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Lessons Learned From Past DOW Milestones

Thursday, March 7, 2013 - 11:22 AM
From MarketWatch.com:

Lessons from past Dow milestones - MarketWatch

The reminder for all is that people never learned from past failures as far as greed/fear goes.  We all say, "It is different this time and I am smart."  The truth is we all are emotional animals that are attracted by market bulls and scared away from market bears.  Thus when the market goes up everyday, we pile our money in to enjoy the daily victory at the end of the day.  When the market tanks, we all bail out with huge losses (no mentioning of it in the party). 

The prudent way is to read all these milestones in depth and conclude that we are not animals that can predict the future (as the Bible rightfully pointed out), and the stock market is, like weather and mood, purely random and unpredictable.  Once one comes to this sobering conclusion, the rest is easy.

Keep the minimum (i.e., that you can afford to lose without losing sleep) in the market and diversify according to your own observation and experience.  Then go on enjoying life and other things (than money) in life that are "priceless."
6
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
1. Thursday, March 7, 2013 - 3:31 PM
Dear 51hh,

Actually stock market is not random, and nor is it unpredictable!

I'll give very broad examples that might indicate non-random-ness of the markets.

... (1) Recently the market moved up in reaction to ADP report about private hiring numbers

... (2) After attacks of 9/11 the market moved sharply down

There was nothing random about the market movement after these events, but it was a rational reaction to the events, and was quite predictable, once the event was known by the market participants.

Yours Truly,
- Anonymous
2
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
2. Thursday, March 7, 2013 - 4:40 PM
Hi Yt,

By "randomness" I meant that which was defined by Mr. Burton Malkiel in his book "A Random Walk Down Wall Street": "One in which future steps or direction cannot be predicted on the basis of past actions."

If one can predict 9/11 and ADP and make huge money due to these events, more power to her/him and congrats.  -- I do not think anyone can do that. 

There are debates whether the stock market is efficient or not; I am not an expert for that, either.  I do know that nobody can predict the market which emulates random walk theory.  Thus do not second guess the market for profit.

BR,

51
1
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
3. Thursday, March 7, 2013 - 4:47 PM
.

.

Dear 51hh,

Okay ... I guess you are pondering whether one can predict the events like ADP report or 9/11 attacks ... Not whether one can predict the movement of the market per se, in reaction to or indedependent of such events.

When I read the words "random" and "market" in a single sentence, immediately I thought of the book by Mr Malkiel.  ( Yes ... have gone over it ... Mostly disagree with the author's points. )

Yours Truly,
- Anonymous
1
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
4. Thursday, March 7, 2013 - 5:49 PM
Yt,

Thanks for your reply. 

The Random Walk book concludes with index fund investing like all value investing experts starting with Benjamin Graham, Bogle, et. al.  I do not agree with that conclusion, either. 

Bozo, and many young people nowadays, favor index fund investing.  This is derived from the fact that the market is random in nature thus buying the entire market makes sense and maybe the only way to make decent money.  I highly respect Bozo and his intelligent approach to investing.

However, I am not able to agree with that strategy.  Being idle by buying the entire market (indexing) is not my investing style. 

I think that you have some smart, maybe unique, strategy (such as buying gold, metal).  I hope to learn something from you for the long term one of these days:-)

I do think that there are ways to beat the market in general; but one has to pay the price of hard analysis and numerous trials-and-errors/lessons.  If you can share with this audience your general strategy (in simple terms:-)), we all will appreciate it.

BR,

51
1
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
5. Thursday, March 7, 2013 - 6:47 PM
Dear 51hh,

Okay ... Let me try.

Most commonly I use a tactic based on "market-breadth".  To demonstrate, I'll go point by point.
  • It surely is possible for one stock to go consistently up or consistently down for an extended period. (And extended is quite sibjective.)
  • It surely is possible for two/three/four/... hightly co-related stocks to exibit similar up/down behavior for identical time-frame.  (e.g. Cisco, Juniper Networks, Extreme Networks ... Wells Fargo, Chase, Bank of America ... BP, Shell, Exxon.)
  • Now, how possible it is for a mix of stocks that are loosely co-related to go up or consistently down for an identical extended period?  Say fifty stocks (Euro Stoxx 50) or hundred stocks (Nasdaq 100) or five-hundred stock (S&P 500) or two-thousand stocks (Russell 2000)?   Perhaps your guess will be that surely it is possible for all of them on an average, to move go consistently up or consistently down for relatively shorter periods only.  Reasonablly quickly they will diverge, and an inevitable "regression to mean" will occur for them collectively.
That's it !!!  The movements of large number of stocks to an untrained eye could look like "random" movements, but there are patterns there.  (No no ... I do not claim to have deciphered them all ... But at times these patterns, these time-frames are clear to me, and when they are, they are actionable mostly resulting in profit.)

BTW, I too don't invest.  I simply trade.

In the thread about the PM/Miners, I posted about buying.  Each of such buys has a stop-loss.  If I'm wrong, and the security moves that is resulting in a loss then the stop-loss will be executed at the level that is "tolerable" to me, rather than a level that will be "wipe-out".  If I'm right and the security moves so that it is in profit, then I'll trail a stop order behind it that will assure me some profit.  If I see a better opportunity, mostly I'll close the position and move on.  If the security is neither moving up or down in a satisfactory manner, and it is getting boring to see it hover, then also I'll close the position and move on.

Another tactic is to do short-term hedges based on the open Structured Notes. (I will not be able to document that today.  Maybe some other time.)

Trading in tax-defereed accounts spares me from immediate taxes, and these days commission is very cheap (and even zero for several ETFs at Schwab, Fidelity, Ameritrade etc.)

Yours Truly,
- Anonymous
2
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
6. Thursday, March 7, 2013 - 8:50 PM
Dear 51hh,

If you wish to learn, do try to focus of what is certain in the market.

I know many would say there is nothing that is certain in the market.  I know of 3 certainties in the market.

As a challenge to logic/thought/observation can you name any?

Yours Truly,
- Anonymous
3
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
7. Friday, March 8, 2013 - 10:58 AM
Dear 51hh,

The basis for the profitable trade I made for the Miners (at link below) is based on one of the certainties in the market I know of.

http://www.depositaccounts.com/forum/thread/12731-precious-metals-miners.html

As you'll see, from the date/time of the posts, they were all done in chronologic order ... So for sure there are movements that are quite predictable and far from being random.  There are far more intelligent/logical/methodical traders (documented by Jack D Schwager) than I can ever be, who do this sort of thing for a living consistently year-after-year.

Yours Truly,
- Anonymous
3
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
8. Friday, March 8, 2013 - 1:31 PM
Dear 51hh,

If you wish to learn, do try to focus of what is certain in the market.

I know many would say there is nothing that is certain in the market.  I know of 3 certainties in the market.

As a challenge to logic/thought/observation can you name any?

Yours Truly,
- Anonymous

Hey Yt, Thanks so much.  I will take the challenge for three things that are certain:

Greed, Fear, and I certainly cannot beat smart and experienced investors like you; thus stock picking/trading is not my cup of tea.

But do please continue to educate; I think it takes a lot of experience, guts, luck, and gambler's instinct.

I know several of those in FWF (they are both cool and intelligent); I am certainly not one of them.  I cannot afford to lose:D

Thanks again; Yt!

1
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
9. Friday, March 8, 2013 - 2:11 PM
Dear 51hh,

Indeed ... That indeed is one certainty. (And the one I have incorporated in my trading logic.)

It is certain that market participants (individual traders, individual investors, institutional traders, hedge funds managers, automated computer programs, professional money managers etc.) will give-in to fear at times, and it is equally certain they will give-in to greed at times, and when the do this in excess there will be panic/euphoria.  At other times the market participants will be recovering from the earlier panic/euphoria and market will be in regression-to-mean phase.

So ... it is certain that during panic markets will be pushed into an over-sold state, and during euphoria markets will be pushed into over-bought state, and rest of times it is the inevitable "regression-to-mean".

Second certainty was disclosed famously by John Pierpont Morgan, when he was asked what would the market do on a particular day as "It will fluctuate". ... So market fluctuation is another certainty!

And the third certainty is the OHLCV (open, high, low, close and volume) of most of the securities.  These are the data (plural of datum) that is a synonym of "fact".  I consider this as certain, and value it much more than what the public  companies disclose via their mandated financial disclosures.

I'd agree that it takes lot of experience and some bit of luck.  But I don't think gut and gambler's instict are the factors (not for me at least).  I strictly perform my trading based on algorithms I've designed.

These days the "automated computer programs" are market participants in their own right, and they reflect the greed/fear of their designers.

You started this tread with the assumption that markets are not predictable and are random.  There are two books by Mr Schwager - Market Wizards and New Market Wizards, that document how some traders surely can predict the markets, and make money off of the non-random-ness of markets.  (Even an individual/non-professional trader like myself can do this, as I demonstrated with my recent trade of Miners.)

I wish you all the best should you decide to venture into this area.

Yours Truly,
- Anonymous
2
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
10. Friday, March 8, 2013 - 5:30 PM
Thanks again, Yt; it is certainly another avenue for profit if one is willing to learn, research, and practice.  Maybe I will consider it as a hobby when I retire one of these days.:-)
2
51hh51hh1,462 posts since
Jan 16, 2010
Rep Points: 6,352
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