News: Finance blogs are boring! *sob*

The new blog carnivals for personal finance and investing are up. There are some really great articles in both, and they are worth checking out.

One that really caught my eye was about the relevance of investing and financial blogs posted at Adult ADD and Money. Apparently, as far as interest levels go, they are at the bottom of the heap. Not altogether surprising, I guess, since people go on to blogs expecting to hear about nasty breakups, sex or cats, rather than pro-forma business ratios.

I’m not surprised that people find investing blogs boring. I mean, it really doesn’t sound all that interesting unless you have ever invested seriously. That doesn’t mean the readers are wrong for not being interested, that just means the writers have try harder to get them interested.

I guess I’m a little guilty of using the wrong medium. Oh well, I am in to deep now. The challenge is just to make this material interesting and entertaining.

How do I do that?

I’m open to suggestions. Hopefully none of them involve nasty breakups, sex or cats, but I guess beggars can’t be choosers.

I’ll take an honest stab at beating this whole boring thing.

Financial: Planning for investors

It’s easy to talk about investing in really abstract terms without realizing that large sums of money are on the line. At least I acknowledge I’m guilty of it.

So, before we start talking about support and resistance, fundamentals and inflation, it’s best that we do some planning on how to build investment capital.

First things first: if you don’t have the fiscal discipline to keep your money in order, than you probably don’t want to be investing. If you don’t have the risk capital, investing quickly becomes gambling and gamblers almost always lose (unless they are really good, in which case they are investing in games).

I would say investing when you are in heavy debt is a poor plan. If you have credit cards charging 20% interest, you need to make an investment with 20% returns to break even vs. paying of debt. Ouch.

So if you are out of debt, you should next look to having an ample amount of safety money (in case you quickly end up in debt or out of a job). If you have a comfort zone, and are saving regularly (taking 15 to 20 percent right of your paycheck is a good way to go) then you can start investing.

Albert Einstein famously said that compound interest was the greatest power in the universe. You really don’t want it to work against you, do you?

Get out of debt. Get to saving. Get to investing. That sounds like a plan to me. Of course, I don’t want to browbeat anyone, that’s just a suggestion…

Education: Overhead supply and admitting mistakes

I, like everyone else, hates admitting I’m wrong—especially to myself.  

Jason over at InvestorGeeks has started his foray into technical investing by looking at Microsoft through the lenses of support and resistance levels. His article points to the way that MSFT is trading in between a range of support on the downside and resistance on the topside, something that’s fairly common in big name stocks.  

His post touched on an occurrence called “overhead supply”, something that I think we will see a lot more of soon.  

Overhead supply occurs when a stock reaches a point where it had been for a long time, and since fallen.  There, the stock finds an immense amount of selling pressure.  You may think that this is just nonsense with no reasoning, but it actually all comes back to my not wanting to admit my mistakes.

The investing community is a lot like me—they don’t want to admit they’re wrong. They especially don’t want to admit they’re wrong with their money.  Suppose MSFT has been trading at $26 for weeks. That means for weeks, people were buying it at $26, which was their perceived approximate value. Then BAM! MSFT tumbles. Everyone feels frustrated and slightly embarrassed—until the chance for redemption comes, that is.

If it regains its bearings, everyone who was in at 26, or got used to 26, will be waiting for that watershed mark.  Once it hits, they will simply want to close their position for breakeven and a small loss simply to prove to themselves that the stock was worth what they paid.  It’s not smart, it’s not pretty, but it is how the subconscious works.  

The same pattern occurs when a stock that lagged heads toward it’s old 52-week high.  Everyone remembers that number and they want to get out where they wished they had before.  This leads to immense pressure at the top and it is a partial explanation of the commonly cited double-top pattern.

This may seem overly simple, and it’s not always true.  But it is likely to be true, meaning it is of some value.  I’ll be sure to follow up with some more rationales about stock patterns in upcoming posts.  

Flaws (like not accepting mistakes) can be useful… as long as you can predict others will share them.

Analytics: The greater fool theory and weak closes

Here is a definition I love, and everyone who trades the markets should know:

Greater fool theory:  A theory that it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger fool) who is willing to pay the higher price. Courtesy of Investopedia.com

With the greatest of fools in mind, consider the implications for the tail end of a bull market.  As stocks become overvalued and no longer wise purchasers, the only buyers become those with the least knowledge, information or experience (the greatest of fools).

If you can tell that the only ups in a market are coming from the fools, you know it’s time to trade places with one of them.

How do you do this you ask?

Time is probably the simplest answer.  There is an old market adage that says something to the effect that “Novices control the opening; professionals control the close.” There is a logic to this statement: the amateur traders only devote the time before or after their day job to placing trades and doing research (usually). This means that they place their trades in the morning before they leave for work, or in the afternoon after the markets close.

If you notice the last couple of weeks, stocks have opened high and closed lower, ending the day in the red.  This tells me that the professionals are selling into the “greater fools.” The trend has been happening almost every day: strong start, painful finish.

The crux of the situation is that people will only keep buying for so long and then all the buyers will fall out. Keep in mind what the market is seemingly telling us. If this isn’t just noise, it may be time to let the “fools” take over and side with the pros.    

Logistics: Choosing your broker

The first step to getting off the ground with trading is finding a suitable broker. As the foremost tool in your investment bag-o-tricks, the broker is synonymous with trading.  However, the best brokers are the one’s you don’t notice (because if you do notice them, chances are something has gone horribly wrong.)

Investopedia had a good article on picking your first broker here—certainly worth the read.

Younger traders can consider alternative, low-cost brokers like Sharebuilder and BuyandHold. These brokers will let you trade for a low monthly fee or for a per trade cost of about $2. There is a catch: the trades don’t happen in real time. You have to trade within a set number of “windows” every day.  If your strategy is really short term, these guys won’t work.  However, if you are not to worried about nickling and diming the price of your shares, they do present a feasible option to someone with less than a thousand dollars to invest (you don’t want to spend 1 or 2 percent of your investment capital on every trade.)

Make sure the broker you pick is reputable, just like you would with any bank. Sometimes it can be easy to forget these people hold on to your money. On the other hand, don’t expect that because a broker charges more they are necessarily better. That kind of thinking just doesn’t follow.  

Ultimately the best broker for you depends on your strategy. As the article says, mind the commissions, margin rates and overall services they provide and you should find a broker worth signing on with.  

Education: Paper trading as a learning tool

The best way to learn is by doing, but unfortunately to get into the investment game doing can be really expensive. But it doesn’t have to be…

If you are starting to get a hang the fundamentals of investing or trading, you may want to put them to the test with paper trading.  There are some websites that give you the opportunity to trade virtual accounts. This can be an amazing resource for helping you realize what your strengths and weaknesses are—something that is very helpful in becoming profitable.

There are some important caveats though:

• Remember that paper trading doesn’t have the same emotional weight as real money trading. You need to develop the cast-iron stomach to treat your real money with the same detachment as your paper trades.


• Keep a detailed journal of why you entered a trade. If it goes wrong, think of why.  This is how you truly learn.


• Trade as realistically as possible in your paper trading so that you can predict the outcome of your system later. An accurate representation of what you are going to do with real money can help you shake out some of the kinks without losing precious, precious change.


• Use risk management now (getting out of losing positions early) so that it becomes habit when you have real money on the line.  This is the best way to develop a nuanced risk management strategy.

There are several free simulators, but the two that I have found most useful are at Investopedia and the Virtual Stock Exchange

Analytics: The logic of market movements

The best way to look at the market is to think about the underlying behavior that is moving it.  When a stock goes down in price, it’s because people are looking to move out of it and into some other position.  If all stocks are going down, it’s because people are moving out of stocks entirely and into something else, like bonds.

Typically, when there is fear of a market correction, the market will see consumer industries lose value along with heavy industry. “Safety stocks” like food and defense (that prosper no matter what the conditions since we always seem to need food and military) typically gain as institutions shift to their safety positions.

Usually, when oil stocks go up its tied to the increase in oil prices and consumer stocks suffer.  When most stocks suffer gold (and gold stocks with large gold inventories) typically go up.  Strangely enough, the last couple of days have seen a drop in every type of stock, even if they are traditional hedge.  We are talking food, gold, and even oil; everything that should be gaining has hit a wall.

Why?

It could just be the market taking a breather, but if it continues, the most logical explanation is money is moving out of the stock market straight across the board and jumping into other vehicles, like the bond market.  Since interest rates have increased, it’s really not that odd.  

Given the strange feel of the market, I would suggest using this time as a learning opportunity to monitor the movements of previous leaders like Google.  See what the reactions are in oil stocks and gold stocks. Maybe over the next couple of weeks we see a divergence between the safety stocks and their traditional inverses.  If not, the markets behavior could indicate a broad correction. Just a thought.

Outlining the trader's arsenal

Everybody takes on the world with an arsenal of different tools.  In the case of investing, they are not clearly supplied to you and they need to be discovered on your own.  I think it important to take stock of the different tools that play a significant role in the investors battle for gains. Since the market is one big game, you might want to spend some time augmenting your arsenal before you compete:

• Psychological: In order to succeed in investing you need some psychological tools, namely, the ability to bypass fear and greed.  You need to be goal-oriented rather than money oriented, and you need to make decisions based on your other tools rather than your emotions.  Often times, the psychological aspect can be as simple as a willingness to accept a mistake (and a loss) and move on rather than stubbornly holding on and never taking another position.


• Logistical: You need both the information flow and the ability to execute trades effectively.  This is the only element of the trader’s arsenal that is found easily enough without much education or personal effort.


• Analytical: The analytical tools and evidence necessary to produce well-reasoned justifications for taking a position.  The more you learn the more sophisticated your analytical tools become and the better your hit ratio.  This area shows how valuable education is.  


• Financial: Part of logistical, part psychological, the amount of money available to you determines a lot about risk and the ability to make particular types of trades.  You must carefully consider if a trade is practical and whether or not you can cope with losing your capital should something terrible happen.


• Educational: Going hand in hand with analytical tools, your increasing education helps make you a better investor.  It opens your eyes and detaches you from the game in the way that makes success possible.

I am going to try to pass on the tools needed to fortify each area of the trader’s arsenal, and prepare all of my readers to grow their investing education in the areas that make success not only possible, but likely.

But don’t just stop here.  There are plenty of resources online to read others insights into investing.  Visit this week’s Carnival of Investing hosted by investorgeeks.com.

Using former leaders to predict a correction

No one wants to admit that the good times are almost over, but sometimes the writing is on the wall (like at a party where too many people have already thrown up).

When the market begins its painful transformation from a bull to bear, there are a few things to look for. Price and volume are a good indication: volume dries up on the days where the market moves up and it increases on down days. Also, fundamental evidence helps a lot too: good news has less of a response, while mediocre news weighs heavily. These are indicators of fewer optimistic buyers in the market.

There is another, much simpler sign of a weakening market and that’s the movement of a former hyperactive leader. If you have been watching a stock that was moved up a lot because of wanton optimism, it can often foreshadow the new market direction. If it starts to make a downward move, there is a good chance the market will follow.

Consider XM Satellite Radio, a good example of a stock that rode the new bull market optimism. Since 2003, XM has moved up on the good will of optimistic investors, but has seen a precipitous drop in price in the last few months. What this shows me is that investors are beginning to get that dose of pragmatism that dashed the market gains of the go-go 90’s in a matter of months. Be forewarned, if XMSR is an indicator of the decreasing confidence of investors, the correction may be coming soon.

Chart courtesy of Stockcharts.com

With resistance breaking down and the stock hitting new lows, it looks as if people are skittish again. If that means they are unwilling to buy a former leader near or below its 52 week low, then chances are they are cutting back on other purchases as well. Not a good sign for the health of the bulls.

I do want to make one caveat: no stock can be considered an indicator for the whole market. Leaders, however, do function as one piece of the puzzle. If fundamental and technical evidence makes you think things are about to turn, than a move by a stock like XMSR can serve as another solid piece of evidence.

So for now, it looks like the good times may be coming to a close. Fortunately, one of the strengths that we are trying to play to is flexibility, which can make these changing tides a good opportunity. Keep reading for more on how to brace for changing market conditions.

Predictwallstreet.com and what it means for you

Price and volume tell you what investors think a stock is going to do—but sometimes it’s fun to ask people a little more directly.

Predictwallstreet.com asks investors whether any given stock is going to close up or down the next day. The theory makes sense: ask enough people what they think, and you should have enough of an idea what the market will do.

There are some concerns though. Remember that these people haven’t necessarily put their money where the mouth is, something that makes the predictions less human (no greed or fear here). Also, the people who post on sites like these aren’t usually the ones who move markets (professionals and big funds). Both of these should keep you from using this site as an indicator, at least for now.

One trait that I find useful is the rating system that keeps tracks of registered users hit/miss ratio as well as the communities overall success at predicting individual stocks movements. This gives the predictions with a consistent success rate a little more credence.

It may be worthwhile to study the times when the majority opinion differs from the people who have a higher success rate (you can read individual predictions on the comments under each stock). If you find some consistent winners disagreeing with the consensus there may be something worth closer study going on.

Whether predictwallstreet.com is useful or not remains to be seen. What I can tell you now is that it’s entertaining and it can give you some insight into the market’s state of mind. Remember, the key to the investment game is getting enough clues to turn the odds in your favor.

Technocrati Tags: Money, Investing, Stocks, Market Prediction

The gamer's stock market edge

I’ve spent the better part of my life playing games and avoiding work. The natural combination of the two would be some how turning my skills at games into money. Unfortunately, that was a dead end. As much as we hear about those professional gamers with their endorsements and competition checks, I’m enough of a realist to know that would not be me.

So I got a job folding boxes – which only furthered my resolve.

Fortunately I really do believe the stock market is a lot like a video game – albeit a soul crushing, potentially ruinous one. For all of you gamers out there, here is why:

Acceptance: You need to be willing to accept strategic and not-so-strategic loses. Sometimes shit happens and you need to be willing to keep playing so you can make up for it.

Information: Have you ever played a SquareEnix game? I mean Christ, they are so complicated I feel like a genius whenever I remember how to heal my damn character. With the difficulty and complication of games these days, don’t you think I could figure out a system that’s been around for over a century? I would hope so.

Quick Reflexes: Being able to sort through lots of information very quickly makes gamers unique animals. Once you hone that skill, you can start using it to your advantage.

Facility with Technology: Games are all about winning with the right tools – just like investing. A gamer’s keen adaptability to the tools of the trade fit perfectly with stocks.

Quick Studies: Learning a bunch of different tools quickly will make investing a snap – knowledge is power.

Killer Instinct: Don’t kid yourself investing is a competition. The players out there are out to make money, and they want it from you. Our innate desire to win drives us to play the game and think less about the money (one of the prime weaknesses of investors).

So you see, it’s not that crazy for me to want to train the gamer nation to win in the hallowed halls of consumerism. After all, if the white-collared analysts can try to learn about games to play EA stock, why can’t we learn their game to take some of their Bentley money?

Technocrati Tags: Video Games, Stocks, Finance, Money