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Wednesday, February 7, 2007

Quotable Quotes

Extracted from Getting Started in Technical Analysis by Jack D Schwager

"The novice trader will ignore a failed signal, riding a position into a large loss while hoping for the best. The more experienced trader, having learned the importance of money management, will exit quickly once it is apparent that he had made a bad trade. The truly skilled trader will be able to do a 180-degree turn, reversing a position at a loss if market behavior points to such a course of action." - Jack D. Schwager

"Human nature will do things that are comfortable but the market will pay the trader for being uncomfortable." - William Eckhardt

"Market wizards do not do predictions. They just trade the market and react to the market." - Jack D. Schwager

"The trend is your friend except at the end when it bends." - Ed Seykota

"It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market." - Edwin Lefevre

"The market is like a flu virus - as soon as you think you have it pegged, it mutates into something else." - Wayne H Wager

"The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss and hope that his profit may become big profit." - Edwin Lefevre

"There is no such thing as being right or beating the market. If you make money, it is because you understood the same thing the market did. If you lose money, it is simply because you got it wrong. There is no other way of looking at it." - Musawer Mansoor Ijaz

"Every decade has its characteristic folly, but the basic cause is the same: people persist in believing that what has happened in the recent past will go on happening into the indefinite future, even while the ground is shifting under their feet." - George J Church

"If making money is a slow process, losing it is quickly done." - Ihara Saikaku

"Do not wish for quick results, nor look for small advantages. If you seek quick results, you willl not reach the ultimate goal. If you are led astray by small advantages, you will never accomplish great thing." - Confucius

"Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined aproach based on your strategy and risk appetite. It is not about listening to rumours or timing the market." - Anonymous

"We buy things we don't need, with money we don't have, just to impress people we don't know" - Anonymous

Sunday, February 4, 2007

Penny stocks are where the crazy money is

18.3% compounded return a year over past 17 years - but money losers in 11 of them


(SINGAPORE) Buying blue chips will yield decent returns over the long term but they are unlikely to catapult investors many more notches up the wealth ladder. The insane money lies in the penny stocks.

A BT study shows that between 1990 and now, consistently buying the 10 per cent cheapest stocks trading on the Singapore Exchange would have given investors a return of 1,641 per cent. That's an 18.3 per cent compounded return a year over the last 17 years or so.

In contrast, buying the 10 per cent most expensive stocks would have returned 60 per cent, or a mere 2.8 per cent a year over the same period.

The Straits Times Index, meanwhile, advanced 165 per cent or 5.9 per cent a year.

The above calculations do not include transaction costs. Of course, transaction costs will eat up a huge chunk of the gains especially for the penny stocks.

Assuming that a 9 per cent cost was incurred for each buy and sell transaction, the strategy of buying the cheapest stocks still provided a return of 1,070 per cent or 15.6 per cent a year.

But timing is crucial if one intended to catch a ride with the penny stocks. The sharp jumps came in spurts, and only when there was an unbridled bull market.

For example, the biggest gains among the penny stocks were chalked up in 1993, 1999, 2003 and last year.

For the first three of those years, one would have tripled one's money in 12 short months by buying into the cheapest 10 per cent of the market at the start of the year.

For 2006, the return was 100 per cent and in the first 18 trading days of 2007 alone, the cheapest 10 per cent of the market has risen an average of 30 per cent.

Other than these handful of years, penny stocks were largely a losing proposition in the other 11 years.

There are a few reasons for the phenomenal performance of penny stocks during a bull market.

First, a bull market reflects the rosy outlook in the economy. Many of the penny stocks are companies which had fallen on hard times during the previous downturn.

So a pick-up in business may benefit some of these companies. Once a company is able to generate enough revenue to cover its fixed costs, any additional increase will give the bottom-line a big boost. This is the so-called operating leverage of businesses.

And since these stocks were so down-trodden, the prospects of earnings will swing their prices up sharply. This is what we are seeing among the construction stocks in Singapore right now.

Second, a bull market will also attract many businesses to gain a quick entry into the stock market. Many a time, these are done via reverse takeovers, and the targets for the takeovers are loss-making micro cap stocks with no viable business. Since 2003, there has been a significant rise in reverse takeover deals in Singapore.

Among them are Wilmar, which took over Ezyhealth; Yoma, formerly Sea View Hotel; Indofood Agri Resources which took over CityAxis, and Time Watch which took over Wee Poh.

Deals currently in the works include Auston, which is being taken over by Internet TV operator M2B World Asia-Pacific; and China Transcom, which announced last week that Henan's Tianhai Electric (Group) Corporation will be injected into it.

And finally, there's the speculative element of investors trying to pre-empt the market by buying into stocks which they hope will turn out to be a reverse takeover target or some other kind of corporate manoeuvres.

The flight of penny stocks during bull markets has been established empirically.

For example, Malcolm Baker from Harvard Business School and Jeffrey Wurgler from NYU Stern School of Business found that when sentiment turns from low to high, returns are high on both extreme growth and distressed stocks. More stable stocks chalk up smaller returns.

However, when sentiment turns from high to low, the reverse is true.

So what makes certain stocks more vulnerable to broad shifts in the propensity to speculate?

According to Baker and Wurgler, the main factor could be the subjectivity of their valuations.

Consider a young, unprofitable, extreme-growth-potential stock.

'The lack of an earnings history combined with the presence of apparently unlimited growth opportunities allows unsophisticated investors to defend, with equal plausibility, a wide spectrum of valuations, from much too low to much too high, as suits their sentiment.

'In a bubble period, when the propensity to speculate is apparently high, this profile of characteristics also allows investment bankers, or worse, swindlers, to further argue for the high end of valuations.

'By contrast, the value of a firm with a long earnings history and stable dividends is much less subjective, and so its stock is likely to be less affected by fluctuations in the propensity to speculate.'

So ride the tide, while the going is good. But beware of the turning point. This is why analysts usually advise investors to go defensive when the market is reversing.

Friday, February 2, 2007