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Delusionary tactics for market dummies

Discussion in 'General Investing Discussion' started by Tropo, 26th Oct, 2010.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    One thing that has always confused me is why those "For Dummies" books have bright yellow and black covers, the two most contrasting colours in the spectrum.
    Hardly discreet. It must put off a lot of Dummies from buying them.
    Indeed, I wonder if books like Navigation for Dummies and Mortgages for Dummies had been an inconspicuous grey the Titanic would still be afloat and the global financial crisis avoided.
    Despite that, I have scoured their 1700 titles and I think I have identified a gap, and have begun to make notes for number 1701 - Popular Stock market Delusions for Dummies. Here's what I've got so far:

    Chapter One: The Warren Buffett Way.
    What's the difference between a rank beginner and a sophisticated investor? Answer - a few Warren Buffett quotes.
    The truth is that the closest anyone who relies on a few Warren Buffett quotes is ever likely to come to the Warren Buffett Way is wearing a cardigan and living in the same crappy house for the rest of your life.

    Chapter Two: Future returns can be projected forward from historic returns.
    No. Historic average returns are a statistic not an expectation. I can prove it. History is history. The future is a blank canvas.

    Chapter Three: Set and Forget.
    Sorry but this only works in hindsight on stocks that have performed extremely well.
    Yes you can quote me BHP and Woolworths but I remember one of my colleagues telling clients when Babcock & Brown first listed that it was a set and forget stock and that you just had to shut your eyes to the huge price rise on listing and buy.
    He'd certainly like to forget that. If you forget anything you have money invested in you are a fool.
    Set and forget is a great excuse for doing nick all and trusting to luck.

    Chapter Four: The average stock market return is about 9 per cent plus dividends.
    No it's not.
    The average annual real return from the stock market after inflation, tax, management fees, trails, commissions and the index fudge is close to zero before dividends. Not 9 per cent.
    Another reason you cannot set and forget. You have to do better than that.

    Chapter Five: You can't time the market.
    Sorry, but you can and thanks to Chapter Four you'd better learn how because without timing you aren't going to make money.
    You have to do it, or find someone that can do it for you.

    Chapter Six: Transformation.
    Every industry sells transformation. My garage with its weights, punchbag and boxes of protein shakes is a monument to my belief in transformation.
    But it's never going to happen by Visa alone.
    Anyone in the finance industry selling anything other than transformation through long-term dedication, sacrifice, education, attrition, error and experience is lying.
    Sorry, but you can't be a "Forex Trader", or an "Options Trader" and no you won't be able to "Give up work and live the lifestyle you always dreamed of" by entering your credit card number. It's rubbish.

    Chapter Seven: Certainty. If you knew BHP was definitely going to go up 10c tomorrow you would borrow every dollar you possibly could to exploit that definite gain. If I told you it might, you wouldn't bother.
    Basically all investment products sell certainty and the more certainty we are sold the more we buy.
    Let me tell you about certainty.
    I once dissected a major investment banks capital guaranteed leveraged equity fund. A product for nervous investors that needed certainty.
    Capital guaranteed was the perfect product. Seemingly.
    But we worked out that if you put in $30,000 and borrowed $70,000 your total fees (at the time) were $16,000 pa.

    Yes your $100,000 worth of shares was fully hedged and you'd never lose money on the capital in the shares but the annual cost of all the options needed to achieve that plus the interest plus a management fee plus a ''it's so complicated you'd never notice'' fee meant that servicing the product structure would cost you over half your original capital.

    But that's OK they said, the costs will be offset by the dividends from the shares. In other words, they kept those as well.
    Certainty sells and the salesman who says "Definitely" earns more than one who says "Maybe".

    Chapter Eight: The more accurate the forecast the better.
    When it comes to making money all you have to do is look at a list of the 10 best and worst performing stocks in the ASX 200 stocks in the past 12 months and you will realise that all the money is being made in the stocks that everyone gets most wrong, not right.
    Stocks that "surprise", not stocks that are predictable.
    The best performers are the stocks that are bid for, are exposed to commodities that rise more than expected and are the stocks that see earnings upgrades.
    And the worst performers, which this year included Elders, ERA, Primary Healthcare, iSoft and Nufarm, are all stocks that had profit downgrades and missed forecasts not made them.
    Making money comes down to working out what the market doesn't know, not what it knows.
    Poring over consensus PEs and yields of no value unless you can see the errors not the genius. Focus on inaccuracy, not accuracy.

    Chapter Nine: Trading on fundamentals.
    You can't.
    A classic example would be buying the CBA on the day of their results this week because there was nothing wrong with them.
    But the share price fell 3 per cent and then another 1.5 per cent the next day. Fundamentals are only any good on a longer timescale.
    At Marcus Today we use them not to select good stocks so much as to get rid of stocks that we won't trade in. They are a great filter.
    But try and make money on some fundamental piffle about a company whose share price is trying to survive in a volatile, ranging and risky market and you won't succeed.
    It's like an archer aiming an arrow on the advice that "it's somewhere over there".

    Chapter Ten: Buy defensive stocks.
    Never buy defensive stocks.
    Defensive stocks are stocks that fall less than the market when it goes down. The only people who should ever buy defensive stocks are institutions whose job it is to beat their competitors in a game of performance relative to the market.
    Outside that, a private investor should never buy a defensive stock.
    In a falling market all they will do is lose you less money than other stocks.
    Why would you buy one of those?
    And when the market goes up you want growth stocks, not defensive stocks.
    The reason most people get caught by the defensive stock theory is because they confuse institutional advice with advice.
    There is only one defensive stock in a falling market - cash.

    Chapter Eleven: Inside information.
    The idea that this is how ''other'' people make money in the market is widely held and it is rubbish.
    The amount of really informed inside trading that goes on is infinitesimal and the amount of uninformed, incorrect, ''you're being manipulated'' inside trading that goes on is huge.
    Inside tippers almost always have an agenda. Which is to get you to buy, not to make you money. It really isn't worth the pursuit.

    Chapter Twelve: Once in a lifetime events.
    I had a client once who bought Qantas call warrants. It was 9/10/2001.
    By the end of 9/11/2001 I had a client who disappeared and an $85,000 bad debt position. A once in a lifetime event.
    Three days later Ansett went bust. A once in a lifetime event. Qantas shot back up to leave me $12,000 out of pocket and I closed it out.
    Bottom line, you have to factor in once in a lifetime events, because they happen twice a week.
    Go to lunch believing the NYSE could be blown up by a bomb and you'll never be surprised.

    Chapter Thirteen: Assuming nothing comes out of left field.
    An admission by a forecaster that they are a sot and that their previous statement is yet another bland random guess absent of integrity.

    Chapter Fourteen: It's a conspiracy.
    A lot of private investors operate in the belief that the markets are some big Machiavellian conspiracy that is out to get them.
    The only thing that will get you is your own ignorance.
    Work on that before you start worrying about "The Man".
    And let me tell you something that'll hopefully give you a bit of a glow this weekend. It's this.
    "The Man" doesn't know his arse from his elbow either.
    M. Padley