Trading Phscology

[Hoop]

“If we have data, let’s look at data. If all we have are opinions, let’s go with mine.” – Jim Barksdale

"Be able to defend your arguments in a rational way. Otherwise, all you have is an opinion" - Marilyn vos Savant

[BIRMANBOY]

So are you recognizing the 'errors of your ways" Hoop and we can expect a simplified, transformed slimline hooplet instead of the monolithic institution that you have become

An interesting piece in my E=mail box this morning from TraderPlanet.com




Simplicity: Why Don't We Appreciate It?

by Vadym Graifer

There is one curious phenomenon that I observe for a long while. You see, my trading approach is fairly simple (let's make a distinction at once -simple doesn't always mean easy). It's a few chart formations, reading the volume, assigning a transparent and logical structure to the setup and following the standard procedure once a trade is triggered. I admire the simplicity,
I enjoy it, and I am a fan of an old phrase by Leonardo: Simplicity is the ultimate form of sophistication.

Yet time and again I encounter people disappointed by how simple my trading approach is. Yes, disappointed and skeptical - even though they see for themselves that it works. Imagine my amazement when I hear something to the effect: "Yeah, I observed you in action, followed some of trades, made money... read trading logs, see that you are fairly consistent... But come on, market is much more complicated than this! There is macroeconomics, there is stochastic, there is this, that, oh and that - and you ignore all this stuff. It makes no sense. Hundreds of pundits devote their life to all the analysis, and you are telling me you can do without any of that? It makes no sense. It makes no sense."

- "Okay... but hey, you do see that it works, right?"

Awkward silence. Pause. Blank stare. Then life returns to my counterpart's eyes as the needle finds the familiar groove: "See all these blogs? magazines? TV channels?..." Etc. You get the idea.

So, why do we do this? Why is simplicity not enough? Worse yet, why is it not enough even though it's proven as an effective approach to trading?

I have my answer to that. See if it's something you can relate to. It goes to the root of the very reason for our trading. Why do we trade? Sure, everyone immediately answers "to make profits" - but is it really so? Or rather, is it true for all of us all the time? In my experience, no. For many of us, it's an intellectual challenge that we are after - we enjoy analysis, arguing points, proving our views to others... and all this stuff may or may not be relevant to trading in its purest form (which is Enter, Exit, add to your Profit or Loss column). If one's motivation is such intellectual exercise, my approach won't satisfy that person. More than that, to some it feels almost as insult!

Traders know how such analysis can and often do lead to entrenched opinion which triggers Ego and leads to a stubborn defense of one's losing position. It's also a point emphasized in A Taoist Trader course. Let me cite a quote from that course:


Much overcomplicated thinking obfuscates the simplicity and clarity of the real
world. Knowledge must be useful and practical.
...................

In comprehending all knowledge,
Can you renounce the mind?
In Taoist philosophy, there are two types of knowledge: useable knowledge that
contributes to the achievement of a goal (daily contentment), and knowledge that does not. The only knowledge worth pursuing is the knowledge that serves the purpose. Our ability to adapt to changes in an environment is a double-edgedsword. Our mind sometimes accepts external values without skepticism.


The amount of information surrounding the markets is mind-boggling. Some of it is useful in the process of decision-making and some serves no useful purpose at all. A trader carefully observes which information helps him navigate the markets and which wastes his time and adds to confusion. Practical usefulness measured by actual performance is a trader's criterion to evaluate which sources should be taken into account and which should be dismissed. A trader must avoid paralysis caused by endless and contradictive information flows.
If you ever catch yourself questioning simple trading approach merely because of its simplicity, ask yourself: Why are you trading...

[lou]

I am a big fan of simple. 50/200 Moving averages, MACD and RSI. Thats all I use. The people I feel sorry for are those who use nothing - they buy on rumour and hot tips, hold on faith, and sell when they have lost hope.

I have herd you explain your system in other posts and it one that I really like.

[born2invest]

I use a dividend discount model and only buy when it is below the price I set to make me 15% return p/a for 7 years holding a stock.

All I have to do is come up with 3x assumptions:

- growth in EPS over the 7 year period
- dividend payout ratio over the 7 year period
- a reasonable P/E ratio to sell the stock when the 7 years are up

This gives me a return to sell the stock at and accumulate the dividends then I work backwards to make a 15% return after tax.

[lou]

I use a dividend discount model and only buy when it is below the price I set to make me 15% return p/a for 7 years holding a stock.

All I have to do is come up with 3x assumptions:

- growth in EPS over the 7 year period
- dividend payout ratio over the 7 year period
- a reasonable P/E ratio to sell the stock when the 7 years are up

This gives me a return to sell the stock at and accumulate the dividends then I work backwards to make a 15% return after tax.

@born2invest How long have you been sticking with this system?
How has it performed for you?
What has the volatility been like?

[born2invest]

@born2invest How long have you been sticking with this system?
How has it performed for you?
What has the volatility been like?

I've been following it almost religiously for over two years.

I'm just about 25 years old. I finished my uni course 4 years ago. Saved for a year in term deposits. Mucked around learning but investing in companies without any strategy for one year then spent the last two years following only this model.

In two years the stocks I've invested into have returned 35% capital growth and around about 10% in dividends on my initial investment amount.

I welcome volitility. It is the friend, not the enemy.

If you want to look at the volitility, look at charts of Credit Corp, Supply Network & Ryman Healthcare which are the 3 stocks I own. I've also owned Tox Free Solutions and Thorn Group Limited in my year when I wasn't really sure what I was doing. I sold them roughly 2 years ago.

[lou]

@born2invest

Your 2yr Return: 35% capital growth and 10% in dividends
2yr Market return: NZ50 Capital index 27%, NZ50 Gross index 39%, ASX200 Gross 22%

Congratulations you have beaten the market in that time frame.

Do you have a strategy for market downturns? I would imagine that picking quality companies will be resilient in bear markets but a falling tide lower all boats and these companies will still suffer.

Did you model your strategy on someone else or a book or two? I would be interested in hearing how you started using this strategy.

[born2invest]

Congratulations you have beaten the market in that time frame.

That's good. I don't pay attention to market indexes but it is a nice fact to know. Must show I'm doing something right.

Do you have a strategy for market downturns? I would imagine that picking quality companies will be resilient in bear markets but a falling tide lower all boats and these companies will still suffer.

My strategy for market downturns is to have cash on hand to buy more positions in companies. You said the companies will suffer. I think you are confusing the company performance with the stock price. I don't pay too much attention to the stock price, I only care about the annual and half reports to ensure the company is still a healthy one.

Did you model your strategy on someone else or a book or two? I would be interested in hearing how you started using this strategy

Buffetology was quite a good one. The seven year timeframe I use I picked up from a book I read but I can't remember which one. It basically said most people do forecasting in 5 or 10 year ranges because they are nice even numbers. But it mentioned that 7 years it generally how long an economic cycle lasts so if you buy in a downturn, it generally takes 7 years for the market to get into bubble type territory before the next market slump. I've read lots and lots of books on value investing, etc. A lot of them used the discounted cash flow valuation method. However, I found the dividend discount/gordon growth model a bit easier to work with. I've copied accross below my excel spreadsheet I use to value stocks. For example below, my valuation of Ryman Healthcare is $4.37.

						19
	1.15
	1.105
year	eps	div	price+div	price	sum div	compounding
	27.35	10.12	529.77	519.65	10.12	437.00	1	15.98
1	30.22	11.18	595.51	574.21	21.30	502.55	1
2	33.40	12.36	668.16	634.51	33.66	577.93	1
3	36.90	13.65	748.44	701.13	47.31	664.62	1
4	40.78	15.09	837.15	774.75	62.40	764.32	1
5	45.06	16.67	935.17	856.10	79.07	878.96	1
6	49.79	18.42	1043.48	945.99	97.49	1010.81	1
7	55.02	20.36	1163.16	1045.31	117.85	1162.43	1
8	60.79	22.49	1285.29	1155.07	130.22	1336.79	FALSE
9	67.18	24.86	1420.25	1276.35	143.90	1537.31	FALSE
10	74.23	27.47	1569.38	1410.37	159.00	1767.91	FALSE
	Buy below
	$4.37
	15.98 PE

[lou]

My strategy for market downturns is to have cash on hand to buy more positions in companies. You said the companies will suffer. I think you are confusing the company performance with the stock price. I don't pay too much attention to the stock price, I only care about the annual and half reports to ensure the company is still a healthy one.

How do you avoid the following hypothetical scenario:
There is a market slump you buy shares and are now 100% invested. You stick with it for few years and there is a nice rally. Then the market crashes, you are still 100% invested from the last slump so can not purchase more shares at discounted prices.

[born2invest]

How do you avoid the following hypothetical scenario:
There is a market slump you buy shares and are now 100% invested. You stick with it for few years and there is a nice rally. Then the market crashes, you are still 100% invested from the last slump so can not purchase more shares at discounted prices.

Dividends and savings from my job.

For example, haven't bought shares for a year or so. Built up around $3000 from dividends and around 15k in savings.