DavidTurner

There's one born every minute? I don't disagree.

Hi karoshiman Really good post - sounds like you're a fan of the Austrian school - and it absolutely reflects my own experiences. I can't possibly do justice to this topic in a post, it really deserves a book (and several books have been written on the topic as you no doubt know). But basically I do take the view that a rational investor should base his value estimate upon the expected cashflows and their timings. However this is complicated by amongst others: subjective utility, choice of discount rate, extreme sensitivity to growth estimates, control premiums, and above all, risk factors. The bottom line is that there is a very wide range on any valuation, however the important point to realize is that the probability of making a profit increases as the deviation from the "rational" range of valuations becomes more extreme. The market is not that stupid that it will continue to place a high price on an asset that hasn't delivered big growth or margin improvements for several years. I have seen good companies consistently undervalued. however with these it's often enough to pick up the dividend yield. Anyway this is all drifting way off the topic of technical analysis, so to bring the conversation back around: I think TA should be classified under behavioral economics.

Hi BlueHorseshoe - I was actually being somewhat precise: investing is about good companies at good prices, whereas trading is about buy-when-it's-going-up, sell-when-it's-going-down (if you'll forgive me for simplifying horribly). While I dabble in trading, the majority of my investments follow a simple value-oriented strategy: evaluate a band of confidence around a target price, then buy when the price is sigma-below and sell when it's sigma-above. These rules actually trigger only once or twice a month, and generally I hold onto a stock for a very long time. The crucial thing (and very much the hard part) is obviously the valuation, for which I use a mosaic of forecasts and Monte Carlo techniques. One problem with this approach is that it's biased towards mid-caps. Another is that it occasionally signals a buy of a perennial loser or a sell of a stock with huge growth potential. So as with all methods, it requires careful thought and judgement on top of the quants.

Good advice, and I'll ignore the slightly condescending tone of the earlier part. Trading is very much like poker - it boils down to an emotional game. In a good market, the rising tide lifts all players and generates enthusiasm. But never forget that what you're doing is swapping money with people who made the wrong call. On average, the long-term profit of high-volume traders is less than the return on the index because of the fees they're paying. Yes, you might be the WSOP champion for four years running, and if you're smart you'll retire after that. But I think most TAs end up like like Jesse Livermore on a smaller scale: made it, lost it, made it again, ultimately lost it all. This is not criticism or even a general "stay away" statement - I play poker too. I'm simply pointing out that you have to recognize the reality of the game and know when to get out.

Yes, and that's basically the point I was making, here and in the other forum: I'm really not interested in hearing about 3% a month unless it's repeated consistently, month after month, year after year. Since no-one does this in practice, I would be happy to hear that you've outperformed the benchmark by 2% on average without major tracking error.

Shennanigans. If you can earn 3% per month after taxes and fees, then all you'd need is $32,000 and 40 years to have more money than Warren Buffett. Plenty of people have $32,000 and 40 years, so how come there's only four people who have $40bn?

Ha ha, yes, very funny. Actually I've only ever been a top-down investor and occasionally a stock picker, and I've done pretty handsomely - especially after trading costs are accounted for. There's an interesting study (sorry, too lazy to look it up but I think it may have been HBR) which says that if you'd simply picked the market index or bonds at the beginning of each month for the last forty years (and been right), you'd have managed a CAGR of something like 40%. Now that is something that I think I could at least have a crack at from an analysis perspective. Anyway the basic truth remains - investing is about buying good companies at good prices.

^^ That's the problem right there. It's an accurate description of technical trading, and also an accurate description of why it's a bad game to play in. The returns to investors ultimately derive from the value created by the companies that receive their capital. On average stocks would not grow if the underlying companies were not, on average, growing. So if you're not trading the markets then you do not have those returns available to you. Instead you are competing in a win/lose zero-sum game - quite literally, you are gambling, and the rake taken by the brokers is pretty steep. In fact I'd go so far as to say that any trade with a horizon less than a year is likely to be a form of hunt-the-sucker. I know there are a lot of A-types out there, but the truth is that statistically half of them will be the suckers. Not great odds.