Stock Beta and Volatility

Perhaps the single most important measure of stock risk or volatility is a stock's beta. It's one of those at-a-glance measures that can provide serious stock analysts with insights into the movements of a particular stock relative to market movements.

In this article, we're going to first attempt to define the concept of beta values, including some of the theory upon which it's based. Next, we're going to talk about the pros and cons of the measure, while providing insights into the correct use of beta values when analysing a stock.

Beta Values
The concept of beta is fairly simple; it's a measure of individual stock risk relative to the overall risk of thestock market. It's sometimes referred to as financial elasticity. The measure is just one of several values that stock analysts use to get a better feel for a stock's risk profile. As we'll see later on in our discussion, the beta value is calculated using price movements of the stock we're analyzing. Those movements are then compared to the movements of an overall market indicator, such as a market index, over the same period of time.

Beta Rules of Thumb
Beta values are fairly easy to interpret too. If the stock's price experiences movements that are greater - more volatile - than the stock market, then the beta value will be greater than 1. If a stock's price movements, or swings, are less than those of the market, then the beta value will be less than 1.

Since increased volatility of stock price means more risk to the investor, we'd also expect greater returns from stocks with betas over 1. The reverse is true if a stock's beta is less than 1. We'd expect less volatility, lower risk, and therefore lower overall returns.

CAPM Theory and Beta
During our discussions of calculating stock prices, and our follow up discussion of the capital asset pricing model, or CAPM, we explained how we could calculate the expected return on an investment by examining risk-free investments, expectations of the stock market, and stock betas.

For example, by using the following CAPM formula we can calculate the expected rate of return on an investment as:

Expected Rate of Return = r = rf + B (rm - rf)

Where:
• rf = The risk-free interest rate is the interest rate the investor would expect to receive from a risk-free investment. Typically, U.S. Treasury Bills are used for U.S. dollars and German Government bills are used for the Euro.

• B = A stock beta is used to mathematically describe the relationship between the movements of an individual stock versus the market itself. Investors can use a stock's beta to measure the risk of a security versus the market.

• rm = The expected market return is the return the investor would expect to receive from a broad stock market indicator such as the S&P 500. For example, over the last 17 years or so, the S&P 500 has yielded investors an average annual return of around 8.10%.

If we were to translate this CAPM formula into words, we'd say the following:
"The expected return on an investment is equal to the return on a risk-free investment plus the risk premium that's associated with the stock market itself, adjusted for the relative risk of the common stock we've chosen."

Stock beta values are a key element when using the CAPM.

Advantages and Disadvantages of Beta

In the next two sections, we're going to discuss the advantages and disadvantages of betavalues. The outcome of this discussion should be an overall understanding of how to use this measure in practice. For example, you may want to look at a stock's beta before making a purchase decision. That's a good step to take as part of your stock research, as long as you understand what the value is telling you.

Advantages of Beta
The calculation of beta is based on extremely sound finance theory. The CAPM pricing theory is about as good as it gets when it comes to pricing stocks, and is far easier to put into practice when compared to the Arbitrage Pricing Theory, or APT. If you're thinking about investing in a company's stock, then the beta allows you to understand if the price of that security has been more or less volatile than the market itself. That's certainly a good factor to understand about a stock you're planning to add to your portfolio.

If we understand the theory behind beta, then it's easy to understand how emerging technology stocks typically have beta values greater than 1, while 100 year-old utility stocks typically havebeta values less than 1. In fact, in March 2007 Priceline.com had a beta of 3.4 while Public Service Enterprise Group had a beta of 0.57. It's nice when theory seems to work in the real world.

Disadvantages of Beta
We're an advocate of value investing, which includes conducting stock research that focuses on a company's fundamentals and an understanding of financial ratios before investing in a stock. Unfortunately, if you're calculating stock beta values using price movements over the past three years, then you need to bear in mind that the "past performance is no guarantee of future returns" rule applies to beta values.

Beta is calculated based on historical price movements, which may have little to do with how a company's stock is poised to move in the future. Because the measure relies on historical prices, it's not even possible to accurately calculate the beta of newly issued stocks.

Beta also doesn't tell us if the stock's movements were more volatile during bear markets or bull markets. It doesn't distinguish between large upswing or downswing movements. So while betacan tell us something about the past risk of a security, it tells us very little about the attractiveness or the value of the investment today or in the future.

Beta Calculations
You'll find calculated values of beta on all of the major stock reporting websites: Yahoo Finance, MSN Money, and Google Finance all report stock beta values. You can also calculate beta yourself using a fairly straightforward linear regression technique that's available in a spreadsheet application such as Microsoft's Excel or OpenOffice Calc.

In fact, to calculate a stock's beta you only need two sets of data:
• Closing stock prices for the stock you're examining.
• Closing prices for the index you're choosing as a proxy for the stock market.

Most of the time, beta values are calculated using the month-end stock price for the security you're examining, and the month end closing price of the stock exchange.

The formula for the beta can be written as:
Beta = Covariance (stock versus market returns) / Variance of the Stock Market


Alpha Values
Finally, in our spreadsheet we also included a calculation of alpha values. Alpha is a measure of excess returns on an investment, which has been adjusted for risk. It's commonly used to assess the performance of a portfolio manager (such as the case with a mutual fund) as it's an indicator of their ability to provide returns in excess of a benchmark such as the S&P 500.
For example:
• If alpha < risk-free investment return, then the fund manager has destroyed value;
• If alpha = risk-free investment return, then the fund manager has neither created nor destroyed value; and
• If alpha > risk-free investment return, then the fund manager has created value.
Edited Article from moneyzine

 

http://sharemarket-srilanka.blogspot.com

What Is The Intrinsic Value Of A Stock?

Intrinsic value is a topic discussed in philosophy wherein the worth of an object or endeavor is derived in-and-of-itself - or in layman's terms, independent of other extraneous factors. A stock also is capable of holding intrinsic value, outside of what its perceived market price is, and is often touted as an important aspect to consider by value investors when picking a company to invest in.
Outside of this area of analysis, some buyers may simply have a "gut feeling" about the price of a good without taking into deep consideration the cost of production, and roughly estimate its value on the expected utility he or she will derive from it. Others may base their purchase on the much publicized hype behind an asset ("everyone is talking positively about it; it must be good!") However, in this article, we will look at another way of figuring out the intrinsic value of a stock, which reduces the subjective perception of a stock's value by analyzing its fundamentals and determining the worth of a stock in-and-of-itself (in other words, how it generates cash).
For the sake of brevity, we will exclude intrinsic value as it applies to call and put options.
Dividend Discount ModelWhen figuring out a stock's intrinsic value, cash is king. Many models that calculate the fundamental value of a security factor in variables largely pertaining to cash: dividends and future cash flows, as well as utilize the time value of money. One model popularly used for finding a company's intrinsic value is the dividend discount model. The basic DDM is:
Where:
Div = Dividends expected in one period
r = Required rate of return
One variety of this model is the Gordon Growth Model, which assumes the company in consideration is within a steady state - that is, with growing dividends in perpetuity. It is expressed as the following:
Where:
DPS₁= Expected dividends one year from the present
R = Required rate of return for equity investors
G = Annual growth rate in dividends in perpetuity
As the name implies, it accounts for the dividends that a company pays out to shareholders which reflect on the company's ability to generate cash flows. There are multiple variations of this model, each of which factor in different variables depending on what assumptions you wish to include. Despite its very basic and optimistic in its assumptions, the Gordon Growth model has its merits when applied to the analysis of blue-chip companies and broad indices.
Residual Income ModelAnother such method of calculating this value is the residual income model, which expressed in its simplest form is:
Where:
B₀= Current Per-Share Book value
B_n= Expected per-share book value of equity at n
ROE_n= Expected EPS
r = Required rate of return on investment
If you find your eyes glazing over when looking at that formula - don't worry, we are not going to go into further details. What is important to consider though, is how this valuation method derives the value of the stock based on the difference in earnings per share and per-share book value (in this case, the security's residual income), to come to an intrinsic value for the stock. Essentially, the model seeks to find the intrinsic value of the stock by adding its current per-share book value with its discounted residual income (which can either lessen the book value, or increase it.)

Discounted Cash Flow
Finally, the most common valuation method used in finding a stock's fundamental value is discounted cash flow (DCF) analysis. In its simplest form, it resembles the DDM:
Where:
CF_n = Cash flows in period n.
d = Discount rate, Weighted Average Cost of Capital (WACC)
In Ben McClure tutorial DCF Analysis, he goes about using the model to determine a fair value for a stock based on projected future cash flows. Unlike the previous two models, DCF analysis looks for free cash flows - that is, cash flow where net income is added with amortization/depreciation, and subtracts changes in working capital and capital expenditures. It also utilizes WACC as a discount variable to account for the time value of money. McClure's explanation provides an in-depth example demonstrating the complexity of this analysis, which ultimately determines the stock's intrinsic value.

Why Intrinsic Value MattersWhy does intrinsic value matter to an investor? In the listed models above, analysts employ these methods to see if whether or not the intrinsic value of a security is higher or lower than its current market price - allowing them to categorize it as "overvalued" or "undervalued." Typically, when calculating a stock's intrinsic value, investors can determine an appropriate margin of safety, where the market price is below the estimated intrinsic value. By leaving a 'cushion' between the lower market price and the price you believe it's worth, you limit the amount of downside that you would incur if the stock ends up being worth less than your estimate.
For instance, suppose in one year you find a company that you believe has strong fundamentals coupled with excellent cash flow opportunities. That year it trades at $10 per share, and after figuring out its DCF, you realize that its intrinsic value is closer to $15 per share - a bargain of $5. Assuming you have a margin of safety of about 35%, you would purchase this stock at the $10 value. If its intrinsic value drops by $3 a year later, you are still saving at least $2 from your initial DCF value and have ample room to sell if the share price drops with it.
For a beginner getting to know the markets, intrinsic value is a vital concept to remember when researching firms and finding bargains that fit within his or her investment objectives. Though not a perfect indicator of the success of a company, applying models that focus on fundamentals provide a sobering perspective on the price of its shares.

The Bottom LineEvery valuation model ever developed by an economist or financial academic is subject to the risk and volatility that exists in the market as well as the sheer irrationality of investors. While calculating intrinsic value may not be a guaranteed way of mitigating all losses to your portfolio, it does provide a clearer indication of a company's financial health, which is vital when picking stocks you intend on holding for the long-term. Moreover, picking stocks with market prices below their intrinsic value can also help in saving money when building a portfolio.
Although a stock may be climbing in price in one period, if it appears overvalued, it may be best to wait until the market brings it down to below its intrinsic value to realize a bargain. This not only saves you from deeper losses, but allows for wiggle room to allocate cash into other, more secure investment vehicles like bonds and T-bills.

www.investopedia.com

How the 25 Richest Americans Failed Miserably

BY DREW HENDRICKS

Resilience may be more important than luck to your success. One thing these multimillionaires have in common is the ability to bounce back.

It's common knowledge that most entrepreneurs fail at some point. Sometimes it's a colossal failure that results in a startup closing its doors.

Other times, it's just a little hiccup that makes for a great story. Regardless of the severity of the failure, many successful individuals have had just as many defeats as victories, making every entrepreneur just a little bit wiser and stronger.

That doesn't mean that it's an easy pill to swallow. Failure isn't fun.

But if it's any consolation, even the most successful, influential, and wealthy individuals in the United States have also had their fair share of failure at some point. Here's a look at the 25 richest Americans and how they experienced failure.

Note: We excluded the Koch brothers and the Walton and Mars families because they inherited their fortunes.

1. Bill Gates

Have you ever heard of Traf-O-Data? Probably not, but it was Bill Gates' first company. Traf-O-Data was a device that read and processed traffic tapes. The problem was that it never worked and Gates was never able to sell it. Despite the failure of Traf-O-Data, Microsoft co-founder Paul Allen stated, "Even though Traf-O-Data wasn't a roaring success, it was seminal in preparing us to make Microsoft's first product a couple of years later."

Today Gates' net worth is a staggering $77.5 billion, so he must have learned a valuable lesson from that first failure.

2. Warren Buffett

Even the great Warren Buffett experienced a few slip-ups during his storied career. In 1951, Buffett purchased a Sinclair Texaco gas station and wasn't able to turn a profit. But by 1962, Buffett was a millionaire. Even then he still had some learning to do.

In 1962, Buffett began purchasing shares in the New England textile business Berkshire Hathaway, but then the company started to decline. Buffet made a deal with the CEO, Seabury Stanton, to sell back his shares. When the papers were delivered for Buffet's signature, Stanton had changed the deal and made an offer for 1/8 of a point lower. Buffett admitted later that this made him so angry that, instead of selling, he purchased enough shares to take control of the company so he could fire Stanton. To make matters worse, Buffett kept the failing textile business (the historic core of Berkshire Hathaway) open for 20 years before pulling the plug. Today, he calls this decision his "200 billion dollar mistake."

3. Larry Ellison

Larry Ellison (along with his former boss, Bob Mine), founded Oracle in 1977. By 1980, Oracle still hadn't experienced much success, which forced Ellison to mortgage his home in order to secure a line of credit.

Ellison never gave up. After rewriting an IBM paper that focused on the database-programming language SQL, he changed the course of the company by developing the business software that dominated the market in the 1980s. However, Oracle was once again on the brink of disaster in 1990 because orders weren't being fulfilled and the software contained bugs. Ellison responded by firing almost everyone in an effort to put the company's finances back in order and rewarded the salespeople who actually shipped the products. By 1995, Oracle had earned $2.5 billion in revenue.

In 1999, when he tried to best Bill Gates with the Network Computer (NC), Ellison experienced another failure. The NC might have worked today, but in 1999 it was too restricted and expensive for consumers who were only able to go online and store documents, videos, etc., on Oracle's database, which was similar to Google's Chromebook.

4. Sheldon Adelson

Always the entrepreneur, Sheldon Adelson began his career at the age of 12 selling papers and toiletries. Following his service in the army, the Boston native became a mortgage broker and investment adviser. At age 38, Adelson was worth $5 million. Unfortunately, the declining stock market and unwise business ventures caused him to lose his fortune not once, but twice.

Next, he attempted to convert apartments into condos in Boston, but that didn't go very far. Adelson struggled emotionally, mentally, and physically during these times, but he kept marching on. Eventually his love of computers lead him to create the Computer Dealers Expo (COMDEX) in 1979. COMDEX, one of the largest computer tradeshows in the world until 2003, is a big reason Adelson is worth $38 billion today.

5. Michael Bloomberg

Michael Bloomberg was let go from the investment bank Salomon Brothers. Bloomberg has stated that he went on to fund his own company because "nobody offered me a job, I was probably too proud to go look for one, and I said well, why not start your own company?" Over the next three years, Bloomberg perfected his company, which focused on finance, data, and media. The firing of this future mayor of New York City may have been for the best.

Bloomberg's big break came after Merrill Lynch purchased 20 of his terminals. Bloomberg said that during the first year of those challenging early years, "you don't think about the downside. The second year is the difficult one. The third year you see that light at the end of the tunnel."

6. Larry Page

In 1998, Larry Page co-founded a little search engine named Google--a reference to the mathematical term "googol" that represents the numeral 1 followed by 100 zeroes. Although it is now one of the most dominant Internet-service and product providers in the world today, Google has made a few mistakes as well. Do you remember Wave, SearchWiki, and Jaiku? Page, who became CEO in 2001, believes that Google, "probably missed more of the people part than we should have,"which explains why its social-media platform never took off like Facebook did.

Don't expect Page and the Big G to make that mistake again.

7. Jeff Bezos

In 1994, Jeff Bezos left behind his comfortable life in New York City and relocated to Seattle to sell books on the internet. There were some speed bumps in the early days of Amazon. The original name, Cadabra, was very often misheard as "cadaver." Bezos described one huge mistake: "We found that customers could order a negative quantity of books! And we would credit their credit card with the price and, I assume, wait around for them to ship the books."

Over the years, Bezos continued to make adjustments and take risks, and it worked. Today, Amazon is the world's largest online retailer. That success hasn't saved Amazon from experiencing failure here and there, however. For example, the bike-messenger delivery service Kozmo.com, the question-and-answer site Askville, and the Groupon competitor LivingSocial have all been less-than-successful ventures.

8. Sergey Brin

Google co-founder Sergey Brin once had an idea he though was sheer genius: He envisioned a business that allowed people to order pizza via fax machine. Reality set in when he realized that not every pizzeria and customer had a fax machine, which created a big problem for his business plan.

9. Carl Icahn

Carl Icahn is well known as a corporate raider in the business world. Since purchasing a seat on the NYSE in 1968, Icahn has made his fortune by taking over companies like RJR Nabisco, Texaco, Marvel Comics, Revlon, and Western Union.

Despite all of his success, Icahn has experienced a number of failures, such as investing in TWA, which later went bankrupt. He's also been on the losing end of the deal with companies like Blockbuster, Time Warner, and Motorola.

10. George Soros

George Soros, a Hungarian refugee who moved to New York City in 1956, began his career as an arbitrage trader. He developed an enthusiasm and talent as a short-term speculator, which led him to found one of the most lucrative hedge-fund firms, Soros Fund Management, in 1970. In 1992, Soros became $1 billion richer in just one day when he bet against the pound during Black Wednesday. However, he went on to lose $600 million dollars in 1994 after he miscalculated the value of the yen to the dollar. To his credit, Soros has stated, "I'm only rich because I know when I'm wrong."

11. Mark Zuckerberg

In 2004, while Mark Zuckerberg and his team were trying to get Facebook up and running, Zuckerberg also toyed around with a project known as Wirehog--"a peer-to-peer (P2P) file-sharing service that hooked up to Facebook." The idea behind this service was to allow Facebook users to share music, documents, etc. It was a great idea on paper--but Facebook began getting slapped with lawsuits. Thankfully, Wirehog didn't catch on and it was suspended in 2006.

Today, at just 30 years old, Mark Zuckerberg is worth $28.5 billion and is still making and learning from his mistakes: Think Facebook lite, Facebook Gifts, Facebook Home, and Poke.

12. Steve Ballmer

In 1980, Ballmer became the 30th employee at Microsoft. Over the years he held many positions within the company, including CEO from 2000 to 2014. Ballmer made so many mistakes while he was CEO at Microsoft that they were highlighted in an article by Business Insider. Some of his epic mistakes and failures include laughing off the iPhone, Windows Vista, and spending billions trying to take on Google. He was also instrumental in acquiring Danger (parent company of the Sidekick) for $500 million and the Zune.

13. Len Blavatnik

Nicknamed "King" at his holding company Access Industries, Ukrainian-born businessman Len Blavatnik made his fortune in oil and metal companies following the collapse of the Soviet Union. However, the King lost $1.2 billion after getting into the chemical industry. He borrowed money to purchase Dutch producer Basell in 2005 for $5 billion and then borrowed $20 billion more to purchase Houston-based Lyondell. After merging the companies, Blavatnik was unable to pay back the debt and declared bankruptcy. Fortunately for Blavatnik, the company has since been able to turn a profit after becoming free of debt.

In 2011 Blavatnick purchased Warner Bros. Music for $3.3 billion, which he reportedly purchased because "he loves what it can do for him socially."

14. Abigail Johnson

Abigail Johnson has earned her position as president of the family business, Fidelity Investments, by self-admittedly "doing whatever had to be done to right the ship." Johnson is one of the wealthiest and most powerful people in America, despite some serious setbacks. For example, she lost two important clients, an experience that she described as "extremely difficult and, at times, painful, personally, for me and for others."

15. Phil Knight

While at Stanford, Philip Knight wrote a term paper about a business that sold shoes. In 1962, he traveled to Japan and met with the founder of Onitsuka Tiger Co., one of the oldest shoe companies in Japan. When he returned home, he teamed up with Bill Bowerman at the University of Oregon to found Blue Ribbon Sports. Knight sold his first Tiger-brand running shoes from his green Plymouth Valiant at track meets across the Pacific Northwest. Sales skyrocketed and in 1978, the company became Nike.

Although the Air Jordan line gained great success, Nike neglected a growing trend in the late 1980s as the market was leaning toward aerobic shoes. Reebok filled that niche and Nike sales dropped 18%. In 1990, Knight and The Swoosh countered with the Nike Air, which reclaimed Nike's spot as the leading footwear brand.

16. Michael Dell

Michael Dell founded Dell Computers in a dorm room at the University of Texas, Austin, in 1984. By 1992, the 27-year-old entrepreneur had become the youngest CEO to be included in Forbes' list of the top 500 corporations. Dell's company went on to become one of the largest sellers of personal computers in the world.

Unfortunately, Dell also had a long list of failures, with his attempts to get involved in the smartphone, tablet, and even iPod market: There was the bulky Dell DJ that couldn't compete with the iPod, the disappointing smartphone Dell Aero, and the discontinued tablet Dell Streak. In 2013, Michael Dell bought back shares to make the company private.

17. Paul Allen

Paul Allen, worth $15 billion, is a relatively successful man thanks to co-founding Microsoft with Bill Gates. However, he missed out on a huge opportunity after he sold his AOL stocks in the early 1990s missing out on $40 billion.

18. Donald Bren

When you're the wealthiest real-estate developer in the United States, you're definitely a success. After becoming the sole shareholder of Irvine Co. in 1996, Bren controlled "50,000 apartments, 40 million square feet of office space, and 8 million square feet of retail space in Orange County, San Diego, Los Angeles, and Silicon Valley," valued at $15.4 billion.

Bren's business record has been spotless, but his personal life hasn't. He's been divorced three times and was involved in a bitter child-support case. While Bren was victorious in court, the reclusive real-estate mogul had his dirty laundry thrown out to the public, declaring that he "never planned to be a parent to the two children." Bren continues to make money, despite his failed marriages and the blow to his public image.

19. Ronald Perelman

Ronald Perelman learned an important trade from his father: how to purchase a company, reduce debt by selling off superfluous divisions, bring the company back to its core model, and either sit on it or sell it. That strategy worked until he hit a roadblock with Revlon. His investment firm, MacAndrews & Forbes, was unable to take Revlon private, which resulted in a penalty and a conflict of interest that kept him from acquiring Revlon.

20. Anne Cox Chambers

Anne Cox Chambers, ambassador to Belgium under Jimmy Carter, and her sister took over the now privately held media conglomerate Cox Enterprises after the passing of her father. An heiress who continues to increase her wealth, Chambers has experienced a couple of setbacks in relation to running her company. For example, there was once a proposed $4.9 billion deal between Cox Enterprises and Southwestern Bell that fell apart. However, even more embarrassing is the fact that her newspapers "make waves, but not too many." That's not a good reputation to have in a troubled field.

21. Rupert Murdoch

He was born in Melbourne, Australia, but Rupert Murdoch calls the U.S. home. Murdoch's media conglomerate is arguably the largest in the world. It encompasses some of the most-successful television, film, book, and newspaper outlets.

Murdoch is not used to failure, but he took a major hit after purchasing MySpace in 2005 for $580 million. Just six years later, he was forced to sell the once-popular social-media platform for $35 million. Murdoch simply tweeted "we screwed up in every way possible."

22. Ray Dalio

Ray Dalio, "the king of the hedge-fund industry," founded the world's biggest hedge-fund firm in a Manhattan apartment in 1975. While the last couple of years have been a bit rough, Dalio's Bridgewater Associates still has $150 billion in assets.

Dalio's failures have been more apparent in his outlandish behavior. On New Year's Eve in 1974, he got drunk and punched his boss. Around the same time, while at the "annual convention of the California Food & Grain Growers' Association, he paid an exotic dancer to drop her cloak in front of the crowd." Even so, he managed to convince some clients to go along with him when he funded Bridgewater after being fired.

23. Charles Ergen

In 1980, Charles Ergen was just your run-of-the-mill professional gambler until he got kicked out of a casino for counting cards. The next logical step? Get into the business of satellite TV. After selling satellite dishes out of the back of a truck around Denver, Ergen finally got EchoStar incorporated in 1993.

Both EchoStar and Dish Network have been incredibly successful. However, the attempts to expand the company into something more than just a satellite-television provider have not. Ergen purchased Blockbuster in 2011, even while in bankruptcy, in an attempt to create a streaming video service to compete with Netflix. That never happened, and Ergen has continued to fail at acquiring other companies, like Sprint.

24. Harold Hamm

Harold Hamm's story is remarkable. The son of a sharecropper who never attended college, Hamm purchased his first oil rig in 1971. For the next 15 years, he stuck with his Oklahoma oil rig. Business was great in the 1970s, but the 1980s were more challenging. For example, Hamm almost went bankrupt thanks to 17 consecutive dry holes. In fact, things didn't get much better after interest in converting fuel from oil-bearing rock known as Bakken shale began to decline in the 1990s. However, Hamm stuck with the business and his company, Continental Resources, had $3.6 billion in revenue in 2013.

25. James Simons

There's a good possibility that you've never heard of James Simons, aka the "Quant King." This mathematician and code-breaker for the National Security Agency founded the hedge-fund-management company Renaissance Technologies in 1982. Since then, Simons and his company have been unstoppable. Renaissance Technologies is one of the most successful hedge-fund companies.

That's not to say that Simons is perfect. In "The Secret World of Jim Simons" by Hal Lux, it's noted that back in "1997, he folded a middling market-neutral fund into Medallion after just three years. And a mortgage-backed-derivatives fund he backed in 1995 swooned after enjoying two fine years." Simons also helped Bernie Madoff "raise money from others," but he became suspicious and began asking questions that eventually led to a regulatory investigation of Mr. Madoff, according to a Securities and Exchange Commission watchdog report.

Of course, a good leader knows when to change course.

Each one of these successful individuals had to change course at some point. Some may have changed a little bit too late, but they still changed and corrected. While building your company and attaining your vision, be sure to evaluate your viability and continually check your business's health. If you need to change course, don't be afraid to do so, it may just lead you to become number 26 on this list!

Source: http://www.inc.com/

Are you capable of earning profits in stock market?

“The first duty of a man is to think for himself.” - José Martí

Positive sentiments during the post-war era attracted a large number of new investors to the capital market. Many investors were able to reach their financial goals while a few others did not earn profits as expected. Several factors would have attributed to the above stated. Today’s article will focus on the mistakes made by new investors who lacked individualism when investing in the market and followed investment decisions of high-net-worth investors without sufficient reasoning. Differently stated, a form of behaviour referred to as herd behaviour in behavioural finance.

Herd behaviour
“Most people say that Shakespeare rocked merely because most people say that Shakespeare rocked.”
- Mokokoma Mokhonoana  
Herd behaviour is the tendency for individuals to imitate the actions (rational or irrational) of a larger group. There are a couple of reasons for this form of behaviour. One reason is the common rationale that it’s unlikely that such a large group could be wrong. After all, even if you are convinced that a particular idea or course or action is irrational or incorrect, you might still follow the herd, believing they know something that you don’t. This is especially prevalent in situations in which an individual has very little experience.

This theory explains why certain investors didn’t earn profits as expected. These new investors entered the market when the market capitalization and market turnover were increasing rapidly. Moreover, return to investment was relatively short term (at times even a few days). Almost all stocks were lucrative. In such a context, new investors were lost for investments as all investments looked profitable. Eventually they based their investment decisions on market rumours that were in most situations determined by investment decisions of high-net-worth investors.

When the rumour of a high-net-worth investor purchasing a stock enters the market, the rest of the investors would blindly purchase the stock without sufficient reasoning or research.

There might have been situations where it was profitable, yet the risk of reducing the return to investment is higher when you blindly invest in a stock simply because a high-net-worth investor did so. The next section will spell out how the herd mentality could reduce profits.

What went wrong?
“Do not repeat after me if you do not understand the words. Do not merely put on a mask of my ideas, for it will be an illusion and you will thereby deceive yourself.”
 -  Jiddu Krishnamurti

•  Differences in investment goals

The key towards successful investment is gearing one’s investment decisions based on his/her financial goals. Financial goals are shaped by risk appetite, rate of return, holding power, etc. Differences in these variables would bring about different financial goals between high-net-worth investors and the rest of the investors. Table 1 explains the degree of difference in investment goals.
When a high-net-worth investor intends to enter the director board, return to investment in terms of monetary gain is not given prominence. The investor might even consider entering even an overpriced stock. However, investment goals of medium/small scale investors are geared at monetary gains. Thus, it explains why a certain investor, who blindly follows, doesn’t obtain expected returns.

•  Trapped in market irregularities

There were times when small/medium scale investors based their decisions simply on market rumours of certain high-net-worth investors purchasing shares. This increases the demand for the stock and pushes up the price. Even though the high-net-worth investors purchase shares at lower levels, the majority of the investors would purchase these shares at higher prices, far above the intrinsic value of the stock. The situation intensified when the high-net-worth investors silently and strategically exited the stock while medium/small-scale investors continued to purchase at higher prices.
These investors blamed the market and other stakeholders on their losses. Yet, it is important to bear in mind that it is their ignorance that fuelled such irregularities. The regulator can only educate you and warn you but cannot force you to make the correct decision. It is the duty of the investor to think and act wisely.

•  Missed market opportunities

The market boom was followed by a market correction that brought about lucrative investment opportunities. Most of the stocks were trading far below its intrinsic value. The herd mentality once again prevented investors from reaping the benefits. They were guided by market rumours that were over exaggerated and backed by hidden agendas.


Is individuality key to successful investments?
“Attempt to be fearful when others are greedy and to be greedy only when others are fearful.” - Warren Buffet
The above quotation clearly states the mentality of successful investors. The success of Warren Buffet does not lie on a well mastered skill of blindly following the herd. The pillars of success would be patience, knowledge, ability to not only think out of the box but also  redesign it and last but not least discipline. You have to be yourself and be focused on what you are aiming at. You should be able to act in the market  as an individual who is capable of independently  comprehending market performance and acting accordingly based on his/her own judgment.

You can learn from successful and high-net-worth investors but never imitate unless it is in line with your expectations.
Lessons could be drawn from the behaviour of foreign investors. They exited the market at a point local investors were blindly investing and once again entered the market at low price levels when the market was experiencing a correction in prices. As discussed above, the herd mentality resulted in local investors missing the opportunity.

A successful investment strategy is a homegrown strategy based on one’s financial credibility, financial expectations, risk appetite and holding power. It is also important for one to act with an open mind backed by creativity and knowledge in order to identify the hidden opportunities.

How do you design your very own investment strategy?
This section will focus on the areas investors should look sharp on when designing a winning investment strategy.

“Sound strategy starts with having the right goal.” - Michael Porter
It is vital that you have clearly defined goals formulated based on your needs. Invest only if investment opportunities go in line with your goals. Don’t change your goals based on short-term market fluctuations. Similarly, don’t aimlessly hold on to a goal if it is not feasible. However, well designed your goal is it is important to look at the results often.

“An investment in knowledge pays the best interest.”- Benjamin Franklin
New investors blindly followed the investment decisions of others due to the lack of sufficient knowledge. Investing in the market is not an easy ride. Your profits greatly depend on the hours of homework. It is true that your investment advisor would guide you but the final decision is made by you. Thus, it is vital that you’re equipped with relevant subject matter. Familiarize yourself with related financial reports and research. It is equally important for you to update your knowledge.

“Earth provides enough to satisfy every man’s needs, but not every man’s greed.” - Mahatma Gandhi
A strategy should not be driven by greed. It should be designed in a manner by which you exit a stock when you obtain an expected rate of return.
“A man is what he believes in. Believe in yourself and make wise decisions in the market.”

www.dailymirror.lk

20 Insights from Peter Lynch

1. Invest In What You Know
This is where it helps to have identified your personal investor’s edge. What is it that you know a lot about? Maybe your edge comes from your profession or a hobby. Maybe it comes just from being a parent. An entire generation of Americans grew up on Gerber’s baby food, and Gerber’s stock was a 100-bagger. If you put your money where your baby’s mouth was, you turned $10,000 into $1 million.

2. Let Your Winners Run
It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. If you’re lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it. Let’s say you have a portfolio of six stocks. Two of them are average, two of them are below average, and one is a real loser. But you also have one stellar performer. Your Coca-Cola, your Gillette. A stock that reminds you why you invested in the first place. In other words, you don’t have to be right all the time to do well in stocks. If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.

3. On Growth Stocks
There are two ways investors can fake themselves out of the big returns that come from great growth companies. The first is waiting to buy the stock when it looks cheap. Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Walmart never looked cheap compared with the overall market. Its price-to-earnings ratio rarely dropped below 20, but Walmart’s earnings were growing at 25 to 30 percent a year. A key point to remember is that a p/e of 20 is not too much to pay for a company that’s growing at 25 percent. Any business that an manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in McDonald’s. A chorus of colleagues said golden arches were everywhere and McDonald’s had seen its best days. I checked for myself and found that even in California, where McDonald’s originated, there were fewer McDonald’s outlets than there were branches of the Bank of America. McDonald’s has been a 50-bagger since.

4. Career risk is more highly regarded than market risk
In fact, between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension-fund manager, or corporate-portfolio manager would jump at the latter. Success is one thing, but it’s more important not to look bad if you fail. There’s an unwritten rule on Wall Street: “You’ll never lose your job losing your client’s money in IBM.”

5. Stocks are most likely to be accepted as prudent at the moment they’re not.
For two decades after the Crash, stocks were regarded as gambling by a majority of the population, and this impression wasn't fully revised until the late 1960s when stocks once again were embraced as investments, but in an overvalued market that made most stocks very risky. Historically, stocks are embraced as investments or dismissed as gambles in routine and circular fashion, and usually at the wrong times.

6. Keep your winners, cut your losers
Consistent winners raise their bet as their position strengthens, and they exit the game when the odds are against them, while consistent losers hang on to the bitter end of every expensive pot, hoping for miracles and enjoying the thrill of defeat. In stud poker and on Wall Street, miracles happen just often enough to keep the losers losing.

7. Look for situations, where perceptions are worse than reality
The big winners come from the so-called high-risk categories, but the risks have more to do with the investors than with the categories.

8. Recency effect impacts many investors’ decision making
No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that’s happened, as opposed to what’s going to happen next. This “penultimate preparedness” is our way of making up for the fact that we didn’t see the last thing coming along in the first place. The day after the market crashed on October 19, people began to worry that the market was going to crash. It had already crashed and we’d survived it (in spite of our not having predicted it), and now we were petrified there’d be a replay. Those who got out of the market to ensure that they wouldn’t be fooled the next time as they had been the last time were fooled again as the market went up. The great joke is that the next time is never like the last time, and yet we can’t help readying ourselves for it anyway.

9. All stocks are price cyclical
Companies don’t stay in the same category forever. Over my years of watching stocks I’ve seen hundreds of them start out fitting one description and end up fitting another. Fast growers can lead exciting lives, and then they burn out, just as humans can. They can’t maintain double-digit growth forever, and sooner or later they exhaust themselves and settle down into the comfortable single digits of sluggards and stalwarts.

Sooner or later every popular fast-growing industry becomes a slow-growing industry, and numerous analysts and prognosticators are fooled. There’s always a tendency to think that things will never change, but inevitably they do. Alcoa once had the same kind of go-go reputation that Apple Computer has today, because aluminum was a fast-growth industry. In the twenties the railroads were the great growth companies, and when Walter Chrysler left the railroads to run an automobile plant, he had to take a cut in pay. “This isn’t the railroad, Mr. Chrysler,” he was told.

Another sure sign of a slow grower is that it pays a generous and regular dividend. Companies pay generous dividends when they can’t dream up new ways to use the money to expand the business.

10. About Growth stocks
THE FAST GROWERS These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10-to 40-baggers, and even the 200-baggers. With a small portfolio, one or two of these can make a career. A fast-growing company doesn’t necessarily have to belong to a fast-growing industry. As a matter of fact, I’d rather it didn’t, as you’ll see in Chapter 8. All it needs is the room to expand within a slow-growing industry. Beer is a slow-growing industry, but Anheuser-Busch has been a fast grower by taking over market share, and enticing drinkers of rival brands to switch to theirs. The hotel business grows at only 2 percent a year, but Marriott was able to grow 20 percent by capturing a larger segment of that market over the last decade. The same thing happened to Taco Bell in the fast-food business, Walmart in the general store business, and The Gap in the retail clothing business. These upstart enterprises learned to succeed in one place, and then to duplicate the winning formula over and over, mall by mall, city by city. The expansion into new markets results in the phenomenal acceleration in earnings that drives the stock price to giddy heights.

11. THE CYCLICALS
A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion. In a growth industry, business just keeps expanding, but in a cyclical industry it expands and contracts, then expands and contracts again. The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals. Even defense companies behave like cyclicals, since their profits’ rise and fall depends on the policies of various administrations.

Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of the stalwarts. This is understandable, since people buy new cars and take more airplane trips in a vigorous economy, and there’s greater demand for steel, chemicals, etc. But going the other direction, the cyclicals suffer, and so do the pocketbooks of the shareholders. You can lose more than fifty percent of your investment very quickly if you buy cyclicals in the wrong part of the cycle, and it may be years before you’ll see another upswing.

12. Boring is good
A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. Both together is guaranteed to keep the oxymorons away until finally the good news compels them to buy in, thus sending the stock price even higher. If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount. Then when it becomes trendy and overpriced, you can sell your shares to the trend-followers.

13. Who are the winners in a cyclical recovery
Depressed enterprises on the edge of disaster can become very big winners on the rebound. It happens again and again in the auto, chemical, paper, airline, steel, electronics, and nonferrous metals industries. The same potential exists in such currently depressed industries as nursing homes, natural gas producers, and many retailers. What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround.

14. Embrace market corrections
It is not entirely clear what causes deep market corrections (a clear prove that markets are irrational), but without them many of the best performing long-term investors would have never achieved their spectacular returns.

15. Hunting for bargains
There are two particular periods when great bargains are likely to be found. The first is during the peculiar annual ritual of end-of-the-year tax selling. It’s no accident that the most severe drops have occurred between October and December. It’s the holiday period, after all, and brokers need spending money like the rest of us, so there’s extra incentive for them to call and ask what you might want to sell to get the tax loss. For some reason investors are delighted to get the tax loss, as if it’s a wonderful opportunity or a gift of some kind— I can’t think of another situation in which failure makes people so happy. Institutional investors also like to jettison the losers at the end of the year so their portfolios are cleaned up for the upcoming evaluations. All this compound selling drives stock prices down, and especially in the lower-priced issues, because once the $ 6-per-share threshold is reached, stocks do not count as collateral for people who buy on credit in margin accounts. Margin players sell their cheap stocks, and so do the institutions, who cannot own them without violating one stricture or another. This selling begets more selling and drives perfectly good issues to crazy levels. If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for. The second is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you’ll find opportunities that you wouldn’t have thought you’d ever see again. Professionals are often too busy or too constrained to act quickly in market breaks, but look at the solid companies with excellent earnings growth that you could have picked up in the latest ones.

16. About sellingIf you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say good-bye to it.

17. WHEN TO SELL A CYCLICAL
The best time to sell is toward the end of the cycle, but who knows when that is? Who even knows what cycles they’re talking about? Sometimes the knowledgeable vanguard begins to sell cyclicals a year before there’s a single sign of a company’s decline. The stock price starts to fall for apparently no earthly reason. To play this game successfully you have to understand the strange rules. That’s what makes cyclicals so tricky. In the defense business, which behaves like a cyclical, the price of General Dynamics once fell 50 percent on higher earnings. Farsighted cycle-watchers were selling in advance to avoid the rush.

One obvious sell signal is that inventories are building up and the company can’t get rid of them, which means lower prices and lower profits down the road. I always pay attention to rising inventories. When the parking lot is full of ingots, it’s certainly time to sell the cyclical. In fact, you may be a little late.

18. WHEN TO SELL A FAST GROWER
Here, the trick is not to lose the potential ten-bagger. On the other hand, if the company falls apart and the earnings shrink, then so will the p/ e multiple that investors have bid up on the stock. This is a very expensive double whammy for the loyal shareholders. The main thing to watch for is the end of the second phase of rapid growth, as explained earlier. If The Gap has stopped building new stores, and the old stores are beginning to look shabby, and your children complain that The Gap doesn’t carry acid-washed denim apparel, which is the current rage, then it’s probably time to think about selling. If forty Wall Street analysts are giving the stock their highest recommendation, 60 percent of the shares are held by institutions, and three national magazines have fawned over the CEO, then it’s definitely time to think about selling.

There’s simply no rule that tells you how low a stock can go in principle. I learned this lesson for myself in 1971, when I was an eager but somewhat inexperienced analyst at Fidelity. Kaiser Industries had already dropped from $ 25 to $ 13. On my recommendation Fidelity bought five million shares— one of the biggest blocks ever traded in the history of the American Stock Exchange— when the stock hit $ 11. I confidently asserted that there was no way the stock could go below $ 10. When it reached $ 8, I called my mother and told her to go out and buy it, since it was absolutely inconceivable that Kaiser would drop below $ 7.50. Fortunately my mother didn’t listen to me. I watched with horror as Kaiser faded from $ 7 to $ 6 to $ 4 in 1973— where it finally proved that it couldn’t go much lower.

19. The biggest winners are usually a pleasant surprise
The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn't the surprise, but what the shares bring often is.

20. Picking bottoms – If they don’t scare you out, they will wear you out
Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place. If you get interested in buying a turnaround, it ought to be for a more sensible reason than the stock’s gone down so far it looks like up to you. Maybe you realize that business is picking up, and you check the balance sheet and you see that the company has $ 11 per share in cash and the stock is selling for $ 14. But even so, you aren't going to be able to pick the bottom on the price. What usually happens is that a stock sort of vibrates itself out before it starts up again. Generally this process takes two or three years, but sometimes even longer.

How many times have you heard people say this? Maybe you've said it yourself. You come across some stock that sells for $ 3 a share, and already you’re thinking, “It’s a lot safer than buying a $ 50 stock.” I put in twenty years in the business before it finally dawned on me that whether a stock costs $ 50 a share or $ 1 a share, if it goes to zero you still lose everything. If it goes to 50 cents a share, the results are slightly different. The investor who bought in at $ 50 a share loses 99 percent of his investment, and the investor who bought in at $ 3 loses 83 percent, but what’s the consolation in that?

The point is that a lousy cheap stock is just as risky as a lousy expensive stock if it goes down. If you’d invested $ 1,000 in a $ 43 stock or a $ 3 stock and each fell to zero, you’d have lost exactly the same amount. No matter where you buy in, the ultimate downside of picking the wrong stock is always the identical 100 percent.

Sometimes it’s always darkest before the dawn, but then again, other times it’s always darkest before pitch black.

Source:
Lynch, Peter; Rothchild, John (2012-02-28). One Up On Wall Street. Simon & Schuster, Inc.. Kindle Edition.

http://sharemarket-srilanka.blogspot.com/

11 Rules for Anyone Who Uses Charts

By Michael Kahn

As I often say about my wine savvy, I know just enough to be dangerous. For many traders, the same holds true with regard to charting and technical analysis.

They know enough to use an RSI (relative strength index) to gauge momentum but really don’t know why they use a parameter of 14. And they use the same process day in and day out because they heard it once in a webinar or read it once in a book.

Trading teachers will tell us to find something that works and stick with it. I contend that unless you understand the “why” and not just the “what” you are setting yourself up for trouble down the road. After all, markets evolve and what worked yesterday may not work today.

This missive is not about deconstructing technical indicators. Rather, it is to get the reader to think about the spirit of the analysis and letting the charts speak to them. Any other method implies that traders are making the market conform to their own biases.

The market hates that and it will make you pay dearly for trying.

Let’s start with RSI and the 14-parameter. Why do so many traders use it? The answer is that is the default setting on the first applications of charting software that came out a few decades ago. There was reason behind it as Welles Wilder, the creator of RSI, was using half cycles in his favored markets as the basis. But once software coders and inexperienced product marketing managers got something in their heads it seemed to be set for life. Even today, many software programs do not let the user change the default parameter to something different.

Of course, indicator parameters should be in sync with the market and time frame in which they are being used. But it goes beyond that. Because markets evolve, indicators can behave differently than they did when they were newly created. Today, “everyone” sees what they think are overbought and oversold levels at the same time and act accordingly. How many times in recent memory have signals simply failed just because everyone – the herd – is taking the same action?

Rather than over-think an indicator or even a chart pattern, here are some rules that will make your life easier and more profitable. They are all rooted in keeping it simple and more importantly letting the market do all the thinking. All you have to do is turn off the news and absorb the message.

Rule 1 - If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.

If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.

Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.

When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?

Rule 3 – You can torture a chart to say anything you want. Don’t do it.

This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.

Rule 4 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).

It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you.

It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.

Rule 5 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.

Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.

As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intraday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?

Rule 6 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.

A three-day correction is not sufficient to get a six-month trend back on track. And a three month pullback after a six month rally is probably a new trend, not a correction.

Rule 7 – Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head-and-shoulders should look like a central peak with two smaller but equal peaks around it.

Rule 8 – Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury because it is often difficult to quantify.

No matter how strong the case built on indicators and the environment surrounding the market may be, there is no change in condition until price action reflects it. How many times has an overbought market become even more overbought?

Rule 9 – Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.

There are hundreds of indicators but only a handful of truly unique types. Be sure you do not try to prove your case with a variation on the same set of input data. Most momentum indicators are quite similar so be sure to look at at least the three types listed in Rule 8.

Rule 10 – Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.

Rule 11 – If a stop is hit you must honor it. All big losses start out as small ones. No exceptions. Feel free to re-analyze a trade that got stopped out to see if you would enter anew but never justify holding on to a loser.

Again, nothing here is rocket science but these rules force you to let the market talk. After all, that is our job as traders, reading the signs and acting accordingly.
http://www.tradingmarkets.com/

10 Trading Lessons You Can Learn From George Bernard Shaw

Born in Dublin, Ireland, in 1856, George Bernard Shaw grew to become one of Great Britain’s greatest and most controversial playwrights. Shaw’s father, a corn merchant, was an alcoholic and therefore there was very little money to spend on George’s education. George went to local schools but never went to university and was largely self-taught.

He was also a co-founder of the London School of Economics, won the Nobel Prize in Literature in 1925 and an Academy Award for Best Adapted Screenplay (Pygmalion) in 1938.

G. Bernard Shaw had quite a bit to say during his lifetime, so here are 10 of his many quotes and what we, as traders, can learn from


1. Beware of false knowledge; it is more dangerous than ignorance.
Don’t believe everything you find on the Internet. There are thousands of trading related websites out there and many of them are created by people who know little or nothing about what they’re talking about or – worse – what they want you to buy. Remember to always do your due diligence. In trading, delusion costs you time and money.2. Everything happens to everybody sooner or later if there is time enough.
Patience is very important. Don’t expect to achieve your goals in just a few weeks or months. It takes time and dedication to learn what you need to know in order to survive the market.

3. He who can, does. He who cannot, teaches.
It’s no secret that most traders fail and quit trading relatively fast. We should accept the fact that trading is not for everyone. Kind of like politics, burglary, pest control, high-rise window washing, surgery, quantitative engineering etc. – just insert other dangerous, high skill requiring or even disgusting jobs that only a few people are able to do.Will you be one of those to quit trading someday? Here is a good exit plan for those who eventually accept the fact that trading is not for them: Did you learn a lot of things about trading, although it didn't work out, but can be helpful for some people? – Then write a book or a trading course and sell it :)

4. Man can climb to the highest summits, but he cannot dwell there long
There are cycles everywhere. Being successful is a cycle which, sooner or later – or on a long enough timeline – always comes to an end. Enjoy it and do good things while it lasts.

5. People who say it cannot be done should not interrupt those who are doing it.
If you finally find something that works for you and you enjoy what you do, don’t let other people tell you that you are doing it wrong.

6. Success does not consist in never making mistakes but in never making the same one a second time.
What are your biggest trading mistakes? Do you remember them? It’s always a good idea to write them down on a list and check that list on a regular basis. Try to find patterns as there’s often a tight relation between smaller mistakes – resulting in trading mistakes of greater magnitude.

7. The minority is sometimes right; the majority always wrong.
More than 90% of traders lose and that’s a fact. Do you believe that doing exactly the same things they do, trading exactly the same way they trade, expecting the same thing they expect – will make you one of the few that are successful? Then you are most likely wrong.

8. We must always think about things, and we must think about things as they are, not as they are said to be.
Details matter, but try to see the forest for the trees. Don’t let the gigantic river of news, opinions, rumours influence your beliefs, plans and strategies.

9. If you have an apple and I have an apple and we exchange these apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.
Unless you found the “holy grail of trading”, it’s a good idea to share information with others. Sometimes many small ideas equal a big one.

10. Progress is impossible without change, and those who cannot change their minds cannot change anything
Always adapt: understand new market dynamics and be ready to go with the flow.Source: http://www.innerfx.com/

Are you interested in investing in an IPO?

The Colombo Stock Exchange (CSE) witnessed an increase in Initial Public Offerings (IPOs) since the beginning of the year as a result of the incentives given by the budget for the year 2014 and the prudent measures taken by market stakeholders.

The current trend attracts many investors to the market. These investors will be able to maximize opportunities only if they make informed decisions. They should refrain from making unwise decisions as done in the past. Hence, this article will give out some useful tips when investing.

Seek — and secure — objective research
It’s not as easy as you might think to find good objective information or research on a private company on the cusp of going public, yet doing so is absolutely essential.
Start by scouring the web for information on the company — particularly any details regarding financing as well as past and current press releases. They can inform you of any news, research or analysis of your IPO, the anticipated price for the offering and perhaps even how the company’s major executives and shareholders have been buying and selling their stocks.

There are still other firms that specialize in performing in-depth IPO researching and reporting. They may charge a nominal fee for this extra information but ensuring you’re well-informed on your prospective IPO is often worth the extra expense. By performing good research, you’ll be able to determine whether your IPO is a stable company, or if it’s just being over-hyped.

It’s also a good idea to take a look at the health of the overall sector in which the company you’re interested in belongs to (e.g., manufacturing, information technology, health care, bank finance and insurance, hotels and travels, etc.). For example, if you’re considering an IPO in the manufacturing sector but that particular sector hasn’t been faring well, you may want to reconsider.

Read and understand the prospectus
For most people, thoroughly reading their investment prospectus can seem nothing more than a tedious — if not entirely soporific — endeavour they’d rather not undertake. Investing in stocks, however, and particularly investing in IPOs, requires that you do more than just skim the prospectus — you must read it from cover to cover. While the material may be a bit dry, the information contained within the prospectus such as the company’s opportunities/risks and how the funds the IPO raises are proposed to be used is invaluable.
Highlighted below are some of the sections of an IPO prospectus that an investor should consider. 

•  Legal proceedings disclose the significant litigation involving the company.
   
• Management’s discussion and analysis gives the management an opportunity to discuss in narrative form the management’s perspective on the company’s financial condition, changes in financial condition and results of operations. This narrative section should provide investors with information to help them understand how and why the company’s financial results have changed over the time period covered by the financial statements and factors that management thinks might affect the company’s future financial condition or operating results.
   
• Dilution illustrates the usually significant disparity between the price that investors are paying for shares in the company’s IPO to both the book value of such shares and the average price paid by the existing shareholders that include founders, officers and early investors.
   
• Use of proceeds specifies what the company plans to do with the money it raises in the offering.
   
• Prospectus summary briefly summarizes information that is disclosed in greater detail throughout the prospectus, including the company’s business, strategy, plans for using the funds raised in the IPO, financial condition and as well as the terms of the IPO itself.
   
• Risk factors identify risks that the company’s management feels could significantly impact the company’s business, operations or performance or an investment in the securities being offered.
   
• Dividend policy describes the company’s history of paying and possibly its plans to pay, dividends to shareholders.
   
• Selected financial data discloses certain key financial and other data in a summarized column format. The information and presentation can highlight significant trends in the company’s financial condition and results of operations.  Companies are generally required to disclose selected financial data for the past years. You should also study the projected accounting figures in the prospectus carefully. If the IPO’s future earnings projections look too good to be true, well, that just might be the case. This is perhaps one of the biggest red flags you should look for when performing your research.
   
• Business describes the company’s lines of business, its principal products or services and their markets, any significant suppliers and customers on whom the company’s business depends and its competitive landscape and principal methods of competition. This section may also provide information regarding the relative contribution to the company’s financial results from different significant lines of business or operations in foreign countries.
   
• The management offers biographical information regarding the directors and executive officers of the company.

It’s also worth remembering that while most companies do their best to disclose everything about the IPO in their prospectuses and provide as much information as possible, all the data and information are written by the company, not a disinterested third party or group.

Watch out for lock-up period
Lock-up agreements are legally binding documents that prevent existing shareholders from selling any shares of stock for a specified period of time. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price.

Evaluate the offering price
The company and the investment bank make the decision on where to set the offering price. It is important to understand that the offering price is determined by a mix of market conditions, analysis and the company’s performance.  Competing interests affect the determination of the offering price.

From the perspective of the company offering its shares in the IPO, the higher the offering price, the more capital the company can raise.

Under-pricing an IPO creates a discount for the initial investors and increase the quantity of shares applied for. This in turn could once again generate more capital to the company. Under-pricing may also affect how much, if at all, the stock’s price rises on its first trading day. If there is a large increase, or ‘bump’, from the offering price during the initial trading, the underwriter’s client-investors may be satisfied because the value of their investment will have increased. However, the company may be unsatisfied in that case, as it might have been able to sell its shares at a higher initial offering price and thereby raise more capital.

All of the foregoing factor into the determination of the offering price.  Whether you have an opportunity to participate directly in an IPO or are buying shares in the open market, it is important to realize that the offering price reflects a negotiated estimate as to the value of the company. The offering price may bear little relationship to the trading price of the securities and it is not uncommon for the closing price of the shares shortly after the IPO to be well above or below the offering price.

Bottom line
Successful companies go public but it is difficult to sift through and find the investments with the most potential. Just keep in mind that when it comes to dealing with the IPO market an informed investor is likely to perform much better than one who is not.

www.dailymirror.lk

CEAT invests Rs. 600 million more on radials

CEAT Kelani Holdings (Pvt) Ltd. which produces almost half of Sri Lanka’s tyre requirements invested Rs. 600 million to establish a new factory for producing radial tyres.

This new factory is adjoining the existing CEAT Kelani manufacturing complex in Kelaniya. The company says that this would enable it to develop its tyres with the CEAT brand name for the local as well as export markets.

With production in this factory beginning from April 2014, the capacity of CEAT Kelani Holdings to produce CEAT radial tyres would increase by 70 percent, from 23,000 tyres per month to 39,000 per month.

CEAT which is the leader in Sri Lanka’s radial and commercial tyre market, produces nearly 50 percent of Sri Lanka’s tyre requirements from the second quarter of 2013-14. From the nearly 1450 metric tons of tyres produced by CEAT Kelani Holdings, some 500 metric tons are exported to markets in many countries including South Asia, the Middle East, Africa etc.

www.adaderanabiz.lk

විදේශීය බැල්ම වැඩිවේ. අද කොටස් පොළේ රැළි මෙන්න!

අද කොටස් වෙළඳ පොළ ගනුදෙනු පහළ ගියද විශේෂයෙන්ම කැපී පෙනුනේ විදේශීය ආයෝජකයින් විසින් රුපියල් මිලියන 853 ක් වටිනා ශුද්ධ කොටස් මිලදීගැනීමක් කිරීමයි.

මේ අනුව, අද විදේශීය ආයෝජකයින් විසින් රුපියල් මිලියන 1033 ක් වටිනා කොටස් මිලදීගත් අතර රුපියල් මිලියන 180 ක් වටිනා කොටස් විකිණීම කළේය.

දිනයේ වෙළඳ පොළ ක්‍රියාකාරීත්වයට විදේශීය ආයෝජකයින්ගේ සහභාගීත්වය සියයට 31 කි.
අද සමස්ත මිල දර්ශකය ඒකක 2.95 කින් ඉහළ ගොස් ඒකක 6,004.78 ක් වෙද්දී එස් ඇන්ඩ් පී මිල දර්ශකය ඒකක 17.96 කින් පහළ ගොස් ඒකක 3,281.94 ක් විය. පිරිවැටුම රුපියල් මිලියන 1946.8 කි.
අද ගිවිසගත් කොටස් ගනුදෙනු හතරක් වාර්තා වූ අතර විශාලතම ගිවිසගත් කොටස් ගනුදෙනුව සිදුවූයේ සිට්‍රස් ලෙෂර් සමාගමේයි. මෙහිදී, එකක් රුපියල් 15.50 ක් වන කොටස් මිලියන 25.66 ක් ගනුදෙනු විය.

මීට අමතරව, චෙව්රන් ලුබ්රිකන්ට් සමාගමේ කොටස් මිලියන 0.11 ක් කොටසක් රුපියල් 272 ක් බැගින්ද, හැටන් නැෂනල් බැංකුවේ කොටස් මිලියන 0.3 ක් කොටසක් රුපියල් 152.50 ක් බැගින්ද, ජෝන් කීල්ස් හෝල්ඩින්ග්ස් කොටස් මිලියන 0.22 ක් කොටසක් රුපියල් 235 ක් බැගින්ද ගිවිසගත් ගනුදෙනු ලෙස හුවමාරු විය.

අද දිනයේදී ජෝන් කීල්ස් කොටසක් රුපියල් 1.20 කින් ඉහළ ගොස් රුපියල් 233.50 ක් වෙද්දී, ශ්‍රී ලංකා ටෙලිකොම් කොටසක් රුපියල් 1.60 කින් ඉහළ ගොස් රුපියල් 47.00 ක්ද, සොෆ්ට් ලොජික් හොල්ඩින්ග්ස් කොටසක් රුපියල් 1.30 කින් ඉහළ ගොස් රුපියල් 12.10 ක්ද වූ අතර වැඩිපුරම කොටස් ගනුදෙනුවීම සිදුවූයේ සිට්‍රස් ලෙෂර් සමාගමේයි. එම ප්‍රමාණය කොටස් මිලියන 25.7 කි. මේ අතර, සොෆ්ට් ලොජික් හෝල්ඩින්ග්ස් කොටස් මිලියන 20.4 ක්ද ගනුදෙනු වී තිබේ.

වැඩිම ශුද්ධ විදේශීය කොටස් මිලදී ගැනීමක් සිදුවූ සමාගම බවට පත් වෙමින් විදේශිකයින් විසින් ජෝන් කීල්ස් හෝල්ඩින්ග්ස් සමාගමේ රුපියල් මිලියන 802.7 ක කොටස් මිලදී ගෙන තිබෙන අතර හැටන් නැෂනල් බැංකුවේ විදේශිකයින් මිලදීගෙන තිබෙන කොටස් ප්‍රමාණයේ වටිනාකම රුපියල් මිලියන 47 කි.
විදේශිකයින් වැඩිපුර කොටස් විකුණා දැමූ සමාගමක් ලෙස හේමාස් හෝල්ඩින්ග්ස් සඳහන් කළ හැකි අතර එහි ශුද්ධ විකුණුම් ප්‍රමාණයේ වටිනාකම රුපියල් මිලියන 23.7 කි.

අද බුකිට් ඩාරා කොටසක් රුපියල් මිලියන 39.80 කින් පහළ ගොස් රුපියල් 560 ක් වෙද්දී ලයන් බෘවරි කොටසක් රුපියල් 19 කින් පහළ ගොස් රුපියල් 362 ක්ද ලංකා දුම්කොළ සමාගමේ කොටසක් රුපියල් 7.90 කින් පහළ ගොස් රුපියල් 106.10 ක්ද වී ඇත.

http://www.adaderana.lk

Nine Lessons From The Greatest Trader Who Ever Lived

The stock market has certainly produced its share of heroes and villains over the years. And while villains have been many, the heroes have been few.

One of the good guys (for me, at least) has always been Jesse L. Livermore. He's considered by many of today's top Wall Street traders to be the greatest trader who ever lived.

Leaving home at age 14 with no more than five bucks in his pocket, Livermore went on to earn millions on Wall Street back in the days when they still literally read the tape.

Long or short, it didn't matter to Jesse.

Instead, he was happy to take whatever the markets gave him because he knew what every good trader knows: Markets never go straight up or straight down.

In one of Livermore's more famous moves, he made a massive fortune betting against the markets in 1929, earning $100 million in short-selling profits during the crash. In today's dollars, that would be a cool $12.6 billion.

That's part of the reason why an earlier biography of his life, entitled Reminiscences of a Stock Operator, has been a must-read for experienced traders and beginners alike.

A gambler and speculator to the core, his insights into human nature and the markets have been widely quoted ever since.

Here are just a few of his market beating lessons:

On the school of hard knocks:

The game taught me the game. And it didn't spare me rod while teaching. It took me five years to learn to play the game intelligently enough to make big money when I was right.

On losing trades:

Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocket book and to the soul.

On trading the trends:

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.

On sticking to his plan:

What beat me was not having brains enough to stick to my own game - that is, to play the market only when I was satisfied that precedents favoured my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play.

On speculation:

If somebody had told me my method would not work, I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.

On respecting the tape:

A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.

On human nature and trading:

The speculator's deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal.

On riding the trend to the big money:

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

On the nature of Wall Street:

Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.

So, what ever happened to Jesse L. Livermore?

He didn't die a poor man - not by any stretch of the imagination.

But he did take his own life, believing he was "a failure," which proves once again that money can't buy happiness.

http://moneymorning.com/2013/01/04/nine-lessons-from-the-greatest-trader-who-ever-lived/#

If trading psychology is a issue for you

If you talk to many very successful traders they know the importance of trading psychology. But they are not consumed by it. In last 10 years I have interacted closely with many successful traders, few market wizards , and some hedge fund people, none of them had ever hired a trading psychologist. And most of those people are at top of their game. The key to their success is their belief system.

But if you talk to struggling traders they often think trading psychology is important and some claim it is the most important thing. If psychology is an issue for you and you think it is affecting your trading , what concrete steps can you take to resolve it.

There is lot of talk of trading psychology , but what exactly are the 3 or 5 things you can do to improve your psychology.

If you want to increase your muscles you go and lift weight

If you want to improve your stamina, you go and run daily

If you want to reduce weight you eat less and exercise more

What exactly do you need to do to improve your psychology.

First starting point if you want to improve your psychology is by examining your beliefs

You can only trade what you believe in.

Your beliefs drive your behaviour.

If you believe only way to trade is using mechanical methods ( that is a belief) and as a result all your behaviour will flow from it.

If you believe one should only trade triple ETF and not waste time on individual stocks (that is a belief) and as a result all your behaviour will flow from it.

If you believe that only way to trade is with big risk (that is a belief) and as a result all your behaviour will flow from it.

Every trade has deeply held beliefs. The bundle of deeply held beliefs drive what kind of set-up they will trade, what kind of time frame they will trade and also all elements of trade like entry, exit , risk,  and number of positions held.

Beliefs are not necessarily based on science or logic. In trading there are many beliefs based on to others pseudo-science . Personally I would never trade based on Elliott Waves , because it is not in line with my belief system. I believe it is not scientific and hocus focus. But there are traders who build their entire trading around it.

Your beliefs drive your trading actions. If you want better results in your trading you start by examining your beliefs about market, how they operate and about your trading and beliefs behind those trading decisions. A critical study of them might show you where you need to fix things.

It is  difficult to change beliefs. Contrary to what self help books and many motivational authors and speakers will tell you it is not easy to change beliefs. Beliefs persist for lifetime in some people. So much of human behaviour is driven by beliefs. Religion survives because people are driven by beliefs.

But psychologists who have studied beliefs know it is difficult to change deeply ingrained beliefs. There are no magical technique or method which will change your beliefs overnight.To change beliefs you need to educate yourself , expose yourself to new way of thinking, get rewarded for new beliefs.

When you are kid you have many simple beliefs, like monster exist or eating sweets will lead to cavities, or my parents are going to be forever, but as you grow and get exposed to science your beliefs change.

New knowledge and new discovery leads to change of beliefs. Same thing with markets and and trading. More you educate yourself and expose yourself to different beliefs you will re examine some of your deeply held beliefs and start changing them. Your surroundings and people you interact with also helps to change or reinforce your beliefs. If you want to change beliefs change your surroundings, friends, family and incentive structure. 

For traders same thing applies. If you hang around with traders who all the time whine and "believe" market is manipulated, you will also imbibe same beliefs, you will get rewarded in that setting for those beliefs. If you change that and say start interacting with a highly motivated trader with 10 year plus track record and no negative years , your beliefs will change. In that setting you will not be rewarded for your beliefs about manipulation.

First starting point if you want to improve your psychology is by examining your beliefs

Align your beliefs with market structure by educating yourself about how markets work. Align your belief with what has shown to have worked in the market based on history and statistics. Align your belief with a style of investing growth, value, contrarian investing. Align your belief with time frame (day trade , swing, position). Align your belief with right kind of market paradigm

Lot of time people claim they have discipline problem, but the basic problem is wrong beliefs and as a result wrong behaviour. If you fix the beliefs discipline is comparatively easy. 

 

http://stockbee.blogspot.co.uk/2014/03/if-trading-psychology-is-issue-for-you.html

 

(http://sharemarket-srilanka.blogspot.com/)