Readings: Week 18 - 24 Sep 2017

Quick Lesson For Trend Traders ** Hint: Don’t Get Off The Plane!

Just like the plane, the flight carried on. In the end, you got there… All you had to do was to hold on. This is always the case with trend trading — conflicting garbage information will tend to flood a sound trade idea. With the plane, the good thing is that when it takes off, you can’t stop it in mid-air, or even get out. On the other hand, in trading, you can get out anytime you want!

You have to learn to weed out the noise. The things you hear that don’t make sense. As far as the story goes: The flight is price. Your perspective or belief is the trade. And that annoying passenger is noise. As long as the plane hasn’t turned, the oxygen masks haven’t dropped, or the captain hasn’t given any emergency instructions, all your incentives are holding to stay on the plane and reach your destination

Try, fail, learn - repeat!

"Well what is the process? What is the checklist here that stops us making some of those mistakes?"

We have a very clearly defined checklist; a piece of research will typically run to 35 to 45 pages. That will include;

- What does the industry structure look like?

- How many players are there?

- Do you think this company has pricing power?

- What do the management incentives look like?

- What do the historical financials look like?

We run through Porter's five forces. We run through a competitor analysis. We look at the individual company's history. All of that comes together into an idea, so there is a lot of work in that. If you know the stock and you've already done a bit, you can pull it together in a week though. I think it's important that we do in-depth research. We make sure we check all the boxes on these stock ideas, the actual idea itself needs to be simple, though. You need to be able to say in a page of work, "Here's what the stock is and here's why I like it." Because if it gets too complicated, complication means there's more things that can go wrong.

That's why the process is so important. Your subconscious is really powerful. Your ability to ignore things that might contravene the case that you've already made works at a very subconscious level. It's not something that you sit down and think, "Well I'll ignore that piece of information." You don't even look at it, because your subconscious is going, "If you look at that, it will disprove the case that you've got over here." So, I'd say the opposite for me; I start with a ’yes’ and I research my way to no.

People just love hearing that story, where the most important thing is; "Well, what price am I paying for that? What is the competitive dynamic going to be? What stops a lot of capital coming into that industry that's got a great story behind it and competing away the returns?"

I think that's the biggest issue that I see time and time again, and it never goes away, and it works both ways. We make a lot of our most successful investments in stocks where the narrative is really bad. People just don't want to buy the stock, because the story is not good and therefore the price more than compensates you for that bad story.

The state of play in markets

There's NO sign of a Recession, but Growth is Tepid.

Monetary policy is still accommodative, but the period of ‘cheap money’ appears to be coming to an end

Corporate earnings have been strong globally, but in Australia the outlook is more sanguine

Valuations are expensive, which makes excellent investments hard to find

There are several risks which could negatively impact markets

Myer buyer: who wants the last Australian department store? The Australian

The results this week showed net profit sinking 80 per cent to $11.9 million, hit by writedowns on brand labels like TopShop and those big restructuring costs.

The ongoing question of the fate of the last all-Australian department store remains. Customers stung by rising energy prices, competition from specialty stores, and internationals including Amazon all worry investors.

“We’re entering a period where the competitive dynamic of the market is increased price competition. It’s is a very dangerous place for a premium full services department store to try and compete on price across the spectrum as its sole selling metric."

Businessman Sollie Lew and his Premier Investments bought into Myer with a 10.4 per cent stake.Now Mr Lew bought in at $1.15, so his shares too are underwater.

Where is the competitive advantage for Myer, they ask. Not in cost, brands, location or speciality.

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