgan wanted to buy out Carnegie’s stake, so Morgan asked how much he wanted for it.
Carnegie said his shares were worth $50,000, plus he wanted an extra $10,000 on top — so a total of $60,000. Morgan agreed to the terms. But the next morning, Carnegie got a call.
“Mr. Carnegie, you were mistaken,” Morgan said. “You sold out for $10,000 less than the statement showed to your credit.” Morgan had calculated that Carnegie’s stake was actually worth $60,000, and with the additional $10,000, that made $70,000. So Morgan sent Carnegie a check for the full $70,000.
Carnegie responded by telling Morgan to keep the extra $10,000 — which, adjusted for inflation, is over $130,000 today. Morgan replied, “No thank you. I cannot do that.”
When reflecting on this story, Carnegie wrote, “A great business is built on lines of the strictest integrity.” He learned from Morgan that it is better to lose money in the short-term if that means maintaining your reputation for the long-term.
Think hard about this: Is your business doing everything it can to ensure that reputation comes before profits?
3. Follow the Rule of Nine-Tenths
There was a story that changed Carnegie’s life. It’s about an old man who lived a life of many tragic events. People in the town pitied him, but the old man said, "Yes, my friends, all that you say is true. I have had a long life full of troubles. But there is one curious fact about them – nine-tenths of them never happened."
Carnegie learned from that story that most of the problems and “what if’s” we imagine almost never occur. Our brains have a tendency to dream up the worst-case scenarios and act accordingly — yet most of those almost never happen. And even if they do occur, they’re almost never as bad as we imagine.
By reminding himself of the “rule of nine-tenths,” Carnegie freed himself from the fear of the unknown and was able to take the risks he needed to achieve his radical success.
Be honest with yourself: Do you get caught up on the “what if’s”? Would your life be better if you followed the rule of “nine-tenths” and reminded yourself that most of those problems won’t actually happen? Are you willing to make a commitment right now to live by that rule?
4. Jump On 'Flashes of Lightning'
When Carnegie was hired for his first job, the interviewer asked him how soon he could start. Most people would have asked for a couple of weeks to transition. But Carnegie’s answer? “I can start right now.”
“It would have been a great mistake not to seize the opportunity,” Carnegie wrote. “The position was offered to me; something might occur, some other boy might be sent for. Having got myself in I proposed to stay there if I could.”
Carnegie didn’t overthink it. He preferred to act quickly and risk something going wrong than to act slowly and risk losing the opportunity entirely.
And this rule worked in reverse, too. When Carnegie realized he owned shares in a company he didn’t like anymore, he told his partner to sell all the shares right away. When his partner said there’s no rush, Carnegie shot back, “Do it instantly!” And good thing he did… that company soon went bankrupt.
Of course, it’s important to study the facts, but if you’re presented with a real opportunity, don’t risk losing it by taking your time. As Carnegie would say, jump on the “flash of lightning.”
How many opportunities do you think have passed you by because you didn’t jump on them right away? Are you ready to act like Carnegie and make your answer “I can start right now”?
5. Find Your "$2.50" Motivation
Early in his career, Carnegie was given a bonus of $2.50. When he gave the bonus to his parents to help support the family, he said “no subsequent success, or recognition of any kind, ever thrilled me as this did… Here was heaven upon earth.”
And from that point on, Carnegie knew he wanted to be rich. But not for himself. He dreamt of making the money for his parents, so they could live a good life.
As soon as Carnegie identified that external motivation, his drive turned into high gear. The key is that he wasn’t motivated to help himself. He was motivated to help someone else.
So whether you’re doing it for your parents, your children, or to help people who don’t even know your name — you need to have that motivation clearly in your mind to fuel you through the inevitable hardships on your journey to success.
Are you clear on who your “$2.50” motivation is? Who are you doing it all for, other than yourself? If you don’t know, figure it out. And if you do know, how can you remind yourself of that “$2.50” motivation everyday?
Andrew Carnegie is proof that if you work hard, keep your mind “out of the shade,” take risks, act quickly, and build a reputation of the strictest integrity — anything is possible.
And the craziest part? Carnegie is just one example of how it’s possible to work your way from poverty to radical success.
He’s richer than Bill Gates and Warren Buffett combined. And he started off as a broke Scottish immigrant. I’ve been dreaming of interviewing him for my book. The only problem? He died 96 years ago.
How did Andrew Carnegie, the man with the world’s largest steel empire, rise from no money, no opportunity, and no connections — to the richest man alive?
I’ve spent hundreds of hours researching Carnegie’s success, and here are the 5 best lessons from the man himself.
1. Get Out Of The Shade
One afternoon, a young man walked into Carnegie’s office to interview him about his success. Carnegie could have told the young man about his journey from poverty to riches or about his wild dealings with John Rockefeller. But instead, Carnegie talked about something else.
His optimism.
Carnegie said the most important thing in his life was his “ability to shed trouble and to laugh through life.” He said that seeing life through a lens of positivity was worth more to him than millions of dollars.
“Young people should know that it can be cultivated,” Carnegie said. “The mind, like the body, can be moved from the shade into sunshine.”
And it makes good business sense, too. By not getting weighed down by the negative, Carnegie could keep his focus on the positive, bounce back from failures faster, and see opportunities where other people didn’t know they existed.
Ask yourself: do you sometimes slip into pessimistic thoughts and negative self-talk? Are you missing opportunities because you let your mind fall under “the shade”? How much would your business grow if you taped a note above your desk that reads: “move your mind into the sunshine”?
2. Tell Him to Keep the Ten Thousand
Carnegie and J.P. Morgan were once partners in a business. One day Morgan wanted to buy out Carnegie’s stake, so Morgan asked how much he wanted for it.
Carnegie said his shares were worth $50,000, plus he wanted an extra $10,000 on top — so a total of $60,000. Morgan agreed to the terms. But the next morning, Carnegie got a call.
“Mr. Carnegie, you were mistaken,” Morgan said. “You sold out for $10,000 less than the statement showed to your credit.” Morgan had calculated that Carnegie’s stake was actually worth $60,000, and with the additional $10,000, that made $70,000. So Morgan sent Carnegie a check for the full $70,000.
Carnegie responded by telling Morgan to keep the extra $10,000 — which, adjusted for inflation, is over $130,000 today. Morgan replied, “No thank you. I cannot do that.”
When reflecting on this story, Carnegie wrote, “A great business is built on lines of the strictest integrity.” He learned from Morgan that it is better to lose money in the short-term if that means maintaining your reputation for the long-term.
Think hard about this: Is your business doing everything it can to ensure that reputation comes before profits?
3. Follow the Rule of Nine-Tenths
There was a story that changed Carnegie’s life. It’s about an old man who lived a life of many tragic events. People in the town pitied him, but the old man said, "Yes, my friends, all that you say is true. I have had a long life full of troubles. But there is one curious fact about them – nine-tenths of them never happened."
Carnegie learned from that story that most of the problems and “what if’s” we imagine almost never occur. Our brains have a tendency to dream up the worst-case scenarios and act accordingly — yet most of those almost never happen. And even if they do occur, they’re almost never as bad as we imagine.
By reminding himself of the “rule of nine-tenths,” Carnegie freed himself from the fear of the unknown and was able to take the risks he needed to achieve his radical success.
Be honest with yourself: Do you get caught up on the “what if’s”? Would your life be better if you followed the rule of “nine-tenths” and reminded yourself that most of those problems won’t actually happen? Are you willing to make a commitment right now to live by that rule?
4. Jump On 'Flashes of Lightning'
When Carnegie was hired for his first job, the interviewer asked him how soon he could start. Most people would have asked for a couple of weeks to transition. But Carnegie’s answer? “I can start right now.”
“It would have been a great mistake not to seize the opportunity,” Carnegie wrote. “The position was offered to me; something might occur, some other boy might be sent for. Having got myself in I proposed to stay there if I could.”
Carnegie didn’t overthink it. He preferred to act quickly and risk something going wrong than to act slowly and risk losing the opportunity entirely.
And this rule worked in reverse, too. When Carnegie realized he owned shares in a company he didn’t like anymore, he told his partner to sell all the shares right away. When his partner said there’s no rush, Carnegie shot back, “Do it instantly!” And good thing he did… that company soon went bankrupt.
Of course, it’s important to study the facts, but if you’re presented with a real opportunity, don’t risk losing it by taking your time. As Carnegie would say, jump on the “flash of lightning.”
How many opportunities do you think have passed you by because you didn’t jump on them right away? Are you ready to act like Carnegie and make your answer “I can start right now”?
5. Find Your "$2.50" Motivation
Early in his career, Carnegie was given a bonus of $2.50. When he gave the bonus to his parents to help support the family, he said “no subsequent success, or recognition of any kind, ever thrilled me as this did… Here was heaven upon earth.”
And from that point on, Carnegie knew he wanted to be rich. But not for himself. He dreamt of making the money for his parents, so they could live a good life.
As soon as Carnegie identified that external motivation, his drive turned into high gear. The key is that he wasn’t motivated to help himself. He was motivated to help someone else.
So whether you’re doing it for your parents, your children, or to help people who don’t even know your name — you need to have that motivation clearly in your mind to fuel you through the inevitable hardships on your journey to success.
Are you clear on who your “$2.50” motivation is? Who are you doing it all for, other than yourself? If you don’t know, figure it out. And if you do know, how can you remind yourself of that “$2.50” motivation everyday?
Andrew Carnegie is proof that if you work hard, keep your mind “out of the shade,” take risks, act quickly, and build a reputation of the strictest integrity — anything is possible.
And the craziest part? Carnegie is just one example of how it’s possible to work your way from poverty to radical success.
Source: https://www.linkedin.com/pulse/96-years-ago-310-billion-man-revealed-secrets-his-success-banayan
Quote for the day
"Any fool can criticize, condemn and complain - and most fools do. But it takes character and self control to be understanding and forgiving." - Dale Carnegie
Friday, 26 February 2021
Quote for the day
"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett
Thursday, 25 February 2021
Quote for the day
"If you want to be successful, it's just this simple. Know what you are doing. Love what you are doing. And believe in what you are doing." - Will Rogers
Wednesday, 24 February 2021
Quote for the day
"Whatever happens, do not lose hold of the two main ropes of life - hope and faith." - Zig Ziglar
Tuesday, 23 February 2021
Quote for the day
"People don't like the idea of thinking long term. Many are desperately seeking short term answers because they have money problems to be solved today." - Robert Kiyosaki
Monday, 22 February 2021
Robin Sharma’s 73 Best Business and Success Lessons
- You can really Lead Without a Title.
- Knowing what to do and not doing it is the same as not knowing what to do.
- Give away what you most wish to receive.
- The antidote to stagnation is innovation.
- The conversations you are most resisting are the conversations you most need to be having.
- Leadership is no longer about position – but passion. It’s no longer about image but impact. This is Leadership 2.0.
- The bigger the dream, the more important to the team.
- Visionaries see the “impossible” as the inevitable.
- All great thinkers are initially ridiculed – and eventually revered.
- The more you worry about being applauded by others and making money, the less you’ll focus on doing the great work that will generate applause. And make you money.
- To double your net worth, double your self-worth. Because you will never exceed the height of your self-image.
- The more messes you allow into your life, the more messes will become a normal (and acceptable) part of your life.
- The secret to genius is not genetics but daily practice married with relentless perseverance.
- The best leaders lift people up versus tear people down.
- The most precious resource for businesspeople is not their time. It’s their energy. Manage it well.
- The fears you run from run to you.
- The most dangerous place is in your safety zone.
- The more you go to your limits, the more your limits will expand.
- Every moment in front of a customer is a gorgeous opportunity to live your values.
- Be so good at what you do that no one else in the world can do what you do.
- You’ll never go wrong in doing what is right.
- It generally takes about 10 years to become an overnight sensation.
- Never leave the site of a strong idea without doing something to execute around it.
- A strong foundation at home sets you up for a strong foundation at work.
- Never miss a moment to encourage someone you work with.
- Saying “I’ll try” really means “I’m not really committed.”
- The secret of passion is purpose.
- Do a few things at mastery versus many things at mediocrity.
- To have the rewards that very few have, do the things that very few people are willing to do.
- Go where no one’s gone and leave a trail of excellence behind you.
- Who you are becoming is more important than what you are accumulating.
- Accept your teammates for what they are and inspire them to become all they can be.
- To triple the growth of your organization, triple the growth of your people.
- The best leaders are the most dedicated learners. Read great books daily. Investing in your self-development is the best investment you will ever make.
- Other people’s opinions of you are none of your business.
- Change is hardest at the beginning, messiest in the middle and best at the end.
- Measure your success by your inner scorecard versus an outer one.
- Understand the acute difference between the cost of something and the value of something.
- Nothing fails like success. Because when you are at the top, it’s so easy to stop doing the very things that brought you to the top.
- The best leaders blend courage with compassion.
- The less you are like others, the less others will like you.
- The thoughts you think today determine the results you’ll see tomorrow.
- Excellence in one area is the beginning of excellence in every area.
- The real reward for doing your best work is not the money you make but the leader you become.
- Passion + production = performance.
- The value of getting to your goals lives not in reaching the goal but what the talents/strengths/capabilities the journey reveals to you.
- Stand for something. Or else you’ll fall for anything.
- Say “thank you” when you’re grateful and “sorry” when you’re wrong.
- Make the work you are doing today better than the work you did yesterday.
- Small daily – seemingly insignificant – improvements and innovations lead to staggering achievements over time.
- Peak performers replace depletion with inspiration on a daily basis.
- Take care of your relationships and the sales/money will take care of itself.
- You can’t be great if you don’t feel great. Make exceptional health your #1 priority.
- Doing the difficult things that you’ve never done awakens the talents you never knew you had.
- As we each express our natural genius, we all elevate our world.
- Your daily schedule reflects your deepest values.
- People do business with people who make them feel special.
- All things being equal, the primary competitive advantage of your business will be your ability to grow Leaders Without Titles faster than your industry peers.
- Treat people well on your way up and they’ll treat you well on your way down.
- Success lies in a masterful consistency around a few fundamentals. It really is simple. Not easy. But simple.
- The business (and person) who tries to be everything to everyone ends up being nothing to anyone.
- One of the primary tactics for enduring winning is daily learning.
- To have everything you want, help as many people as you can possibly find get everything they want.
- Understand that a problem is only a problem if you choose to view it as a problem (vs. an opportunity).
- Clarity precedes mastery. Craft clear and precise plans/goals/deliverables. And then block out all else.
- The best in business spend far more time on learning than in leisure.
- Lucky is where skill meets persistence.
- The best Leaders Without a Title use their heads and listen to their hearts.
- The things that are hardest to do are often the things that are the best to do.
- Every single person in the world could be a genius at something, if they practiced it daily for at least ten years (as confirmed by the research of Anders Ericsson and others).
- Daily exercise is an insurance policy against future illness. The best Leaders Without Titles are the fittest.
- Education is the beginning of transformation. Dedicate yourself to daily learning via books/audios/seminars and coaching.
- The quickest way to grow the sales of your business is to grow your people.
Source: www.robinsharma.com
Quote for the day
"We don't have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett
Sunday, 21 February 2021
Simple Budgeting With The 50/30/20 Rule
When it comes to budgeting, how much should you allocate to each area? A simple rule of thumb which is easy to implement is the 50/30/20 rule. It is a rule coined by Harvard Bankruptcy expert Elizabeth Warren. This rule offers a big picture view of what your budget should look like before getting into the nitty gritty.
50/30/20 stand for?
50% = Essential Expenses
30% = Lifestyle Expenses
20% = Financial Goals and Savings
Spend at Most 50% of Your Income on Essential Expenses
What do essential expenses include? They include household expenses i.e. groceries, utilities etc., transportation, personal and dependent expenses such as childcare, child education etc. It also includes home loan repayment if you own your house and stay in it. While these are expenses which are very critical to your family, they should not take up more than 50% of your income.
While a lot of the essential expenses are fixed like housing loan repayment, childcare, choices can still be made to reduce them if you happen to spend more than 50% on essential expenses. For example, one could choose to take cheaper forms of public transportation more frequently and control aircon usage at home to save on utilities.
Do Not Spend More Than 30% of Your Income On Lifestyle Expenses
Lifestyle expenses include expenses such as travelling, entertainment, dining out, luxury items etc. They are expenses which are non essential and the guideline is not to spend more than 30% of your income on them. Since lifestyle expenses are usually a matter of choice, it is easier to scale back on them as compared to essential expenses.
Devote At Least 20% of Your Income to Savings and Financial Goals
Saving funds and financial goals do not get achieved overnight. They are accumulated slowly over time through saving a portion of your income and then investing into appropriate investments. The 50/30/20 rule advocates at least 20% of the income goes toward savings and the higher the better.
The 50/30/20 rule provides a very simple but effective way to balance your budget. By following it, your income and expenses level should be relatively healthy. While they are not hard and fast figures, it is important not to deviate too far away from the guideline, especially if you are under saving.
50/30/20 stand for?
50% = Essential Expenses
30% = Lifestyle Expenses
20% = Financial Goals and Savings
Spend at Most 50% of Your Income on Essential Expenses
What do essential expenses include? They include household expenses i.e. groceries, utilities etc., transportation, personal and dependent expenses such as childcare, child education etc. It also includes home loan repayment if you own your house and stay in it. While these are expenses which are very critical to your family, they should not take up more than 50% of your income.
While a lot of the essential expenses are fixed like housing loan repayment, childcare, choices can still be made to reduce them if you happen to spend more than 50% on essential expenses. For example, one could choose to take cheaper forms of public transportation more frequently and control aircon usage at home to save on utilities.
Do Not Spend More Than 30% of Your Income On Lifestyle Expenses
Lifestyle expenses include expenses such as travelling, entertainment, dining out, luxury items etc. They are expenses which are non essential and the guideline is not to spend more than 30% of your income on them. Since lifestyle expenses are usually a matter of choice, it is easier to scale back on them as compared to essential expenses.
Devote At Least 20% of Your Income to Savings and Financial Goals
Saving funds and financial goals do not get achieved overnight. They are accumulated slowly over time through saving a portion of your income and then investing into appropriate investments. The 50/30/20 rule advocates at least 20% of the income goes toward savings and the higher the better.
The 50/30/20 rule provides a very simple but effective way to balance your budget. By following it, your income and expenses level should be relatively healthy. While they are not hard and fast figures, it is important not to deviate too far away from the guideline, especially if you are under saving.
Edited article from www.drwealth.com
Quote for the day
"The world belongs to optimists; the pessimists are only spectators." - Francois Guizot
Saturday, 20 February 2021
61 One-Sentence Rules That Will Make You Better With Money
There are 56,956 personal finance books on Amazon.com. In aggregate, they contain more than 3 billion words.
This seems absurd, because 99% of personal finance can be summarized in nine words: Work a lot, spend a little, invest the difference. Master that, and the other 2.999 billion words are filler.
The most important finance topics don't require details. Most can be, and should be, summarized in a sentence or two.
Here are some I've learned.
This seems absurd, because 99% of personal finance can be summarized in nine words: Work a lot, spend a little, invest the difference. Master that, and the other 2.999 billion words are filler.
The most important finance topics don't require details. Most can be, and should be, summarized in a sentence or two.
Here are some I've learned.
Friday, 19 February 2021
The Education of a Trader
“The game taught me the game. And it didn’t spare the rod while teaching.” -Jesse Livermore
Trading Losses:
Trading Losses:
There are two types of losses, one loss is caused by the market simply not being conducive to the profitability of your system. The other type of loss is caused by a lack of discipline, causing you not to follow your trading plan, system, or position sizing. Experiencing a loss while following your trading plan is to be expected. If you are trading a proven and tested method, then you have learned that taking a loss is simply part of trading. However, if your breach of discipline caused your loss, whether not taking a stop, over riding your plan, not taking an entry, or trading too big, then it is time to learn why you failed. Ego? Fear? Greed? Overconfidence? Laziness? It is crucial that you understand your shortcomings, so you do not repeat the same mistake again. If you don’t have a quantified methodology then everything you do is a mistake.
Charts:
Charts:
Studying the past price action of charts and backtesting is very beneficial because you can understand what did and did not work in the past. This will show you how prices have reacted at support/resistance levels in the past, along with moving averages and any other indicators that you may choose. It is important that you understand how your market has historically been traded with price and technical indicators. Whether it is currencies, commodities, stocks, or bonds, it is crucial that you learn how to identify a trend, a day trade, a swing trade, and a range bound market.
Social Networks:
Social Networks:
There are many great traders on Facebook, Twitter, and Stocktwits. There are several that freely give away their knowledge because they enjoy sharing what they have learned. There are others that may not add much value. To separate the wheat from the chaff, focus on who gives advice that makes money over time. Only follow traders that discuss all three elements of trading. You need to learn and be reminded about risk management, trader psychology, and entries and exits. Be very wary of anyone that makes trading look like easy money; it is work like any other profession.
A Mentor:
A Mentor:
Getting a mentor is a great learning shortcut. Having someone available to ask questions of, and get direct feedback from, is incredibly valuable and short cut the learning process. The hard part is finding the right mentors. If you are paying for a service then you need to verify the mentors credentials and success as a trader and coach. If a successful or rich trader agrees to help you with no compensation, it is crucial to respect their time. Have questions ready and ask good questions by doing the necessary homework. It is also possible to pick legendary traders and study them in depth through the internet, interviews they have done, books they have written, and purchasing any services they offer.
Trading Books:
Trading Books:
Books that are written by researchers and successful traders are a gold mine of information that can speed up the learning process for new traders. When looking for the best trading books, I use Amazon and focus on books that are written by traders that have successful track records or best selling trading authors that have studied trend followers and Market Wizards. I also like to see many 4 and 5 star reviews for the trading book.
These are 5 of a trader’s best teachers combined with their own actual trading experiences of both wins and losses.
These are 5 of a trader’s best teachers combined with their own actual trading experiences of both wins and losses.
Source: www.newtraderu.com
Quote for the day
"A prudent speculator never argues with the tape. Markets are never wrong, opinions often are." - Jesse Lauriston Livermore
Thursday, 18 February 2021
The Old Man and the Tree: A Parable of Valuation
Once there was an old, wise man who owned an apple tree. It was a fine tree. With modest care it yielded a crop of apples which he sold for $100 each year. The man wanted money for new pursuits and thought of selling the tree. So, hoping to teach a good lesson, he placed an ad in the Business Opportunities section of the Wall Street Journal: "For sale, apple tree - best offer."
Salvage value
A lumberjack was the first to answer the ad. He offered to pay $50. "That's what it would fetch if I cut it down for firewood." The old man moaned, "You are foolish. You see only the tree's salvage value. Perhaps, your price would be good for a pine tree or perhaps even an apple tree no longer bearing fruit. Or perhaps if apple wood had become prized, more than apples. But my tree is worth much more than $50. No, thank you."
Current production
A grocer was next. She offered $100. "I will harvest and sell this year's crop." The old man smiled, "You are not quite so foolish as the first one. You see this tree has more value as a producer of apples than as a source of firewood. But $100 is not the right price. What of next year's crop? And the many crops after? Your price will not do."
Future (undiscounted) production
A marketer then answered the ad. He lived by the adage, "Buy low, sell high." So he offered $1499. "I figure the tree should live for at least another fifteen years. If I sell the apples for $100 a year, that will total $1,500." The old man wrinkled his nose, "You think ahead, but not carefully enough. Will the $100 you earn by selling apples fifteen years from now be worth $100 to you today? Stop and consider that if you placed $41.73 today in a bank account paying 6% interest, compounded annually, you would have $100 at the end of fifteen years. The present value of $100 worth of apples fifteen years from now, assuming an interest rate of 6%, is only $41.73, not $100. You offer to buy high and sell low. I cannot take your money."
Market price
A wealthy physician was next. "You get what you pay for," she announced. "I'll pay the market price -- whatever your last serious offer." The old man laughed, "You can't be serious, doctor. Now if there were truly a market in which apple trees were traded with some regularity, the prices at which they traded would be an indicator of their value. But there is no such market. The isolated offer I just received tells very little. If you had only heard the other foolish offers I had today!! You should seek advice before you invest."
Book value
An accountant soon answered the ad, demanding first to see the old man's books. The old man had kept careful records and gladly shared them. After examining them, the accountant declared, "You paid $75 for this tree ten years ago. You have made no deductions for depreciation. Assuming this conforms with generally accepted accounting principles, the book value of your tree if $75. I will pay that." The old man chided the accountant, "It is true the tree has a book value of $75, but is that its worth? Why, in just one year I can sell more than $75 in apples. Your accounting numbers look to the past, not the future."
Discounted future earnings
A young stock broker was next. She too asked to examine the books and after several hours announced she was prepared to offer. "I will value the tree on the basis of the capitalization of its earnings." The old man's interest was piqued. The broker continued, "While the apples sold for $100 last year, those weren't your profits from the tree. You had expenses. There was the cost of fertilizer and tools. You paid for others to prune the tree, to pick the apples, to cart them to market, to sell them. These costs and expenses should charged against the revenues from the tree. Moreover, the purchase price of the tree was an expense, a portion of which should be taken into account each year of the tree's useful life. Finally, there were taxes. Your profit from the tree was a mere $50 last year." The old man exclaimed, "Wow. I thought I made $100 off that tree."
Salvage value
A lumberjack was the first to answer the ad. He offered to pay $50. "That's what it would fetch if I cut it down for firewood." The old man moaned, "You are foolish. You see only the tree's salvage value. Perhaps, your price would be good for a pine tree or perhaps even an apple tree no longer bearing fruit. Or perhaps if apple wood had become prized, more than apples. But my tree is worth much more than $50. No, thank you."
Current production
A grocer was next. She offered $100. "I will harvest and sell this year's crop." The old man smiled, "You are not quite so foolish as the first one. You see this tree has more value as a producer of apples than as a source of firewood. But $100 is not the right price. What of next year's crop? And the many crops after? Your price will not do."
Future (undiscounted) production
A marketer then answered the ad. He lived by the adage, "Buy low, sell high." So he offered $1499. "I figure the tree should live for at least another fifteen years. If I sell the apples for $100 a year, that will total $1,500." The old man wrinkled his nose, "You think ahead, but not carefully enough. Will the $100 you earn by selling apples fifteen years from now be worth $100 to you today? Stop and consider that if you placed $41.73 today in a bank account paying 6% interest, compounded annually, you would have $100 at the end of fifteen years. The present value of $100 worth of apples fifteen years from now, assuming an interest rate of 6%, is only $41.73, not $100. You offer to buy high and sell low. I cannot take your money."
Market price
A wealthy physician was next. "You get what you pay for," she announced. "I'll pay the market price -- whatever your last serious offer." The old man laughed, "You can't be serious, doctor. Now if there were truly a market in which apple trees were traded with some regularity, the prices at which they traded would be an indicator of their value. But there is no such market. The isolated offer I just received tells very little. If you had only heard the other foolish offers I had today!! You should seek advice before you invest."
Book value
An accountant soon answered the ad, demanding first to see the old man's books. The old man had kept careful records and gladly shared them. After examining them, the accountant declared, "You paid $75 for this tree ten years ago. You have made no deductions for depreciation. Assuming this conforms with generally accepted accounting principles, the book value of your tree if $75. I will pay that." The old man chided the accountant, "It is true the tree has a book value of $75, but is that its worth? Why, in just one year I can sell more than $75 in apples. Your accounting numbers look to the past, not the future."
Discounted future earnings
A young stock broker was next. She too asked to examine the books and after several hours announced she was prepared to offer. "I will value the tree on the basis of the capitalization of its earnings." The old man's interest was piqued. The broker continued, "While the apples sold for $100 last year, those weren't your profits from the tree. You had expenses. There was the cost of fertilizer and tools. You paid for others to prune the tree, to pick the apples, to cart them to market, to sell them. These costs and expenses should charged against the revenues from the tree. Moreover, the purchase price of the tree was an expense, a portion of which should be taken into account each year of the tree's useful life. Finally, there were taxes. Your profit from the tree was a mere $50 last year." The old man exclaimed, "Wow. I thought I made $100 off that tree."
Net returns
"You should have matched expenses with revenues, in accordance with generally accepted accounting principles," she explained. "And you don't actually have to write a check to be charged with an expense. For example, you bought a station wagon some time ago and you sometimes used it to cart apples to market. Some of the wagon's original cost has to be matched against revenues. A portion of the amount has to be deducted each year even though you expended it all at one time. Accountants call that depreciation. I'll bet you never figured that in your calculation of profits." The old man said, "No, I didn't. Tell me more."
"I also noticed in your books that in some years the tree produced less apples than in other years, and the prices varied and the costs were not exactly the same each year. Taking an average of only the last three years, I came up with a figure of $45 as a fair sample of the tree's earnings. But we're only halfway to figuring the value." The old man asked, "What's the other half?"
Discounting future returns
"The tricky part," she told him. "We now have to figure how much I value owning something that produces $45 in earnings every year. If I believed the tree were a one-year wonder, I would say 100% of its value -- as a going business -- was represented by one year's earnings. But if I believe, as we both do, that the tree is like a corporation that will keep producing earnings year after year. What am I willing to pay to receive $45 in earnings every year into the future. That will be the capitalized value of the tree." The old man was ready to hear an offer, "Do you have something in mind?" he asked.
"I'm getting there. If this tree's earnings were steady and predictable, like a U.S. Treasury bond, it would be easy. But its earnings are not guaranteed. So we have to take into account risk and uncertainty. If the risk of its ruin is high, I would insist that a single year's earnings represent a higher percentage of the value of the tree. After all, apples could glut on the market one day and you would have to cut the price and increase the costs of selling them. Or some doctor could discover that eating an apple a day is linked to heart disease. A drought could cut the yield of the tree. Or the tree could become diseased and die. These are all risks. And, on top of this, we don't know what will happen to costs related to the tree." The old man sought to brighten her perspective, "There are treatments, you know, that could be applied to increase the yield of the tree. In fact, this tree could spawn a whole orchard."
Computing risk (capitalization rate)
"I know," she assured him. "We will include that in the calculus. The fact is, we are talking about risk, and investment analysis is a cold business. We don't know with certainty what's going to happen. You want your money now and I'm supposed to live with the risk. Your tree isn't the only game in town. I have to choose between your tree and the strawberry patch down the road. I cannot do both and the purchase of your tree will deprive me of alternative investments. That means I have to compare the opportunities and the risks."
"To determine the proper rate at which we should capitalize earnings, I have looked at investment opportunities that are comparable to the apple tree, particularly in the agribusiness industry where these factors have been taken into account. I have concluded that an appropriate rate of return is 20%. In other words, assuming the average earnings over the last three years are representative, I am willing to pay a price that will earn me a 20% return on my investment. If you say I should take a lower rate of return, I'll simply go buy the strawberry patch instead. Now, to figure the price, we simply divide $45 by .20." The old man hesitated, "Long division was never my long suit. Is there a simpler way of doing the figuring?"
"There is," she assured him. "The reciprocal of .20 is 5. If you don't want to divide by the capitalization rate, you can multiply by its reciprocal, which we Wall Street types prefer. We call that reciprocal the price-earnings (or P-E) ratio. To compute the ratio, we divide 100 by the percentage rate of return we are seeking. If I was willing to take an 8% return, the P-E ratio would be 12.5 to 1. Since I want to earn 20%, by P-E ratio is 5:1. I'm willing to pay five times the tree's estimated annual earnings or $225 -- $45 times 5. The old man sat back. "I appreciate the lesson. Let me think about your offer. Can we meet again tomorrow?"
Cash flows
The next day when the young woman returned she found the old man emerging from a sea of work sheets, small print columns of numbers and a calculator. "Glad to see you," he said. Perhaps we can do business. It's easy to see how you Wall Street smartened make money, buying people's property for a fraction. But I think you'll agree my tree is worth more than you figured." The broker was willing to listen, "I'm open minded."
"You worked so hard over my books to come up with something you called profits, or earnings. I'm not so sure it tells you anything that important." She protested, "Yes, it does. Profits measure efficiency and economic utility."
"Maybe," he mused, "but it sure doesn't tell you how much money you've got. Yesterday I looked in my safe and found some stocks that hadn't ever paid much of a dividend. The company sent me reports telling me how great earnings were, but I couldn't spend them. It's just the opposite with the tree. You figured the earnings were lower because of some amounts you called depreciation that I never had to spend. It seems to me these earnings, after depreciation, are an idea worked up by the accountants. Now ideas are useful, but you can't fold them and put them in your pocket." The broker was surprised, "What's important, then?"
"Cash flow," the old man declared. "I'm talking about dollars you can spend, or save or give to your children. This tree will go on for years yielding revenues after costs." She sputtered, "what about the risks, the uncertainties?"
Expected returns
"Ah, yes," the old man observed, "I think we can deal with that. Chances are that you and I could agree, after some thought, on the possible range of revenues and costs. I suspect we would estimate that for the next five years, there is a 25% chance that the cash flow will be $40, a 50% chance it will be $50 and a 25% chance it will be $60. That makes $50 our best guess, if you average it out. Then let us figure that for the next ten years that the average will be $40. And that's it. The tree doctor tells me the tree won't last longer than 15 years. Now all we have to do is figure out what you pay today to get $50 each year for the next five years, and $40 each year for ten more years. Then, throw in the $50 we can sell the tree for firewood at the end of 15 years."
Discount rate (and comparable P/E ratio)
"Simple," she said, again on familiar ground. "You want to discount to the present value of future receipts. Of course, you need to determine the rate at which you discount."
"Precisely," he noted. "That's what all these charts and the calculator are doing." She nodded knowingly as he showed her discount tables that revealed what a dollar received at a later time is worth today, under different assumptions of the discount rate. It showed, for example, that at a 8% discount rate, a dollar delivered a year from now is worth $.93 today, simply because $.93 today, invested at 8%, will produce $1 a year from now.
"You could put your money in a bank and receive 5% interest, insured. But you could also put your money into obligations of the U.S. Government and earn 8% interest. That looks like the risk free rate of interest to me. Anywhere else you put your money deprives you of the opportunity to earn 8% risk free. Discounting by 8% will only compensate you for the time value of the money you invest in the tree rather than in government securities. But I concede that the cash flow from the apple tree is not riskless, sad to say, so we can use a higher discount rate to compensate you for the risk in your investment. Let us agree that we discount the receipt of $50 a year from now by 15%, and so on with the other deferred receipts. That is about the rate that is applied to investments with this magnitude of risk. You can check with my cousin who sold his strawberry patch yesterday.
According to my figures, the present value is --
That is, the total present value of all the net cash flows is $273.56. You can see how much I'm allowing for risk because if I discounted the stream at 8%, it would come to $398.07. I'll take $270 -- to round it off."
After a few minutes reflection, the young broker said to the old man. "It was a bit foxy of you yesterday to let me appear to be teaching you something. Where did you learn so much about finance as an apple grower?" He counseled her softly, "Don't be foolish, my young friend. Wisdom comes from experience."
Comparison DCF and capitalization of earnings
The young woman smiled. "I have enjoyed this lesson. But I'll tell you something that some financial whiz kids say whether you figure value on the basis of the discounted cash flow method or the capitalization of earnings, so long as we apply both methods perfectly we should come out at exactly the same point."
"Of course," the old man exclaimed. "But which method is more likely to be misused? I prefer my method because I don't have to monkey around with depreciation. You have to make assumptions about useful life and how fast you're going to depreciate. That's where you went wrong in your figuring."
"You are crafty," she rejoined. "But your calculations aren't perfect, either. It's easy to discount cash flows when they are nice and steady, but what if you have some lumpy expenses? For example, several years from now that tree will need pruning and spraying that you didn't include in your cash flow. The costs of that will throw off your calculations. Tell you what. "I'll offer $250. My cold analysis says I'm overpaying, but I've come to like that tree. Maybe I'll sit in its shade."
"It's a deal," said the old man. "I never said I was looking for the perfect offer, but only the best offer. You make good sense."
Moral
There are several. First, methods are useful tools, but good judgement comes from mixing methods and experience. And experience comes from mistakes. Second, listen closely to the experts, and hear what they don't say. Behind all their elegant sounds, there is much discordance and uncertainty. One wrong assumption can carry you far off track. Finally, you are never too young or old to learn.
There are several. First, methods are useful tools, but good judgement comes from mixing methods and experience. And experience comes from mistakes. Second, listen closely to the experts, and hear what they don't say. Behind all their elegant sounds, there is much discordance and uncertainty. One wrong assumption can carry you far off track. Finally, you are never too young or old to learn.
Source: http://users.wfu.edu/
Quote for the day
"Amateurs look for challenges; professionals look for easy trades. Losers get high from the action; the pros look for the best odds." - Alexander Elder
Wednesday, 17 February 2021
Quote for the day
"Successful trading depends on the 3M`s - Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger - deciding when to buy and sell. Money refers to how you manage your trading capital." - Alexander Elder
Tuesday, 16 February 2021
3 Types of Confidence
First, is what I call ‘false confidence’ That’s the person who talks big and poses like a big shot. This type of person often takes big risks in an effort to either impress others or to assuage their own discomfort, and the results can be terrible.
Next, there is temporary confidence, which is conditional on recent performance. This is the person whose self-esteem is tied to their account equity or P & L. When on a good run, they feel confident and take larger risks (often the prelude to giving it all back). And when performance is lousy they start grasping at anything, maybe exiting winners prematurely or taking on excessive risk to get their money back.
Finally, we have true confidence. This is confidence that does not depend on recent results. It is based on a deep sense of inner trust. This is the person who has a history of doing the right thing, regardless of the outcome. Doing the right thing in the sense that they act in their own best interest and trust and understand that doing such over time has a positive impact on results. The trust runs deep enough to provide resilience in the face of disappointment. This is true self-confidence, the kind you want in trading and in life.
Almost everyone says that discipline is a requirement to succeed in trading. But most people never talk about what really underlies that type of discipline. The answer……true self-confidence.
Source: http://www.andrewmenaker.com/
Next, there is temporary confidence, which is conditional on recent performance. This is the person whose self-esteem is tied to their account equity or P & L. When on a good run, they feel confident and take larger risks (often the prelude to giving it all back). And when performance is lousy they start grasping at anything, maybe exiting winners prematurely or taking on excessive risk to get their money back.
Finally, we have true confidence. This is confidence that does not depend on recent results. It is based on a deep sense of inner trust. This is the person who has a history of doing the right thing, regardless of the outcome. Doing the right thing in the sense that they act in their own best interest and trust and understand that doing such over time has a positive impact on results. The trust runs deep enough to provide resilience in the face of disappointment. This is true self-confidence, the kind you want in trading and in life.
Almost everyone says that discipline is a requirement to succeed in trading. But most people never talk about what really underlies that type of discipline. The answer……true self-confidence.
Source: http://www.andrewmenaker.com/
Quote for the day
"Much of our trading comes down to a battle between our patience and our impulses." - Steve Burns
Monday, 15 February 2021
Quote for the day
"Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets." - Alexander Elder
Sunday, 14 February 2021
Quote for the day
"Money is multiplied in practical value depending on the number of W's you control in your life: what you do, when you do it, where you do it, and with whom you do it." - Timothy Ferriss
Saturday, 13 February 2021
Quote for the day
"Too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like." - Will Rogers
Friday, 12 February 2021
Quote for the day
"One of the greatest gifts you can give to anyone is the gift of attention." - Jim Rohn
Thursday, 11 February 2021
Quote for the day
"The way of success is the way of continuous pursuit of knowledge." - Napoleon Hill
Wednesday, 10 February 2021
Read this if your stock-market results are disappointing.
I'm reading a great book that is making me think about how I've been managing my share portfolio, even after several years of stock-market investing.
It's called "Selecting Shares That Perform" and was written by Richard Koch and Leo Gough, one a successful investor and the other a prolific author of financial and investment books.
With greater focus on just a few shares, it's more likely that we will be on the ball when it comes to buying and selling. The book suggests that between five and ten shares is adequate for most investors.
5. Do not invest heavily when everyone else is
You've probably heard the adage: "When they are crying, it's time for buying; when they are yelling, it's time for selling." In other words, when everyone has gone share crazy, there's a good chance that markets may be close to a cyclical high -- often a disastrous time to buy most shares.
If we invest in speculative companies with no profits, but with great 'potential,' it is usually very similar to betting on the horses with an unpredictable outcome. On the other hand, finding attractively valued, profit-making businesses with good growth prospects can help us to achieve results that are more predictable.
Bottom Line
To me, these are sensible rules and I'm looking forward particularly to applying the first two more with my own share portfolio.
by Kevin Godbold
www.fool.co.uk
It's called "Selecting Shares That Perform" and was written by Richard Koch and Leo Gough, one a successful investor and the other a prolific author of financial and investment books.
Some of their rules for portfolio management challenge my previously held views, but I think they make sense. The following list starts with the rules that are rocking me the most:
1. Never 'average down' when the price is falling
They must be joking, right. Never average down; surely that flies in the face of conventional wisdom. Heck, I've averaged down on my investments loads of times, when they've moved against me.
But here's the thing -- although times of general market weakness may be a good time for bargain hunting, maybe there's a rational argument for not averaging down when an individual investment tanks. What we are talking about here are shares that fall despite being part of a rising index or portfolio. After all, we buy shares in companies because our analysis leads us to think that they will go up. If they go down, we were wrong, plain and simple.
Averaging down means we think a share is about to turn around and go up again, right? Well that's a tough call to make and one that's easy to get wrong. If you don't believe me, look at shares such as Royal Bank of Scotland (LSE: RBS), Lloyds Banking (LSE: LLOY) and Taylor Wimpey (LSE: TW), all popular 'value' favourites around 2007. Look at the share prices of these companies now and think of those investors that averaged down into the share-price destruction.
To me, it seems wise either to maintain our original weightings in such bad performing investments, or even to consider using the next rule:
2. Never be afraid to sell at a loss
Instead of averaging down, why not axe a falling share? I mean, it's doing the exact opposite to what it was 'supposed' to do, so why not just cut and run after a predetermined decline? The book I'm reading suggests 7-10%.
I wish I'd done that much more often. Shares such as Trinity Mirror (LSE: TNI), Dixons (LSE: DXNS) and HMV (LSE: HMV) could have been prevented from causing so much private-investor carnage if those punters had simply sold on share-price weakness.
3. Balance patience and prudence
Whether we fall into the 'long-term buy and hold' camp or the 'it's never wrong to take a profit' camp, it's a good idea to seek a balance between the two philosophies.
How patient should we be? If we are holding a share for years, and nothing happens, maybe it would be more prudent to sell and move on to other opportunities. Similarly, if a share rockets very quickly, maybe it's prudent to pocket some of those gains. My own rule-of-thumb is 'the faster the gain, the faster the sale.'
Generally, I think it's wise to be flexible and not become too entrenched in either philosophy.
4. Do not over-diversify your portfolio
Traditionally, a diversified portfolio of shares is seen as a defence against individual company risk, but too many shares in a portfolio can actually increase risk.
With too many shares, it's hard to know the underlying companies that well. There is a risk that the quality of your choices might decline and, with so many holdings, you could end up chucking in a few speculative punts with hardly any thought.
1. Never 'average down' when the price is falling
They must be joking, right. Never average down; surely that flies in the face of conventional wisdom. Heck, I've averaged down on my investments loads of times, when they've moved against me.
But here's the thing -- although times of general market weakness may be a good time for bargain hunting, maybe there's a rational argument for not averaging down when an individual investment tanks. What we are talking about here are shares that fall despite being part of a rising index or portfolio. After all, we buy shares in companies because our analysis leads us to think that they will go up. If they go down, we were wrong, plain and simple.
Averaging down means we think a share is about to turn around and go up again, right? Well that's a tough call to make and one that's easy to get wrong. If you don't believe me, look at shares such as Royal Bank of Scotland (LSE: RBS), Lloyds Banking (LSE: LLOY) and Taylor Wimpey (LSE: TW), all popular 'value' favourites around 2007. Look at the share prices of these companies now and think of those investors that averaged down into the share-price destruction.
To me, it seems wise either to maintain our original weightings in such bad performing investments, or even to consider using the next rule:
2. Never be afraid to sell at a loss
Instead of averaging down, why not axe a falling share? I mean, it's doing the exact opposite to what it was 'supposed' to do, so why not just cut and run after a predetermined decline? The book I'm reading suggests 7-10%.
I wish I'd done that much more often. Shares such as Trinity Mirror (LSE: TNI), Dixons (LSE: DXNS) and HMV (LSE: HMV) could have been prevented from causing so much private-investor carnage if those punters had simply sold on share-price weakness.
3. Balance patience and prudence
Whether we fall into the 'long-term buy and hold' camp or the 'it's never wrong to take a profit' camp, it's a good idea to seek a balance between the two philosophies.
How patient should we be? If we are holding a share for years, and nothing happens, maybe it would be more prudent to sell and move on to other opportunities. Similarly, if a share rockets very quickly, maybe it's prudent to pocket some of those gains. My own rule-of-thumb is 'the faster the gain, the faster the sale.'
Generally, I think it's wise to be flexible and not become too entrenched in either philosophy.
4. Do not over-diversify your portfolio
Traditionally, a diversified portfolio of shares is seen as a defence against individual company risk, but too many shares in a portfolio can actually increase risk.
With too many shares, it's hard to know the underlying companies that well. There is a risk that the quality of your choices might decline and, with so many holdings, you could end up chucking in a few speculative punts with hardly any thought.
With greater focus on just a few shares, it's more likely that we will be on the ball when it comes to buying and selling. The book suggests that between five and ten shares is adequate for most investors.
5. Do not invest heavily when everyone else is
You've probably heard the adage: "When they are crying, it's time for buying; when they are yelling, it's time for selling." In other words, when everyone has gone share crazy, there's a good chance that markets may be close to a cyclical high -- often a disastrous time to buy most shares.
Conversely, when markets have plummeted and shares are very unpopular due to recent investor losses, it is usually a good time to pick up cheap shares on depressed valuations.
6. Only invest if you are confident in the company's prospects
The book cautions: "Investing in the stock market is not like picking a winner at Aintree", and we can only be confident in a company's prospects if we have researched and analysed it thoroughly.
6. Only invest if you are confident in the company's prospects
The book cautions: "Investing in the stock market is not like picking a winner at Aintree", and we can only be confident in a company's prospects if we have researched and analysed it thoroughly.
If we invest in speculative companies with no profits, but with great 'potential,' it is usually very similar to betting on the horses with an unpredictable outcome. On the other hand, finding attractively valued, profit-making businesses with good growth prospects can help us to achieve results that are more predictable.
Bottom Line
To me, these are sensible rules and I'm looking forward particularly to applying the first two more with my own share portfolio.
by Kevin Godbold
www.fool.co.uk
Tuesday, 9 February 2021
Quote for the day
"You are the master of your destiny. You can influence, direct and control your own environment. You can make your life what you want it to be." - Napoleon Hill
Monday, 8 February 2021
Quote for the day
“The starting point of all achievement is DESIRE. Keep this constantly in mind. Weak desire brings weak results, just as a small fire makes a small amount of heat.” – Napoleon Hill
Sunday, 7 February 2021
15 Exchanges New Traders Need To Make
1. For a trader to be successful their intellect must defeat their ego.
2. A trader must use probabilities to overcome their own personal opinions.
3. A trader has to use risk management to overcome the hope that a losing trade will turn around and just take the original stop loss plan.
4. A trader must allow the actual price action to overcome any personal directional bias.
5. A trader has to let a trailing stop overcome their desire to take profits too early early in a trade.
6. Successful traders use their passion and goals to overcome their tendencies to laziness or procrastination in doing their trading homework.
7. A profitable trader has learned to allow patience to overcome their desire to trade before they get a real entry signal.
8. We must allow our knowledge of the risk of ruin to defeat any desire to go all in on any supposed can’t miss trade.
9. Math must be used in place of hope, logic in place of fear, cautiousness in place of greed, and humbleness instead of ego.
10. The development of a robust trading method must be the work that replaces the search for the “Holy Grail” of trading that never loses or a trading guru that has all the answers.
11. Trading price action has to replace trading off of predictions.
12. Personal opinions, beliefs, and emotions must be replaced with quantified entries, exits, and position sizing.
13. A felling of cleverness must be exchanged for a real edge.
14. Ignorance about trading must be exchanged for knowledge.
15. Knowledge about trading must eventually be converted to trading profits.
2. A trader must use probabilities to overcome their own personal opinions.
3. A trader has to use risk management to overcome the hope that a losing trade will turn around and just take the original stop loss plan.
4. A trader must allow the actual price action to overcome any personal directional bias.
5. A trader has to let a trailing stop overcome their desire to take profits too early early in a trade.
6. Successful traders use their passion and goals to overcome their tendencies to laziness or procrastination in doing their trading homework.
7. A profitable trader has learned to allow patience to overcome their desire to trade before they get a real entry signal.
8. We must allow our knowledge of the risk of ruin to defeat any desire to go all in on any supposed can’t miss trade.
9. Math must be used in place of hope, logic in place of fear, cautiousness in place of greed, and humbleness instead of ego.
10. The development of a robust trading method must be the work that replaces the search for the “Holy Grail” of trading that never loses or a trading guru that has all the answers.
11. Trading price action has to replace trading off of predictions.
12. Personal opinions, beliefs, and emotions must be replaced with quantified entries, exits, and position sizing.
13. A felling of cleverness must be exchanged for a real edge.
14. Ignorance about trading must be exchanged for knowledge.
15. Knowledge about trading must eventually be converted to trading profits.
Source: newtraderu.com
Quote for the day
"The ignorant mind, with its infinite afflictions, passions, and evils, is rooted in the three poisons. Greed, anger, and delusion." - Bodhidharma
Saturday, 6 February 2021
Quote for the day
"As long as greed is stronger than compassion, there will always be suffering." - Rusty Eric.
Friday, 5 February 2021
Quote for the day
"The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge." - Daniel J. Boorstin
Thursday, 4 February 2021
Quote for the day
"We struggle with the complexities and avoid the simplicities." - Norman Vincent Peale
Wednesday, 3 February 2021
Quote for the day
"Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools don't imitate the successes of the wise" - Cato the Elder
Tuesday, 2 February 2021
The Psychology Behind Casinos And The Stock Market
Traders don’t like it when their profession is compared to gambling (and vice versa) because they believe that in trading skills determine if you come out ahead, whereas gambling is seen as a pointless endeavor where skills do not exist and only the desperate people are hoping to hit the jackpot.
However, in today’s world, the stock market has become a topic that you can read about in the news daily or watch 24/7 TV coverage of what is happening in the markets around the world. The way the stock market and trading is displayed and talked about has shifted significantly from sophisticated investing to sensation driven entertainment.
The implications of such a presentation and the impacts on the mindset and on the trading approach can be significant, without people even knowing how and why their trading decisions are being manipulated and impacted. The following article has been inspired by a chapter from the book “The indomitable investor : why a few succeed in the stock market when everyone else fails” where the parallels between the world of casinos and the stock market are compared.
Casino vs. Stock Market
Casinos
When people go to the casino, they often have a very detailed game-plan about how disciplined they are going to play, what their risk limit is, how much they are willing to lose at most and plans about leaving with more than what they came with. However, the casino managers are aware of the ‘preparation’ of the average gambler and they found ways to trick them into abandoning their good intentions.
The Stock Market
The fact that financial media and the media coverage is impacting investor behavior is widely researched and 3 findings stand out which highlight the impacts of financial media:
1) Attention-grabbing events lead active individual investors to be net buyers of stocks.
2) Individual investors are more likely to trade an S&P 500 index stock after an earnings announcement if that announcement was covered in the investor’s local newspaper.
3) Investors who have never previously owned a stock are more likely to buy when stocks reach upper price limits such as all-time highs.
These three findings show that the media and attention has a big influence on how the average investor makes his decisions. Furthermore, even if you think that you make your decisions completely independent, being exposed to very emotional and convincing reports or announcements can lead to trading decisions that deviate from your original plan. The next points will show how a trader can protect himself from such negative influences.
Implications for your own trading and tips to counteract the outside influence
#1 “Think slow to think at all”
Before you make a decision, think about what caused to you think in a certain way. Before entering a trade, ask yourself whether the trade idea is based on sound principles and your trading rules,or did get you the idea from an outside source? To be profitable over the long-term, a trader has to make his decisions self-determined and based on his own research.
“Give a man a stock tip, and you feed him for a day; show him how to trade, and you feed him for a lifetime.” – Modern_Rock
#2 Who do you engage with during trading?
It is OK to interact with other traders and talk about experiences or personal views. But during trading sessions, traders should be somewhat isolated. Being active in forums, trading chat rooms or listening to financial news can influence your own decision making process. Amateur traders often look for outside confirmation when a trade goes against them and then they ask other traders, often with completely different trading methodologies, why a trade is still good.
“When a trade goes wrong if you’re looking for confirmation bias instead of hitting stops, you don’t have the mental strength to be a trader.” – Assad Tannous
#3 Check your surroundings
As we have seen above, the atmosphere in casinos can have big impacts on how we perceive risk and act in situations. Therefore, be aware of the music you play while trading and avoid anything that is too arousing – some traders report that they listen to classical music during trading sessions to keep their level of arousal low. Do you really need to have CNBC running at all times? To bypass periods where nothing happens, do you watch funny YouTube videos or engage in any other activity that could have an impact on your mood?
This point might sound over the top, but everything around us, and the activities we engage in directly impact how we perceive risk and make our decisions, even though we might not be aware of it at first glance.
#4 The colors on your chart
However, in today’s world, the stock market has become a topic that you can read about in the news daily or watch 24/7 TV coverage of what is happening in the markets around the world. The way the stock market and trading is displayed and talked about has shifted significantly from sophisticated investing to sensation driven entertainment.
The implications of such a presentation and the impacts on the mindset and on the trading approach can be significant, without people even knowing how and why their trading decisions are being manipulated and impacted. The following article has been inspired by a chapter from the book “The indomitable investor : why a few succeed in the stock market when everyone else fails” where the parallels between the world of casinos and the stock market are compared.
Casino vs. Stock Market
Casinos
When people go to the casino, they often have a very detailed game-plan about how disciplined they are going to play, what their risk limit is, how much they are willing to lose at most and plans about leaving with more than what they came with. However, the casino managers are aware of the ‘preparation’ of the average gambler and they found ways to trick them into abandoning their good intentions.
- Free alcoholic drinks to seduce people to take more risk than what they had planned
- Women and other attractions to create arousal and to stop people from thinking too much about risk and potential losses
- Bright and flashy lights and sounds to create a casual atmosphere with lots of excitement
- Everything in a Casino is designed to make you want to spend your money, often created by professionals with a psychological background, including odors, sounds, patterns of the carpets, etc.
- Casino chips are used to make you forget you are actually playing with real money
The Stock Market
Although trading and investing is a very hard thing to do successfully, the way the media presents investing in the stock market is comparable to a large scale casino where the only goal is to create attention, excitement and awaken the hopes of people who are looking for a fast buck. The following attributes of the mainstream media and trading websites often create a wrong impression of trading and can be the cause of a negative trading performance:
- TV channels and newspapers use attention grabbing headlines and slogans to attract people
- Pictures and photos of young , rich men are used to awaken hopes and dreams of a certain clientele
- The hosts of investing shows have often little to do with sophisticated investors, but are very emotional to draw a lot of attention
- If there are extreme rallies you can read and hear about it everywhere and you can witness that even ‘the average Joe’ now suddenly sees himself as an investor
The fact that financial media and the media coverage is impacting investor behavior is widely researched and 3 findings stand out which highlight the impacts of financial media:
1) Attention-grabbing events lead active individual investors to be net buyers of stocks.
2) Individual investors are more likely to trade an S&P 500 index stock after an earnings announcement if that announcement was covered in the investor’s local newspaper.
3) Investors who have never previously owned a stock are more likely to buy when stocks reach upper price limits such as all-time highs.
These three findings show that the media and attention has a big influence on how the average investor makes his decisions. Furthermore, even if you think that you make your decisions completely independent, being exposed to very emotional and convincing reports or announcements can lead to trading decisions that deviate from your original plan. The next points will show how a trader can protect himself from such negative influences.
Implications for your own trading and tips to counteract the outside influence
#1 “Think slow to think at all”
Before you make a decision, think about what caused to you think in a certain way. Before entering a trade, ask yourself whether the trade idea is based on sound principles and your trading rules,or did get you the idea from an outside source? To be profitable over the long-term, a trader has to make his decisions self-determined and based on his own research.
“Give a man a stock tip, and you feed him for a day; show him how to trade, and you feed him for a lifetime.” – Modern_Rock
#2 Who do you engage with during trading?
It is OK to interact with other traders and talk about experiences or personal views. But during trading sessions, traders should be somewhat isolated. Being active in forums, trading chat rooms or listening to financial news can influence your own decision making process. Amateur traders often look for outside confirmation when a trade goes against them and then they ask other traders, often with completely different trading methodologies, why a trade is still good.
“When a trade goes wrong if you’re looking for confirmation bias instead of hitting stops, you don’t have the mental strength to be a trader.” – Assad Tannous
#3 Check your surroundings
As we have seen above, the atmosphere in casinos can have big impacts on how we perceive risk and act in situations. Therefore, be aware of the music you play while trading and avoid anything that is too arousing – some traders report that they listen to classical music during trading sessions to keep their level of arousal low. Do you really need to have CNBC running at all times? To bypass periods where nothing happens, do you watch funny YouTube videos or engage in any other activity that could have an impact on your mood?
This point might sound over the top, but everything around us, and the activities we engage in directly impact how we perceive risk and make our decisions, even though we might not be aware of it at first glance.
#4 The colors on your chart
As we have seen, even the color and pattern of the carpet in a casino has the purpose to make people loosen up, feel comfortable and lull them into plying more.
The colors we use in our trading platforms impact how we perceive the current price development. All our lives we are primed to respond to the two most commonly used signal colors red and green. Whenever we see green, it means go and everything is good, whereas red signals an immediate stop or danger.
Are traders more likely to engage in impulsive trading decisions when they are currently faced with a big green or red candle? Very likely. Are you more likely to close a buy trade when the current candle is red? Possibly. Even if the impact is minor, a trader should grab every possibility to put the odds a little more in your favor should be embraced.
The colors we use in our trading platforms impact how we perceive the current price development. All our lives we are primed to respond to the two most commonly used signal colors red and green. Whenever we see green, it means go and everything is good, whereas red signals an immediate stop or danger.
Are traders more likely to engage in impulsive trading decisions when they are currently faced with a big green or red candle? Very likely. Are you more likely to close a buy trade when the current candle is red? Possibly. Even if the impact is minor, a trader should grab every possibility to put the odds a little more in your favor should be embraced.
Source: https://tradeciety.com/
Quote for the day
"The person interested in success has to learn to view failure as a healthy, inevitable part of the process of getting to the top." - Dr. Joyce Brothers
Monday, 1 February 2021
Short And Distort – Naked Short
Short and distort
is a less publicly known investment scam similar to the classic pump
and dump. Shorting is a word in traders jargon and means basically
selling a stock, currency, paper or any other similar financial item
that can be traded. Short and distort is as illegal as the pump and dump. The short and distort scheme is used in a bearish trend (prolonged period in which investment prices fall) and is the inverse method of pump’n dump.
The short and distort player will look for stocks that might be overvalued. When there is little activity on a stock due to news, the short seller may come into the market and sells the stock. He will then spread unsubstantiated rumors and other kinds of unverified bad news in an attempt to drive down the equity’s price. This can be done by negative posts to message boards, chat rooms, newsgroups, issuance of newsletters recommending the sale of the stock, seminars, private phone calls and similar. The plan is to entice investors to dump their stock with the prime objective of driving the price down. Instead of excitement, the distorter tries to stimulate fear. When the price is falling, the manipulator will buy stock to cover his position. Buying the stock at a discount and thereby making a profit. In order to create a selling frenzy which the distorted must do in order to buy enough stock to cover his position and not drive the price up he will create the impression that there is a great deal of selling taking place. He will do this by having his friends and brokers cross stock to each other giving the impression of large volume. In the end the investors who bought stock at higher prices will sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective negative campaign.
TIPS FOR AVOIDANCE
- Everyone providing investment information or advice must fully explain the nature of the relationship between him and the company that is the subject of the report. If there is no disclaimer, investors should disregard the report
- Potential profit should not be exaggerated. Assumptions upon which the earnings model is based should be clearly stated so that the reader can evaluate the reasonableness of the assumptions. If a report lacks these details, it is generally safe to assume that the report lacks a sound basis, and investors should ignore the report
- It is a good sign if the author’s name and contact information is on the report, because firstly it gives you a way to contact the author for additional information and secondly it shows the author is proud of the report. If the author’s name is not given, investors should be very skeptical of the report’s contents. Don't believe everything you read and verify the facts on your own before making an investing decision
- Beware if the report contains a lot of great words and exclamation points. Good analysts are not supposed to be boring, but good reports don’t read like a Mcdonalds commercial. A good report should be interesting, but would never use exaggerations, sure things and guarantees. You would never be suggested to mortgage your home to buy a stock
- An ongoing research coverage usually acts as a sign that the firm legitimately believes in the long-term potential of a stock
Source: http://www.bustathief.com
The short and distort player will look for stocks that might be overvalued. When there is little activity on a stock due to news, the short seller may come into the market and sells the stock. He will then spread unsubstantiated rumors and other kinds of unverified bad news in an attempt to drive down the equity’s price. This can be done by negative posts to message boards, chat rooms, newsgroups, issuance of newsletters recommending the sale of the stock, seminars, private phone calls and similar. The plan is to entice investors to dump their stock with the prime objective of driving the price down. Instead of excitement, the distorter tries to stimulate fear. When the price is falling, the manipulator will buy stock to cover his position. Buying the stock at a discount and thereby making a profit. In order to create a selling frenzy which the distorted must do in order to buy enough stock to cover his position and not drive the price up he will create the impression that there is a great deal of selling taking place. He will do this by having his friends and brokers cross stock to each other giving the impression of large volume. In the end the investors who bought stock at higher prices will sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective negative campaign.
TIPS FOR AVOIDANCE
- Everyone providing investment information or advice must fully explain the nature of the relationship between him and the company that is the subject of the report. If there is no disclaimer, investors should disregard the report
- Potential profit should not be exaggerated. Assumptions upon which the earnings model is based should be clearly stated so that the reader can evaluate the reasonableness of the assumptions. If a report lacks these details, it is generally safe to assume that the report lacks a sound basis, and investors should ignore the report
- It is a good sign if the author’s name and contact information is on the report, because firstly it gives you a way to contact the author for additional information and secondly it shows the author is proud of the report. If the author’s name is not given, investors should be very skeptical of the report’s contents. Don't believe everything you read and verify the facts on your own before making an investing decision
- Beware if the report contains a lot of great words and exclamation points. Good analysts are not supposed to be boring, but good reports don’t read like a Mcdonalds commercial. A good report should be interesting, but would never use exaggerations, sure things and guarantees. You would never be suggested to mortgage your home to buy a stock
- An ongoing research coverage usually acts as a sign that the firm legitimately believes in the long-term potential of a stock
Source: http://www.bustathief.com
Quote for the day
"What we need to understand is, one, that there are market failures; and two, that there are things like asset bubbles and irrational exuberance. There are periods of booms, bubbles, and manias. These things, if left to themselves, can lead to crashes, to busts, to panics." - Nouriel Roubini
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