Forum Archive Index - February 2003

["Ralph Redfern" <redrad1@xtra.co.nz>]

----- Original Message -----
From: Travis Morien <travismorien@yahoo.com>
To: <sharechat@sharechat.co.nz>
Sent: Sunday, February 09, 2003 9:21 AM
Subject: Re: [sharechat] TLS Chart Update


>
> --- Phaedrus <Phaedrus@techemail.com> wrote:
>
> > <<<< The counterargument would be to show the chart
> > of a stock that didn't stop at the same point twice,
> > and there are thousands of these.>>>>
> >  That is not a counterargument at all! A stock that
> > is continuing to make new highs doesn't stop at the
> > same point twice, and as you rightly observe, shows
> > no evidence of sustained resistance at any point.
> > Most people call that an uptrend and there are
> > indeed thousands of examples of these. Your
> > counterargument is completely specious.
>
> Support and resistance, whether it exists or not, is a
> virtually useless concept.
>
> What it basically implies is that a stock will either
> go higher than a previous high - or it won't.  Or it
> may fall below a previous low - or it won't.
>
> No way of knowing in advance.
> It doesn't work far more often than it does.
>
> What exactly are we supposed to *do* with this
> marvelous insight that stocks have support and
> resistance anyway?
> >
> >  You seem to have misunderstood the concept of
> > resistance. It is NOT something that is always
>
> Nope, i understand it completely.  I was a trader for
> many years and have a deep understanding of technical
> methods.  I don't use them because I realised that
> they don't work, and have never worked.  Successful
> traders use money management and risk management
> systems designed to work for their trend following or
> reversal systems.  I've never seen any evidence that
> any form of technical analysis works.
>
> In fact academics first got the idea of market
> efficiency by scrutinising technical analysis.
> Unfortunately they figured that if TA doesn't work
> that implied that FA didn't work, and it was 20 years
> before the CAPM and beta and all that other rubbish
> was dumped in favour of the new model (much like the
> old model) Fama/French Three Factor analysis and
> studies of regression vs momentum.
>
> > present. It means something if it is present, and it
> > means something else if it is not. It is of
> > particular significance if a level that has
> > previously been respected many times is breached. To
> > me it is self-evident that this indicates a change
> > in market sentiment.
>
> It works unless it doesn't work.  A trend will tend to
> keep going until it stops.  A stock will go up unless
> it goes down.
>
> Technical analysts have developed over many years a
> sophisticated Delphic phrasing system that enables
> them to sound like they are deeply insightful on a
> stock's progress when in fact almost everything they
> say is an each way bet.
> >
> > <<<<Any method of analysis that works only in
> > hindsight and does not indicate much of any
> > consequence in advance is of very limited
> > usefullness.>>>>
> >   Travis, that's three mistaken assumptions in a
> > single sentence!
> > (1) The trendline break Sell signal shown on the
> > chart was evident in real time. When TLS price
> > action gives a Buy signal by breaking above the
> > current downward trendline, that, too will be
> > evident in real time. I will post it here for you
> > when it happens, if you like - no hindsight
> > required! This trendline has been in place for 3
> > years now, and has been confirmed on many occasions.
> > Where, exactly, do you see hindsight as having been
> > used here?
>
> Stocks on average have about a 50% range between their
> high and their low in any given year.  Autocorrelation
> studies of the stock market show that trends in stocks
> are no more common than one would expect them to be in
> random walk data.  trends are impossible to tell apart
> from minor movements until the trend is already well
> established.
>
> However a value investor trying to estimate future
> return on equity, sales growth , profit margins and
> growth in book value could see that Telstra was
> overpriced a long time ago.  My analysis shows that it
> is *still* overpriced. (though that is relative to
> what discount rate one adopts)
>
> > (2) This system indicates NOTHING in advance, and no
> > claim of indicating anything in advance was ever
> > made. I do not believe that anyone or any system can
> > do that. This is a trend-following system - note how
> > the exit was made late and below the peak. When the
> > Buy signal comes, rest assured that it will be late,
> > and above the preceding low.
>
> What good is a system that indicates nothing in
> advance?
>
> Trend following systems have the fatal flaw that they
> result in very high turnover, which wrecks tax
> efficiency and adds massively to trading expenses.  I
> gave up trading and swore off all technical methods
> the day I did the maths working out what kind of
> pre-tax return I'd need to get to compensate for my
> trading expenses and short term CGT events compared to
> a buy and hold investor.  My failure to find a single
> role model of a famously successful trader that didn't
> go broke eventually was also powerful incentive to
> stop speculating.
>
> I was profitable as a trader, it worked while I was at
> it.  (At least until the point where I bought index
> put options just before the bear market began - a
> month or two too early and thus lost money).  I gave
> up trading because I realised that bigger money was to
> be made as an investor, with less risk.
>
> > (3) Very limited usefulness? I disagree, strongly.
> > This chart is an excellent example of just how well
> > TA can work. I built my TLS stake over the week or
> > so when it first listed (acting on the basis of my
> > trading rule #28 - buy anything the government
> > sells). I sold on the trendline break, as charted. I
> > have not held TLS for nearly four years now, but
> > will seriously consider buying again when price
> > action breaks above the current downward trendline.
>
> Why?  Do you have reason to believe that the present
> value of the future profits of Telstra exceed the
> price of Telstra stock, or are you just hoping that
> everyone else does and you'll be able to ride on the
> backs of investors?
>
> How will you know if the upward break is not just a
> false signal, and how will you estimate your future
> profit?
>
> > I know people that are still holding, having given
> > most of their gains back to the market. Other poor
> > souls have bought high, and been buying all the way
> > down. Averaging down, Dollar-cost averaging. Very
> > expensive mistakes here. How have you fared with
> > this stock?
>
> Got out pretty much at the peak, aeons ago. 8)
>
> I more or less completely got out of stocks in 1999 in
> fact.  At the time I was using technical approaches in
> addition to valuation approaches, but valuation
> approaches gave an earlier and more reliable signal.
>
> It wasn't until mid 2002 that I really seriously got
> back into the market on the long side.  Until recently
> most of my recommendations were sells (CSL and BIL
> were doozies!)
>
> >  I was somewhat amused by your choice of quote from
> > Ben Graham - from a TA perspective, you could hardly
> > have chosen a better one to illustrate exactly what
> > we are discussing. :-
> > "Market movements are important to (the investor) in
> > a practical sense (CHARTS!!!) because they
> > alternately create (depict) low price levels at
> > which he would be wise to buy (SUPPORT!!!) and high
> > price levels at which he certainly should refrain
> > from buying and probably would be wise to sell."
> > (RESISTANCE!!!)
>
> Support and resistance levels rarely ever coincide
> with levels of intrinsic under and overvaluation.  If
> they do, this is entirely coincidental.  What Graham
> is saying is that if a stock is sold so low that it is
> undervalued it then becomes a good buying opportunity.
>  If the stock is overvalued, you might consider
> selling it.  Support and resistance don't come into it
> because support and resistance levels are set by
> speculators with no concept of value, only price.
>
> The next bit says "Conceivably they may give him a
> warning signal which he will do well to heed - this in
> plain English means that he is to sell his shares
> *because* the price has gone down, foreboding worse
> things to come.  In our view such signals are
> misleading at least as often as they are helpful.
> Basically, price fluctuations have only one
> significant meaning for the true investor.  they
> provide him with an opportunity to buy when prices
> fall sharply and to sell wisely when they advance a
> great deal.  At other times he will do better if he
> forgets about the stock market and pays attention to
> his dividend returns and to the operating results of
> his companies."
>
>
>
> >  Why do you think TLS stopped rising at the price it
> > did? Maybe there were enough followers of Ben Graham
> > selling, at a level where they now considered TLS to
> > be overvalued, to stop the meteoric rise of TLS in
> > its tracks. Whatever the cause (and I believe that
> > nobody could answer that question with any
> > certainty) the collective market opinion was
> > unchanged ten months later. At 916, TLS again hit a
> > wall of selling. In a year, TLS had moved from being
> > an undervalued stock to being an overvalued stock.
>
> The stock was overvalued long before it got to those
> levels.  Telstra had ceased to be an investment and
> quickly became a speculation only a short time after
> it was floated.  Once it reached the point where
> reasonable estimates of the present value of future
> earnings were well below the selling price value
> investors had no further influence on the stock.  Why
> should they, value investors make up fewer than 5% of
> market participants?
>
> >  I am a simple, unsophisticated chap. To my mind,
> > individual stock prices are, overall, either going
> > up, down or sideways. I have found that if I buy and
> > hold the ones that are in uptrends, I make money. If
> > I buy and hold the ones that are in downtrends, I
> > lose money. I have found that it is possible to make
> > money by short-term trading stocks that are moving
> > sideways between an upper and lower boundary in a
> > trading range, though I do find this a little more
> > difficult than trend following.
>
> Have you ever calculated the before tax return you'd
> need to get to compensate for your trading and tax
> expenses compared to a buy and hold type?
>
> I'm sure you are a very clever person but if you
> really can achieve a return *double that of the
> market, for extended periods of time* then you
> shouldn't be mucking around here - go apply for a job
> with the Quantum fund, you and George Soros have a lot
> more in common than you might have supposed.
>
> >>  Travis, it is apparent that we have some deep
> > philosophical differences. In an attempt to
> > ascertain just how deep, I would like to know if you
> > accept/believe/acknowledge/admit/concede that stock
> > prices sometimes move in sustained trends, and that
> > sometimes they move sideways, ranging between an
> > upper and a lower level.
>
> Whether they move in exploitable trends that can be
> recognised ex-post, often enough to pay for
> transaction costs is debateable.
>
> Momentum in stock prices is well known, see for
> example Louis Chan, Narasimhan Jegadeesh and Josef
> Lakonishok, "Momentum Strategies" The Journal of
> Finance 51 (no. 5), December 1996 where both price and
> earnings momentum was demonstrated on a time frame of
> up to 12 months from portfolio formation.  However,
> the momentum premium was below what one might
> reasonably expect transaction and excessive tax costs
> to be for a high turnover strategy, so momentum
> investing doesn't really work in practice.
>
> On the other hand, it is also well known that over
> periods of five years or more a company's price will
> move in almost perfect correlation with earnings.  If
> a stock is genuinely undervalued (something that can
> be identified for the more extreme examples of under
> (or over) pricing) then the future movement of the
> stock is likely to be biased in the direction of the
> true valuation.  An undervalued stock is still going
> to exhibit something close to a random walk over short
> timeframes however on longer time frames trends may
> manifest themselves.
>
> If you are a chart reader, and only a chart reader,
> you are probably too busy watching the monkey to
> notice the organ grinder who is the one really calling
> the shots.  You may well mistake numerous short term
> runs with trends, and end up churning your account
> when these runs revert to normal trading.  The normal
> course of the market is for trends not to exist.  When
> a true trend is in progress it is likely that the
> majority of the movement will take place before it
> becomes apparant that this is a trend and not a
> retracement.
>
> I liken my value investing to hedging.  When you buy a
> futures contract you reserve the right to buy that
> asset at some time in the future at the price you
> bought the contract at.  A rise in prices won't hurt
> you because you'll make a hedging profit on the
> contract which you can use to offset the spot price of
> the commodity you wish to buy.
>
> If the price falls then that needn't bother you much
> as a hedger because your purchase decision was made
> with the assumption that today's price was acceptable
> to you and the chance of a fall in purchase prices was
> less significant than the consequences of a rise in
> prices.
>
> As a value investor I seek to predict the future
> return from owning a business, using mathematics
> identical to that used to value a bond.  Based on my
> assumptions of future profits, which for some
> businesses are certainly more predictable than stock
> prices, I can calculate with a reasonable degree of
> certainty what the "yield to maturity" might be from
> buying that business/bond at that particular price.
> If I find that a stock has a yield to maturity that is
> very high, say 15 or 20%pa over a ten year period, I
> consider this an outstanding opportunity and wish to
> lock in that profit by buying today.
>
> Like a hedger, I am happy with this return and try not
> to become too concerned if my decision to go long was
> a little bit early.  More often than not I'll buy more
> stock if the price falls still further and I notice
> that this business that I covet trades at still higher
> yields to maturity.
>
> Travis
> www.travismorien.com
>
> Well if charts are useless why on earth do FA people bother to publish
them ?

Ralph
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