That’s a great example of the middle-ground approach I discussed in an earlier example.
News readers like this are a very new and emerging area. At some point in the future, the database providers may have this down pat. But we’re not there. I’ve seen demos of such products and they still leave much to be desired (this is harder than it looks; by the time a news-scanner is likely to pick up the word “fraud,” the stock is more likely to already be at a level that might appeal to contrarian speculators if anyone. “Restate” and even “materially restate” wouldn’t be sufficient because this doesn’t always spell consequences quite that drastic. Moreover, to the extent these databases are available, they’re very expensive so you would have to expect to pay a much higher fee for use of p123, and at some point, you’d have to weigh and balance the impact of an occasional loss like this (mitigated, I hope, by realizations that 5-stock portfolios are not properly diversified) versus the certainty of much, much higher subscription fees. It’s like a store that has $1,000/month in shoplifting losses. It pays to get a perfect security system if it could be had for $100/month. But if a partially effective security system costs $5,000 a month, it pays to just let the shoplifters continue to do their thing.
One way to guard against very bad news is, obviously, to properly diversify your models.
There’s also the other way. Don’t underrate what P123 offers. We may not automatically read press releases, but if you’ll work with the data panels and create a cust0omized set, you’ll find we do offer one that picks up the latest Yahoo! press news headlines and lets you click through to see the full text on Yahoo!. I include this panel in the layout I use most frequently and it’s usually the thing that alerts me to trouble when I choose to do quick-scans on the stocks that pass my models. We’re working aggressively right now on a much better Help setup, but for time being, check pages 118-27 of the Z to Z Guide that’s in the present Help area under “Tutorials.” If you care about info in press releases, set up that panel.
Thank you for sharing your experience and the book recommendations and expert advice on control the emotions.
On search of nurturing discipline.
Yesterday, I have stopped at Barnes & Noble and found the following books in investment sections.
The Marshmallow Test: Mastering Self-Control Hardcover – September 23, 2014
The Inner Voice of Trading: Eliminate the Noise, and Profit from the Strategies That Are Right for You - Sep 13, 2011
Believe, both these books are worth a read.
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I used to read stocks & commodities trader magazine and tradingmarkets for around 6+ years, most of them suggesting buy the pullback using technical indicators, double the position when stock is down. – may be good for professional traders and monitoring all the indicators closely; not for beginner.
P123 approach uses fundamentals, an entirely different world belongs to successful investors.
Believe, any one passes Marshmallow Test along with p123 approach can become successful investor.
Thank you again for sharing decades of real investment experiences and expert advice.
I will set up panels. In part because I take diversification to heart, I really do not have time in the morning to look at all of my purchases at rebalance in any depth.
However, I check my stocks regularly during the day. I notice the stocks that are crashing and go to Yahoo financials to get the news. I would be interested in a set of systematic criteria for getting out of a crashing stock. It is my experience that a simple stop loss harms my performance.
Criteria I use now include: a crashing stock and the Company is charged with fraud by the federal government. This is from O’Shaughnessy’s book and in my very limited experience these stocks just keep going down. O’Shaughnessy does not sell for simple restatement unless the stock would not have met the criteria for a buy at the time of purchase (What Works on Wallstreet). Another is if the company receives a takeover offer (O’Shaughnessy includes some criteria about price action relative to the offer price). O’Shaughnessy’s list seems a bit limited.
Any other ideas for criteria would be greatly appreciated. Would the word fraud appearing in the article be enough? If it kind of sounds like fraud would that be enough? What else?
"by the time a news-scanner is likely to pick up the word “fraud,” the stock is more likely to already be at a level that might appeal to contrarian speculators if anyone. "
You have less than 30 seconds to make this trade if you plan on beating a scanner that will execute a trade based on a keyword. Check out the spikes that sometime occur during the Fed speeches for reference.
Look out for stocks that have either announced a large decrease in dividends or eliminated it entirely. I owned Weight Watchers when they did this and in the next couple of months it tanked, even though it is in the SP500.
I had a similar case in my port about 2 years ago. I was lucky to be in front of my screen when what appeared to be a Chinese scam fell 75% in 1 day and was halted on close. I was able and happy to sell at -50%. It’s frustrating but not a big deal if you have a correct money management. For example, if you combine various models with a total of about 35 positions, you know that you never risk more than about 3% on idiosynchratic events. And if you limit your universe to index members, you also know that the stock has little risk to fall to zero.
What I do even with large caps: a quick look at the latest links in Finviz, and at the chart. If it really smells a lot, I skip to next rank. Less than 30 sec per stock. It may be questionable, but when the model is backtested to higher ranks it has little risk to be harmful.
I may take discretionary decisions on macro events.
I have excluded the Energy and Material sectors of all my models after it was clear that the OPEC would do nothing to support oil price. The gain over the “normal” models was significant ( I have no more exclusion now). I kept airlines (2) during Ebolamania because I thought it was irrational fear (for developed countries at least), it was also profitable.
When I read comments by members about news events affecting their stocks and resulting in drops of 50% or 75%, I am prompted to repeat a couple of ideas that have served me well:
Forget about trying to watch the news and reacting to it. You will only hurt yourself. I haven’t turned on CNBC or Bloomberg TV in about four or five years. My returns went dramatically higher as a result. If you are buying good companies at the right price, you won’t need to ever worry about the news. You know Buffett never watches that nonsense. I worked as a sell-side stock analyst for Wall Street firms for 15 years. To them, retail investors are ‘tools’ (to be used/manipulated). Also, the TV stations all facilitate playing the prediction game that Wall Street uses to manipulate retail investors and manufacture activity/commissions. Ignore all the self-serving ‘experts’ in the media. They are out for themselves, not for you. It’s a big con. Don’t play that losing game.
Forget about trying to get 100%+ returns from micro-cap stocks. Temper you goals and buy quality mid-cap or large-cap companies with stock that is temporarily mis-priced and you won’t have to worry about the junk companies that Kumar (this thread’s OP) was asking about. Consider using the S&P 400 or S&P 500 as your universe and you won’t need to worry about ‘fraud’ or words like that in news releases. (I can’t say it will never happen, but if you are buying good companies with the right fundamentals, it is almost unheard-of.)
Design P123 systems that take your personal needs into consideration so that you aren’t second guessing your system’s picks and doing a manual over-ride. Those ad-hoc decisions are typically made by your emotional, ‘lizard brain’ and will sabotage your returns every time. If you can’t stand to see a stock drop more than 15%, then put in that rule, even if it hurts your returns. With time and success, you will build confidence and you can remove the ’training wheels.’
Diversify so that the inevitable few bad apples don’t ruin the whole basket.
Stick with your portfolio’s buy/sell recommendations to the letter. We have the most powerful tool that’s available to eliminate the emotion-based decisions that emanate from the days when we, as a species, climbed out of the trees. Stick with your portfolio’s recommendations. We shouldn’t over-ride our portfolio with our emotionally hobbled brains. As much as we read, understand, and try to overcome emotion in our financial decisions, its impossible. It’s not because we’re stupid; it’s because we’re human.
I have 33 years in the industry with half of that as a professional stock analyst. It was really hard for me to put aside 20 years of professional experience in scrutinizing companies. However, when I turned off my personal judgements and let my well-designed quantitative system run the show, it doubled my returns. These simple rules have served me extremely well, and I think they will help most quantitative investors using P123.
I have doubled my small account from March 2009 to October 2009 by fluke (as you said beginner luck).
Then lost around 30% of my original account (130% from peak) in next few months. then stopped.
Believe, this time I am blessed with p123 community, no more blinder, I can avoid stupid tax.
Chris,
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you won’t have to worry about the junk companies that Kumar (this thread’s OP) was asking about
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Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders.
The Little Book of Market Wizards: Lessons from the Greatest Traders
I respect your experience and success in your investment and selflessness in sharing your expertise with others.
Believe, your approach is one among few thousands (if not million) successful approach.
It does not mean people can’t succeed by investing in micro cap and small cap.
Sir John Marks Templeton (29 November 1912 – 8 July 2008)
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My close analysis with
CTP (Amex),
MX -South Korea,
If SIM reocommends any stock from AMEX stock exchange or country other than US and Canada.
Steve idea to buy only US and Canada stocks.
If some one want to benefit from other country stocks or AMEX exchange stock; then need to do extra work.
2. Dwpeters idea - If need to have extra money, then need to do more trade and extra work.
Extra work;
3. Need to go thru news and value connection expert Mgerstein checklist from this thread before pressing buy button.
Yes, that’s a great practice. A quick scan of your portfolo with attention to stocks moving in oddball ways is an effective and efficint way to direct your attention to where it needs to go.
Much has been written on this topic: So, so, so, so much.
For “systematic,” beleive it or not, the single best practice I use is to simply sell when a stock exits a model. None of the other adages have worked for me as well as that one.
If I’m bringing judgement into the picture, I look at the stock as a potential Buy. If I’d make a new purchase at the depressed price and given the news, then I’d see no reason to sell. If it’s a stock I’d aviod, then I sell.
Uusally, I fall on the avoid/sell side of the fence if there’s some unanalyzable situation. Legal/ethical situations are a good case in point. Acquisition situatins are another; once the news is announed, the stock typically rises to a elvel that idscounts the deal and that, for me, pretty much serves as a sell-with-a-smile situation. More gains may occur, but whether or not or the extent to which it happens falls in the realm and skill sets of merger arbitrage; it’s not really the p123 world. Samll biotech/pharma fascinates many, but I have absolutely zero ability to assess new-drug trials or relatyed news.
Big declines due to earnings disappointments or lowered guidance usually aren’t things that moticvate me to sell. Some of my best expereinces over time have occurred as a result of my willinghless to sit with what many others dismiss as dead money. But ultimately, each situation has to be considered case by case. Every now and then, a seemingly routine earnings-related disappointment can reveal a problem that’s likely to be lasting.
There is no easy answer to the judgement question and I know sometimes I’ll mess up. But on the systematic side, trusting your model is probably as good as it gets, assuming the model was well conceived with enough diverisification to tolerate the wrong “decisions” it will inevitably make.
Again, FWIW: I made a lot of money on cheap China stocks. Then I sold them in Jan '10, and I still won't touch them. How many cases of fraud until pattern? The panels showed MX data only to '12. You think that might be a problem for '15 recommendation?