Tag Archives: Investment

Best Investment Advise of 2011

There’s plenty of advice floating around these days when it comes to investing in the financial markets. The problem is to find the ones who really is worth something, like the famous “Bob Farrell’s 10 Rules of Investing.” But once in a while I stumble over something that sounds quite wise to me, and I happy to pass it on. Here is the top 20 investing rules for 2011 from the independent advisers at Cabot.net, (And, of course, a copy of Farrell’s classic ” Top 10″.

“Markets are never wrong; opinions are.”

Jesse L Livermore

There is of course different advise for different types of investors. So,the first thing you should determine is what kind of investor you are; a speculator investing to make as much money as possible in the shortest amount of time? Are you investing to save money and preserve the wealth you already have? or maybe you’re an ethical investor trying to make some kind of statement by the way you invest?

There is – however – some advice that are valid regardless of what kind of investor you are.

The following 20 tips from Cabot.net is the kind of sound, good common sence advise. and can be applied to almost every type of strategy.

Enough jaba-jaba from me – here they are:

Cabot’s 20 Best Investment Advise For 2011

1. Cut losses short (definitely rule #1 for growth stock investing).

2. Search for strong sales and earnings growth (especially triple-digit sales growth).

3. Search for revolutionary products with major benefits. First Solar and Crocs filled the bill in 2007 and were our two biggest winners.  This year we’ve benefited from Green Mountain Coffee Roasters’ revolutionary Keurig single-cup brewer.

4. Heed the message of the overall market–never fight the main trend!

5.  Never average down in growth stocks.

6. Be prepared for all contingencies (always have an exit plan ahead of time).

7. Never try to buy at the bottom or sell at the top (if you try, you’ll just lose more money).

8. To avoid gut-wrenching volatility, stick with stocks that are liquid (at least 500,000 shares traded per day or more).

9. Only put more money to work after your past purchases are showing you a profit.

10. Be humble—making money in stocks is tough, so don’t kill yourself over one or two bad trades. Be thankful when you hit a big winner.

11. Find an investing system that works for you, then follow it. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it’s too late—by then, your emotions are out of control and you’re likely to do the exact opposite of what’s constructive.

12. “Markets are never wrong; opinions are,” is a quote from Jesse L. Livermore, one of the most colorful, flamboyant, and respected market speculators of all time. At Cabot, we agree wholeheartedly with his comment and truly embrace this thinking. And you should, too, if you want to become a successful growth investor.

13. When looking for potential purchase candidates, examine both the company’s fundamentals and its stock’s technical performance. When analyzing the technicals, focus on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.

14. Find a company that has a big idea … one that leaves few if any limits on its future growth potential. It’s these big ideas that create an atmosphere that can push a growth stock to dizzying heights!

15. Warren Buffett once said there were only two rules to follow with your investments: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.

16. Our goal is to get you heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money! But, of course, no market moves in one direction forever. So, when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases, while building up cash by selling your weakest stocks, is a good idea.

17. Be an optimist. In our more than three decades of publishing investment advisories, we’ve seen many ups and downs for both the market and our country. But after every tough event our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because our country and stock market will give you some dazzling opportunities!

18. Diversify your portfolio. For our Model Portfolio in Cabot Market Letter, 12 stocks provide plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.

19. Once you’ve invested in a stock, be patient. Recognize that time is your friend. Frequently stocks don’t go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you’ll have a great advantage.

20. Buy growth stocks with strong Relative Performance (RP) lines. RP studies are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!

Bob Farrell’s Classic Rules

When it comes too investment advise, it’s impossible to get around Bob Farrell’s 10 classic rules of investing.

Every trader, saver or investor should have a copy pasted on their wall, or somewhere where they’re sure to be remembered when turbulence are rocking the boat and the so-called experts are more confused than ever.

(You can download a copy at the link below.)

Here’s a quick summary of Farrell’s “10 Rules of Investing”:

1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras — excesses are never permanent.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-outfundamental downtrend.
9. When all the experts and forecasts agree — something else is going to happen.
10. Bull markets are more fun than bear markets.

Download: Bob Farrell’s 10 Rules of Investing

See also: David Rosenberg: How To Play 2011

On a personal account, I’d like to remind you of John Maynard Keyes well-known quote: “The markets can stay irrational longer than you can stay solvent.”

Worth keeping in mind in this age of quantitative easing.

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Filed under International Econnomic Politics

Evolving Use of Leverage and Derivatives

Many US closed-end funds (CEFs) continue to utilize traditional forms of cash-funded leverage such as bank loans, debt or preferred stock in order to enhance yields and returns for their common shareholders.

“Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

Fitch Ratings

Additionally, CEFs may also utilize various types of derivatives to meet their investment objectives, either for purposes of hedging or as means to more efficiently achieve return and leverage targets, according to a special report published by Fitch Ratings, Monday.

As of July 30, 2010, 416 leveraged CEFs in the U.S. had issued $55.4 billion of cash-funded leverage against $180.4 billion in assets under management, according to the statement.

Additionally, 71 Fitch-rated CEFs had utilized $4.7 billion in notional of derivatives as an alternative to cash-funded leverage (termed “economic leverage”) and, to a lesser extent, for hedging purposes.

While leverage strategies enhance equity returns in favorable markets with rising asset returns and positively-sloped yield curves, leverage may also amplify the downside risk to debt, preferred stock and common stock investors in less favorable markets.

The report, entitled “Closed-End Funds: Evolving Use of Leverage and Derivative” discusses the extent to which different forms of leverage and derivatives are utilized by US CEFs, contrasts derivatives used for hedging purposes from those used for economic leverage purposes, highlights the Securities and Exchange Commission‘s (SEC) current and evolving regulatory treatment of derivatives, and summarizes Fitch’s treatment of derivatives when rating CEF debt and preferred stock issues.

“Current regulatory requirements for derivatives vary, however, and may not appropriately capture the potential for increased off-balance sheet leverage in excess of that allowed for more traditional forms of cash-funded borrowings,” the rating agency says.

Recognizing the evolution of derivatives usage by investment companies (including CEFs), both the SEC and American Bar Association continue to examine the issue to determine appropriate methods of measuring and reporting derivatives activity by applying a risk-based approach.

“Fitch believes that derivatives can be an effective tool for CEFs to manage existing risks and/or take on new risk exposures, provided that the marginal risk contribution is appropriately identified and measured.”

Further, Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

“Regardless of the form that fund leverage takes (cash or derivatives), Fitch seeks to account for the risk to fund investors.”

For derivatives, Fitch seeks to recognize any additional economic leverage by ‘grossing up’ the CEF balance sheet, while also taking into account potential differences in the price volatility of the reference assets, the agency says.

“Conversely, hedges are viewed as a reduction in the overall risk profile of CEFs, to the extent the hedge is well-matched.”

The special report entitled “Closed-End Funds: Evolving Use of Leverage and Derivatives” was published on Sept. 27, 2010 and is available at http://www.fitchratings.com.

Additional research: Closed-End Fund Debt and Preferred Stock Rating Criteria

Example of use, Direct Market Access (DMA):

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“Artificial Intelligence” To Be Implemented In HFT

The increasingly fast electronic trading systems have become too fast for humans to handle. We are now seeing a wave of  investment firms turning to the science of artificial intelligence to make investment decisions. Unlike most Wall Street actors, the trading robots are capable of learning from their mistakes.

“No human could do this. Your head would blow off.”

Michael Kearns

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Investors using the approach are implementing “machine learning”  – a branch of artificial intelligence in which a computers analyzes huge chunks of data to make predictions about the future.

The following post is based on an article by Scott Patterson, journalist with The Wall Street Journal, one of the few mainstream reporters who really understand the HFT business.

Scott Patterson

The original article was published in July this year, but have until recently only been available to WSJ’s subscribers.

According to Patterson, there’s a new wave of firms using machine learning to trade.

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt.

Most investors trying the approach are using “machine learning,” a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future.

It is used by tech companies such as Google to match Web searches with results and NetFlix to predict which movies users are likely to rent.

Young Geeks In Action

Rebellion Research

One of the new upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks.

Run by a small team of twenty-something math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor’s 500 stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund.

Like many hedge funds, its goal is to beat the broader market year after year.

“It’s pretty clear that human beings aren’t improving,” says Spencer Greenberg, 27 years old and the brains behind Rebellion’s AI system. Adding:  “But computers and algorithms are only getting faster and more robust.”

Some sophisticated hedge funds such as New York based Renaissance Technologies LLC are said to already have deployed AI to their investing programs.

For years, these firms were the exceptions. But not anymore.

The Rise of The Machines

Rebellion is part of a new wave of firms using machine learning to trade. Cerebellum Capital, a San Francisco hedge fund with $10 million in assets, started using machine learning to invest in 2009, according to Patterson and The Wall Street Journal.

A number of high-frequency trading firms, such as RGM Advisors LLC in Austin, Texas, and Getco LLC in Chicago, are using machine learning to help their computer systems trade in and out of stocks efficiently, says people familiar with the firms.

The programs are effective, advocates say, because they can crunch huge amounts of data in short periods, “learn” what works, and adjust their strategies on the fly.

In contrast, the typical quantitative approach may employ a single strategy or even a combination of strategies at once, but may not move between them or modify them based on what the program determines works best.

Will Blow Your Head Off

“No human could do this,” says computer scientist, Professor Michael Kearns, at the University of Pennsylvania who has used AI to invest at firms such as Lehman Brothers Holdings Inc. “Your head would blow off.”

Rebellion has struggled to raise money, in part because investors since the credit crisis are dubious of opaque math-based strategies.

The firm has attracted at least one long-time “quant” skeptic: famed value investor Jean-Marie Eveillard, who recently invested several hundred thousand dollars of his own money into Rebellion.

“My cup of tea is not quantitative investing,” he says. “But I think they are serious investors, and I’m impressed by the fact that they don’t have a high turnover…and don’t use leverage.”

Read the full post at The Swapper:

Related by the Econotwist:

The Ultimate Trading Weapon

Survey: Market Surprised By Negative Derivative Perception

Testimony Of A High Frequency Trader

The Rise Of The New Market Makers

Flight to Mystery

May 6. 2010: “The Black Thursday”

Wall Street Collapse: Did Somebody See It Coming?



Filed under International Econnomic Politics, National Economic Politics