1. It is unlikely that God’s plan for the universe includes making you rich. Success in the stockmarket requires effort, discipline and patience. 90% of success is having the discipline to be consistent.
2. "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
Buffetology: Can we understand the business? Does it have a sustainable competitive advantage? Do we like the people? Are we getting it at the right price?3. Trust falling interest rates to begin a new bull market. Bull markets are driven by liquidity. It takes a lot of bad news to reverse a bull market, and a lot of good news to reverse a bear market. Calculate and analyse ‘trend’ very carefully.
4. Long range plans engender the dangerous belief that the future is under control. Try to stay flexible, open minded and sceptical. Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. In a bull market focus on price & momentum, a bear market focus on valuation. Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. BUY when others are despondently selling. SELL when others are greedily buying. When too many people are doing the same thing the market will adjust. Bull markets are driven by liquidity.
5. Markets over-react slowly; resist the temptation to buy ‘falling knives’. Momentum is essentially the market behaviour of the participants. There is a lot of ‘motion’ in ’emotion’. Do not underestimate the tendency of a trend to ultimately reach a level, either up or down, that is illogical and just plain wrong, and hence, unsustainable.
Extract from The Ecinya Investment rules
Sadness, disruption, delay, disappointment, are NOT permanent features of free enterprise. Economic and market cycles will play out again much as they have in the past. Confidence will recover, consumers will continue to save and spend, banks will continue to lend, new companies will emerge, old companies will merge. History never really repeats itself precisely, but it certainly rhymes.
From the Ecinya pages December 2002, near to the end of the last big down cycle, and before the beginning of the long 2003-2007 bull-market. The last sentence is courtesy of Mark Twain.
WHERE ARE WE AT?
From the March 2009 lows the All Ordinaries index (XAO) is up 49% (4636) and our global proxy the SP500 is up 69% (1141). In this market cycle the All Ordinaries peaked at 5024 on 15 April 2010, a rise of 62% and the SP500 peaked at 1217, a rise of 80%. The decline peak XAO was 4250 on 5 July 2010, a fall of 15% and the harmonic SP500 fall was to 1022 on 2 July, 18%. The current positive leg for both markets is circa +12%. Momentum and conviction are lacking.
WHERE DO WE CURRENTLY THINK WE ARE GOING?
We are envisaging downside targets on the SP500 of between 1030 and 1080, about 10% to 6% from last week’s closing peak of 1148. Our market quant model suggests that these SP500 numbers would give a range of circa 4300 to 4500 for the All Ordinaries.
WHEN?
‘When’ is the most vexatious question of them all out of Rudyard Kipling’s Six honest serving men (What, Why, When, How, Where, and Who). Our belief is that this next retracement to the SP500 and XAO will occur in October or November 2010. This month or next.
BULL or BEAR? Not quite the right question.
At Ecinya we do not ever admit to being a bull or a bear. We avoid such generic tags. We are either bullish or bearish, the former meaning that we think the market will go up, the latter that it will go down. If the markets are elevated we look for reasons, and later evidence, that they might go down. If down we look for reasons and evidence that they might go up. Always we try to operate against the background of our own investment rules, though we occasionally fail to heed our own advice. We consult widely, but with few selected persons of significant quality and experience.
After one more retracement we are bullish into year end. This does not necessarily mean that we will do nothing between now and then because we deal in stocks, not indices. But indices provide a directional context and given that our reference indices are weighted towards major stocks then our stock selection in a general sense will move in an harmonic way with the market, except where we have selected stocks that can outperform such as out-of-favour recovery stocks (wounded generally from the global financial crisis) or takeover targets or special situations. However, if a pervasive crisis occurs no stock is safe.
THE BULLISH CONTEXT
HISTORY
- History suggests that boom follows bust
- History suggests that recovery follows recession.
- History suggests that positive outcomes follow negative happenings.
- History suggests that success follows the succesful exposure and occasional prosecution of fraudulent excess.
- Economic theory and history suggests that in a fiat money world, inflation is not a problem if excess capacity exists.
- History suggests that economies perform better if politicians do not excessively impede worthwhile business endeavours by rampant and wasteful taxpayer funded expenditures (e.g bad wars such as over-time and over-budget Iraq, pink batts, building revolutions, cash for clunkers etc).
LOCAL FACTORS
- That the grid-locked Federal Parliament curtails the waste and extravagance of the Labor government.
- That the Reserve Bank is careful in its interest rate settings and not excessively fixated on inflation numbers at the expense of economic growth.
- That commodity prices in $US terms stay sufficiently elevated to offset the strength of the Aussie dollar.
- That China and Asia generally continue to grow and prosper.
- That tax reform stays on the agenda. Ecinya has written more than a few papers on this under ‘Insights’.
- That some useful takeovers take place.
EXTERNAL FACTORS
- That the US November mid-term elections come out with a result that does not enhance the standing of The Tea Party, but that the Republicans regain control of the House of Representatives and Mr Obama is forced to cheerfully shift from left to centre.
- That the new Obama economics team has some business experience rather than Wall Street or nurdish bureaucratic inclination and lineage.
- That Mr Obama comes to be regarded as a leader and not a celebrity.
- That third quarter US GDP growth is no worse than 1.3% annualised, and moves closer to 3% in the fourth quarter. First cut of Q3 GDP is published at the end of October and this might co-incide with our envisaged retracement low of circa 1030- 1080.
- That the US domestic and current account deficit undergoes what is regarded as a sustainable policy unduced capacity for improvement.
- That Europe becomes more sensible and less enamoured of welfare spending.
- That China and America do not engage in currency and trade wars.
- That the Middle East peace process show some improvement.
- That Afghanistan does not become a debacle.
- That the $US experiences an early 2011 recovery.
- That the Europeans win the Ryder Cup and the Americans show themselves to be good sports, but should they win, display an appropriate level of humility – "The game is greater than the player".
THE BEARISH CASE
The bearish case is simple…. none of the above take place, America becomes even more dysfunctional, Afghanistan becomes a chaotic example of failed US policy, that event risk occurs such as a terrorist attack, that Congress and Mr Bernanke simulate the American economy to oblivion and destroy the value of the $US, and no structural of attitudinal changes occur.
There are doomsayers of manifest eloquence to support the bearish case, best sellers promoting end-of-the-world-as-we-know-it scenarios, TV and radio commentators warning of economic hell with zealous rage, and ratings to match.
EARNINGS
Sustainable stock-market advances are dependent on EPS growth. EPS growth does not occur without good fiscal and monetary policy settings, and economic growth across the global economy. Our current belief is that the July-December 2010 period will yield subdued EPS numbers, but that confidence will be in evidence for the first half of calendar 2011. Our belief is that the stock-market will lead the economic recovery and a restoration of confidence. We are looking for the glass to be half-full in the fourth quarter, having gone from half empty, and prior to that "where is the glass?".