Forum Archive Index - February 2003

["Morgy" <morgy40@xtra.co.nz>]

Travis

You have written inter alia as follows,

"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."





Here is what Benjamin Graham has to say about your method, I have lifted the
quote and associated passage from a article on a web site that was posted
yesterday entitled Bubble Troubles Part 3 It Ain't Over Yet for the Stock
Market  by Jim Puplava
http://www.financialsense.com/stormwatch/oldupdates/2002/0927.htm


The problem with forecasted earnings is that they are highly unreliable and
subject to constant change. The father of securities analysis, Benjamin
Graham, did not believe in predicting earnings for stocks. In his last book,
The Intelligent Investor, Graham urged investors to look at stocks based on
their investment merit with value measures. Benjamin Graham was an eminent
security analyst. The fact that he declined to predict earnings reflects his
long experienced view that he did not have much confidence in his own
ability or in others in making predictions, especially long-term ones.
Graham felt that profit forecasting was too inaccurate to be useful for
intelligent investing. Ben Graham believed that future earnings were already
incorporated into market prices. Using forecasted earnings for valuation
measures gave way to the danger of double-counting for good earnings
prospects. Commenting on their inherent inaccuracy,

 Graham wrote,
"In forty-four years of Wall Street experience and study I have never seen
dependable calculations made about common-stock values, or related
investment policies that went beyond simple arithmetic or the most
elementary algebra. Whenever calculus is brought in, or higher algebra, you
could take it as a warning signal that the operator was trying to substitute
theory for experience, and usually also to give to speculation the deceptive
guise of investment."

Graham, Benjamin, The Intelligent Investor: A Book of Practical Counsel,
Harper Collins, 1985, p. 321


I came across the above passage while reading the associated article (the
article not being relevant to your thread in any way) and having read your
email from earlier today and being highly amused at your ability to
"predict"  future value based on "assumptions" of future profits it sort of
jumped out at me.
There are a lot of unemployed analysts around at the moment who also assumed
future profits based on there predictive assumptions.

Regards

Morgy




----- 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
>
>
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