Find businesses that trade more than 500,000 shares a day. If each share is priced under $1, make the trading threshold over 1 million shares a day. The idea is to have enough trading going on so you can get out without affecting the price.
Make sure the amt of stock u own is less than 1% of average volume in trading dollars.
Friday, March 7, 2008
Ch12: The Three Tools
1. MACD - moving average convergence divergence
Combination of 2 moving averages - a fast one and a slow one - and how they interact (converge & diverge)
Use slightly faster and more responsive model - "8-17-9" instead of 12-26-9. This searches for stocks that are going to move up rapidly in price, this more responsive MACD captures more of the upward moves and makes more money.
Beginning of a mountain, time to buy. Beginning of a valley, time to sell.
2. Stochastic
Can be viewed in either a "fast" mode or a "slow" mode. Moderate speed is preferable to avoid being whipsawed in and out all the time (false signals). Use 14-5.
Buy line crosses up, buy. Buy line crosses down, sell.
3. Moving Average
By setting it to a fast speed, it syncs up better with the other two Tools. Use 10-day MA.
When price line crosses above moving average line. When the price line crosses below the moving average line, sell.
In Summary:
Wait for all 3 to give the signal. The way we configure the Stochastic often makes it the early-warning signal.
The only way to make money with certainty in any kind of investment is to buy it well below its value.
These tools will get us out of a stock before it crashes, because the big guys almost always get an early hint that things aren't going to be so good, and start selling.
Combination of 2 moving averages - a fast one and a slow one - and how they interact (converge & diverge)
Use slightly faster and more responsive model - "8-17-9" instead of 12-26-9. This searches for stocks that are going to move up rapidly in price, this more responsive MACD captures more of the upward moves and makes more money.
Beginning of a mountain, time to buy. Beginning of a valley, time to sell.
2. Stochastic
Can be viewed in either a "fast" mode or a "slow" mode. Moderate speed is preferable to avoid being whipsawed in and out all the time (false signals). Use 14-5.
Buy line crosses up, buy. Buy line crosses down, sell.
3. Moving Average
By setting it to a fast speed, it syncs up better with the other two Tools. Use 10-day MA.
When price line crosses above moving average line. When the price line crosses below the moving average line, sell.
In Summary:
Wait for all 3 to give the signal. The way we configure the Stochastic often makes it the early-warning signal.
The only way to make money with certainty in any kind of investment is to buy it well below its value.
These tools will get us out of a stock before it crashes, because the big guys almost always get an early hint that things aren't going to be so good, and start selling.
Thursday, March 6, 2008
Ch11: Grab the Stick
Even if we did everything totally right and didn't make a mistake, couldn't the stock price go down in the short run and cause us to lose money? We need a solution to this problem.
Solution #1: PRETEND
Never say to yourself that even though the stock gone down in price, as long as you don't sell it you haven't really lost any money.
Solution #2: MAKE UP THE DIFFERENCE
Warren Buffett fills the hole by making more money in some other short-term investment. However trading is a more advanced technique and requires more time and training.
Solution #3: DON'T LOSE MONEY IN THE FIRST PLACE
Institutional funds make up the market. They control the price of any stock they're investing in. If they put more money in, the price goes up. If they take their money out, the price goes down.
This means that even a biz that's on sale for 50% below its Sticker Price could go down some more in the short run if the fund managers keep selling it, even though, rationally, it shouldn't. Institutional fund managers only really acre about the short-term success -- how much they can make in the current quarter.
Events themselves don't change the stock price; institutional money moving into and out of the market in response to these events is what changes stock prices.
TOOLS
We should exploit our size advantage to move nimbly. It takes a typical fund manager about 6 to 12 weeks to get in fully invested in a stock or to get completely out.
The tools are great for 2 reasons:
1. They lower our risk of losing money
2. They eliminate emotional rule of investing (Murphy's law)
Solution #1: PRETEND
Never say to yourself that even though the stock gone down in price, as long as you don't sell it you haven't really lost any money.
Solution #2: MAKE UP THE DIFFERENCE
Warren Buffett fills the hole by making more money in some other short-term investment. However trading is a more advanced technique and requires more time and training.
Solution #3: DON'T LOSE MONEY IN THE FIRST PLACE
Institutional funds make up the market. They control the price of any stock they're investing in. If they put more money in, the price goes up. If they take their money out, the price goes down.
This means that even a biz that's on sale for 50% below its Sticker Price could go down some more in the short run if the fund managers keep selling it, even though, rationally, it shouldn't. Institutional fund managers only really acre about the short-term success -- how much they can make in the current quarter.
Events themselves don't change the stock price; institutional money moving into and out of the market in response to these events is what changes stock prices.
TOOLS
We should exploit our size advantage to move nimbly. It takes a typical fund manager about 6 to 12 weeks to get in fully invested in a stock or to get completely out.
The tools are great for 2 reasons:
1. They lower our risk of losing money
2. They eliminate emotional rule of investing (Murphy's law)
Ch10: Know the Right Time to Sell
If the biz becomes unpredictable, perhaps the Moat has been breached. In that case, by Rule#1 definition, is no longer wonderful and we sell it.
When to Sell:
1. The Biz Has Ceased to Be Wonderful
There r only 2 reasons a biz can change from wonderful to not so wonderful:
(a) an Outside Attack
(b) an Inside Traitor
2. The Market Price Is Above the Sticker Price
Guideline for rebuying a business:
Buy back when it drops 20% below sticker price.
Great businesses have 20% price changes all the time.
When to Sell:
1. The Biz Has Ceased to Be Wonderful
There r only 2 reasons a biz can change from wonderful to not so wonderful:
(a) an Outside Attack
(b) an Inside Traitor
2. The Market Price Is Above the Sticker Price
Guideline for rebuying a business:
Buy back when it drops 20% below sticker price.
Great businesses have 20% price changes all the time.
Tuesday, March 4, 2008
Ch7: Bet on the Jockey
"Do not hire a man who does your work for money, but him who does it for love of it." - Henry David Thoreau (1817-1862)
CEO -- Most important qualities:
CEO -- Most important qualities:
1. Owner-orientated
- Honest; highlights problems; future plans
2. Driven
- Read up on their articles, letters to sharholders
- Online sources: Forbes; Businessweek; Fortune; Fast Company; WSJ
Insider Trading:
Ch6: Calculate the Big Five
Figuring growth rates in your head:
- Use rule of 72. Take 72 and divide by no. of years needed to double up. The answer would be the average yearly growth rate.
Priority of Growth Rates (order of importance):
- Use rule of 72. Take 72 and divide by no. of years needed to double up. The answer would be the average yearly growth rate.
Priority of Growth Rates (order of importance):
- Equity growth
- EPS growth
- Sales (or gross profit) growth
- Cash flow growth
Reject inconsistency.
Ch5: The Big 5 Numbers
Tip: Simply look at the 10-year average, if it's not above 10%, skip.
ROIC: Check last 10 average, last 5 average, last year.
Check the 4 Growth Rates: Sales; EPS; Equity; Cash
By calculating growth rates of 2 competing companies, you can really see what's going on and who's got the wider Moat in the industry.
Buffet loves companies that buy their stock back when it's cheap. Good for owners.
Rule on Debt: To determine if debt is reasonable, find out if it can pay off its debt within 3 years by dividing total long-term debt by current free cash flow.
The Rule shows us that companies priced well above their value are the first to go down in a market downturn.
ROIC: Check last 10 average, last 5 average, last year.
Check the 4 Growth Rates: Sales; EPS; Equity; Cash
By calculating growth rates of 2 competing companies, you can really see what's going on and who's got the wider Moat in the industry.
Buffet loves companies that buy their stock back when it's cheap. Good for owners.
Rule on Debt: To determine if debt is reasonable, find out if it can pay off its debt within 3 years by dividing total long-term debt by current free cash flow.
The Rule shows us that companies priced well above their value are the first to go down in a market downturn.
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