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#21
10-09-2007, 02:39 PM
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Re: I DESERVE RESPECT
Shoe, I hate when you post because it reminds me about not buying NTDOY mid 2006. I can never decide if it's too late to get in, so I don't. Apparently every time I've asked myself, the correct answer has been no.
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#22
10-09-2007, 05:16 PM
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Re: I DESERVE RESPECT
[ QUOTE ]
i see what you're trying to say here but it is literally just semantics in terms of profit vs. value maximizing. profit maximizing = the individual placing the order is concerned with his/her/its bottom line (in terms of that specific order/market). however they trade, be it value, technicals or whatever, their goal is to maximize their bottom line profits. your argument makes a very good point though in that since equity markets have such a large dollar weighted percentage of rational profit maximizing entities doing VERY DIFFERENT types of trading, the inefficiency is quite likely higher. if they were all doing the same type of trading, i'd venture to guess the market would be less inefficient. [/ QUOTE ] I'm not sure if I quite understand your last paragraph but it's not just semantics. Entities that try to buy when value > price and sell when price > value lead to discovery of efficient prices. No other form of profit-maximizing activity leads to any sort of efficiency other than increase in trading volume and corresponding reduction in bid-ask spreads. Most of speculative trading in equity markets is almost certainly not value-driven. Thus there's nothing inherently efficiency-maximizing about greater levels of speculative activity. Another way to look at it is from a game-theoeretical perspective. Play between best profit-maximizing poker players doesn't approach Nash equilibrium as the best players get better, as long as there's implicit understanding that there may be at least one sucker. [ QUOTE ] [ QUOTE ] I also don't get this notion that markets driven by need are necessarily inefficient (more specifically, the notion is that speculators are more successfully value-driven than natural actors). People allocating to international equity without hedging are not making currency markets any more inefficient, unless you feel that their decision making is flawed, in which case their "irrationality" has an effect on the corresponding equity market as well. [/ QUOTE ] if you are placing a currency bet simply to gain on the underlying equity without factoring in the currency (what virtually all foreign investors in equity markets do), you are not concerned with your profit as it relates to the currency market. you are just using the currecny market as a tool. [/ QUOTE ] [ QUOTE ] more precisely, the view that an individual cannot affect the rationality of the currency market without affecting the rationality of the equity market (in the case of a domestic investor allocating to int'l equity markets w/o hedging) is wrong. their decision in the equity market has unintended and irrational consequences in teh currency markets. look at it this way. is it rational to add volatility to your portfolio without adding any return?? developed world currencies don't yield any return over the long run and add a ton of volatility. rational actors in the currency market would hedge some amount (less than 100% given transaction costs) in order to reduce that volatility. the fact that probably over 95% of dollar weighted int'l investors hedge 0% shows that given all the above, they are irrational in the currency market even if they are being rational in the equity markets. [/ QUOTE ] Investment in foreign equity isn't comprised of two bets, one of which he understands and undertakes voluntarily and the other of which he's forced to make. It is a single investment. The empirical observation that the price of a stock in its currency and the price of the currency may be de-linked in a way that reduces volatility is somewhat irrelevant to the fact that if whoever is making the investment isn't looking at the price of his investment, he isn't looking at the price for either component. (As a side note that the observation itself speaks volumes about how inefficiency in one market can transfer to another - if the equity markets, even in aggregates, were efficient but the forex wasn't, then equity market indices in nominal terms would have negative correlation with the currency in which they are denominated, removing, partially, the need for currency overlay management). Furthermore, the investor does not end up holding any currency but rather a piece of the business he's investing in. He is neither long, nor short, the currency - the currency he initially purchased to buy the security has been returned to somebody else. It's now that entity's choice whether to sell the currency because it's overpriced or keep it because it's underpriced. Also, while we're talking about unsophisticated investors, I'll say that just about every single individual investor appears to look at positive short-term past performance as a positive (in other words, they are not just price-insensitive, but their demand curve has negative price elasticity!) [ QUOTE ] much like central banks (that hold pegs) do. look at every single peg ever. they all break down eventually. this is a HUUUUGE inefficiency. central banks that peg don't care about their profit/fundamentals/technicals whatever. they simply are willing to spend as much as necessary to hold down/up the value of their currency relative to another. that is a very clear source of market inefficiency. [/ QUOTE ] Well, I thought we were largely talking about currencies without pegs. [ QUOTE ] Finally, let me take this exact statement and prove it wrong: [ QUOTE ] I also don't get this notion that markets driven by need are necessarily inefficient (more specifically, the notion is that speculators are more successfully value-driven than natural actors). [/ QUOTE ] look at commodity markets. the returns from backwardation have been to speculators, paid by for "natural actors" or hedgers. they are using the market in order to reduce volatlity of their underlying product so as not to be exposed entirely to future price movements of that product. in other words, that market (to the extent it is used by the hedgers) is based on need. speculators DIRECTLY gain from that. this is studied, proven, etc. the hedgers pay speculators to hedge their future revenue streams. they are basically paying insurance. they are consciously losing money in the commodities market to insure their revenues for their business. they are making efficient business decisions, yes. but within that, they are making inefficient decisions in terms of the commodities market. i.e. they are not placing bets on price changes to derive profit from that market. they do not add to efficiency in that market. they subtract it by the way that act to secure their overall bottom line (which is rational for them overall) vis a vis the commodity market. [/ QUOTE ] I'm not getting what you're saying - speculators making money is not a proof of them adding efficiency. The right question is: what would the prices look like if there was less speculative activity? Are you saying that hedging commodity producers are price-insensitive? That's far from the truth. Are you saying that hedging commodity consumers don't exist? That's also far from the truth. Are you saying that by having fewer producers and fewer consumers trade commodities and more speculators trade, prices will be closer to fundamentals? Aren't what natural actors are willing to pay for, in essence, fundamentals? And anecdotes don't really prove anything - there appears, for instance, to be a correlation between mispricing in the housing market and high levels of speculative trading. As in, when most people are buying houses to live, prices appear to track rents much better than when more people buy houses as a speculative holding. One important reason is that almost any reasonable need can be expressed in terms of value, hence price willing to be paid. The speculator, however, doesn't care about price paid, as long as investment returns sufficiently exceed his cost of capital. [ QUOTE ] [ QUOTE ] Besides, most of the trading in currencies, whether directly or indirectly, is done by banks and large corporations with international exposure. [/ QUOTE ] that is most likely hedging and can be argued as definitely rational from the opint of view of a bank with a large amount of exposure to something that they cannot control or accurately predict and thus cover some of their exposure...but, as stated above, that rational action by a business can lead to inefficiencies in another market. [ QUOTE ] To me, it seems that these are the exact entities whose views reflect the fundamentals. [/ QUOTE ] no. they are not concerned with the value they get from the currency market by itself. they only care about how their trading profits correlate and offset their underlying large exposure. volatility of profit streams to them is likely to be a huge cost and they want to reduce that cost via hedging (trading in teh currency markets). so while it may reflect the fundamentals of their business, it doesn't have to have anything to do with the fundamentals fo the currency market (i.e. interest rate differencitals, CA balances, momentrum etc.) [/ QUOTE ] How are banks' assets and liabilities in different currencies NOT part of the fundmentals? Demand for dollars is demand for dollars, whether it is used to pay US taxes, pay off dollar-denominated liabilities or interests thereof, pay wages of US-based operations, import US products or simply to travel to the US. Multinationals also have a lot of discretion in where they choose to expand or contract and also where to shift manufacturing to and etc. All of these activities reflect fundamentals and are undertaken in a price-sensitive way. In fact the least-price sensitive class of participants in the currency market may be investors of financial assets. Currency markets also don't suffer from the asymmetry between long and short positions that asset markets have (it's easier in general to borrow money than borrow specific securities). [ QUOTE ] [ QUOTE ] unlike stock markets, where most of the trading is certainly not done by those whose views reflect the fundamentals (insiders) but rather by those who are far removed from businesses and are either 1) trained to trade on technicals or 2) momentum-driven asset-allocators (almost all large funds, individual investors). [/ QUOTE ] can you rephrase this, i can't tell if you're saying that 1) and 2) relate to currency markets or stock markets. thanks, Barron [/ QUOTE ] Stock markets. I meant most of the trading in equity are done by people who have nothing whatsoever to do with the businesses that the shares represent, have no real use for the shares and have no real ability to price the shares. Another way of saying that forex markets are less efficient than stock markets is basically saying that individual equities are priced more efficiently than aggregates of goods and services denominted in that currency.
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#23
10-09-2007, 08:21 PM
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Re: I DESERVE RESPECT
[ QUOTE ]
[ QUOTE ] [ QUOTE ] In that I recommended the following stocks. Stock Current price 8/23 price gain in < 2 months ----- -------------- ---------- ------------------ NTDOY 68.35 57.70 18.45% GME 56.65 47.45 19.38% GNK 66.35 54.17 22.48% VMW 95.09 70.20 35.45% TTWO 17.98 14.35 25.29% As a reference, the S&P 500 is up 5.9% over the same time period. [/ QUOTE ] I don't want to rain on your parade, but don't get too excited yet. I have one word for you, "variance". During the internet bubble anyone could have results like this if they just stuck to tech stocks. If they stayed in tech after the bubble they gave it all back and then some. These were people who mainly knew nothing about the companies, their valuations, the future, nada. The market can make anyone look like a genius over a short period. You've made some great picks, but it's the long run that separates skill from just good fortune. It won't always be this easy. But given the crap you've had to take on this forum, you deserve the opportunity to crow a little. BTW, love your title. [/ QUOTE ] my long winded post was just trying to say some version fo this with a few addendums etc.. DC did it perfectly. also, check your email...i sent youa rudimentary excel sheet. Barron [/ QUOTE ] Thanks all for the replies and comments, and thank you for the spreadsheet Barron! I'll try to answer the questions I saw in this thread to the best of my ability. As for the stock listed in my original post, I think all of them will continue to do well, although I feel GNK might be nearing its peak. My only regret (along with NTDOY) is that I did not take out my 0% credit card loans earlier to get both of these stocks a year ago. But all I can do is look towards the future and appreciate the gains I have been able to realize. Also, I don't know how much longer VMW can stay on the wild tear it has been on. I fear it is becoming over-valued, but who knows how far the speculators will drive it. Since it is such a young, volatile stock I am having a hard time determining how fairly it is currently valued. VMW has the biggest risk of becoming a bubble that could burst. However, VMW does have a great product with no serious competition (atleast for the forseeable future) that has just begun to scratch the surface of the IT world so the potential is huge for it as well, especially as major companies start to replace all of the servers with VMWare. A safer play on VMW would be to buy their parent company EMC, which owns 84% of VMW. Despite owning such a large stake of VMW, their stock has barely gone up leaving their core business under-valued. The market now appears to be warming up to this company and their stock has started to climb. I see all of the video game stocks (NTDOY, GME, and TTWO) continuing to out peform the market for the forseeable future. Of these, TTWO has the most risk associated with it, but also has the most potential if management can finally keep this company on the right track (but that is also the risky part). I don't have a timetable as to how long I am going to hold these stocks. I just continue to absorb as much information as I can about each company and will sell when I feel better opportunites present themselves. Also, thanks for reminding me to keep things in perspective -- I agree I have been doing great in the short-term but that by no means I can/should expect the same results over the long term. I'm going to continue to absorb as much information as I can and give it my best shot though. I'm still confident I can beat the market year after year, but obviously, only time will tell. Sorry if this thread offended anyone, I agree I got a little carried away in parts of my OP. Some day I may need to eat the crow I dished out, hopefully not [img]/images/graemlins/smile.gif[/img] Good luck and I hope we all enjoy great success going forward!
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#24
10-09-2007, 08:38 PM
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Re: I DESERVE RESPECT
[ QUOTE ]
[ QUOTE ] [ QUOTE ] overall, i think equities get the closest to efficient and currencies and some bond markets get the furthest (UK IL bond market, US LT treasuries mkt etc.)...currencies are the definite furthest though imo. [/ QUOTE ] That's interesting, because when I was designing a trend-following trading system a while back, i discovered that individual equities trend the least efficiently, followed by equity indexes, commodities, and currencies which trend the best. i didn't study bonds as they weren't suitable for my system. I assume this ties into their efficiency. [/ QUOTE ] how did you determine this (i.e. what test did you run?) can i run that test in MATlab? also, what time period were you looking at? over how long? (i.e. t and T.... t=1day T=1 year) also, note that my listing was based on my understanding and thus was simply an educated guess. thanks, Barron [/ QUOTE ] I don't know whether the results I obtained suggest whether or not I found markets to be efficient, but they seemed to roughly (inversely?) correlate to what you said about different markets having different levels of efficiency. I've been told that to evaluate a trend mathematically, linear regression and quadratic regression can be applied - but I'm not familiar with doing this in Excel. I used a variation of the Directional Movement index. This will be on all chart packages, but I calculated it using EOD data in Excel (not sure how in MATlab) for various markets going back between 10 and 35 years. This basically measures the strength of a trend (but not its direction) as an index from 0 - 100. I calculated EMAs of this value and found the index to both have a higher average value, and to have a greater number of trending days (ie-an index value of 20 or more) for currencies, and the lowest values for individual equities. Equity indexes fared a little better than their individual components, and lesser studied indexes (eg: Hang Seng, All Ordinaries, BSE 30) fared better than their more widely studied (and traded) US & European counterparts. In fact when back-tested over 15-20 years using a medium-term trend following system, all profits came from trading HK & Sydney markets. This may be because these markets are less efficient than their widely followed and studied US/Euro equivalents. This may also suggest that smaller capitalised stocks trend better than the big caps - but I've yet to test this out myself. The trend trading systems I've studied and used make spectacular gains during trends but allow your account to be nibbled away during ranging markets (ie-70% of the time) and I worked with this indicator to try and filter out signals when the market appeared to be ranging, and maybe fade the signals during this time (or move to a shorter term system that buys value and sells excess inside a channel generated by a medium-term EMA) All this is from my own practical study and I have little idea regarding the theoretical or academic ideas regarding efficient markets. I'd say they were not efficient based on the assumption that not all players are rational, and not all players' real motivation is to make (or not lose) money. And I'd also say that I feel I've spent years re-inventing the wheel. [img]/images/graemlins/crazy.gif[/img] [ QUOTE ] Everybody gets what they want from the market - Ed Seykota [/ QUOTE ]
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#26
10-10-2007, 02:23 AM
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Re: I DESERVE RESPECT
Shoe,
I also thought GME was a good play, but I couldn't get UB to ship me monies to put into it quick enough=/ I have a check coming this week, If I can get money into my account do you still think GME is a good play until say Dec 15th?
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#27
10-10-2007, 12:57 PM
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Re: I DESERVE RESPECT
[ QUOTE ]
Shoe, I also thought GME was a good play, but I couldn't get UB to ship me monies to put into it quick enough=/ I have a check coming this week, If I can get money into my account do you still think GME is a good play until say Dec 15th? [/ QUOTE ] Yes, I still like the stock and think it will continue to do well for the forseeable future. I plan to hold on to my current shares well into next year bearing any unforeseen circumstances.
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#28
10-10-2007, 08:33 PM
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Re: I DESERVE RESPECT
just in case it's not clear, nobody "deserves" respect. They earn it from their actions. Your actions do not deserve respect, they deserve jealousy (of being a luckbox).
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#30
10-11-2007, 04:05 AM
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Re: I DESERVE RESPECT
It's really not difficult to outperform the broader averages for an individual small investor. Relative performance is really only something the big institutions moving large amounts of money are concerned with. And that's just because it is their scorecard that they use to attract investors into their funds. This has been a very easy market to make money in. What has been going up keeps going up. This isn't a choppy market or a tough market to trade in. BIDU is up every day, GOOG the same, all the commodity names, BG, MON, FCX, all up. All you have to do is buy what's working and print money. It has been that easy. A lot of people are making a lot of money right now. It hasn't been a stockpickers market. You just have to be in the right industry, and out of the bad ones. My guess is that you haven't been around the market for a long time. I see a lot of other people saying the same thing you have. They think they are market geniuses. That's what bull markets do, they make everyone feel like geniuses. There will come a bear market, a choppy market, a difficult market to trade and make money in. When that time comes you will be humbled. If not, kudos to you then. That's great. But don't think that since you got some right in this particular tape that you are special. I'm not trying to knock you. Just hoping to help you before the market teaches you a lesson.
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