It’s been a long while since I last made a blog post. My temporary “hiatus” from social media is meant for me to study more for my CFA exam. Meanwhile, let me share a rather nice CFA term which perhaps can be a trading meme best for recall.
What is a Spurious Correlation?
CFA- A spurious correlation – There may appear to be a relationship between two variables when, in fact, there is none.
In layman’s term – status relationship is “It’s complicated”
(anyway, sana may natawa sa joke ko. Hindi ako comedian kasi. Pero anyway, spurious correlation is actually one of the limitations of regression analysis. This can be verified via a simple wikipedia or google search. What it means is that, although there may be a significant statistical relationship between the amount of chocolates I eat and my stock market returns, it is a simple spurious correlation. There was a study before that the amount of rainfall in Arkansas had a 90+ % correlation with stock market returns. Well I can’t remember where I read that from due to the number of articles or news I read from time to time. Sometimes it’s just serendipitous so don’t take every correlation seriously.)
In my next series of posts (watch out for that – perhaps after June 7) , I will explain strategies that can be employed (General tactics and examples) to beat boring bank rates. Some topics I will cover will be
1.) Peso Cost Averaging Works When Timing Entries and Exits are Difficult
2.) Support Zone and Resistance Zone Tranches (Collar Bone Style)
3.) Spot Vomits and Buy the Puke Method / Spot Euphorias and Sell Irrational Exuberance Method
(Find Capitulations, Bullish Hammers and Reversals. Similarly Sell Exhaustions, Gravestone Dojis et al)
We will discuss the Safe Methods of Buying/ Bottom Fishing with concrete examples. I will show you many charts and patterns to prove my point.
4.) Battle Tested Methods of Trading – from the MSCI quarterly rebalancing et al. These are money making methods which you can take advantage.
Fundamentals will eventually win end of the day so find companies with good fundamentals, good margin of safety entries and good risk reward ratios. These can be boring companies but provided they give good dividends, you can weather it out and buy them slowly.
Quantify the impact of qualitative events. Qualify the impact of quantitative events as well.
First Quarter EPS is not always equal to 2nd quarter EPS, 3rd quarter EPS and 4th quarter EPS. Please check the nature of the business. It may be cyclical, seasonal et al. In general, mining companies are cyclical. Retail companies are seasonal. Ice cream sells better during hot days than rainy days and so forth. Electricity consumption is high during hot weather rather than cooler days. Retail spending is larger during Christmas and holidays prevalent during the last quarter of the year and so forth. It takes a lot of common sense in understanding businesses. Don’t always multiply by 4 whatever quarterly earnings you have to estimate the year’s income and the next years’. Use the appropriate variables when judging the net income to make your forecasts and guesstimates at the end of day to be more precise. In the end though, one must acknowledge that these are still only approximations and not actual results.
Fundamental Analysis is not as easy as it looks because analysis relies on assumptions. When these assumptions are violated, inferences, target prices are questionable. A good trader and investor must primarily know what are the variables? Is it number of stores opened? Is it the sales revenues per store? Is it the sales growth per store? How do we detect when our variables are over or under estimated? How do we correct for it?
Rather than being static, the market and the variables are dynamic. Hence, target prices of fundamental research reports are not futile but they have to be evaluated via assumptions. It is up to the reader of the research reports to assess instead of ridiculing the analysts writing the research reports. Any new information or news flow should affect the price whether in the short term or in its long term depending on the gravity of the nature of the disclosures set forth. Do not involve yourself so heavily with target prices but weigh them against the assumed variables or drivers that grow the earnings of the business. Intiendes?
I will discuss this in clearer form in my next posts with better and “in your face” examples to show that these methods work over time across many companies. The purpose is for you to become a better trader in spotting them when they come along, and hopefully profiting from them. 😀
Faceless Trader 🙂
For any trader who is currently using the strategies I will explain in the next series of posts, no worries really because as they say in the world of markets – it is always the trader who knows the rules , when to break the rules and when to use them that matters. These are all guidelines. When enough people use these methods, the “arbitrage” profits tend to go away, making the inventive, adaptive, dynamic and creative traders flourish to make a new series of tools and methods to profit again. Also, technical analysis as a method of making money has been written in so many books with methods repeated over and over again in centuries but human emotions never quite change, making the adept trader spot these arbitrage profits and make money over time. Ain’t the markets fun? There’s no one single method of making money in the markets. 😀
Come to think of it, it’s more fun writing a blog rather than status updates in social media since this is archived and easily referenced. There are times when buying breakouts must be made. There are times when you must fade a breakout. Richard Dennis coined the Turtle Method – Buying Momentum – he’s widely acknowledged as one of the father of momentum trading with Curtis Faith talking about “The Way of the Turtle” in his own book as well as Michael Covel’s Turtle Traders narrative. There’s equally a very successful trader named Larry Williams and Linda Raschke who have Oops Methodology and Turtle Soup Methods which are actually the opposite of Richard Dennis and Curtis Faith’s methods. I like Mr. Jeff Cooper’s Hit and Run Methodology too. There is one thing constant I find amongst very good traders and investors in the world. They all have systems. Fundamentalists can explain their systems. Traders can explain themselves too. Hybrids and macro investors and managers all have indicators and systems. They all know when to cut loss and when to acknowledge the failures of their own systems. 🙂