Why Clever Investors Should Follow the IPO Market

Lukas Hofer

The IPO market is gaining momentum. Just two weeks ago Ferrari announced an IPO. Now Neiman Marcus wants to go public. Both are big players in their respective industry.

If you don't know what Neiman Marcus does, just take a look into the wardrobe of your wife. Yes, they sell clothes. Check her shopping bills and you'll see what kind of clothes. Neiman Marcus is a luxury fashion retailer. Almost 40% of customers have a median household income of more than $200,000.

An IPO is one of the critical milestones in a company's history. On the one hand, going public grants access to an additional financing source, which is great if the company has many projects and a promising growth potential.

On the other hand, there will be more people having a stake in the company and the management has to take care not to send unfavorable signals to the equity markets. Pleasing shareholders isn't always easy, especially if business is not going well.

When a company goes public, there will be an offer price at which investors can buy. The question is, is that price higher or lower than the actual value of the company?

As is so often the case, investment bankers of course have their fingers in the pie. However, it's not like some crazy bankers are pulling any price out of their a**. No, they apply sophisticated financial models during their valuation process in order to arrive at the fair value of the IPO firm.

Did you get the irony? We all know it doesn't work like this. That “fair value” is not really “fair” and they often pull it indeed out of their a**, at least partly.

Usually, they use multiples valuation, discounted cash flow models or dividend discount models. Science has proven that none of these models is superior; all are equally biased. In the end, it depends on the information which bankers factor in their models. So they can influence the outcome of that “fair value” calculation quite a lot.

The thing is that banks have their own incentives. I assume that none of you really believes that fairy-tale anymore that bankers are 100% genuine advisers.

The business relationship between the client and the bank is mostly limited to the IPO event. However, banks maintain long-term relationships with institutional investors, because they hope to hook up at other occasions as well. Hence, banks have an incentive to keep IPO prices lower than the “fair value,” in order to kiss the a** of their buy side buddies.

So the “fair” value is mostly biased and on top of that, bankers apply a discount, which is often not fully recovered during the IPO pricing process.

That's why underpricing is very common, which makes IPOs attractive for investors. If a company is sold under its real value, the probability is high that prices will go up after the IPO. 

Regarding Neiman Macus, here is a word of caution: The management has filed with the SEC without any underwriters. Hence, they are not yet paying banks to advise them. This is very unusual. There could be two reasons for such a move.

First, Neiman is owned by Ares Management LLC, a private equity firm. They might have the guts to go for it alone.

Second, they might not seriously plan to go public. Filing with the SEC might be an attempt to reach out to potential acquirers. Take a look at their company history. In 2013, they announced an IPO but then the owners sold the company. That might be a dual track strategy? We'll see...

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Why Dividend Stocks Can Be a Great Addition to Your Portfolio

Lukas Hofer

You buy, the price goes up; you make money. You buy, the price drops; you lose money. It's that easy. No rocket science, quite simple.

We call the end result capital gains… or capital losses! It's the first thing most people have in mind when they think about stocks. Indeed, looking for capital gains is a great way to make or… lose money. However, it's not the only way, not by any stretch.

Have you ever heard of dividend stocks?

Imagine you buy a stock and money comes in, even if it loses in value. That would be great, right? It's like getting drunk without a hangover. Or eating cake without gaining weight…

Especially if you are retired and don't have an income any longer. Wouldn't it be nice to have a steady income stream without thinking about price developments too much?

Some people appear to fuel an erroneous perception of dividends. Contrary to common beliefs, companies don't pay out sporadic dividends – here or there – because they had an extraordinary profit this quarter or because they feel like being nice to their shareholders next. Usually, the management follows a well-planned dividend payout strategy.

Imagine a company pays out a dividend one year and then drops it the following year. The market would react immediately and assume the company is not doing well. Hence, investors run away, the price drops, the CEO gets a lower bonus and can't afford a new Ferrari this year. Poor him!

Therefore, companies try to keep their dividend policy steady or grow their dividends slightly with each installment. That's why dividend stocks can ensure a steady income stream, even if their prices fluctuate. And that's why they are attractive to long-term investors.

John Rockefeller said: “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.” Of course, I think dividends shouldn't be the ONLY thing coming that gives you pleasure (I won’t go into the detail…), but they can definitely contribute to your personal well-being.

Just ask Dr. Google for great dividend stocks; there are a lot of these. Many are huge, well-established players, such as PepsiCo or McDonald’s, which offer dividend yields of around 3%. PepsiCo has grown its dividend payouts over the last two decades. Their smallest dividend increase was 5%. I'm not necessarily a big fan of their drinks, but their dividend is quite “delicious” and welcome.

Obviously, the dividend yield and its growth – or lack thereof – are not the only parameters you should factor in when you evaluate dividend stocks. It makes total sense to look at other criteria, which you would consider when you assess other stocks as well: earnings, revenue, leverage (debt), moat (competitive positioning), etc.

However, there is one variable that is especially important when you look at dividend stocks: Cash flow. Usually, when evaluating a stock, you would look at price-to-earnings ratios. In case of a dividend stock, the price-to-free-cash-flow ratio may make more sense. Dividends are paid out in cash. Earnings or profit, however, are a non-cash accounting metrics. Hence, cash flow is more relevant when considering dividend stocks.

In other words, free cash flow is cash that is available; dividends are cash that leaves the company. Earnings or profit, however, is not cash that comes in. In order to calculate profits, you would for example subtract amortization and depreciation from your earnings, because that's a cost. However, it's not cash “effective,” so it's not cash that exits the firm.

Looking at dividend stocks, you should ask questions like: How did the cash flow develop over the past few years? What percentage of the cash flow does the company pay out in dividends? Is the distribution rate too much of a burden? Is the dividend safe? What do they do with the rest of their cash flow?

Give it a thought. Some dividend stocks could be a great addition to your portfolio.

Mr. Share The Agonized Agony Aunt

Ezra White

In a world of financial uncertainty, it’s good to have someone we can trust for reliable (if somewhat irreverent) advice. Once more we turn to our resident agony aunt for help with our investment woes.

My friend says I should invest in oil because, according to him, it’s the perfect time. What’s best, olive or vegetable?

Your friend is a wise man; you are not. As it happens, this could be a great time to invest in oil (although, not the sort you drizzle on a salad) but it could also be a terrible time. The crude oil market is very volatile right now and in the last year or so its value has fallen by close to 50%. Investors have been getting on board throughout this time, taking advantage of the low price and expecting it to climb, but it has continued to fall. Whether or not its current price is the “rock-bottom” one is anyone’s guess, but it could be expensive to speculate. One way to go about it could be to start taking small positions in relevant energy stocks and add over time.

Should I care about what’s happening with the stock markets in China? I mean, I live in and invest in the United States, so why would it affect me?

Think of it this way. The recent cluster-f**k in Greece was enough to send the markets into a free-fall not only in Europe, but also around the world. Well, we’re getting carried away. It was not really a free-fall, was it? Nonetheless, stock markets were impacted worldwide. Greece may be the cradle of civilization and the home of incredibly original soccer, but it’s still a tiny country with a GDP that is lower than several US states. China, on the other hand, is a global superpower, the second biggest in the world – well, by some measures, the first. If we draw an apocalyptic comparison (which seems apt) Greece is a serious case of the sniffles, one that made several people feel ill and then (hopefully) disappeared, whilst China is the Black Death.

How do the commodity markets work? I want to invest in several kilos of grain but have nowhere to store the mess.

This is tricky, but interesting nonetheless. The commodity markets allow you to invest in a number of commodities, such as grain. These markets began as a way for farmers to sell their harvest to investors and in the early days they would actually deliver a bag of grain to the trading floor so that buyers could sample it. This was a slow process, but the buyers soon realized that certain global events affected the price of the grain they had just bought, giving them an opportunity to sell it on for a profit or loss. From this, an entire market was established whereby trades were a form of speculation, as opposed to an actual purchase.

If you invest in a commodity you are sinking your money into the hope that it will retain its value or increase it, at which point you can sell it. You have no physical investment, but you are taking a position on a virtual market that has been around for more than 100 years, and in a product that is a big part of the economy and human civilization. It’s not like investing in stocks, though. The shares investors own may appreciate over time as their enterprises conquer markets and grow earnings. Betting the price of grain, chocolate, wheat, gold or oil will go up (or down) is mere speculation, not an investment in a wealth-creating venture. It’s a trade, period. Care to flip a coin instead?

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The Magic of Bubbles – But You Don’t Have a Wand

FredericMarsanne

Earlier this morning I was pouring a glass of milk and for some reason there were tons of bubbles in it. Well, not tons. It’s air after all! But that got me thinking…

There are so many types of bubbles. Come to think of it, they’re everywhere. The danger is we really hardly notice them. Do you dive? I’ll see the shark roaming around the delicious fresh meat that I am, not the multitude of bubbles in the water that are as many proofs that I am alive – yes, I am still breathing.

Liquid bubbles. Soap bubbles. Stellar-wind bubbles – yeah, in case you’re wondering, these are large cavities that a star's energy creates in the interstellar space. Bubble wrap. Champagne. Superbubbles. Mephedrone – it’s a synthetic stimulant – not that I ever tried. They’re everywhere. It’s an invasion!!!

And the list goes on. Dot.com bubble. The dot itself is a bubble sort of, isn’t it? Real-estate bubble. Tulip bubble. Chinese-equity bubble. Chinese-property bubble. When does it stop? 

Everywhere. Only I couldn’t see them until just about now for some reason. Finally, I am aware. It’s about time. And all of a sudden I realize how my life, our lives – yes, I’m talking about us, dear – is running on thin air…

So I rushed to that old masterpiece of a booklet by John Kenneth Galbraith, “A Short History of Financial Euphoria.” The book itself feels like a bubble somehow. So light you hardly feel you’ve read anything by the time you’re done indulging.  

110 pages. That’s it! Who does not have the time for such a jewel? I enjoyed it. It’s so entertaining! I can’t seem to remember the main point it’s nearly, how shall I say, elusive. It’s just too fun for its own good.

But make no mistake about it. It really weighs a ton. The book reviews the great speculative episodes of the past three centuries or so. They show common denominators. Galbraith comments, “This is of no slight practical importance; recognizing them, the sensible person or institution is or should be warned. And perhaps some will be. But (…) the chances are not great, for built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place.” Rings true, doesn’t it?

Fueling this euphoria, Galbraith continues, are two key devilish ingredients – first, financial amnesia or, as he put it, “the brevity of financial memory.” Financial collapses get forgotten fast. Come a new bubble a few decades or even years later, a youthful and self-confident generation hails the circumstances that create it as a breakthrough, which Galbraith also refer to as “a brilliantly innovative discovery.” The second is the widely held belief that the more money an individual is endowed with, the more intelligent he or she is. In short, the more moula, the more brains. If someone makes money buying this, they’re smart. My turn then to buy it…

Continues Galbraith, “Uniformly in all such events there is the thought that there is something new in the world. (…) In the 17^th century it was the arrival of the tulips in Western Europe (…) Later it was the seeming wonders of the joint-stock company (…)” Yesterday it was the Internet.

What will it be next? Biotechs with no revenue and no earnings? Drones are pretty light, aren’t they? Do they qualify as bubbles?

Take a company like Ambarella (AMBA). Fabulous firm. Great technology. Super-fast grower. Its system-on-a-chip designs HD video processing, image/audio processing and system functions onto a single chip, delivering gorgeous video and image. 

Ambarella flies high on drones. The notion of drones with high-definition cameras roaming the skies is a bit perplexing or mind-buggling, but clearly investors are taking flight on the idea big time. AMBA started to trade at around $6 in October 2012 and shares are now worth more than $120. It’s a 20-bagger!

Shall I buy and hope for another 20-bagger from here like so many frenzied folks? AMBArassing I even hesitate.

Remember, though. A great company does not necessarily make for a great investment if you overpay.

The magic of bubbles... Just don’t forget you investor may not have a wand!

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How Stocks Going Down Can Be Great News!

Frederic Marsanne

I know… Seeing your stock portfolio lose value is no fun. No fun at all. Who said there is anything to love about that? But one day it will happen. Yes, believe it or not, there will be another correction (defined as prices decreasing at least 10%) and another bear market (defined as prices going down at least 20%).

But a meltdown can be great news in many ways.

First, a stock market correction or a bear market bring valuation down and create true buy opportunities. Biogen (BIIB) lost more than 20% of its value on Friday, July 24. Chairman and director Stelios Papadpoulos, purchased 10,000 shares at an average price of $304.88 the following Monday. The Biogen big shot is also the Chairman of the Board of Directors of Exelixis, Inc. and Regulus Therapeutics, Inc., a member of the Board of Directors of BG Medicine, Inc. and the co-founder of Anadys Pharmaceuticals, Inc., which Hoffman-La Roche acquired in 2011. He retired as Vice Chairman of Cowen & Co., LLC, a financial services company, in 2006, after six years with the firm where, as an investment banker, he focused on the biotechnology and pharmaceutical sectors. (Source: www.biogen.com) The point is that he likely knows a good biotech investment when he sees one. Prices go down dramatically? If the asset has value, buy; don’t sell! As Warren Buffett put it, "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Second, a correction or a bear market will test your mettle, and that’s a very good thing! Are you a real investor or just a trader or speculator? Think about it this way. The shares of Amazon (AMZN) and Netflix (NFLX) have gone through tremendous ups and downs over the years. Yet despite the huge fluctuations, all that you had to do is stay invested in their shares and you’d have created huge wealth for yourself. In 17+ years, one dollar invested in AMZN would have accrued well in excess of 300. But the shares did lose more than 90% of their value after the tech bubble imploded. To quote Warren Buffett again, “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” It takes tremendous resolve and discipline, not to mention nerves of steel, to hold on to these shares, but if you do you’ll be rewarded. Do you have the b@lls, may we dare ask? LinkedIn (LNKD) recently collapsed. Did you sell or buy LNKD that day or shortly thereafter? Alibaba (BABA) is languishing after its IPO. Are you buying or selling? There is real satisfaction in showing courage and staying the course. Congratulations! You are getting rich. Just fasten your seatbelt!

Third, Investors should be aware that a market can’t keep going up forever; it needs to take breathers. If stocks keep rising, they may reach bubble territory. Once we’re in a bubble, the way down can be quite traumatic. The following bear market and reversion to the mean then have an end-of-the-world feel to them.  Crashes and crises can trigger recessions in their own right, disrupt economies and destabilize societies. Think 1929… Stocks go down? Enjoy! A healthy pullback is to be expected on the way to stardom and fortune. Even the implosion of bubbles eventually regenerates societies, economies and the process of wealth creation and (re)distribution. So be it.

Fourth, in the rare case you have invested in a losing stock (does it ever happen I wonder?), well selling it at a loss will reduce your taxable capital gains for the year and you won’t owe Uncle Sam and the IRS quite as much. Lucky you!

Fifth and lastly, experiencing firsthand the ferociousness of bear markets will try you, educate you and “better” you.  As Mark Twain put it, “A man who carries a cat by the tail learns something he can learn in no other way.” Corrections and bear markets produce, not only attractive valuations, but also the next generation of great investors.

The Great Depression had Benjamin Graham, Warren Buffett and Sir John Templeton. Will the next one have you?

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Currency Trading Is The World’s Largest Financial Market

At the core, all you need to remember is that betting on a currency’s direction is speculation, not investment. When you buy Pounds or Swiss Francs or Euros or Yens, you don’t buy an ownership right into a firm that can grow its top and bottom line, and thus its equity and the wealth of its shareholders over time. You just hope that the relative value of the currency you purchased will increase. It’s a trade, nothing more, nothing less. Twenty years from now, it’s quite possible that the Euro and the dollar will still be close to parity. What long-term return can you then hope for from taking such a position? Meanwhile, companies like Facebook or LinkedIn may have made their owners rich – very rich. Primarily because they grow profit and you owner own some of it. Lucky you!

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I should have studied finance. I don’t even know what a devaluation is. Instead, I am the proud alumnus of a two-hour webinar that taught me I could become rich trading foreign currencies. Rich! Do you understand? Rich!!! But a foreign-exchange investor is like an... oxymoron. And if you remove the oxygen, he or she becomes a moron. My first wife should be doing this. After all, it’s for ex… Definitely not for me!

Yes, you learn a skill and hope to make a killing. But the murdered one in the end may be… you. Most retail currency investors lose money most of the time. FXCM Inc. and Gain Capital Holdings Inc., two leading publicly traded over-the-counter forex companies, have reported that, on average, nearly 70 percent of investors had a net loss from trading in recent quarters. The average OTC forex investor drops out of the market after just four months, according to the National Futures Association (NFA).
Currency trading is the world’s largest financial market; $5.3 trillion changes hands every day, according to the Bank for International Settlements. There are zillion of market participants. Pension funds and multinational corporations operate in the space of course. But also all sorts of speculators, brokers, weirdoes and people with broken dreams…

And then there is… me. Both my shrink and a friend of a friend of my dentist who said he knows someone recommended I get a piece of the action.

Damned, why did I listen and choose to enroll?

Can you believe I can supercharge my bets with 50:1 leverage? Stock investors are amateurs. The U.S. Federal Reserve limits individual stock investors’ leverage (margin requirements) to 2:1. I say, 50:1 or nothing! If I have $1,000 I want to bet $50,000’s worth minimum. The dream! This kind of juice can lead to monstrous wins -- even in a market that moves little. But of course investors – really, speculators – can have their entire position vanish in days. How about that for magic! Don’t overleverage, they recommend. But I’m saying 10:1 is for sissies… Or am I deranged?

Image source: google.com

Sure, leverage can blow me out. But if you don’t mind losing $10 instead of a mere $1, gambling the house, unsleeping at night, discovering the true meaning of conflicts of interest (Brokers often buy what I sell and sell what I buy so I guess they trust my judgment big time, don’t they?), enticing pitches by people who truly don’t care, piling up credit card debt for the wrong reasons (as though there ever were a good reason!), just help yourself! Do forex by any means.

Yes I’m going to max out my credit card. Oh yeah baby! That’s what FXCM suggested I do when I started with them. Fastest way to open an account, they teased. Why not? I have tons of credit cards I must be rich. The combination of leverage and plastic is a dream come true. I can end up paying an upfront fee, a transactional interchange reimbursement fee, a terminal fee (yeah, I’m about to die), a payment gateway fee, as well as debt with as high an interest rate as 25 percent. And the Fed is looking to boost rates; can you believe the dream? It’s like paradise! Who dared say I can lose it all?

Hold on! It’s already tomorrow and I forgot to make money. Thank God today is the day! Let’s go back to those Polish złoty and Mongolian tugrik…

In the “I trade. Do you mind?” Series Forex Routines, Beware Mirages!

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We have a very unique daily routine as forex traders, so beware.

• 3:00am EST Wake Up and Stress

• 1 hour reading on Stress and how to deal with it

• 30 minute workout to chill and try to forget about stress

• 4:30 Shower – We find using freezing water helps forget stress if only for a few minutes

• 4:31 Start the long, painful process of unfreezing

• 5:00am Breakfast including Tarte Tatin and double whopper Cheese because it’s going to take a lot to survive the day

• 5:30 Logon computer to check out all critical news feeds and hyper-sensitive emails that make us feel self-conscious or nervous or worse and disregard any that exacerbate stress levels or do not fit with expectations of what the data should look like today – it’s only fair.

• 6:00 Respond to any emails that’s worth responding to specially those that are quick to process – avoid anything challenging. Now is not the time.

• 6:30 Think of tax implications of the above. Call accountant and lawyer for a pleasant, well-deserved relaxing chat. Oops, too early we’re going into voice mail. Can you believe some people are still sleeping? What a bunch of deadbeats! Leave messages.

• 6:45 Skype call to Trading Partners - if I do feel I have any today: run our daily scan and proceed through market analysis. Select best vehicles for profit generation or at least loss prevention. Well, mostly loss prevention. Sorry, loss reduction. Damned! Remember stress is not the enemy. Panic when you are stressed; paradoxically, panic can help you forget you are stressed because you’re so stressed it’s like paroxysmal and numbing.

• 7:30 Second Breakfast to include hot dog and lots of eggs. Don’t forget the pickle. Pizza welcome as long as toppings include pineapples.

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• 8:00 Second Skype call to Trading Partners: Tertiary analysis review of the basket of relevant currencies and associated exit strategies. Bond with futures now before they’re past if you have to. Avoid exotic currencies like the British pound, especially if they feel dear.

• 8:01 Stress Coping Tactics. Avoid any inappropriate online content if, and only if, you must.

• 9:00 Pre market analysis sequel to make sure our overall (and ante-post-pre) analysis is correct. No way it is. Limit resulting damage. Only trade currency pairs we are super familiar with. My favorite one lately has been the Polish złoty versus the Mongolian tugrik. The tugrik today is worth around 0.00052 US dollars so I can get tons of tugriks for a dollar. Makes me feel good. I didn’t know, but in tugriks I’m a millionaire. Maybe you are too; think about that! The złoty is worth .27 US dollar. So you can still get lots of Mongolian moola per złoty.

There are other pairs I like. But I’ve found the U.S. dollar versus the euro tough to read, unpredictable as it has become lately. Thank the Greeks and the Germans for that!!! All this chat of Grexit and Grexhaustion makes me feel queasy. Not to mention the U.S. dollar versus the Swiss franc, an old favorite of mine. Remember a few months back when the Swiss currency jumped by nearly 30% against the euro right after the Swiss National Bank decided to stop curtailing the value of its currency? No warning, not even an apology. Nothing. Just wiped me out. FXCM Inc., one of the largest retail currency brokers in the world, had to beg for an emergency $300 million lifeline from investment firm Leucadia National Corp. Leucadia did not rescue me, though! Shares of FXCM were suspended on the New York Stock Exchange after the company said client (yeah, that’s me folks!) losses on Swiss franc trades threatened to put it in violation of regulatory capital rules. No kidding! I also owned shares of FXCM… Yeah, exactly, that’s me! A double whammy for the God of trades!!! Do you believe the comfort zone? What a day! The bast@rds! The yen is more predictable but you never know in which direction. Let me clarify: it’s not clear.

• 9:01 Check the markets. The first thing any pro trader does before breathing each day (that is, after all of the above, so there’s a good chance I’m already dead by now) is to check any outstanding order or open trades from the previous day. Depending on what happened overnight I may have to adjust stop losses on open positions, or just cry and wish I were a rock star. If the pre-determined plan was to trail stops on an open position, I will take the time to find the most logical next step (again, whatever that means), assuming the position has evolved in a certain way that’s not the opposite of what I had predicted and if it has not then I have to reevaluate. If any trades have closed out overnight, hitting either the set target (target, what target?) or stop loss level, I will update my trading journal to reflect these changes. Yes, because I write a journal. Thank God nobody reads it. Not even me! Are you kidding?

• 9:30 Market opens. Oops, hold on. It was already open. The foreign exchange currency market is not traded on a regulated exchange like stocks. It consists of a whole bunch of financial institutions and brokers, which follow their own modus operandi. Since most participants trade between 8:00 a.m. and 4:00 p.m. in their local time zone, this is widely assumed to be the market open and close times. I trade during the working hours of the three largest Market Centers: London, New York, and Tokyo. Sydney is for tourists and Frankfurt for Frankfurter Wuerstchen (THE sausage) amateurs. Given the multiplicity of operations in different time zones, the forex market is available for trading 24 hours a day, five and one-half days per week. You can be sleeping and have a nightmare and it is still open. Always on. I can engage after dinner or before breakfast or whenever I breathe. See, I can lose money anytime; I just have to click! I am waiting for triggers, fingers crossed. What? Who? Where? How? These are the key questions.

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• 9:30am – 4:00pm -- Live market analysis and news feeds and real-time transaction nightmares. I shall be placing a few trades. You know, the saying that genius is the ability to recognize patterns... Well, guess what, I don’t have it. I usually use technical analysis but today I again feel non-inspired. There are tons of zigzagging lines in the currency-price charts on the screen but I see no W formation. Maybe a V. Definitely a q. Oh yeah, going down alright… No, I don’t see any currency rising the way I want. I look online at my broker’s listing of bid and offer prices for THE currency pair. Where is the Polish złoty versus the Mongolian tugrik? OK, I’m going to short the Brazilian Real against the U.S. Dollar (get real… not!). Am I a genius or what? Eat while monitoring trades for further analysis. Can you believe the mess? Chew. The hardship? Chewing is good. The food deserves my hatred. Masticate. Make every effort not to scream or cry, however inhuman or unfair or unnatural the market’s hysteria seems. Daydream and use adult content – nobody said you are a child. Damned! Try to take time off the market. You don’t have to be in it all the time. What am I? A newbie? Have a life! Relax… Don’t stare at the charts like this. You look mad.

• 4:00 – 11:00pm Market roundup of today’s trades. P/L report. Prep messages to family, partners and banks to remind them – and most of all you – that money isn’t everything. Losing a few grand is not the end of the world. Too bad it’s more than a few!

• 11:00pm – 2:59am TV relaxation including any Show on Wall Street Meltdowns or Cramer vs. Cramer or Banging the Bank if you have to. Can you believe some traders are even worse off?

• 2:59am – 3:00am Time to wonder if currency trading is a worthy activity given nexus of failed tactics and losing trades, and looming yet inevitable impoverishment. Meditate. Would God be a currency trader or a long-term stock investor? Revisit all assumptions. How come Warren Buffett does not trade forex? George Soros has been known to, but not everybody has a gorgeous foreign accent and a predisposition for foreign exchanges. Can you believe Carl Icahn doesn’t buy and sell the same currency twenty times a day – and incur fees, taxes, bloodbaths, violations of good faith (oops, no that must be for stocks) and all sorts of supposedly impossible, granted sometimes-unpredictable yet very real downfalls?

Learn More-  FUNanc!al Two Cents: Why You May not Wish to Trade Forex

Price Channels – Bollinger Band

The price of a share fluctuates (no kidding!) and may at times evolve in a channel, that is, until it decides not to (you never know when it will decide not to – good luck with that!) This is why many traders, full of hope (others call it illusions or superstition) favor technical indicators that highlight the market’s channel-like movement, at least until they again realize that these efforts may at some point turn out useless.

John Bollinger has given his name to one of the most popular technical indicators, the Bollinger Band, which can play the guitar. The BB (some also call it the bee or the baby) now serves as a standard overlay for many technical traders. <b>z35W7z4v9z8w</b>
 

Image source: google.com

Here is how they say it works. You plot a moving average of the past N periods. Then, calculate the standard deviation of the past N periods. To get the upper band, displace the moving average upwards by a multiple of the standard deviation (often two). For the lower band, displace the moving average lower by the same distance. Optionally, you can compute the square root of the diameter of the triangle that a woman’s breast may inspire you to draw as you beau linger (this is the origin of Bollinger, right there; got it?) and contemplate so much beauty. Of course, if you’re a woman, you are welcome to contemplate the breast of a handsome man.

When prices hit the upper Bollinger Band, the stock is deemed overbought, sending a sell signal; conversely, when they hit the lower band, the stock is oversold, triggering a buy signal. In a strong uptrend, prices usually fluctuate between the upper band and the moving average. A crossing below the moving average may then warn of a trend reversal to the downside, also thought of as reversion to the mean and... Beware overshooting! (Do not use guns during this process.)

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There are of course a whole bunch of other indexes including the relative strength index, the commodity channel index, the average directional index, the Donchian channel and Keltner Channel, the Kilimandjaro Vexation Climb, the Rhino Elephantine Biffurcation gauge. Not to mention the Trader’s Stress Therapeutics Tetrapode Token and the Bear/Bull ZooLead ratio. But these require a level of expertise that only the fiercest of traders will be in a position to leverage. Disregard for now. It’s just too much to handle at this juncture.

OF COURSE, ALL THE RULES ABOVE CONSTITUTE A FRAMEWORK THAT THE SHREWD TRADER WILL TRANSCEND.

The interpretation rules above look simple and mechanical. But they are merely guidelines. In fact, if you apply them mechanically, you will not make money. No, nothing. Zip.
Thus it is most critical to:

•  Not follow the rules above if you don’t feel like it.
•  Grasp the market context in which they work; often the best way of doing this is by (please fill out as you deem appropriate).
•  Learn to read price action together with technical indicators to complete your learning. If you don’t know how to do this, ask one of us at FUNanc!al when we’re back from vacation.
•  Not forget that there are underlying assets. Say a company’s share. What do the top and bottom lines look like? And other annoying questions regarding the fundamentals of a business... Is the CEO pretty or handsome? Married? And so forth.
•  Learn from the masters who really if you think about it don’t really day trade at all, so food for thought right there.
• Combine indicators to form a rounded perspective that amounts to probably not much but who knows?

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ADD VOLUME INDICATORS INTO THE MIX

Any price movement gains additional significance if it occurs in high volume. When you’re in a mood for it, add in volume indicators for another dimension of analysis. By volume we don’t mean for you to modulate your voice as you sing along the Bollinger Band.

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You may think twice before using the information above for day trading. Are some of the richest men on Earth day traders? No. Remember: Warren Buffett is a long-term investor. George Soros and Carl Icahn may place more speculative bets, but they don’t usually day trade. How many Forbes 1000 billionaires are day traders? None. But there are plenty of investors and entrepreneurs who are long stocks big time. Microsoft fan Bill Gates built a fortune by holding onto his shares. You don’t see Facebook king Mark Zuckerberg day trade, do you? Warren Buffett’s favorite timeframe: hold forever! Don’t day trade, invest.

Trend Indicators – Moving Average Convergence Divergence

The aforementioned oscillators are all about reversals. The technical indicators below pinpoint trends, or at least they endeavor to. Of course, if the reversal is the trend, you’ve got yourself another problem coming.

Gerald Appel’s MACD is one of the most intuitive technical indicators around. It amplifies the value of moving averages in a fashionable way to track both trend and momentum in a non-reversal scented sort of semi-twist.

The MACD plots the difference between two moving averages, usually the 26-period and 12-period. A 9-period moving average of the MACD is then plotted as the signal-triggering line. If you see a histogram on a MACD plot, it is the difference between the MACD line and its signal line. No, this has nothing to do with burgers, be they MACDonald’s or what not.

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In a trending market, the space between two different moving averages expands. The MACD deducts the shorter moving average from the longer one, thus its value rises in a bull trend and falls in a bear trend. If the MACD is above the signal line, you guessed it, it’s considered bullish. If MACD is below the signal line, it’s bearish. In addition, the histogram delineates the momentum of the market. High positive histogram values mean strong bullish momentum; high negative histogram values mean strong bearish momentum.

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=> Price Channels – Bollinger Band

Trading Oscillators – The Stochastic Indicator

Trading oscillators measure the relationship between an issue's closing price and its price range over a predetermined period of time. It’s the definition you’ll find at Investopedia.com.

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Fourteen is the number used in the time model, and it can, depending on a trader's objective, represent days, weeks, months, years or centuries (for those with a truly long view). Fourteen has been selected as the base reference because there are fourteen days in a two-week period and 14 is also the atomic number of silicon. Incidentally, it’s also the Saros number of the solar eclipse, which began on July 31, 2568 B.C. The real reason for picking the number, however, is that 14 is also the minimum age at which one can view, rent, purchase, or buy tickets to an 18A rated movie with an accompanying adult in the Canadian provinces of the Maritimes and Manitoba. Please, act accordingly!

The scholastic, sorry, stochastic indicators measure the momentum/speed of price movement. Essentially, they find over-extended market movements that might be reversing. George Lane’s Stochastic Oscillator has been the classic oscillator since its invention decades ago. (We assume this means George Lane liked classical music, but we’re not sure at all.)

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The Stochastic plots two variables: %K and %D. If the price closes at or near the top of its range (say a stock traded between 10 and 11 to close at 11; this means it closed at the top of its range), the two-week Stochastic produces a high %K value. If the price hovers near the bottom of the range, a low %K value is assigned. The %D line, which is usually a 3-period moving average of %K, acts as the trigger line. If the market is at the extreme (high or low) of the recent trading price range, there is clearly strong momentum in one direction. What the hell! Hold on...

Well, see, in the end it’s a matter of momentum. The price action may not be sustainable. The stock may be overbought or oversold. The rule is as follows. If the stochastic value is above 80, we’re in overbought territory, and you should possibly consider anticipating selling if at all potentially because 80… Well, it’s because according to Exodus 7:7, Moses was 80 years old when he initially spoke to Pharaoh on behalf of his people. Today, 80 years of age is also the upper age limit for cardinals to vote in papal elections. See, that’s why. Conversely, if the stochastic values are posited below 20, we’re in oversold territory and it is time to buy.

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Likewise, if the %K crosses below %D, you’ve got yourself a beautiful sell signal; if the %K crosses above %D, it’s a buy! Want to know the truth? It’s all related to the Pareto principle (also known as the 80-20 rule), which states that, for many events, roughly 80% of the effects come from 20% of the causes. What the hell am I talking about? I need a drink.

Trend Indicators – Moving Average Convergence Divergence

Price Moving Averages: Trading Strategy in the Stock Market

There are millions of trading indicators that investors and traders can use to strategize and forecast market moves. We’ll focus on four we consider most helpful. (There is only one that we really understand.) The use of charts (also deemed technical analysis) and the mastery of colorful lines, which help optimize the leverage of technical indicators, are mission-critical; this is why we don’t use them here. But learn how to draw and paint if you have to.

PRICE MOVING AVERAGES

The simple moving average (SMA) is calculated by taking the average closing price of the past N sessions. For some reason, many people calculate the SMA based on N equal to 50 or 200. It is just the way it is. Sort of an act of God… Of course, the SMA is easy to compute and thus quite popular amongst traders and investors who… can’t do complex mathematics.

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Is the price of the share above or below the SMA? 

The answer helps assess market sentiment. If the price is above the SMA, you have a bullish scenario; if it is languishing below the SMA, it’s bearish. The slope of the SMA is also illuminating; we mean it shines. If the SMA line is sloping up, the market is considered bullish; if the slope trends down, it’s bearish.

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 Many traders see the moving average as a line of support or resistance. For example, they’ll consider buying a stock if after a strong run the share consolidates and finds support at the SMA line. If however it violates support at the SMA line in high trading volume, the move is considered bearish. When the price of shares evolves below the SMA, the SMA line may act as a line of resistance.

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Let’s start complicating matters because we enjoy it so much! The Exponential Moving Average (EMA) is a weighted average closing price of the past N bars. To compute the EMA value, the trader gives a higher weight to the most recent values. The EMA is thus more responsive to recent market prices and tends to produce more buy/sell signals; however, the more signals, the less reliable each signal becomes. We don’t know what exponential means, so we don’t use the EMA. It’s your call if you want to complicate things…

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=> Trading Oscillators – The Stochastic Indicator

Stock Market is FOR FUN and So Much More: How Investing in Some Young Guns Will Make You Filthy Rich

Can you believe that $1,000 invested now in some young guns, meaning companies that have had an Initial Public Offering recently, will turn into about, say, $1 million in 50 years or so?

No really, can you believe it? Choose a firm that has a leading-edge management team and a unique portfolio of solutions; by unique, we mean these products or services are so good the firm essentially has no competition. Read “From Zero to One” by Peter Thiel to get his take on the value of monopolies, which command higher margins. Make sure of course that the firm as a result can and will accrue very high sales and earnings growth over the years, and that you pay a reasonable price for the privilege of owning it.

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The beauty is, you don’t even have to time the market before buying. And you know what? It’s good news because nobody can. When will the next bear start? Your guess is as good as mine or anyone else’s for that matter. In “Becoming Rich: The Wealth Building Secrets of the World’s Master investors Buffett, Icahn, Soros” – a must read for anyone interested in investing in stocks – Mark Tier rightly reminds us that there are a number of deadly investment sins, one of which is “believing that you have to predict the market’s next move to make big returns.” Billionaire investor Warren Buffett does not sell his Wells Fargo (WFC), Coca-Cola (KO) or IBM (IBM) holdings contingent on what he believes the indexes will do tomorrow or next year. Seen another way, an investor in Microsoft (MSFT) or Google (GOOG) since their Initial Public Offerings years ago only had to hold to his or her original investment to build a fortune. No need to time the market, buy or sell on (dubious) cues! Of course, it is best to start positions or invest in firms, new and otherwise, when the market is depressed and shares cheap. During the 2008 financial crisis, many astute investors including Warren Buffett were buying when the world was selling. But that’s another story…

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Once you’ve selected an issue, the rule is, hold on to it like dear life. Don’t sell because you’ve made 20% after three months or 100% after two years. True market winners will keep rising for… decades. Coca-Cola and Microsoft are still around, aren’t they? Granted, billionaire investor George Soros, unlike Warren Buffett, tends to sell a holding if the shares acquired start behaving in an unforeseen way (i.e., go down if he’s long). It’s called risk control and capital preservation, a key ingredient of any master investor’s methodology and philosophy. If you believe you have made a mistake, then you may sell. (You can always re-buy the stock later on.) Of course, a great company bought at the right price should not sell off, but the market can be unpredictable… Warren Buffett tends to hold the stocks he buys forever, or at least as long as his criteria for buying the shares in the first place remain in place.

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Hold on to your shares and fifty years later, maybe you can treat someone at FUNanc!al for coffee or something. Lucky you!

Incidentally, these things aren’t about luck. It takes hard work to pick the rightt socks and understand markets, and plenty of nerves to survive bears (that is, declining stock prices).

Have fun and get filthy rich!

And please visit us at FUNanc!al, www.funanc1al.com for great stock market fun and a unique perspective on everything financial.

Stocks stress you out? Read one page a day… It’s fun and you may learn!!!