Hey, just popping in to vouch for Bo, (not that he needs it). His Master Interview on our site is one of our highest rated ones. He's got a pretty good way of explaining things. Here's an example.
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longer-term swing trade
- Thread starter honghsu
- Start date
Benjamin Graham and David Dodd collaborated to to write Security Analysis in 1934. The 5th edition of the book was published in the late eighties. Ben Graham was one of Warren Buffet's college professors - they worked together after Buffet left school. Buffet has always said that Graham was one of his biggest influences and Buffet continued the Graham style. Another excellent (and more recent) fundamental text is Investment Valuation by Damodaran.
These texts help to explain the kind of forensic accounting that needs to occur when doing hardcore fundamental analysis of businesses...if that's why you're making the purchase. If you're buying a stock simply because it's trending up, then these books are wasted time and money.
I have modified the traditional theories by adding the use of derivatives on both sides. I rarely buy or sell stocks, I normally sell puts and get assigned the stock or sell calls and have the stock called away. The exceptions are when the fundamentals have radically changed or when I am anxious to get in or out. In my model, derivative income replaces dividend income from Graham's approach. Most of the changes I have made reflect the changing array of instruments available to the market participant.
These texts help to explain the kind of forensic accounting that needs to occur when doing hardcore fundamental analysis of businesses...if that's why you're making the purchase. If you're buying a stock simply because it's trending up, then these books are wasted time and money.
I have modified the traditional theories by adding the use of derivatives on both sides. I rarely buy or sell stocks, I normally sell puts and get assigned the stock or sell calls and have the stock called away. The exceptions are when the fundamentals have radically changed or when I am anxious to get in or out. In my model, derivative income replaces dividend income from Graham's approach. Most of the changes I have made reflect the changing array of instruments available to the market participant.
I have a mathematical model for averaging down. The only requirement for following it is that the fundamentals are intact. Warnings or news can cause me to reevaluate and maybe exit.
An example would probably best illustrate what some here will no doubt refer to as madness.
I have been buying MIR since December. When I started, I decided that I would not buy more than $100K of the stock. I sold 10 Dec 15 Puts for $1 and got assigned. I then sold 10 Jan 15 calls for an average of $1.25 and did not get assigned. Had I been called away - this would have been a $2.25 profit on $15 in a month. Now with a $12.75 basis I sell 20 of the Feb12.5 Puts for (avg of) $1 and 30 of the Feb 10 Puts for ($1.10) and get assigned on everything.
On expiration day in Feb, I sell 50 March 7.5 Puts for .75. Fundamentals are still good but owners of this stock swear it's another ENE. The stock turns to head up, now my basis is about 9.90 and I would like to get out at $15, so I sit. I start writing calls for the Apr15 but only get off 30 at around .80 (avg). I wanted to keep writing at higher prices but the stock retreated and I kept the premium. According to my model, I start writing at .70 and write more every .15 til I am 100% covered. I also wrote 10 12.5 calls at $2 and get called away on those in Apr.
Now my basis is about $8.90, so I need to write more 15 calls or more 7.5 Puts. Of course, the stock drops like a stone and I'm back on the 7.5s, writing 30 June 7.5 puts for .80 (worthless) and then 50 July 7.5 puts for .75.
Including the July writing, I have a basis of about $7.75 now on 5000 shares and only about 38K in the stock. I could sell today and still have a small profit. The point of all this is that the stock has been cut in half since I started buying and I am still around breakeven or profitable because of the derivatives. I didn't call the bottom, I won't call the top. I have made mistakes at every turn and still have a profit to show for this. The only area where I MUST be correct is in my fundamental analysis. That prevents the stock from going to zero and gives me a floor to work with.
I am still waiting for $15.
An example would probably best illustrate what some here will no doubt refer to as madness.
I have been buying MIR since December. When I started, I decided that I would not buy more than $100K of the stock. I sold 10 Dec 15 Puts for $1 and got assigned. I then sold 10 Jan 15 calls for an average of $1.25 and did not get assigned. Had I been called away - this would have been a $2.25 profit on $15 in a month. Now with a $12.75 basis I sell 20 of the Feb12.5 Puts for (avg of) $1 and 30 of the Feb 10 Puts for ($1.10) and get assigned on everything.
On expiration day in Feb, I sell 50 March 7.5 Puts for .75. Fundamentals are still good but owners of this stock swear it's another ENE. The stock turns to head up, now my basis is about 9.90 and I would like to get out at $15, so I sit. I start writing calls for the Apr15 but only get off 30 at around .80 (avg). I wanted to keep writing at higher prices but the stock retreated and I kept the premium. According to my model, I start writing at .70 and write more every .15 til I am 100% covered. I also wrote 10 12.5 calls at $2 and get called away on those in Apr.
Now my basis is about $8.90, so I need to write more 15 calls or more 7.5 Puts. Of course, the stock drops like a stone and I'm back on the 7.5s, writing 30 June 7.5 puts for .80 (worthless) and then 50 July 7.5 puts for .75.
Including the July writing, I have a basis of about $7.75 now on 5000 shares and only about 38K in the stock. I could sell today and still have a small profit. The point of all this is that the stock has been cut in half since I started buying and I am still around breakeven or profitable because of the derivatives. I didn't call the bottom, I won't call the top. I have made mistakes at every turn and still have a profit to show for this. The only area where I MUST be correct is in my fundamental analysis. That prevents the stock from going to zero and gives me a floor to work with.
I am still waiting for $15.
I got your points!
I will start to read Damodaran's book and to see how can I set up a set of formula for valuation based on his principles.
You mentioned that The fundamental work is the most time consuming and most important aspect of the operation. As you need to feed company's income statement and balance sheets into your formula, where do you grub these information? Do you get them from website like theStreet.MultexInvestor.com, OR some integrated software?
The worse thing is that in order to trace a couple of thousand companies' income statement and balance sheets, one could sit in local library for several days to read Value Line Investment Survey or read each company's 10Q report on the web. And one can not remember all important figures preciously because there are too many figures. How do you keep tracking these numbers?
Last question, would you give one or two example of companies which meet your three criteria: sustainable margins, industry/sector leadership positions and solid financials.
Thanks a lot,
I will start to read Damodaran's book and to see how can I set up a set of formula for valuation based on his principles.
You mentioned that The fundamental work is the most time consuming and most important aspect of the operation. As you need to feed company's income statement and balance sheets into your formula, where do you grub these information? Do you get them from website like theStreet.MultexInvestor.com, OR some integrated software?
The worse thing is that in order to trace a couple of thousand companies' income statement and balance sheets, one could sit in local library for several days to read Value Line Investment Survey or read each company's 10Q report on the web. And one can not remember all important figures preciously because there are too many figures. How do you keep tracking these numbers?
Last question, would you give one or two example of companies which meet your three criteria: sustainable margins, industry/sector leadership positions and solid financials.
Thanks a lot,
I recommend Trader Vic , I think somebody else did too. It is a great book. It is written by a guy who does all time frames, from day trading futures to position trading with stocks. Great book and a great section on psychology as well.
As far as strategies go, I have no problem with position building, but not averaging down. The difference is that with position building you have bought an initial position and it has held up well but not made a big run or maybe come back to the place where you first bought. So, then you add more. That is cool.
Buying something and then watching it drop because you have no stop loss order, and then buying more is just being a sucker and is the most common mistake. But that's just my opinion and of course if you throw in selling options against your stock position it changes the dynamics. Still I think if you take a stock position and you are wrong, then it is better just to sell rather than trying to "save" the trade with fancy strategies. Trader Vic recommends that as well.
As far as strategies go, I have no problem with position building, but not averaging down. The difference is that with position building you have bought an initial position and it has held up well but not made a big run or maybe come back to the place where you first bought. So, then you add more. That is cool.
Buying something and then watching it drop because you have no stop loss order, and then buying more is just being a sucker and is the most common mistake. But that's just my opinion and of course if you throw in selling options against your stock position it changes the dynamics. Still I think if you take a stock position and you are wrong, then it is better just to sell rather than trying to "save" the trade with fancy strategies. Trader Vic recommends that as well.
Originally posted by honghsu
I got your points!
I will start to read Damodaran's book and to see how can I set up a set of formula for valuation based on his principles.
You mentioned that The fundamental work is the most time consuming and most important aspect of the operation. As you need to feed company's income statement and balance sheets into your formula, where do you grub these information? Do you get them from website like theStreet.MultexInvestor.com, OR some integrated software?
The worse thing is that in order to trace a couple of thousand companies' income statement and balance sheets, one could sit in local library for several days to read Value Line Investment Survey or read each company's 10Q report on the web. And one can not remember all important figures preciously because there are too many figures. How do you keep tracking these numbers?
Last question, would you give one or two example of companies which meet your three criteria: sustainable margins, industry/sector leadership positions and solid financials.
Thanks a lot,
Being an ex-quant, I've done multi-factor models for stock selection based on fundamental factors like(earnings revision, p/e, p/cf, dividend yield, and a whoel host of others). And I can say, you do NOT have to spend your life at the library or on the net getting the info.
They are readily available in databases that you can subcribe for a not so cheap price! FactSet, IBES, FirstCall,etc. Those are the tools institutions to model stocks and they have historical info going back for decades.
good luck!
99
Jeez, ktm, you're gonna make me think! Thx for the info - I'm gonna study it.
As far as risk, your strategy makes complete sense to me since I assume you are risking only a relatively small part of your account per issue. For example, I think some people won't risk a large loss on one stock for a sure large gain on 5+ stocks.
As far as risk, your strategy makes complete sense to me since I assume you are risking only a relatively small part of your account per issue. For example, I think some people won't risk a large loss on one stock for a sure large gain on 5+ stocks.
On the fundamental side, I track about 4000 stocks. I have a proprietary database and use Multex.com for downloads from their screener. This is free once you register. From the Multex raw data dumps, I have a series of relatively complex formulae that run against the data and screen for certain situations.
From this select list, I manually mark certain stocks to review further. I also keep notes on every stock I evaluate along with the date and my feelings about an issue at the time and the reasons behind the comments. This is very interesting to review a year later and see what happened to the stock and if my feelings were correct. I need to short more!!!!
The screening and selection part is not very time consuming, reading the 10Ks and digging takes a while.
TRDO comes to mind as a good candidate. They are virtually without a competitor, have outstanding margins and excellent growth prospects and solid financials. They maintain the enhanced 911 lookup numbers/data (when you call 911, your info gets displayed automatically, etc..) They are also working with cellular providers on triangulation of cellular 911 callers. I have a small position (building as it drops).
Multex custom screening can help you find some pretty specific stuff. My proprietary database goes back 17 years and is absolutely massive. I pay for nothing in the way of research. There's a wealth of free data out there.
From this select list, I manually mark certain stocks to review further. I also keep notes on every stock I evaluate along with the date and my feelings about an issue at the time and the reasons behind the comments. This is very interesting to review a year later and see what happened to the stock and if my feelings were correct. I need to short more!!!!
The screening and selection part is not very time consuming, reading the 10Ks and digging takes a while.
TRDO comes to mind as a good candidate. They are virtually without a competitor, have outstanding margins and excellent growth prospects and solid financials. They maintain the enhanced 911 lookup numbers/data (when you call 911, your info gets displayed automatically, etc..) They are also working with cellular providers on triangulation of cellular 911 callers. I have a small position (building as it drops).
Multex custom screening can help you find some pretty specific stuff. My proprietary database goes back 17 years and is absolutely massive. I pay for nothing in the way of research. There's a wealth of free data out there.
Originally posted by ktm
On the fundamental side, I track about 4000 stocks. I have a proprietary database and use Multex.com for downloads from their screener. This is free once you register. From the Multex raw data dumps, I have a series of relatively complex formulae that run against the data and screen for certain situations.
From this select list, I manually mark certain stocks to review further. I also keep notes on every stock I evaluate along with the date and my feelings about an issue at the time and the reasons behind the comments. This is very interesting to review a year later and see what happened to the stock and if my feelings were correct. I need to short more!!!!
The screening and selection part is not very time consuming, reading the 10Ks and digging takes a while.
TRDO comes to mind as a good candidate. They are virtually without a competitor, have outstanding margins and excellent growth prospects and solid financials. They maintain the enhanced 911 lookup numbers/data (when you call 911, your info gets displayed automatically, etc..) They are also working with cellular providers on triangulation of cellular 911 callers. I have a small position (building as it drops).
Multex custom screening can help you find some pretty specific stuff. My proprietary database goes back 17 years and is absolutely massive. I pay for nothing in the way of research. There's a wealth of free data out there.
Yep. I almost forgot about Multex! Yeah, the internet has really level the playing field. Institutions really overpay for financial databases when a lot of it is now available on the net for free or negligible cost. But, I guess our data provider has to guaranteed cleaniness/accuracy of historical data while the stuff you get off the net has no such guarantees.
But, however, Multex's quality is extremely HIGH!