OUTSIDE THE BOX
ONE of the topics in my stock-market seminars is the psychology of stock- price movement. That is that prices are driven higher or lower by what is going on in the hearts and minds of the investors.
While we would like to believe that prices are moved in a logical and sensible manner based on all those neat financial numbers that companies report, ultimately it is an emotional human that pushes the buy or sell button. You are, of course, going to remind me that all those expert institutional funds use complex and complicated computer programs and formulas to trade the market. Yes and no.
While it is true that this “black box” trading does dominate the Western markets, it is also true that black boxes are not all programmed to make the same decisions based on the same information. Otherwise, every black box would be buying on one day and selling on the next. And non-humans do not trade to any large degree on the Philippine stock market.
A 20-year study of the New York stock market made in the 1960s and 1970s showed that stock prices tended to fall, outside the possibility of random chance, on days that the weather was gloomy in New York City. Nice weather did not move prices higher but bad weather sent prices down.
In 1926 Prof. George Taylor from the University of Pennsylvania came up with the “Hemline Index.” Taylor was able to draw an almost direct correlation between the length of women’s skirts to economic and stock-market performance. The shorter the skirt, the higher the stock market. The mini-skirt became fashionable in 1965. In 1965 the Dow Jones index was at 995 and by 1975 the index had fallen to 577. So had women’s hemlines. From the sexy and skimpy fashions of the Roaring 1920s, by 1932 women’s dresses were back to touching the floor.
It makes sense to me. When your mood is good and you are ready to party, your partying probably includes buying stocks.
If you accept the concept that investors make emotional and intellectual judgments when trading the market and that those decisions move prices, then measuring the investor mood is a way to plot the direction of stock prices. And we technical analysts believe that price movement reflects investor psychology. Further, this analysis can pick up the mood swings that will change the direction of prices.
The markets are made from the hearts and minds of thousands of individuals who tend to generally move in one direction or another depending on the overall prevailing psychological attitude. But the key here is “individuals.” While your psychology has an effect on stock prices, what we sometimes forget is that in our own trading, we are all the psychology that goes into the decision.
Whether you make 20 transactions a day or one a month, we all face the “Empathy Gap.” The “gap” is when your intellect is overrun by your emotions. It is a psychological situation that affects your trading in two ways that you need to be alert to.
The British are big “bettors,” gambling on everything from sports to celebrity marriages. A study showed that having a fight with your spouse and then going to the betting parlor increased losses. Your frame of mind when you place a bet or a stock trade affects the results. I have this posted next to my computers where I trade. “Be aware of yourself and your surroundings. The market will be aware of you. Your market performance will improve.”
The second way the Empathy Gap can cost us money is when we let emotions change a decision we made with our heads. “I will buy this stock when it breaks out of its range on heavy volume.” And when that time comes, you don’t buy it, because the stock jumps 5 percent the minute it breaks out. You wanted to pay P50 and at P52 it suddenly seems expensive. Then you watch it go to P60.
Or this example. “I am not going to chase that issue. The Risk/Reward is not favorable.” Yet you still buy it because everyone you know is telling you how much money they are making with it.
Gamblers play their game using emotions. Investors do their business of trading the market with their brains.
On a personal note, my “Your Money: Preservation and Profits” stock-trading seminar will be April 28th in Makati. I guarantee you will find it beneficial, new trader or experienced. Reservations are strictly limited and must be made absolutely no later than this Thursday, April 19th. E-mail me at firstname.lastname@example.org for details. In this kind of a market, you will be very glad you attended.
E-mail to email@example.com, Facebook page is MangunOnMarkets, and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.
Wednesday, 18 April 2012
Monday, 16 April 2012
WHILE we move further into the second quarter of 2012, it might be appropriate to write about: 1) the Philippine economy, and 2) all the good things that the government is doing to make the country richer.
As for number 1, I have a loyal white Labrador Retriever who gets a very sad expression on his face when I get depressed. As for number 2, the BusinessMirror would prefer that this column be longer than two sentences.
Brian Lund is someone that I have not talked about before but whose opinions I respect. Mr. Lund owns an online brokerage company and runs bclund.com. He and I share a minor common thought; we both think CNBC’s stock analyst Jim Cramer is somewhat of a buffoon. But that is probably because Lund and I are jealous that Cramer makes a ton of money being a stock-market buffoon and that he has 490,000 Twitter followers.
Mr. Lund fought back one time, setting up a Twitter account under the name of Hotporn Traderchick, picking up 200 followers in one day.
With the stock market in a potential short-term downtrend, it is good to visit some important ideas and concepts that investors need to hold close.
If you have been a stock-market investor for less than 10 years and invested a limited amount of funds, you probably have not made enough mistakes.
This advice from Mr. Lund must be taken seriously. “Find a mentor. I can’t emphasize how crucial this is because being able to interact with a seasoned trader on a regular basis will shorten your learning curve like nothing else.”
That is a problem with the PSE. Trading experience before 1998 really does not count. The peso now floats more in line with global market conditions. The amount of foreign money is so much greater than it used to be.
And mentoring does not mean asking, “What’s your hot tip?” What you need to learn from a mentor is the real-time, real-life trading decisions done in the heat of battle, and why the mentor is trading a particular way.
“Develop a methodology. Analyzing your trading success by outcome is a dangerous game. If you go to the casino, put your life saving on ‘red’ and win, it [would] still [be] a bad move. You have to develop a risk-based methodology that over time is successful and then evaluate your trading by how well you follow that methodology.”
A trader must clearly understand and follow a strict Risk/Reward model. Risking P10,000 to profit P5,000 does not work. You should be able to lose even on 60 percent of your trades and still make a lot of money if your Risk/Reward is 1 to 3.
“Remove your emotions. Understand that you will lose on more trades than you will win on; that is just part of the game. If you are the type that always has to be “right” you are going to have a hard time becoming a successful trader. The goal in trading is to make money, not to be a perfect trader.”
Any time I hear a person talk about all the successful stock trades they have made, I know I am talking to a gambler and not an investor. Even professional gamblers like poker players only talk about their net longer-term return, not individual card hands.
However, you should thoroughly examine every losing trade, like it was a bad relationship. What did I do wrong? What would I do different next time given the same circumstances?
Here are some sure ways to lose money.
“Buy every dip and every rally. All stock prices will eventually come back” …except for the ones that don’t. The saddest words I heard recently were from an investor that was so happy that a certain issue has been going up. His position is now breakeven from buying every rally on the way down since 2007.
“Don’t look at charts; that is like reading yesterdays newspaper.” Charts are the only way to know the price trend. You would not hire an employee without doing a background check. You do not trade a stock without knowing its price history.
And the best way to make sure you lose money, large amounts, is to remember and follow this thought “How much lower can it go?” A stock price can go low enough to wipe you out.
On a personal note, my “Your Money: Preservation and Profits” stock trading seminar will be on April 28th in Makati. I guarantee you will find it beneficial, new trader or experienced. Reservations are strictly limited. E-mail me at firstname.lastname@example.org for details. In this kind of a market, you will be very glad you attended.
VICTORIA Woodhull was the first woman candidate for US president. She was the first woman to start a weekly newspaper. Woodhull and her sister became the first women stockbrokers and in 1870 opened a brokerage firm on Wall Street.
Woodhull made a fortune in the stock market. The financial press called these women “Queens of Finance” and “Bewitching Brokers.”
Throughout my time in the markets, there were always a substantial number of women working as investment consultants and stockbrokers. The lack of female participants was always on the client side.
Women tend to view stock-market trading as something of a gambling endeavor reserved for men. I always felt that women in general were not willing to put in the time and effort to learn about trading. However, at least one-third of the MangunOnMarkets subscribers are women who actively manage and trade their own or family funds.
Ms. Charmel de los Santos, a Filipina living in Australia, perhaps is typical of the new breed of females, trading stocks for their own wealth creation. She started her career as a business analyst and worked in IT for 15 years. But do not think that Charmel wears sensible shoes and a 2001 hairstyle. She was a Binibining Pilipinas contestant in 1998.
This is not a hobby for her. She has been trading for 11 years. As a mother of three small children, she actively trades the financial markets to make more money.
Last year she limited her trading activity to write a book to explain to women why, how and what they needed to know on trade and the financial markets. The result is High Heeled Traders.
Much of the reason for women not being in the markets is that the industry is dominated by men. Ms. de los Santos writes, “As we all know, women are different from men, and I thought that the barrier for women to get into trading is how the ideas are communicated to them.”
The subtitle of her book is, “Understand Trading with Shopping, Fashion, and Shoes!” Her premise is that “Considering women shop a lot, I thought we would be natural traders! We just don’t realize it.”
Because this book is aimed at women who are not market participants, Ms. de los Santos spends considerable time looking at the psychology an investor needs to have, comparing it to a woman shopping for shoes.
There is a great deal of motivational talk that might not hit the average man. She speaks of the necessity for positive lifestyle choices, proper eating and exercise, as well as making sure your self-esteem is confident before venturing into the stock market.
I can appreciate the lifestyle part. My early stock-market mentor Jim Walraven once told me, “John, you probably shouldn’t have a bad hangover when you trade, but if you do, I always have a breakfast beer to wash it away.” Great advice.
There are sections on personal financial planning that can help people understand that, as a business venture, trading needs to fit in with your other financial plans. It makes the reader understand that this is a business, not a game.
Chapter Five is called “Dressed to Trade.” When I read that, I knew I was in trouble. Charmel was not going to approve of my trading attire: jogging pants and T-shirt, scattered with cigar ashes by the end of the market.
However, every woman can appreciate her thoughts. She takes the reader through getting dressed up, from makeup to perfume, as a method to explain how to understand and put together all the things you need to know about trading just as you would build a suitable outfit and glamorous look.
Two critical parts of the book are for every trader. She speaks at length about the Risk/Reward equation. “You don’t go out and chase profits. You patiently wait for the opportunity, seize it when it comes, and drop the trade when it is unfavorable to limit your loss.” She likes a 1:3 risk-to-reward ratio and that is reasonable. Do not buy bargain shoes that do not fit. Do not buy very expensive shoes to wear once. It makes good sense.
The second important aspect of trading is the Trading Plan. Charmel has 15 steps and it is very complete. Mine has only five steps because that’s the way I buy shoes: 1. Casual/dress. 2. Laces/slip-on. 3. Brown/black. 4. Expensive/cheap. 5. Comfortable/fancy. Yeah, I am a man.
High Heeled Traders is a valuable resource particularly for women who are or want to be stock-market investors. Buy it at Fully Booked stores or at http://highheeledtraders.com.
On a personal note, my next seminar will be April 28th in Makati. E-mail me at email@example.com for details.