I received some questions from a good friend (Ken) about my previous posts. I answered these on May 29th, 2017. The answers became very relevant past Friday (June 9th, 2017) afternoon when Goldman Sacs announced Tech was in bubble territory and there was a massive rotation out of tech to Energy. Notice my Answer #3 referring to that below (in bold).
I am marking a key paragraph in Pink for my future reference.
Am posting all questions along with answers in this post:
- This is trivial, but which graphing software are you using? – tradingview.com mostly.
- Are you charging people for insights, or considering doing so, or is this simply done for the joy of discussion? – for right now, teaching is the best form of learning, putting these together allows me to refine my understanding. Knowledge in my books should always flow freely. If I won’t have given it out for free, you will not have asked these questions and I will have never gotten an opportunity to understand things even better while trying to answer these questions.
- Given that investment (other than some indexes) essentially requires selecting particular vehicles, how are these generalized theories helpful (even if correct)? – Towards the end of http://malhotra.ca/index.php/2017/05/27/us-stock-market-2017/, I do mention some trading vehicles I am using. “For right now I will be exiting Financials (XLF, WFC, BAC, JPM etc) and very soon will be exiting Technology (XLK, AAPL, FB, NVDA etc) and basic industry (XLI, CAT etc). And will be looking at adding Energy, Utilities, Consumer non-cyclicals and Precious Metals.“ However, you are correct that in most scenarios the choice of trading vehicles is left to the reader or their investment advisor. I do not postulate their correctness. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market’s general position and outlook.
- None of the approaches offers a decent insight to the problem of “when to sell”. – Not all Posts do but two of them http://malhotra.ca/index.php/2017/05/27/us-stock-market-2017/ and http://malhotra.ca/index.php/2017/05/20/canadian-housing-bubble/ clearly label out the selling timeframe. There are 3 ways of solving the “when to sell” and it’s corollary “when to buy” problem, (1) the Warren Buffet way – if there is a better opportunity, sell something and use it for that opportunity, if there’s no good opportunity, then sit on cash. If trade goes other way then buy some more (2) the hedge fund / Goldman way – look at a fundamental shift mostly in government policy, then find the right vehicle that generates a decent risk:reward ratio. Once it meets the intended reward, sell it and take your profit. if it goes other way temporarily, then hold. and (3) a Quant / Day Trader way where you sell or buy every time volatility peaks and it’s close to the edge of a Bollinger band, if the trade goes the other way, let it hit your stop loss. Take smaller losses, never take a big loss.
- There is a vast difference between employing statistical methods to measure variability (thus risk) in equity markets where leverage opportunities are quite limited and visibility and liquidity is high vs the same in residential real estate where leverage can be very high, visibility low and liquidity extremely variable. – Agreed that it looks that way. Real estate markets in some extent can be seen as options markets, not every buyer wants the same expiration date / strike price for the same instrument and options markets can have variable liquidity. As regards to leverage, most brokers usually provide a 1:20 – 1:40 leverage using futures vs a 1:5 found in housing. And futures today drive the market in significant manner.
- Another unquantified aspect relates to the significantly different personal attachment to a residence vs that for an equity investment. – Bell curve of a normal distribution comes to mind here. Some will have very high attachment, some not at all and most somewhere in the middle.
- Wrt the various theories and interpretation, have you considered the parallels with religion, and the interpretations of various dogma? Both attempt to offer nostrums that capture the outcomes of a great many hitherto largely unknown forces and purport to provide forward guidance. – that’s a little too far fetched for me. I just do math when possible and if not, then an evidence based empirically verified theory. I use theories to provide context and a basis for disciplined thinking.
- Khaneman correctly reports on the greater relevance placed by individuals on loss aversion when there may be no statistical support. He overlooks or under emphasizes the relevant aspect that avoiding critical losses keeps one alive. I know of many cases with outsized wins followed by catastrophic losses where that individual was wiped out and never recovered? Somewhat similar to a race car crash? – case in point Bill Ackman and VRX