Readings: Week 10 - 16 Jul 2017

16 Jul 2017

 

 

 

 

A (LONG) CHAT WITH PETER L. BERNSTEIN - JASON ZWEIG

 

 

What are investors’ most common mistakes? Extrapolation

 

 

Do you think the investing public has gotten smarter? No. The day-trader phenomenon would not have developed out of a population that was thoughtful about how the stock market works. And I don’t think that many individual investors have learned that the more you press, the more problems you’re going to get into. They have not learned that, and maybe they never will.

 

 

How can investors avoid being shocked, or at least reduce the risk of overreacting to a surprise? In general, survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn. The riskiest moment is when you’re right. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance. Diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place

 

 

What are the important lessons about risk from your book Against the Gods?

 

(1) First, in 1703 the mathematician Gottfried von Leibniz told the scientist Jacob Bernoulli that nature does work in patterns, but “only for the most part.” The other part — the unpredictable part — tends to be where things matter the most. That’s where the action often is.

 

(2) Second, Pascal’s Wager. You begin with something that’s obvious. But because it’s hard to accept, you have to keep reminding yourself: We don’t know what’s going to happen with anything, ever, over any period. And so it’s inevitable that a certain percentage of our decisions will be wrong. There’s just no way we can always make the right decision. That doesn’t mean you’re an idiot. But it does mean you must focus on how serious the consequences could be if you turn out to be wrong

 

Pascal’s Wager doesn’t mean that you have to be convinced beyond doubt that you are right. But you have to think about the consequences of what you’re doing and establish that you can survive them if you’re wrong. Consequences are more important than probabilities.

 

 

What investing and personal advice do you offer your great-grandchildren?

 

I would teach them Pascal’s Law: the consequences of decisions and choices should dominate the probabilities of outcomes. And I would also teach them about Leibniz’s warning that models work, but only for the most part. I would remind them of what the man who trained me in investing taught me: Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take.

 

 

You’ve often written that something important happened in September 1958. What was it? 

 

Stocks began to yield less than bonds, and it was not something tentative. It really showed me that you don’t know. That anything can happen. There really is such a thing as a “paradigm shift,” when people’s view of the future can change very dramatically and very suddenly. That means that there’s never a time when you can be sure that today’s market is going to be a replay of a familiar past. Markets are shaped by what I call “memory banks.” Experience shapes memory; memory shapes our view of the future.(That’s also what happened [in 1999] when tech stocks were enormously exciting; most of the new participants in the market had no memory of what a bear market is like, and so their sense of risk was muted.)

 

 

How, if at all, should investors be hedging against the risk of a sudden rise in the cost of living?

 

There is a tendency for people to expect the status quo either to last indefinitely or to provide advance signals for shifting strategies. The world does not work like that. Surprise and shock are endemic to the system, and people should always arrange their affairs to that they will survive such events. They will end up richer that way than [by] focusing all the time on getting rich.

 

 

Tell us why dividends are important.

 

In 1995 I said, “Dividends don’t matter.” I’ve been eating those words ever since. I assumed that reinvestments [the cash that companies put back into the business instead of paying out as dividends] would earn the same rate of return. I was wrong. Managements are more careful when they’re not floating in cash.

 

Hugh Liedtke, the former CEO of Pennzoil, used to joke that he believed in the “bladder theory”: Companies pay dividends so that management can’t p–s all the money away.

 

In the 1960s, in “A Modest Proposal,” I suggested that companies should be required to pay out 100% of their net income as cash dividends. If companies needed money to reinvest in their operations, then they would have to get investors to buy new offerings of stock. Investors would do that only if they were happy both with the dividends they’d received and the future prospects of the company. Markets as a whole know more than any individual or group of individuals. So the best way to allocate capital is to let the market do it, rather than the management of each company. The reinvestment of profits has to be submitted to the test of the marketplace if you want it to be done right.

 

 

Over the course of your career, what are the most important things you’d say you had to unlearn?

 

What’s great about this business is that you keep learning. In fact, I don’t know anybody who left investing to become an engineer, but I know a lot of engineers who left engineering to become investors. It’s just so infinitely challenging. You just have to be prepared to be wrong and to understand that your ego had better not depend on being proven right. Being wrong is part of the process. It’s really why the market fluctuates.

 

 

 

WHAT YOU SHOULD — AND SHOULDN’T — LEARN FROM WARREN BUFFETT - JASON ZWEIG 

 

Mr. Buffett has always organized himself with a sole focus on investing sensibly, without having to answer to impatient clients or obsessing about what other investors are doing.

 

Mr. Buffett has never wavered in the principles he learned from his mentor, Benjamin Graham: Stocks are ownership stakes in businesses, not pieces of paper or blips on an electronic ticker; their market prices often are driven by the mood swings of investors rather than by the value of the underlying businesses; and investing is worthwhile only when value exceeds price by an amount great enough to create a “margin of safety.”

 

Mr. Buffett isn’t unemotional but inversely emotional: alarmed by other people’s greed and greedy to capitalize on their fear. “One of the hardest things for most investors is to sit by and watch other people make money,” says Howard Marks, co-chairman of Los Angeles-based Oaktree Capital Management, who has known Mr. Buffett for many years. “But that doesn’t bother Warren at all when the opportunities are outside his sphere.”

 

“Warren has the ability to figure out which things are important in a whole narrative and to ignore everything else,” Mr. Marks says. “He’s also extraordinarily good at knowing what he’s good at and what he’s not, and staying away from the latter.”

 

Too many investors try to mimic Mr. Buffett by copycatting his stock picks and parsing every syllable he says and writes. They miss the forest for the trees. To learn from Mr. Buffett, concentrate your energies on figuring out what you stand for as an investor, who you are, what you know and what you don’t. Be inflexible on those principles. Then change and learn and grow relentlessly as you put them into practice.

 

 

IS YOUR BRAIN WIRED FOR WEALTH? - JASON ZWEIG 

 

For the first time in any nonscientific publication, this article will take you deep inside your own brain to help you understand why you invest the way you do — and, more important, how to enhance the workings of your brain to get better results.

 

I think you’ll see that the neuroscience of investing helps explain one puzzle after another:

- why we chronically buy high and sell low,

- why “predictable” growth stocks sell at such high prices,

- why it’s so hard to understand our own risk tolerance until we lose money,

- why we keep buying IPOs and “hot funds” despite all the evidence that we shouldn’t,

- why stocks that miss earnings forecasts by a penny can lose billions of dollars of market value in seconds.

 

“Scams often offer the prospect of immediate rewards,” says Bechara. “You can only resist that temptation if you can keep the long-term consequences in mind. Even slight damage to this part of the brain can cause a myopia for the future.”

 

Technical analysts insist that charts of past prices can predict the path of future returns — and every Wall Street strategist thinks he can forecast where the market is headed. At heart, all of us (even market strategists) know that these things are utterly unpredictable. So why do we persist in trying to predict them? It turns out that we have no choice. Our brains are wired to force us into forecasting; it is a biological imperative. In fact, humans are born with what I’ve come to call “the prediction addiction.”

 

A recent study by Irene Kim, a finance scholar at the University of Michigan, shows that the more times in a row a company has topped Wall Street’s expectations, the further its stock drops when it finally falls short of analyst forecasts.

 

And what about value investing? Value stocks tend to have lumpier, less linear earnings; as their profits and share prices bounce around, our brains probably seek to interpret them as an alternating pattern. But alternation is hard for us to grasp. That may show why value stocks are so consistently underpriced: Because the path of their earnings growth is more erratic in the short run, your anterior cingulate struggles harder to predict what’s coming next. Short-term focus of our brains leads us to overlook the longer-term truth: Over the course of many years, the earnings growth rate of value stocks is barely lower than that of their growth counterparts and, in the long run, value investing is at least as lucrative as a growth-only strategy.

 

That release of dopamine after an unexpected reward makes humans willing to take risks. Without it, explains Baylor’s Read Montague, our early ancestors might have starved to death cowering in caves, and we modern investors would keep all our money under our mattresses. The dopamine rush we get from long shots is why we play lotto, invest in IPOs, keep too much money in too few stocks and invest with active portfolio managers instead of index funds. It’s why phrases like “the next Microsoft” or “the next Peter Lynch” make us whip out our wallets.

 

Patterns, especially repetition, trigger a subconscious, automatic and uncontrollable response in this part of the brain. That appears to explain why, if a stock goes up a couple of days in a row, or a company reports improved earnings for a few straight quarters, we immediately think that we know what’s coming next. Instead of reaching an objectively factual conclusion — “so far, this stock has been going up” — we inevitably tell ourselves something speculative: “This stock is going to keep going up.” All too often, that turns out to be wrong — but our brains are hardwired to project the past into the future.​

 

“You will be much more in control,” says Antonio Damasio of the University of Iowa, “if you realize how much you are not in control.” Damasio’s point is both simple and profound: Since it’s impossible to change how the brain works, you must learn to make the most of its strengths and limitations alike.

 

Here’s how neuroscience leads to a new science of investing.

 

Strap yourself in. Because the amygdala is an almost irresistible force, you must reduce your exposure to images that can provoke panic. Turn away from stock tickers; turn off the televised images of closing bells and yelling traders. And promise aloud or in writing, before a friend or family member who can hold you to it, that you won’t check the value of your accounts more than once a month. That way, your investing commitment can never flag, even when you are full of fear.

 

Stay in balance. Geniuses like Warren Buffett can get away with putting all their money in a handful of holdings. The rest of us need to set limits on our prediction addiction.  

 

Redouble your research. If a stock or fund goes straight up, don’t just enjoy the ride. The better an investment does for you, the more powerfully your brain will believe nothing can ever go wrong with it. Each time it rises, say, 50 percent, study it again more closely; ask what could go wrong; seek out negative opinions. The time to do the most homework is before bad news can catch your brain by surprise. There are no guarantees, but doing extra research just when things are going well is the best way to prepare yourself in case something later goes wrong — or seems to. You’ll then have a better sense of whether it’s a false alarm or a real one.

 

Use different wallets. If you can’t stop chasing “the next Microsoft,” at least chase it with only part of your money. Just as prudent gamblers lock most of their cash in the hotel-room safe and go onto the casino floor with no more than they’re willing to lose, you should set up a “mad money” account. You can’t control your prediction addiction, but you can at least contain it — by putting into your mad-money account only what you can afford to lose. That way, you speculate with a fraction of your money, not with all of it.

 

Build an emotional registry. Remembering what you did is only one way to learn from your own experience. Emotions can be an excellent guide to what you should and shouldn’t do. But to use them as an accurate guide, you need to remind yourself of how you felt after your decisions (and their results).“Regularly evaluating whether an outcome made you feel good or bad,” says University of Iowa’s Antoine Bechara, “will help you learn from your behavior.” Keeping a written record of your feelings — what Bechara calls an emotional registry — is a good idea, particularly if you are a younger investor. Store these “feeling records” alongside your trading records.

 

Look at the long run. Remember that your brain perceives anything that repeats a couple of times as a trend — so never buy a stock or a fund because its short-term returns look hot. Check out the long run, and never assess performance in isolation; always compare a stock or fund to other similar choices.

 

Diversify, diversify, diversify. This grim bear market has revealed the biggest risk of all: underestimating your own tolerance for risk. Thinking you can tough it out, then suddenly finding you can’t, is a recipe for financial disaster. Diversification — making sure that you never keep all your money in one kind of investment — is the single most powerful way to prevent your brain from working against you.

 

By always holding some cash, some bonds, some real estate, some U.S. and foreign stocks, you ensure that your prediction addiction can never force you into a single, sweeping bet on a “trend” that disappears. And by keeping your money in a broad basket of assets, you lower the odds that a meltdown in one investment will send your amygdala into overdrive.

 

Seth Klarman on Risk Aversion - The Novel Investor

 

The benefit of a risk-averse strategy is it tends to set up you up as opportunities arise, but it requires a willingness to act when risk is low. Which is exactly why it’s not the easiest thing in the world to follow.

 

Typically the times when real risk is lowest is exactly when perceived risk is highest. In late 2008 – early 2009, people saw the stock market as extremely risky, but hindsight shows that perception was wrong. It was the best time to buy. It also happened to be the hardest time to buy.

 

Risk aversion means having the emotional discipline to act when perceived risk conflicts with real risk. Without that, a risk-averse strategy becomes a bond-only strategy.

 

Risk is not beta. Risk is not volatility. Volatility…is a wonderful thing. Because if you buy a bargain, and there’s a lot of volatility, it becomes a better bargain. You can make more money. Volatility helps you.Volatility is not correlated to risk. Value is something that correlates to risk. In the sense that, if the price you pay is higher than its value, you have risk. If the price is lower, you don’t. We think about risk as the chance of losing.

 

 

 

Ben Graham on Buying Low and the Mistake of Buying High - The Novel Investor 

 

Of course, buying stocks on the way down is not the easiest thing for most investors to do. If it were easy, then everyone would do it, but then the market wouldn’t act the way it does.

 

The important thing to remember is that price matters. So even if you can’t buy stocks in a falling market, paying a fair price is still okay. Missing the opportunity to buy at a lower price happens all the time. But don’t try to make up for it by paying a too high price later on.

 

Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes — in fact, very frequently — they make mistakes by buying good stocks in the upper reaches of bull markets.

 

The important point is to beware of buying popular stocks when the market is at the height of popularity, but also beware of “cheap” stocks because loved markets eventually turn into loathed markets that drag everything down with it. For the “value-minded” investor, loathed markets are worth buying.

 

 

Ben Graham on Market Cycles and Second-Level Thinking - The Novel Investor

 

You are not going to get good results in security analysis by doing the simple, obvious thing of picking out the companies that apparently have good prospects — whether it be the automobile industry, or the building industry, or any such combination of companies which almost everybody can tell you are going to enjoy good business for a number of years to come. That method is just too simple and too obvious — and the main fact about it is that it does not work well. If something is easy and obvious, then almost everyone else is probably thinking the same thing. And if almost everyone is thinking the obvious thing, then it’s already priced in.

 

You need to be a second-level thinker. So instead of hunting for companies with “good prospects”, Graham recommends hunting for value. Instead of buying a company because it has good prospects, look for companies that the market believes have terrible prospects, but really aren’t that bad. Put another way, it means separating the bad companies that deserve a lower price from the good companies that everyone thinks are bad and selling to the point of being undervalued.

 

 

Buffett on the First Things You Have to Learn- The Novel Investor

 

The best way to think about investments is to be in a room with no one else and just think

 

Wall Street makes its money on activity. You make your money on inactivity.

 

Taking time to think about potential investments is important. Not being influenced to act after you’ve made a decision is just as important.

 

Part of that is temperament. Part of that is knowing what information is worth paying attention to. And part of it is knowing how to use that information wisely. But it starts with learning how to filter out the noise.

 

We don’t want to pass up the chance to do something intelligent because of some prediction about something that we’re no good on anyway. So we don’t read or listen to or do anything in relation to macro factors at all. Zero.

 

Being able to filter out the noise is an immensely useful skill. Removing all the predictions and conjecture in the market – all the unimportant and unknowable stuff – will lead to better decisions.

 

 

 

Seth Klarman on Value Investing - The Novel Investor

 

Our investment strategy is to invest bottom up, one stock at a time, based on price compared to value. And while we may have a macro view that things aren’t very good right now – which in fact we feel very strongly – we will put money to work regardless of that macro view if we find bargains. So tomorrow, if we found half a dozen bargains, we would invest all our cash.

 

When we look at value, we tend to look at it on a very conservative basis – not making optimistic forecasts many years into the future, not assuming growth, not assuming favorable cost savings, not assuming anything like that. Rather looking at what is there right now, looking backwards and saying, Is that the kind of thing the company has been able to do repeatedly? Or is this a uniquely good year, and is it unlikely to be repeated? We tend to look at hard assets as much as possible.

 

Predicting things like future cash flows, growth rates, potential cost savings, and picking the right discount rate are all opportunities to be wrong. Howard Marks said it another way and I’m paraphrasing – a lot of things need to go right to consistently pick winners.

 

 

Do 95% of traders fail? - JOHN FORMAN

 

I think the bottom line is that active trading is hard and very few people achieve long-term success.Are you in it for a quick hit? Probably best if you look elsewhere.

 

Making a big return in a short period means taking large risks and is almost totally down to luck.

 

In the research I did for my PhD I found that somewhere around the 3 year mark in terms of experience is where you see a major improvement in trader performance. The point is that it takes time to develop trading skills.

 

If you can keep your expectations reasonable and are committed to putting in the time and effort then you can take a big step toward improving your chances of being a successful trader  

 

 

 

 

HOW THE RIGHT MINDSET AND DISCIPLINE CAN GIVE YOU AN INVESTMENT ‘EDGE’


We can loosely define 3 types of investing ‘edge’.

 

(1) Firstly, there is the informational edge

(2) The second type of edge relates to interpreting and using the available information better than everyone else. This type of analytical edge is what Howard Marks calls “second-level thinking”.

(3) The final type of edge is simply having the mental fortitude and patience to adhere to a long-term investment strategy. This “emotional edge” (for lack of a better word) can be found within everyone. In fact, the individual investor has an advantage over the professional money manager, because s/he is not subject to monthly or quarterly performance reporting. This makes it much easier to ride out the inevitable rough patches of performance.

 

For individual investors, having the right mindset and discipline to follow an investment strategy is much more important than knowing more or having better insights than everyone else. While possessing second-level thinking does help, it is the ability to sit still and take less action that separates the successful individual investors from those who merely contribute to the average.

 

 

 IS TECHNICAL ANALYSIS MERE HOCUS POCUS?

 

Technical analysis and charting has broad appeal because we want to believe that there is an effortless way to make money

The path of least resistance has enormous appeal – what could be better than looking at a computer screen and buying ‘when the red line crosses the blue line’ and selling when they reverse?

 

In reality there are two paths on which to approach the stock market.

(1) The first is as a venue to purchase pieces of businesses whose long term value is determined by the path and magnitude of their earnings. As investing legend Peter Lynch once said: stocks always follow earnings and cash flow – focus on them, and you will get the stocks right.

(2) The alternative approach is to treat stocks like chips that rise and fall on a computer screen. But betting on the ‘ups’ and ‘downs’ is an approach that treats the stock market as nothing more than a casino. Charting is only concerned with the ups and the downs and many advocates of technical analysis suggest that even knowing what the underlying company does is irrelevant.

 

 

Trend Following: Don't Call It A Comeback - Mellisinos Trading

  • Pure long-term Trend-Followers regularly hold positions for 6 to 18 months. They attempt to capture large trends that persist over long time frames. “Pure” as firms that only trade a diversified long-term trend-following strategy; they do not incorporate any short-term, counter-trend or fundamental strategies.

  • Since 2011, we experience 12 6-month losing periods. In the 18 months following a 6-month loss, we produce a profit 6 times (50% odds); winning periods average 22.92% while losing periods average -3.19%.

  • Trend-Followers make only one assumption – that trends will continue happening over time. They believe markets will continue generating periods of momentum either up or down and will never flat line - for too long. They do not pretend to know which direction markets will move, but just that they will move one way or another.

  • As a contrast, Value investors assume that economies, companies, and more directly, the status quo, will continue improving over time. To profit from their assumptions, they analyze fundamental data to find companies or markets at attractive prices. They invest in companies or markets that exhibit an attractive present value relative to its future potential.

  • We all feel frustration when our investments do not perform well. I believe we must understand that all investments go through periods of negative performance.

  • Losing periods do not necessarily mean the investment is “dead” or that something is wrong with it. Typically, investors make losses worse by medicating their impatience with quitting.

  • When we come to understand that losing periods are part of the process, we can get on the path of viewing losing periods as investment opportunities

 

 

Using Volume to Make Better Trades - Dan Zanger

  • What tools I use to trade. My answer is always the same: chart patterns and volume.

  • Price movement tells us how “frisky” a stock is, and volume tells us how committed traders and investors are to buying or selling it.

  • Chart patterns tell us when the big moves are getting ready to happen.

  • What many may not understand is that volume tends to show up at the beginning and the end of trends.

  • During periods of consolidation, volume generally drops.

  • Rising volume tells us when buyers or sellers are coming into a stock.

  • So when is volume most important? Volume matters on breakouts (or breakdowns) from a consolidation like a bull flag or cup and handle pattern.

  • When a stock leaves a range, volume provides a measure of buyer commitment to that move.

  • When a fast moving stock rises on 200% of its average daily volume for example, I make sure it’s on my watchlist!

  • There is a general rule in trading that a stock moving up on light volume is considered bearish since it shows lack of buyer commitment. The opposite can be said about a stock moving down on low volume – it shows limited selling interest and is therefore bullish.

  • What I need to see before entering a trade is a move in either direction accompanied by large volume.

 

What to do with missed profit targets? How do we deal with trades that come close to our target but don’t quite get there? What to do?!?!

 

  • One of the common struggles developing traders have is that they work first on executing their stops and diligently taking their losses. I’m willing to bet that most serious, developing traders learn to do this very well and many of them can take those stop losses without undue emotion. (We are human, so we always will have some emotional reaction to trading.)

  • However, many of those traders then find themselves making very bad decisions with profit taking, and doing things like getting in trades with $10 targets and then taking $0.20 profits as soon as they get nervous.

  • I think this is one of the great, underappreciated struggles of learning to trade: learning to take profits is hard! So many of the mistakes that developing traders make center around this issue.

  •  “the market is highly random, even with a great setup.”

  • The discipline of process is more important than the outcome of any one trade.

  • That’s how we make money in the market, not by “figuring it out” on any one trade, or getting ahead of any situation. We need a repeatable process, and that’s the most important thing. If we have a good process, some very good and very bad things will happen to us, but the sum of our trades should be positive. We have to understand this and have faith in the process.

  • Don’t let a loss provoke mistakes. What we must, at all costs, protect against is letting the market provoke us into making another mistake: going revenge trading in another market, just reentering on the stop out, jumping down and trading lower timeframes (thinking that we are “scalping”), doing the next trade on larger size, not taking subsequent trades in other stocks, etc. These are all examples of errors that can follow an emotional event in the market.

  • As always, the answer is simple to write but sometimes difficult to execute: simply follow your rules, no matter what. Just follow the rules. Above all, the discipline of process and consistency are what matter most, and a losing trade is simply a step on the road to our eventual success.

 

 

Make a Big Kill Every Once in a While - Mellisinos Trading

 

  • Apex predators don’t succeed all that often. Tigers succeed only 5% of the time; Polar bears 10% and Leopards 14%. All they need is one big kill every once in a while to stay atop the food chain.

  • Tigers, lions and other predators know their game. They balance persistence and knowing when to quit; hunting only for the home-run and conserving energy.

  • You don’t see lions hunting rabbits and other small vermin. It’s a waste of their time. They’re OK with not eating every day, but when a big opportunity presents itself, they invest heavily to make the kill. And even then they succeed only 30% of the time. The king of the jungle fails 7 out of 10 times. Think about that.

  • Investing is no different. Trend traders lay low most of the time; expending little energy while waiting for a big trend to emerge. Most of the time, like lions and other predators, we come up empty. Frustration occurs, but it doesn’t distract us from the process. You keep at it and eventually you make a big kill.

  • Each market can go many months or years without producing a big trend. When this occurs, you have to sit tight and try not to lose much money. Make small bets when it looks like a trend is burgeoning, but cut it quickly if it doesn’t materialize.

  • Our job is to stay in business and keep our eyes open for opportunity. The markets trend when they’re ready to trend

  • Don’t expect big trends to occur all that often, but as we learn from nature, we can thrive with making a big kill a small percentage of the time.

 

Dan Zanger – “10 Keys I Use to Recognize Market Reversals” - TradersLog

 

Learning to recognize key turning points in markets is one of the most important lessons any trader can learn. 10 Key Reversal Signs

 

1) Learn to recognize major reversal chart patterns.

2) Don’t get hung up on the news. “It’s basically impossible for most individual traders to trade the news, which for the most part is old information by the time it’s published.”

3) Know the key differences between bull and bear markets rallies.

4) Learn to recognize the market leaders. By identifying the stocks making the greatest gains, you will know which stocks will be leading the market. When they stop leading, its time for caution as leaders often falter ahead of the pack when the rally is weakening.

5) Never ignore the Fed.

6) Know what sectors are moving.

 

 

Australian outdoor advertising revenue growth - STUART JACKSON, Montgomery Investment Management

 

The are a number of reasons why the outdoor advertising industry should grow its share of the overall advertising pie over the next five to ten years.

  • Fragmentation of the audience in traditional forms of media

  • The roll out of digital screens which provide the dual benefits of

     

    - Growth in available site capacity

    - Greater speed to market, allowing the industry to tap into more reaction and short life advertising and marketing pools (eg product promotions)

    - Opportunities for enhanced content and greater interactivity

  • Improved audience measurement and data. This provides better reliability and information around the advertisers return on investment as well as the ability to produce more targeted outcomes. 

These longer term drivers present an attractive investment case for the outdoor advertising industry.

 

- Large format roadside showed the strongest growth, with revenue up 12.1% in June and by 13.6% in the 6 months to June. Large format roadside revenue growth has exceeded that of the overall outdoor industry for the last 2 years.

Digital sign revenue is the driver of revenue growth for the industry with digital revenue increasing 30% in the June half year relative to the prior year

 

However, more recently we have seen some concerning signs for the industry

 

- the number of large format digital screens operated by the three largest players will have increased around 120% in June 2017 relative to the same time last year.

- these screens have significantly higher capital cost and increasing the number of them in the market increases the aggregate operating costs of the industry due to higher lease costs and electricity charges.

- there has been somewhat of a land grab occurring in the industry with digital capacity growth outstripping the rate of demand growth.

- it appears that growth supply in the short term is significantly outstripping demand growth, presenting the risk that earnings expectations as a result of weakening margins.

 

 

 KEITH LAW'S TRADING PLAN

 

The hardest part of trading is to learn the necessary self discipline. It is hard to acquire and lack of discipline is often expensive. The four signs of a lack of self discipline are:

1) Guessing about market direction. You cannot predict markets but you can react to market trends. You might guess right sometimes but it is still only a guess.

2) Lack of a Trading plan or Trading method.

3) Following tips and broker recommendations instead of sticking with a trading plan.

4) Buying a stock because the price has fallen to a "cheap" level.

 

My prospecting system is still based on trend following and trend change indicators with immediate price action through candle formations also as a main consideration.stocks. My purpose in using technical analysis is to define market trends.

 

Diversification is a critical component of my plan.

 

I particularly liked the Multiple Moving Average concept espoused by Daryl Guppy. Basically this looks at trends in differing time frames (short and long) and looks for reversals when trends consolidate and crossover.

 

I use a Moving Average Crossover system based upon linear regression analysis. The advantage of the Linear Regression Indicator over a normal moving average is that it has less lag than the moving average, responding quicker to changes in direction.

 

It is very unlikely that you can buy at the low point and sell at the high point of a trend. The use of crossovers between short and long term trends means that you will do well to capture 70% of the trend move. A trend is not established until the short term line passes through the long term trend.

 

I do not rely on the buy and sell signals generated by the software. They are at best simply a guide. I rely upon my visual inspection of the graph combined with knowledge of the current fundamental position to seek buy and sell signals.

 

Exiting trades is always difficult. Indeed selling is a more emotional experience than buying. This is where the greed and fear really do take a toll. Therefore a strong exit strategy is the key to trading profits. When to exit from a trade whether as a stop loss or by realising a gain is the area of trading I find most difficult.  

 

 

Happy Hour: Consequences of Being Wrong - Novel Investor

 

There are 2 parts to this

 

(1) The first is the reminder nothing is guaranteed to happen with investing.

  • You can do the right thing, make the correct decision, and still not get the result you expect.

  • So you have to expect to be wrong sometimes.

  • But you also need to know the difference between making the right decision and making a mistake even though you get the wrong result.

  • If you understand probabilities, repeating the right decision will get you positive results over time. Repeating the mistake is a recipe for disaster.

(2) The second part is understanding the consequences of being wrong.

  • Warren Buffett has a filter for catastrophe risk, where he asks one simple question:What are the odds that this business could be subject to any type of catastrophe risk – that could make it fail?

  • If the risk exists, he passes. It doesn’t matter what type of return he can get if there’s a chance he’ll lose everything. He wants high-probability, low-risk investments. Buffett knows that if he finds enough of those, over a long period of time, the returns will speak for themselves.

  • Most investors think about what could go right and maybe at the end they ask what could wrong? What are the consequences? Buffett starts at the end. Avoiding unnecessary risks is what keeps Buffett in this game called investing.

 

 

11 Jul - Stocks Discovery

 

Challenger Ltd (ASX: CGF) is the annuity provider that has a tailwind as more wealthy baby boomers enter retirement and seek out the security that its guaranteed income products offer. The stock also offers a decent yield above 3% and given its growth rates the stock looks reasonable value under $13.

 

National Veterinary Care Ltd (ASX: NVL) is the veterinary practice aggregator with an experienced management team, reasonable valuation and room to grow much further. The stock sells for $2.58 and management expect to pay a maiden dividend in the not-too-distant future.

 

Rural Funds Group (ASX: RFF) is the agricultural investment trust that leases farmland on a long-term basis across a diversified group of farming sectors. It has solid fundamentals, a 5.5% dividend yield, and could deliver market-beating total returns from today’s price of $1.88.

 

Data#3 Limited (ASX: DTL) shares have surged 8.5% to $1.79 after the technology consulting company announced that it expects its half-year net profit before tax to come in 31% higher year on year at $8 million. The company had a very strong FY 2016 and appears to have carried this momentum through to FY 2017. At the current share price it could be worth a closer look in my opinion.

 

Macquarie Group Ltd’s (ASX: MQG) asset and debt management businesses may enjoy a decent FY 2018 given the strength of the US economy and signs of a recovery across some major European economies. The bank also offers a trailing 5.2% partly franked dividend yield and is forecasting that its FY 2018 should be “broadly in line” with the prior year. Over the long term this company has the potential to easily outperform the wider ASX’s returns.

 

Iress Group Ltd (ASX: IRE) is a high-quality software company that offers investors defensive recurring revenues and solid long-term growth prospects. Its current valuation means it has some big growth expectations built into its share price of $12.10, although if the stock were to get 10% cheaper I think it’s an excellent business to own for income and steady earnings growth. 

 

12 Jul - Stocks Discovery

 

The Money3 Corporation Limited (ASX: MNY) share price may have risen 56% in the last 12 months, but it is still trading at a little under 11x trailing earnings. I think this is especially cheap given the small loans provider delivered a 37.7% jump in half-year net profit after tax to $13.7 million in February. Furthermore, management increased its full-year profit guidance.

 

 

 

 

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