What is good for the goose is not necessarily good for the gander

I read somewhere that Ed Lampart is adding to his stake in auto parts retailer Autozone and buying shares heavily. For those who don’t know him, he is a billionaire hedge fund manager. A couple of weeks ago, Warren Buffett said in a leading US paper that it was time to buy. Does the fact that these 2 people are buying mean that it’s time for everyone to buy? In my point of view the answer is no. Don’t misunderstand what I’m trying to say. I’m not saying that these guys are wrong in their thinking. I’m not even qualified to say so as I have not made a fraction of the money they have made on the stock market. However, they have a peculiar style of investment and if you are going to follow their advice then you need to make sure that your style is similar to theirs.

Since Buffett made his announcement, the Dow index has fallen over 1000 points, some shares have fallen more than 20%. This is a big drop for a trader or investor that is only willing to hold onto a share provided it doesn’t drop more than 10 – 20 % from his entry point. This type of trade won’t be suitable for a short term investor.

You also have to think about risk management. Depending on the school of thought (or should I say risk) that you belong to, it’s been suggested that to survive as an trader (or even investor) you should not risk more than 5% of your capital on one single stock. Ed Lampart and Warren Buffett have billions at their disposal and can afford to buy shares now and hold onto them till the whole turbulence is over. They are concerned about a company’s fundamentals and won’t be moved by a 20 or 30% drop in the value of a share price. They know that share prices are heavily discounted at the moment and they are willing to hold onto the shares for as long as it takes. Just consider the following 2 quotes by Warren Buffett

“Our favourite holding period is forever.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

To round up, if you are not happy to hold onto the shares for a long time, don’t buy yet. If you are a technical analyst, wait for your charts to give you the signal. That might be tomorrow, next week or next month. Nobody know when.

Happy trading

Is the UK in a recession?

There is a lot of talk around the fact that the UK might be heading into a recession. The UK's Gross Domestic Product (GDP) which measures the output of the UK economy shrank 0.5% in the third quarter. This was a greater contraction than what economists had predicted. We still haven't had two consecutive quarters of economic contraction, so “technically” we are not yet in a recession.
However, government announcements are lagging indicators in determining whether we are in a recession or not. It is a lagging indicator in that the contraction had actually taken place before the announcement.
The stock market indexes are leading indicators when it comes to showing the health of an economy or whether an economy is in a recession. The stock market is “forward thinking” and the future health of the economy of a company is usually factored into the value. The stock market points to the fact that it is very likely we are already in a recession. However the good news is that share prices tend to rise during the second part of a recession. They fall during the months leading into a recession and the earlier part of a recession. Why do they rise during the second part of a recession? They rise because they economy would have started to expand (meaning business would be better) before the announcement is made by government.
Although I haven’t got any official figures to show how the UK stock market has performed during UK recessions, the table below shows the performance of the S&P during the last 5 US recessions.

Bear markets of the past 100 years

The table below shows the bear markets of the last 100 years. The worst so far was the September 1929 - July 1932 when the Dow lost 89%. In the current market the Dow has lost about 33% from it's recent peak at 14,000. This just illustrates that even though share prices have fallen a lot and shares are "cheap", there is still downside potential in the market.

Bloodbath on the Stock Market

September was a rollercoaster month in the major stock markets. Blood was shed, giants got slaughtered, fortunes were lost, and governments were forced to take emergency measures. The largest one day increase in more than a decade occurred in September, ironically, the largest one fall in more than a decade occurred within the same month. While the bulls received a whipping, the bears were smiling all the way to the bank, that is the banks that are still standing.

Personally, even though I knew from the charts the the market was heading down (check my post on the 4th of September http://diligenttrader.blogspot.com/2008/09/why-market-might-be-heading-for-another.html), I stood aside most of the month. This was mainly because volatility was high and it was a day trader's market. Also, there was a lot of suspense with regards to what would happen next, for instance, will the house pass the $700b bail-out bill, will the treasury inject money into the system etc. Most openings were either a gap up or a gap down and the market was driven by sentiment and news.

What does October hold. The daily charts are showing signs of recovery even though the monthly charts are still in a downtrend. I'll be looking at individual shares rather than the indices and look for buying and shorting opportunities. However, it has to be said that this is a market that should be treaded with care and good risk management is essential.









All the best.

Can AIG survive the turbulence?

The current market turmoil has claimed a number of high profile casualties. A lot of people will be wondering what’s going to happen next. Who’s going to be the next casualty? How many “patients” are waiting on the sidelines for their number to come up? I’m sure there are still a few more to go. There are still a lot of companies that are week both technically and fundamentally, and there are also a lot of companies that will have no option than to go under if they cannot get access to additional funding.

If Wall Street giants are finding it difficult to get access to funds, imagine what much more difficult if will get for the average person to gain access to loans.

The American Insurance Group (AIG) is another company that is currently struggling. Will AIG survive? The charts look ugly. It looks like time is running out for the insurance giant. However, miracles happen. Who knows what the future holds for AIG? It looks like there are still shorting opportunities on the stock, however, this is not one you would want to buy. Not now.

All the best.

How are the mighty fallen

No disrespect to the fallen investment banks, but I can’t help saying to myself, “how are the mighty fallen”. What happened to the big guys? How could the geniuses get it wrong? These are companies that wouldn’t employ graduates with less than a second class upper. You had to go to certain schools, or business schools to qualify working for them. A few months ago Bear Sterns had to be bailed out. Over the weekend Merrill Lynch was acquired by Bank of America, while Lehman Brothers filed for Bankruptcy. The unimaginable happened to these guys. These companies were casualties of the subprime mess and the subsequent credit crunch, however their greatest undoing was their irresponsible risk taking. I call it irresponsible because it was excessive and was fed by greed. Nemesis caught up. Goldman Sachs, one of the big investments banks that are still standing had a more conservative policy on risk. They might not have looked like the “shining stars” when other investments banks were taking on the big risk and declaring big profits and bonuses, but the fact that they are still standing, and that there are no doubts about their future is evidence that their responsible risk management is paying off.

The same applies to retail investors. Pigs get slaughtered. It is the one that manage risk properly that stay around for a long time. Time might be a time that we all have to review our risk management practises so we can ensure we stay around for a long time. It’s not the person that makes a £1000 pounds overnight that is the winner, but the person that makes smaller and steadier profits, accompanied with good risk management.

The attached charts show the decline of Merrill Lynch’s share price from $95 to just over $17 and Lehman’s from around $85 to $3.65 before it applied for bankruptcy.





Three down, will there any more?

All the best

£3.5bn a year lost to scams

I saw this in the paper today. I find it very amazing that people actually fall for scams like these. The paper suggests that around 3 million British people fall for theses scams each year. It’s likely that with the current credit crunch, the number of victims is likely to increase.

This report shows the desire of the average person to accumulate riches without working for it. It shows the greedy nature of human beings and how intelligent but scrupulous people take advantage of this weakness.

I guess the best way to reduce the number of victims for by educating people whenever we have the opportunity. That’s a job for everyone. You and me.

All the best