Last week’s picks*:
FX: GBPUSD -50 pips
VA: PKG +4.84%
SC: INTT +12.15%
SH: CHH +1.34%
TF: CYY -0.14%
My stock picks performed better than my forex picks last week as I vastly underestimated the significance of the Scottish Independence vote in the UK. A Scottish breakaway would impact UK GDP and that is bearish for the pound, which gapped lower again this morning.
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Shiller CAPE may be elevated and volatility may be low but recent economic data has been improving. This is now pointing to above trend GDP growth in the third quarter, bouncing back from the Winter snap. July and August are usually quiet months for trading and there lacks a catalyst for a downward turn.
As a result, I have cautiously increased my longs and made these stock market buys last week:
Toyota Motors $TM
Freeport McMoRan Copper & Gold $FCX
Diploma Plc $DPLM.L
Games Workshop $GAW.L
Jesse Livermore, aka the Boy Plunger, aka the Great Bear of Wall Street, is one of the great American stock traders. He made (and lost) several million dollar fortunes buying and short selling stocks in the early 20th century and traded through the great Wall Street crashes of 1907 and 1929.
His book ‘Reminiscences of a Stock Operator‘ is one of the all time best trading books and contains many of Jesse’s best trading rules.
Jesse Livermore Trading Rules & Quotes
1. Always sell what shows you a loss and keep what shows you a profit.
Buy as a print!
2. Money cannot consistently be made trading every day or every week during the year.
3. A man must believe in himself and his judgement if he expects to make a living in this game. That is why I don’t believe in tips.
4. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
5. Prices are never too high to begin buying or too low to begin selling.
Available as print. Click to buy
6. Remember, don’t fight the tape!
7. Never buy a stock because it has had a big decline from its previous high.
8. Nobody can catch all the fluctuations.
Available as print.
9. The human side of every person is the greatest enemy of the average investor or speculator.
10. It is not good to be too curious about all the reasons behind the price movements.
11. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
12. Never sell a stock because it seems high-priced.
Buy as a print!
13. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
14. No diagnosis, no prognosis. No prognosis, no profit.
Available as print.
15. Wishful thinking must be banished.
16. Fear keeps you from making as much money as you ought to.
17. One should never permit speculative ventures to run into investments.
18. Never average losses.
19. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
20. I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly.
Available as print.
21. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
22. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. It was an utterly foolish play…
23. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
24. Markets are never wrong. Opinions often are.
Buy as a print!
I hope you enjoyed some of these quotes. If you haven’t read Reminiscences of a Stock Operator make sure to pick it up because it’s a great entertaining read too.
By the way, these prints are available to buy! Just click on the one you are interested in. They would look good in any trading office 😉
What’s your favourite Jesse Livermore trading rule?
Sources: telegraph.co.uk, Datastream, Hargreaves Lansdown
How this was created
With US stock markets at all time highs, traders and investors are becoming nervous about the steepening valuation of US equities.
Everybody is talking about volatility and volume right now and both of these conditions suggest that a significant market correction could be near.
The CBOE Volatility Index (VIX) has long been an indicator of fear in the markets right now it continues to trade at some of the lowest levels in it’s history. In fact, the VIX is trading under 11, and has only been this low on a handful of occasions. And as Kerry Prazak points out, the stock market has pulled back significantly nearly every time the VIX drops this low.
But the VIX isn’t the only indicator that suggests a correction is imminent. The Shiller CAPE ratio is also significantly overvalued with a reading of 25.6, 57.6% above it’s median and the third highest in 100 years.
Furthermore, the total market cap to US GDP ratio (a favourite of Warren Buffett) is overvalued at 122%, suggesting future annual returns of just 1.3% on the US stock market.
With US stocks so expensive right now, the question remains: Where else can traders look for profits? Well there are places in the world that are still cheap.
5 Cheapest stock markets in the world
It may not be all that surprising that the Russian stock market is one of the cheapest in the world right now. Geopolitical turmoil and conflict in Crimea has seen investors flee equities and the Russian stock market now trades at a PE ratio of 5.30 with a price to book ratio of 0.71 (the lowest of the 34 developed nations analysed).
Despite the volatility, there are signs of peace and notable investors (Jim Rogers included) have expressed renewed optimism in the former Communist state.
Like Russia, it is no surprise to learn that the Greek stock market is cheap. It is in fact the cheapest of all 34 countries studied with a PE ratio of just 3.40 while the cyclically adjusted PE is 6.08. Contrarian investors with a strong stomach should be able to find some value there.
A better place for investors could well be China and with a PE ratio of 6.30, the Chinese market is the third cheapest of all 34 nations, behind only Russia and Greece.
Investors have bailed out of China in recent months as the economy slows down but could be due for a rebound. The Chinese central bank have plenty of tools available to combat the slowdown and that could lead to a good performance from Chinese shares.
The Japanese Nikkei gained almost 40% in 2013, but the stock market is still cheap when compared to other nations and is 60% below its 1990 all time high.
Japan suffers from an ageing population but the aggressive monetary policy put in place by the Bank of Japan is injecting renewed life into the economy and depreciating the value of the Japanese yen.
With a PE ratio of 13.90 and price to book ratio of 1.32, Japan is cheaper than most other developed markets.
Source: Yahoo Finance
Turkey is another stock market that is cheap right now. The Turkish equity market has a PE ratio of 9.90 making it the fourth cheapest behind Greece, Russia and China.
Riots and violence has clearly put investors off the country and the Turkish Lira has also taken a beating.
However, Turkey’s current account deficit of -7.90% is dangerously high and suggests there could be further problems ahead.
Click to buy!
Last November, at a price of $80 a share, I wrote an article for Seeking Alpha saying 3D Systems (DDD) had entered an extremely overbought state which could only end in a significant share price correction.
Although the share price proceeded to fall around 13% after I made the claim, 3D Systems ended up going higher by another $17 before the bubble finally popped.
Since then, 3D Systems has lost nearly 50%, hitting a low of $44.80 in April of this year.
Now that the sharp price fall has taken place, there is very little value left for shorts, and the next direction for DDD shares is likely to be up following a potential short squeeze.
Last week’s Bank of America Merrill Lynch Global Technology Conference highlighted some of the reasons why 3D Systems could still be the stock of the future.
For me, the potential partnerships that DDD alluded to in last week’s conference form the most exciting part of the story.
3D Systems spoke of opportunities in food printing with Hershey (HSY).
In mobile, 3D Systems is working with Intel (INTC), whose mobile 3-D printing chip, RealSense, has just been launched.
While, potential agreements with Google (GOOG, GOOGL) could be even more exciting.
It’s also possible that a tipping point for 3D printing products could be reached within a couple of years. A scenario that could see 3D printing products in the average American household.
Time to buy 3D Systems? Technical outlook
While the future will no doubt be good for 3-D printing, technical outlook forms a big part of any analysis on 3D Systems too, principally because the market has been subject to such intense speculation.
Today, 3D Systems trades almost 50% lower, and short sellers (unless unreservedly greedy) will almost certainly be closing out their positions at these prices.
$56.64 is the level to watch, and a break of this would surely see all remaining shorts exit their trades.
Click here to read the full article on Seeking Alpha
If you want to be successful at investing or trading you need to find your own way. I don’t see much point subscribing to any of these stock picking services or ‘Guru’ picks.
(Unless of course they are used to educate yourself as to how to find good trades.)
That being said, one of my favourite investors is Jim Rogers and it’s always good to hear him talk.
If you don’t know Jim I wrote a bit of a profile on him a while back. Suffice to say, Jim is a legend on Wall Street and not just for setting up the Quantum Fund with George Soros.
Video from London Real
The video below comes from one of my favourite online podcasts, London Real, and is about an hour long if you fast forward through some of the advertising at the beginning.
Jim is always happy to talk about where he is invested and it’s good to hear his thoughts on markets.
As a longer term investor, Jim’s views on markets change very slowly. He has been bullish on commodities (particularly agriculture) for years now and he is likely to be bullish for a long time yet.
He sees markets moving in cycles and believes that most cycles take 20, 30 years to play out.
He’s bullish on Asia, particularly China but also recommends Singapore and Japan in the video. He also recommends North Korea and would put all of his money into the country if he was allowed (which he isn’t).
How to play China like Jim Rogers
Jim has been bullish on China for more than 30 years and continues to be positive on the country. He picks his moments though, and after some time on the sidelines, he’s recently started to buy up a few more Chinese stocks.
Jim says that the way he is playing China is to follow the government. The Chinese government are spending lots of money this year ($2.45 trillion to be precise) and the best way to profit is to follow where the money’s going.
According to Rogers, anyone can see where the money’s going so it’s just a case of finding strong companies that may benefit and putting some money in. Railroads, water, defence and tourism. These are all areas that will see big government spending over the next couple of years as China seeks to improve infrastructure, tackle the nation’s water problem and beef up it’s national security.
So with that information in mind, how can investors benefit? What about these ideas?
Anhui Conch Cement Co. and Sany Heavy Industry Co. are two construction-related companies that could benefit from increased government spending on infrastructure.
China Easter Airlines Corp. is China’s second-largest airline carrier set to benefit from the boom in Chinese tourism.
Jiangxi Copper Co. could do well as China rolls out national power grids mostly made from copper.
China Green Agriculture Inc. might prosper with the country’s increasing food demands.
China Water Industry Group Ltd. may be the answer to the nation’s dramatic water problems.
Can you think of any Chinese stocks that could benefit from more government spending? Please comment below.
Just picked up ‘Finding the Next Starbucks: How to identify and invest in the hot stocks of tomorrow’ by Michael Moe.
It’s not a very new book, it was actually published in 2006 but I’m finding it pretty good so far. As you might guess, the gist of the book is to try and find the next hot stock; another Starbucks, Amazon or Google. The ten and twenty baggers as Peter Lynch likes to call them.
Finding the Next Starbucks
The author Michael Moe knows what he’s talking about. He’s been on Wall Street for over 20 years and was one of the first research analysts to identify Starbucks as a huge opportunity in 1992. Back then the company was worth around $220 million and today it’s worth over $56 billion, having gone up thousands of percent.
But that isn’t the only impressive stock pick Moe has made over the years and in this book he shows how he goes about looking for similar hot companies or Starbucks-esque ‘supernovas’. For example, he also picked Apollo Group and even called Google cheap at the time of IPO.
Opportunities in smaller cap stocks
Michael Moe strongly believes that if you want to obtain super sized returns you need to look at smaller companies. Moe claims that small-cap stocks are overlooked by Wall Street since they do not have the size to take large volume orders. That represents an opportunity for smaller investors to capitalise on their own knowledge and find the next big company while it’s still in it’s infancy. As the author states, nearly all big companies today were small caps once.
For example: Apple, Gilead Sciences, Nike, Home Depot, Wal-Mart, Cisco, Yahoo!, all these stocks began with a market cap (at IPO) of less than $1 billion.
After going through the book it’s clear that although Moe likes smaller companies that does not necessarily mean penny stocks. In general, it seems that Moe finds his best success stories in the small-cap range – between $200 million to $1 billion or there abouts. The reason for this is clear. Small-cap stocks outperform large stocks over time. For example $10,000 invested in small caps in 1973 would have been worth over $1 million dollars in 2005 (an annual gain of 16.3%) while $10,000 invested in large-cap stocks would have yielded only $127,963 (8.6% annual return).
Looking for bargains
One of the things Moe is keen to stress in the book is that finding the next Starbucks or Apple stock does not come down to luck. Rather it comes down to a lot of research and by using a system that he has honed over the years.
The essence of which is to find companies in their infancy that possess some key characteristics.
Firstly, Michael Moe suggests that earnings are the most important criteria by which to assess a stock and that a stock price will move in direct relation to it’s earnings over time (a fact the author repeats throughout the book).
Second, Moe talks about the ten commandments that govern his search process. These cover the long-term and short-term outlook of the company, the valuation, the management and the industry it operates in.
The Four Ps
Moe then writes about the 4 Ps that help him come to an investment decision. Which are:
Essentially then, Moe looks for companies with great people and he considers good management to be the biggest factor in finding ‘supernova’ stocks.
The company’s product must also be good. It must be unique and hard to replicate elsewhere and it could well be causing a stir among those who have come across it.
Potential is all about the opportunities for open-ended growth of the company. And this also comes down to global trends or as Moe puts it ‘megatrends’.
Finally, predictability means taking a professional, value approach to investing and minimising risk. Trying to find companies that in their short histories have been able to consistently drive up their revenue.
Without going too much further into the book, another key concept that Moe puts across in ‘Finding the Next Starbucks’ is the impact of ‘megatrends’, a term first coined by John Naisbitt. Moe gives several examples of these:
The Agrarian economy in the 18th Century, the Industrial revolution, the manufacturing boom around 1910, the services era in the 70s and the information economy brought on by the invention of the Internet.
Moe claims that we now exist in a knowledge megatrend and that knowledge jobs such as IT, health and business services will excel. The key is to study the world, look at what is happening and what people are talking about. Look at the things that are really changing people’s lives and where the money is flowing.
If the past is anything to go by, looking for a megatrend and hitching a ride seems like the surest way to get on board a tenbagger supernova and reaping the rewards.
All in all ‘Finding the Next Starbucks’ is an excellent book for stock pickers and written in a similar vein to Peter Lynch’s One Up on Wall Street or Chris Camillo’s Laughing at Wall Street. It’s easy to understand, somewhat inspiring, and a great read for those looking for small high growth stocks. While this book should not be number one on the list for new traders or investors it’s definitely quite high up.
US stock markets fell yesterday indicating a new stock market warning with the Dow Jones Industrial Average dropping -0.25% while the Nasdaq sank -0.28% and the S&P 500 fell -0.11%. The fall comes after four days of rallies took global markets to a record value of $63.8 trillion and saw the S&P 500 hit another new high at 1911.91.
The elevated position of most stock markets appears to be reaching new heights now and it would be no surprise to see a significant period of weakness come in over the next few days and weeks. Most notably, volatility levels and other market indicators are suggesting that a market top may be near. Volatile price action in the last hour of trading yesterday may also indicate a shift in trader sentiment.
VIX hits lowest since 2013
The CBOE Volatility Index, known as the VIX, dropped to the lowest level since March 2013 on Monday and has stayed under 15 for the last 16 of 28 trading days. The VIX now trades at a historically low level of just 11.68 and this has caused traders to load up on VIX call options according to research from Bloomberg. In fact, VIX calls have reached their highest levels since 2008 as traders anticipate a spring back in volatility over the next couple of weeks.
As you can see from the chart, the VIX does not usually stay at such low levels for long so volatility could well ramp up soon.
Source: Yahoo! Finance
High levels of bullish sentiment and significant deviation from market average
As well as the significant drop in volatility levels, StreetTalkLive report that bullish sentiment among investors as reached high levels and such levels have been consistent with previous market peaks.
StreetTalkLive also show how the stock market has gotten ahead of itself and diverged from the 36 month average significantly. This has been another good indicator of market tops in the past as shown in the below chart.
Caution from John Hussman
Further indication of Hedge fund manager John Hussman reports that the fund’s measure of current market conditions present “overvalued, overbought, overbullish extremes [that] match only a handful of prior historical instances including 1929, 1972, 1987, 2000, and 2007”. Hussman goes on to suggest that the fund expects 10 year S&P 500 total returns of just 2.3% annually from current prices.
A number of important market indicators have reached extreme levels and this is likely a precursor to a rise in market volatility over the next couple of weeks that could lead to a significant market correction of 10-20% or more. Traders should use extra caution at this time and refrain from entering any new positions until the overbought condition has cleared.
I have been trading stocks and shares for at least 6 years now so these tips for share trading come from direct experience in the markets.
For me, stocks are the best instruments to trade. There are so many of them that there is always an opportunity to be found.
14 tips for share trading
Stick to what you know
My number one tip for successful share trading is to stick to what you know as that way you will always come out ahead. Your interests and passions can often lead you to know more about an industry than the average Wall Street trader does. If you stick to the companies you know a lot about, industries that you are interested in, then you’ll be able to foresee changes more quickly.
Never follow tips
When I say never follow tips I don’t mean stop reading this list. I mean you should never, ever follow a tip to buy a stock from your broker or man in the street. (At least not without doing your due diligence first at least).
There’s several reasons for this. First, your broker has a conflict of interest. She wants you to buy the stock so that she can get a commission so she doesn’t really care if the stock goes up or down. Also, if she was actually a good share trader she’d be doing that instead of stockbroking.
Second, if you get a tip from someone else, you have no idea what their intentions are. That person may have bought the stock at much lower levels, or they may have already hedged it with another short trade. They probably haven’t told you about their exit strategy either.
Volume can indicate direction
It’s not always the case but volume often shows direction and this is particularly true for smaller cap stocks with less liquidity. Basically, when a stock moves up and this is accompanied by an unusual increase in volume it shows that investors know something and they’re bullish.
Take a look at this stock as an example. $EXH provides equipment to oil producers and as you can see the stock moved up strongly in August 2013 accompanied by very high volume. In fact, volume surged from an average of just 2-3 million shares traded a day to $15m shares. The strong volume indicated investors were bullish and this turned out to be a good buy signal.
Use money management
This tip could easily be number one but you should probably know about it by now. In order to profit from stock market moves, it’s important to work out how much money you are going to risk and this is best done in a scientific way. That way, you can develop your own system and never put too much capital in any one trade.
Stocks do not always trend
There’s a couple of interesting points to note about stocks. First is that they don’t always trend. In fact some stocks never trend at all.
You see, every stock has it’s own personality, some are high risk, some are defensive, some are speculative and some are high growth. Peter Lynch does a great job talking about the different personalities of stocks in One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Working out the personality of a stock is great way to set up your money management.
The second point is that stocks often move aggressively, which means you need to be invested at the right time in order to capture the gain. Stocks frequently jump on the open or rally 10-20% in one day and then do nothing for the rest of the month or even year.
Shorting stocks requires extra care
Plenty of stocks lose money and several go to zero. However, backtesting shows that shorting stocks is a very difficult thing to do. From countless tests that I have performed shorting shares, I have found no real method that gives results anything better than break-even.
Most of your gains will come from a handful of shares
Traders and investors who have been around for a while all seem to say the same thing when it comes to share trading returns. That is, that most of your profits come from just a handful of shares. That’s why it’s important to have a good portfolio of attractive stocks. Capturing those ten and twenty baggers, the one’s that go up 100%, 200%, 1000%, are the ones that really help a portfolio grow. The rest of the portfolio usually just hovers around break-even.
Don’t fight the tape
Even if you do the hard work and find a great stock, you should never become too tied down to it. Even George Soros will change his mind if the trade is not going his way. There’s no more point trying to fight the market. If you have a stock that is going down when you think it should go up, you should cut your losses and look for a better opportunity.
Shorter term timeframes are more risky
Trading commissions and the spread (difference between bid and ask price of a stock), mean that short term trading is more difficult. Short term trading is also dominated by algorithms and high frequency trading. Fundamental factors like valuations need much longer periods in order to come into effect. Weekly and monthly timeframes are easier to trade.
Another thing I have found over the years is that the smoother a stock comes down, the smoother it goes up. I tend to stay away from volatile, erratic stocks and look for those that trade in smooth trends with little noise. Those stocks where most of the candlesticks have very short wicks.
A stock can always go higher
Most of the profits from a share portfolio can come from just one or two stocks so it makes sense that those big winners will have hit multiple new highs on their way. For example, a stock like Coca-Cola will have made tens of thousands of new highs through it’s history. The conclusion is that a stock can always go higher and for the same reason, it can always go lower.
Test your stock-picking on historical data
It’s true that a stock can always go higher but does that necessarily mean you should buy any stock that makes a new high?
Not likely. A better way is to get hold of historical stock market data and test your strategies on the data. That’s the only real way of finding out what worked in the past and therefore, what is likely to work in the future.
Don’t hold too many
Going back to the first of these 14 tips for share trading tip, when you buy a stock, buy something that you know a lot about. That means holding a small enough portfolio so you can understand what is going on, not holding an unmanageable bag of 30, 40 stocks.
Put in the work
Look at the financial ratios and the balance sheet. Read up what people are saying about it on Seeking Alpha, read the annual report and listen to the company’s most recent conference call. Read as many books as you can about trading and seek out the latest journals If you put in a bit of work at the beginning, you’ll be able to pick a winner and will have less work to do in the long run.
I hope you enjoyed these tips for share trading. For more tips, advice, and secrets, make sure to check out my new book which is on Amazon and discounted for a limited period of time:
US stock markets reversed losses on Monday after ISM non-manufacturing numbers came out and Billionaire investor Warren Buffett spoke enthusiastically about the state of American business. A contraction in Chinese manufacturing, and continuing violence in Ukraine, caused markets to open lower but stock markets were not in the red for too long and managed to finish the session up by around 0.10%.
There were plenty of stocks in the green yesterday and Apple shares gained around 1.4%, taking the stock past the $600 mark for the first time since 2012. The company is now higher by around 15% since the company reported earnings a few weeks ago and over 50% higher than it’s April 2013 low.
Is Apple stock still a good buy?
Clearly, Apple at $380 was excellent value and I spoke at the time that the plunge from $700 was a tremendous opportunity. Buying into such a quality company at such cheap prices has meant that those brave enough to invest will now be looking at 50+% gains without having to endure any pain at all.
Now that the stock is up to $600 again, a potential investment is likely to be more risky and buying now could lead to some losses in the short term. Longer term, however, I continue to see Apple as one of the best large cap stocks available, and for many of the same reasons that I discussed in my article for Seeking Alpha here.
Most importantly, the reasons for buying Apple stock then, still apply today. Notably, the financial conditions still indicate excellent value.
PE is cheap at 14.36 and PEG is still below 1 at 0.96. Price to sales is still reasonable, and the recent strong earnings results mean that Apple has managed to grow EPS at an average of 42% over the last 5 years. These are strong numbers and make a good case for still investing in the company.
Another way of looking at the stock is to do a DCF (discount cash forecast) valuation.
Currently, Apple operates with a trailing twelve month EPS of $41.85 while EPS is expected to grow at 14.99% over the next 5 years.
If we use a more conservative measure of 10% over the next 5 years, falling to 3% thereafter (in line with inflation) and assume a discount rate of 11%, we get a DCF valuation of $718.64.
That means Apple at $600, trades at a 20% discount to the DCF measure, using a conservative estimate for growth.
Based on the evidence, Apple still looks like a great investment even though the stock is now up past the $600 mark.