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Volatility Is Not Risk

Tyler Durden's picture





 

From John Goltermann of Overmeyer Asset Management

Volatility Risk

John Bogle, the founder and CEO of Vanguard Funds, appeared on CNBC a few weeks ago to be queried on the Facebook IPO debacle. In his interview, he provided a great nugget of wisdom with the following statement: “Betting on value is an intelligent way to own property as compared to trading in stocks.” During the interview, he also commented that there are way too many people speculating on price and very few who focus on value. As usual, John’s clearthinking conveys the right way to approach investing. We agree that value, or lack of value, is the true source of reward and risk.

Dramatic price moves and the substantial volatility of recent years is why many people struggle with the current market. Volatility understandably creates anxiety, especially with the cost of living rising as it is. Many would rather take a zero return in cash and bank deposits than be subjected to the emotional adversity of a negative month. This is a situation that will likely remain the case for some time, but this is also why values abound!

Let’s face it: downward volatility is really the only type that unnerves investors. Upward volatility is welcome all day long. While I ultimately want to focus on framing the reality of market volatility, it may help to provide some background on one of the major sources of its occurrence.

Joseph Schumpeter, an economist and political scientist, wrote that an economic “recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustments, new maladjustment of its own…” These words cogently remind us that while government stimulus – through low rates or other measures – can help in the near term, ultimately it does not actually solve problems. It merely moves them around and defers them. It is important for investors to realize that many still look to the U.S. government to address the festering problems of high unemployment and declining competitiveness (the true legacies of excessive debt expansion), but they fail to realize that it was the government and the central bank that were largely responsible for those problems in the first place.

By providing stimulus after stimulus during periods when the system was trying to cleanse itself, needed adjustments were deferred to later periods and possibly even handed it off to subsequent generations. Today, the continued clamor for government solutions empowers Congress, the President and the Fed to try to tweak, minister, guide, cajole and jawbone the economy, making for a highly charged political backdrop and a very unpredictable, volatile investment environment.

Some may point to Wall Street as the source of today’s problems, but the truth is that banks simply acted on incentives that were put in place by Congress (through Fannie Mae and Freddie Mac), by the Federal Reserve (through monetary policy), by the Glass- Steagall Act of 1933 (which created the FDIC) and by the repeal of the provisions of the Banking Act of 1933 that limited affiliations between commercial banking and securities firms.

In the last 25 years, the government has done much to encourage private sector borrowing and relax regulation, and in the process has created a speculative economy with high debt levels.

Increasing debt levels was a politically convenient way to mask declining real wages and a way for people to maintain their living standards. While the government will likely continue to pick winners (speculators) and losers (savers), it can do very little to fix current imbalances or create a competitive economy.

For jobs, it can only hire people directly or encourage industries to expand through subsidies; but without offsetting tax increases, this furthers a rapidly deteriorating fiscal condition, which in turn impairs confidence. In a similar vein, trying to stabilize housing and improve wealth creation by holding interest rates too low simply encourages speculation to the peril of those who don’t speculate well and to the benefit of those who do. Actions have reactions, and not all of them are constructive.

I could write ad nauseam about what’s happening in investment markets, but what should ultimately matter to an investor is “value” – that is, what is received in return for capital invested. Price volatility, which is independent of value, too often is regarded  as something to be avoided. In fact, the best assets often have high levels of price volatility. Downward volatility itself causes a momentum effect of continued selling, which brings prices that make for attractive entry points. As the chart below indicates, high volatility (as indicated by the VIX index) occurs often at the moment of the lowest price (greatest value), and is coincident with the highest fear, lowest lagging returns and the best subsequent returns. While high volatility doesn’t predict future average returns, it can be a useful guide for productive investing.

This concept also applies to individual investments. Assuming the fundamentals of the investment haven’t permanently changed for the worse, great investments can be subject to significant downside volatility for no apparent reason and can stay below their value for long periods of time. This is what makes patience and focus invaluable attributes of successful investors.

Adverse markets come and go, as do market liquidity and confidence, but it is a universal truth that long-term investments (not speculations) are better made in adverse markets than in euphoric markets because good values are more pervasive. The question is not when and by how much something might go up, but what the risk is and how much you get paid to take it! And everything has risk of some kind, including cash and CDs; one just needs to pick the risks that are best to take.

What makes for a good investment is price. Price is everything. You need to receive value in excess of the price paid. An investment’s value is the amount of real cash its underlying assets can reasonably be expected to deliver to its shareholders in the future, discounted for its risk – period. The investment’s price will either be higher than its value (an uncompensated risk), the same as (neutral) or lower than its value (a compensated risk). But since value is an imprecise measurement, the best one can do is to build in a margin of safety by buying investments that are at deep discounts to a reasonable estimated value.

Too many investors let an investment’s short-term price movements, or perceptions of short-term price movements drive their decisions. But since short-term price moves are unknowable, irrelevant and independent of investment merits, this is not worthy of any time spent analyzing.

If short-term price moves were knowable, then a cadre of top-performing chartists and market technicians would have far greater net worths than Warren Buffett, Charlie Munger and the Saudi Royal Family. They would need only apply leverage to their process and repeat it a few times in order to accrue hundreds of billions of dollars. Question: How many market technicians occupy the Forbes 400? Answer: Zero. Why? Because successfully guessing future price moves based on charts, MACD indicators or tea leaves is not a repeatable process. Investors who do this generally have poor outcomes because they are pursuing answers to the wrong question.

The right question is: where is the value?

The Facebook IPO was a perfect demonstration of this. Many people bent over backward to procure shares in the offering because of the strong consensus that it was a one-way bet that would rise in price post-release. A month of television airtime was spent ahead of the opening trade talking about the IPO. The focus on price, without regard to value, cost many individuals and institutions significant amounts of capital.

This leads to the definition of risk. Unfortunately for many, the investment industry often operates on the premise that price volatility equals risk and is something to be minimized or avoided. This reflects faulty logic because price volatility is independent of risk. Seth Klarman of the Baupost Group properly defines risk as 1) the size of a potential loss and 2) the probability of its  occurrence. He refers to losses of a permanent nature (not volatility-related), and I would add that they need to be measured in real (i.e, after inflation) terms. For example, cash has lost significant value through time as it is continually debased by the Fed.

Although cash experiences no price volatility, it is risky.

To illustrate what risk really is, consider the following chart:

Kodak cameras and film enjoyed product ubiquity at one time, but this didn’t prevent a 100% loss of capital for buy-and-hold investors who became complacent about the company’s dividend, management and/or the brand name. Ubiquity does not provide a margin of safety and great companies can see abrupt and permanent losses in their primary assets’ value. And if someone tells you that that can’t happen to certain companies, and gives you a host of reasons why not, put one hand over your wallet!

No level of financial analysis performed when business is good can tell you what will happen when a company’s assets begin to lose relevance or deplete. Kodak, RIMM, Nokia and a multitude of others, serve as cautionary tales as to what can happen to a business and its stock price when its intellectual property loses its usefulness. This is risk.

To avoid such risk, attention needs to be paid to price, and conservative assumptions need to be made to estimate value. This will go a long way towards stacking the odds in your favor of having successful outcomes over time, and can help relieve the anxiety that comes with gutwrenching market gyrations and gloomy projections of the future.

For today’s challenging environment, mental preparedness and a focus on what truly matters is paramount. While these are indeed tremendously tricky times to invest due to the macroeconomic and political factors that receive so much attention, these are also great times for those who have both capital and time and who focus on value. For those who speculate on price, these are perilous times because of the pervasive view that volatility is risk and the huge amounts of capital that is traded accordingly. Great assets bought well give comfort that no matter what prices do, there is something tangible and real that backstops the price and reduces risk.

 


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Fri, 06/15/2012 - 17:54 | Link to Comment urbanelf
urbanelf's picture

I prefer metal preparedness over mental preparedness.

Fri, 06/15/2012 - 18:05 | Link to Comment TheGardener
TheGardener's picture

Good first, sarc tag out of the way , jingo is the way to go.

 

You prefer nothing.

Fri, 06/15/2012 - 17:58 | Link to Comment SilverTree
Fri, 06/15/2012 - 17:55 | Link to Comment SemperFord
SemperFord's picture

judging from the previous spikes, is the VIX about to soar again?

Fri, 06/15/2012 - 18:10 | Link to Comment indianajohns04
indianajohns04's picture

I hope so bought 2,000 UVXY @ 14.88! I understand that it is pure gambling but it'll be a good hedge against my IRA.

Fri, 06/15/2012 - 19:18 | Link to Comment sablya
sablya's picture

Wow, did you buy after hours?  That's an amazing buy.  I have 2000 UVXY also but I'm closer to 16.  I don't mind though.  I invest in volatility....lol, volatility **is** value. :)

Sat, 06/16/2012 - 07:22 | Link to Comment ndotken
ndotken's picture

Buying UVXY or VXX or any other inverse ETF is not gambling if properly used as a hedge on your portfolio.  That's what it was designed to be used for.  But in case you didn't know, those types of ETF's and ETN's were never intended to be long investments.  In fact, their prospectus even states that those investments WILL, given a sufficiently long holding period, result in a 100% loss of captial.  I can't think of any riskier investment than one with a guaranteed 100% loss.  Beware!!!

Fri, 06/15/2012 - 17:58 | Link to Comment hugovanderbubble
hugovanderbubble's picture

VIX = 100 next week

Fri, 06/15/2012 - 18:50 | Link to Comment kalasend
kalasend's picture

Yeah, I think so too.

Problem is, I've seen similar comments on many boards these days. I guess we are all going to get rich?

Fri, 06/15/2012 - 17:59 | Link to Comment Clint Liquor
Clint Liquor's picture

The Markets have become so corrupt and manipulated none of this is applicable anymore. Price has become an illusion.

Fear not for HFT is providing all the nanoseconds of liquity the market needs.

Sat, 06/16/2012 - 23:30 | Link to Comment Thomas
Thomas's picture

The Fed has rendered our hard earned and saved capital worthless by flooding the market with free capital. What a bunch of dicks. When does the violence begin.

Fri, 06/15/2012 - 17:59 | Link to Comment ACP
ACP's picture

Hey, don't knock tea leaves!

Fri, 06/15/2012 - 18:00 | Link to Comment El Oregonian
El Oregonian's picture

Lawyers for Ron Paul have taken over Paul's campaign and will have him nominated as the Presidential candidate and have Mitt Romney stripped of his delegates! Great interview and a MUST LISTEN.  Finally, some really great news on dismantling this Tyranny! Long Live Liberty!!

http://www.talkshoe.com/talkshoe/web/audioPop.jsp?episodeId=635553&cmd=apop

Fri, 06/15/2012 - 18:08 | Link to Comment SilverTree
SilverTree's picture

WTF

 

5:30 into it.

Fri, 06/15/2012 - 19:20 | Link to Comment fuu
fuu's picture

The whole thing is pretty wtf, or a Facebook commercial.

Fri, 06/15/2012 - 19:28 | Link to Comment El Oregonian
El Oregonian's picture

No, its for real. The mafioso's that are nothing more than two crime syndicates will hopefully be finally exposed.

Fri, 06/15/2012 - 18:01 | Link to Comment Mordan I
Mordan I's picture

I am. So just suck it up. Get on the that horse. I told you .... 

Fri, 06/15/2012 - 18:01 | Link to Comment TheGardener
TheGardener's picture

Prices makes for civilized exchanges of goods.  Dramatic changes in valuations that can

not be priced into human behavior make for big upheavals.

Fri, 06/15/2012 - 18:02 | Link to Comment Pairadimes
Pairadimes's picture

And in other news, NASA reports that the sun is still hot.

Fri, 06/15/2012 - 18:09 | Link to Comment Mordan I
Mordan I's picture

It has been a while but I am here. Change no and yes. Maybe I should give myself a break? 

 

Fri, 06/15/2012 - 18:27 | Link to Comment TrillionDollarBoner
TrillionDollarBoner's picture

Yes, I think you should give everyone a break and stop clogging up the airwaves with impenetrable pseudo-poetic banalities. 

Fri, 06/15/2012 - 18:18 | Link to Comment Standard Deviant
Standard Deviant's picture

While the general point might be fine, facts are wrong.   At a minimum both Paul Tudor Jones and John Henry made use of technical analysis when amassing their fortunes.    I don't know many of the names on the list, maybe others did as well.

Fri, 06/15/2012 - 18:48 | Link to Comment junkyardjack
junkyardjack's picture

Exactly.  You can certainly create more Alpha so to speak if you can pick great names to buy but if you are ignoring price you are going to end up in trouble.  You also need to know when you cut your loses which is much harder if you believe you know the real "value" of the company that you are holding.  Stops are the most important part of trading

http://www.michaelcovel.com/2009/03/26/top-2008-earners-trend-followers-right-there/

Sat, 06/16/2012 - 08:09 | Link to Comment Diogenes
Diogenes's picture

You can add Jack Dreyfus of Dreyfus Funds to the list. He said that his "secret weapon" in the fifties was a weekly average posted daily, in other words a moving average.

Fri, 06/15/2012 - 18:21 | Link to Comment orangegeek
orangegeek's picture

Nothing wrong with the MACD (or other oscillators) when used in conjunction with other tools.

 

What is astonishing is watching the USD (down again today) continue to incrementally decline.   Half the US Index is the Euro.

 

http://bullandbearmash.com/index/usd/daily/

Fri, 06/15/2012 - 18:25 | Link to Comment Zero Govt
Zero Govt's picture

this article is a pitch for value investing 

i'm not aware it works

 

Fri, 06/15/2012 - 18:31 | Link to Comment junkyardjack
junkyardjack's picture

Even good value investing needs chart reading to know when to enter a trade

Fri, 06/15/2012 - 18:30 | Link to Comment RobotTrader
RobotTrader's picture

How many "Market Technicians" and "Gurus" predicted the following:

 

1) Greatest retail and REIT stock rally in financial market history:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=xrt&inst...

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=iyr&inst...

2) World record collapse in interest rates while debt is going up at record speed

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=%24tnx&i...

3) Two consecutive crashes in the CRB Index during Quant Sleaze programs, POMO's, LTRO's, and Twists

http://www.crbtrader.com/data.asp?page=chart&sym=CIY0&domain=crb&studies...

4)  "Cult" retail stocks like Whole Foods and ULTA making historic record runs during the worst economy in 75 years and the biggest European crisis ever.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=wfm&inst...

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ulta&ins...

 

Fri, 06/15/2012 - 23:53 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

that fearless, intelligent, handsome, bra-clad sell-sider~~ robo_T? 

 

Sat, 06/16/2012 - 08:59 | Link to Comment gjp
gjp's picture

It really is just corrupt madness. The market goes where the pigmen want it to, as far as they retain control. It has zero connection to value now, and to suppose it will in the future is to suppose that the market will survive in some recognizable form when they lose control, which they inevitably will.

For now, it's all momentum, and it doesn't matter if they want to put a 40+ pe on a grocer growing 15% with already excessive margins on premium priced products in an over-retailed market where most of the rich neighborhoods already have locations. It's a cult stock as you say, value means nothing and the sky is the limit.

All while Rome burns away. Sickening.

Fri, 06/15/2012 - 18:37 | Link to Comment babylon15
babylon15's picture

Drivel.

Fri, 06/15/2012 - 18:39 | Link to Comment bxy
bxy's picture

The biggest determinant of direction of any individual equity is the direction of the overall market.  Fundementals mean nothing in this bullshit, manipulated, house of cards.  Good luck with that.

Fri, 06/15/2012 - 18:40 | Link to Comment Centurion9.41
Centurion9.41's picture

Oh how I loath the long only sell side sphincter muscles....

Were do we start?

VIX - To represent, over the long period displayed, market volatility via the VIX is utter garbage.  Why not simply chart ATR as a %?  Because it would not support the sales meme.

"Value" - really what is value?  Before a product outperforms, over a given period, the concept is no different than beauty; a very very subjective opinion. 

And oh yes, my favorite... "technicals" & "technicians".  Seriously, this is where what's jammed in this sphincter, beyond his orifice, is most clearly seen.  "Fundamental Analysis" IS in form and function almost identical to Technical & Quantitative analysis.  The ONLY functional difference is in the way the data is presented.   They all use mathematics to explain and display data. 

To claim P/E ratios and all the other "fundamental" mathematics is functionally different is utter garbage. 

If their vaunted fundamental/value analysis is so great, why do they have to spend most of their time explaining why reality did not match their math?

Seriously, if you can not see the utter idiocy and evil in this paragraph:

"This leads to the definition of risk. Unfortunately for many, the investment industry often operates on the premise that price volatility equals risk and is something to be minimized or avoided. This reflects faulty logic because price volatility is independent of risk. Seth Klarman of the Baupost Group properly defines risk as 1) the size of a potential loss and 2) the probability of its  occurrence. He refers to losses of a permanent nature (not volatility-related), and I would add that they need to be measured in real (i.e, after inflation) terms."

... then please, sit down, because I have something very important to tell you.  You are a member of that baying herd of Sheeple.

God do I hate the Wall Street marketing Zombies.

Fri, 06/15/2012 - 18:56 | Link to Comment brainwashed
brainwashed's picture

I'm totally with you on this one and I have a CFA charter to boot. I can read financial statements as well as anyone in the world, but my fundamental issue is that all information that public gets is LATE. Someone already has received this information before the public does. Therefore, to analyze the value of a company using financial statements and future projections for me is absolute nonsense as someone has already done that and moved the price towards fair value in the process.

Fri, 06/15/2012 - 19:08 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Only one thing matters for consistent returns when moving big money: how much of an insider you are. Only then can you minimize the chance of being ripped off by every middleman in the WS food chain and maximize the chance of knwoing what will happen before everyone and their taxi driver does. 

Otherwise technicals are no different than card counting techniques: "sure things" used to predict which card will turn up next

Fri, 06/15/2012 - 19:58 | Link to Comment sablya
sablya's picture

That's where volatility and technical analysis come into play.  If you don't have all then there is no chance to make money in the markets.  You have to know what you want to buy and you have to be moderately close on when to buy it AND when to sell it. 

If there is no volatility then there is no opportunity.  I make money in the markets by buying when people are dumping (like UVXY today) and holding onto it until people are willing to pay me much more for it than I paid. 

I know UVXY is going to be worth more to someone in the future just because nothing has fundamentally changed in the world, and yet this "asset class" is being indiscriminately dumped.  Trash today, treasure tomorrow.  Volatility and timing of value purchases equals opportunity.

 

Sat, 06/16/2012 - 00:41 | Link to Comment emersonreturn
emersonreturn's picture

sablya, "...just because nothing has fundamentally changed in the world..."??  it seems everything is changing fundamentally?

Fri, 06/15/2012 - 21:50 | Link to Comment Global Jackie
Global Jackie's picture

But the value is not based on price. Agreed, the public gets inofmraiton late but if the public uses common sense investing; then, the value of a company should be ascertained via some rudimentary research. If you can't find the info you need, don't invest. 

 

http://www.theglobalroundhouse.com

@GlobalJackie

Sat, 06/16/2012 - 00:04 | Link to Comment SV
SV's picture

You're assuming common sense - that's your first mistake right there.  Van Tharp puts it best, "You don't trade markets - you trade your beliefs about the market."  This is no where more true than the age-old debate between the fundamental vs. technical crowds.  Both skills are needed like hunting and cooking.  Just because you can bag your kill doesn't mean you can make a good stew or meal out of it.  Both skills are highly complementary.

Fri, 06/15/2012 - 18:51 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

Only 3 letters can sum up the last 26 hours:  WTF? 

Fri, 06/15/2012 - 18:52 | Link to Comment newsguy68
newsguy68's picture

Here is some Volatility for you read.....very good read.

12 Signs Of The Europocalypse

http://govtslaves.info/12-signs-of-the-europocalypse/

Fri, 06/15/2012 - 18:51 | Link to Comment lolmao500
lolmao500's picture

http://www.haaretz.com/weekend/magazine/idf-chief-of-staff-turned-vice-p...

IDF chief of staff-turned-vice premier: 'We are not bluffing'

Moshe Ya'alon tells Ari Shavit he is preparing for war. He suggests you do the same.

Bullish... war is good for the economy right? The bigger the better! Ask Krugman the genius!

Fri, 06/15/2012 - 19:05 | Link to Comment impermanence
impermanence's picture

Receiving more value than the price paid is theft.

Fri, 06/15/2012 - 19:18 | Link to Comment jmc8888
jmc8888's picture

It's funny FDIC protection was never meant as a backstop for gambling in fraudulent products.   The separation of banks coupled WITH FDIC insurance is a sound plan.  But then with the repeal of Glass-Steagall the FDIC allowed the banks to use the gov't as a backstop for their gambling in fraudulent products. 

The answer isn't to get rid of the FDIC.  The answer IS to reinstate Glass-Steagall and separate the banks before the FDIC has to try and fail in coming up with trillions the banksters lost.  Even now they're broke.

But the banks, who control congress and the presidency, no matter the party, lobbied and bribed their way to an even sweeter deal than they had before the depression.

The author doesn't really understand that sometimes, certain aspects of laws were made to be in conjunction with others.  FDIC with Glass-Steagall, without Glass-Steagall, the FDIC is just a backstop for the banksters who hold deposits hostage.  It's sort of like in fight club where the lye burns your skin, but mix it with vinegar, and it's neutralized. 

The FDIC is important but it is critical when having such protection, that the banks are separated.  But hey Wall Street bought the best congressmen that fiat can buy, yet remember they had no role in setting the characteristics of what congress voted on, did they? Oh wait they DID.  Congress (or a gov't at large) that is bought and paid for is just another arm of Wall Street.

Glass-Steagall

 

Fri, 06/15/2012 - 19:21 | Link to Comment junkyardjack
junkyardjack's picture

I'm glad the Daily Show covered this as well so that the average American can at least get a glimpse of what is going on in this country

http://www.thedailyshow.com/watch/thu-june-14-2012/bank-yankers

Fri, 06/15/2012 - 19:19 | Link to Comment bulldung
bulldung's picture

Great advice, buy low.And the lesson the Eastman chart,sell high. Got it.

Fri, 06/15/2012 - 19:23 | Link to Comment andrewunknown
andrewunknown's picture

Take your troglodyte anti-technical arguments back to your cave, John. 

"MACD indicators"?  That's the analytical equivalent of saying the Earth is 6000 years old: why not try to develop some rudimentary, epsilon semi-moron-grade competence before you begin typing, ever again.   

"Tea leaves"?  You've probably been trotting out that facile little gem of an EMH straw man since those halcyon days when your intellectual infatuation with Fama began back in B-school.  Nice one.    

"But since short-term price moves [you don't define this, by the way] are unknowable, irrelevant and independent of investment merits" - No technician would argue that they're "knowable" - which blows your point of view to hell - and your categorical claims that they're "irrelevant and independent of investment merits" are intellectually indefensible.  Not that analytical prejudice can hear reason.

These poor technicians you deride, deluded and destitute, reduced to penury (after all, they're not in the Forbes 400) as they foolishly "guess" their capital away, "pursuing answers to the wrong question". Nevermind the inconvenient fact that there are many fabulously successful traders, asset managers, etc. who have run money using technical analysis all-but exclusively their entire careers.  Some trade short-term; others don't.  None of them would "apply leverage to their process and repeat it a few times in order to accrue hundreds of billions of dollars" because they - as you espouse - manage risk!  Moreover, they would argue - quite compellingly - that "price is everything" and that they use their "tea leaves" to exploit value...just like you.  Not the voodoo your random walk guru had you smoking back when you developed your analytical bigotry.

All that said, you, however, are an ideologically-steeped Bogle devotee zealously chipping away at the "right question" - which of course begs another question: for all your efforts, where the hell are you in the Forbes 400?

Fri, 06/15/2012 - 19:35 | Link to Comment junkyardjack
junkyardjack's picture

Bravo,

"Although there are certainly important exceptions, letter writing is often a beginning job in the industry, and as such may be handled by inexperienced traders or non-traders. Good traders trade. Good letter writers write letters." - Ed Seykota

Fri, 06/15/2012 - 19:45 | Link to Comment eclectic syncretist
eclectic syncretist's picture

Awesome post my friend.  Whichever Tyler wrote this is a real nub.  Should have just stuck to the point that the markets are more prone to intervention over the past decade or so, and that's been hard on technicians and fundamentalists alike.

Fri, 06/15/2012 - 19:59 | Link to Comment Reese Bobby
Reese Bobby's picture

Hit a nerve did he?  You remind me of the saying "the bigger the words, the smaller the ideas"

Fri, 06/15/2012 - 20:09 | Link to Comment andrewunknown
andrewunknown's picture

And you remind me that pithy ad hominem sayings are deployed as a distraction meant to divert attention from an inferior argument.  Typically it doesn't work: take your reply, for example. 

Fri, 06/15/2012 - 20:20 | Link to Comment Reese Bobby
Reese Bobby's picture

Don't get your panties in a knot sweetheart.

Fri, 06/15/2012 - 20:29 | Link to Comment andrewunknown
andrewunknown's picture

As long as you pledge to be a living witness of Matthew 5:5 and Luke 18:9-14 from this moment forward....

Fri, 06/15/2012 - 19:24 | Link to Comment junkyardjack
junkyardjack's picture

If you had no understanding of Eastman Kodak and you only used charts to invest in companies you would have shorted the company to almost zero, if you were a value investor and you believed that your thesis was correct you would have held on until the stock no longer traded.  Figure out the maximum amount of pain you are willing to take on an investment.  Analyze the price volatility to know how much of a particular security you should buy and wait to either get stopped out or profit.  Valuable investing...

Fri, 06/15/2012 - 23:35 | Link to Comment mkkby
mkkby's picture

Correct, plus 1 green.  I would add, what good is fundamental analysis when financial statements are engineered to the point of extreme fraud?

Fri, 06/15/2012 - 19:28 | Link to Comment lolmao500
lolmao500's picture

Give Obama another peace prize!

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/06/14/MND91P1OHT.DTL

U.S. expanding secret spy operations in Africa

The U.S. military is expanding its secret intelligence operations across Africa, establishing a network of small air bases to spy on terrorist hideouts from the fringes of the Sahara to jungle terrain along the equator, according to documents and people involved in the project.

Fri, 06/15/2012 - 19:35 | Link to Comment Abraxas
Abraxas's picture

He deserves the Oscar too.

Fri, 06/15/2012 - 19:34 | Link to Comment Abraxas
Abraxas's picture

A while ago I compared TA to voodoo and rain-dance at TF website, for which they called me a troll and kicked me out (seriously!). Apparently, me being Au and Ag friendly and that I accumulated some (in my mind) valuable juniors, did not prevent me from being a troll. Nor did my obvious dislike of MSM, WS swindlers, crony politicians and Jon Nadler (hate that guy). There's not much difference in opinion over there anymore. Whatever. Finally, at least some authority figures are agreeing with me on this.

Fri, 06/15/2012 - 19:45 | Link to Comment andrewunknown
andrewunknown's picture

For some people their analytical process is dogma.  As you found out, they're intolerant of criticism. 

Or maybe they thought someone denigrating their practice - and for some, success - by parroting tired caricatures like "voodoo" and "rain-dance" carried so little objective merit that they deserved to be ruthlessly cut out of their discussion. 

A bit on the draconian side, I agree, but then it does sound like they take themselves seriously.

Fri, 06/15/2012 - 20:09 | Link to Comment Reese Bobby
Reese Bobby's picture

Sounds like the website for you.

Fri, 06/15/2012 - 20:18 | Link to Comment andrewunknown
andrewunknown's picture

But not you: they like to kick trolls. 

Fri, 06/15/2012 - 20:22 | Link to Comment Reese Bobby
Reese Bobby's picture

You sound like a little kid now.  My work is done.

Fri, 06/15/2012 - 20:27 | Link to Comment andrewunknown
andrewunknown's picture

There's that ad hominem thing again. 

Fri, 06/15/2012 - 19:43 | Link to Comment Johnk
Johnk's picture

I'll take Seth Klarman over this bunch any day.

Fri, 06/15/2012 - 20:17 | Link to Comment Abraxas
Abraxas's picture

Why come here then?

Fri, 06/15/2012 - 19:52 | Link to Comment skepticCarl
skepticCarl's picture

Smart value investing is not buying low p/e, or high dividend stocks.  It is picking future winners out of a large pack of mediocrity.  That is very hard to do.  As an engineer, I grew up using Microsoft, Intel, Apple and AutoCad products, but their high p/e ratios kept me from buying the stocks in the 80's and 90's. (that's years, not stock prices) I had no sense of the potential of these companies to grow, even though some of my colleagues made the case. They retired earlier than me.

What are tomorrow's ten- hundred baggers?  A junior miner, a biotech, a solar power?  This time, I'll listen.  And I won't give a damn about it's chart, and a good entry point.

Fri, 06/15/2012 - 23:39 | Link to Comment mkkby
mkkby's picture

You'll listen and you'll still lose.  Because every dog has boosters who make convincing sales pitches.  The chart is essential because it tells you when others are believing the story and voting with their dollars.  Even more importantly it tells you when the story is over and it's time to move on.

Sat, 06/16/2012 - 01:23 | Link to Comment jimmyjames
jimmyjames's picture

What are tomorrow's ten- hundred baggers?  A junior miner, a biotech, a solar power?  This time, I'll listen.  And I won't give a damn about it's chart, and a good entry point.

***************

What are the most hated sectors in the market-

As always-Gold-

Nuclear energy-

Soon-if not already-real estate-

Eventually stock markets will be-

Debt will move into the top most hated-if it isn't already

When they get to that point-when there's blood in the streets over them and financial advisers are warning about the dangers-

It's usually time to start liking them-

Sat, 06/16/2012 - 13:43 | Link to Comment Go Tribe
Go Tribe's picture

Spanish banks. Vamos!

Fri, 06/15/2012 - 19:54 | Link to Comment Itch
Itch's picture

"Question: How many market technicians occupy the Forbes 400? Answer: Zero. Why? Because successfully guessing future price moves based on charts, MACD indicators or tea leaves is not a repeatable process. Investors who do this generally have poor outcomes because they are pursuing answers to the wrong question.

The right question is: where is the value?"

 

 

As a devils advocate, there is value in timing. Some of those indicators do give a decent reading of a turning market by their very nature, volatility breakouts and the like… its just that they send too many false signals, hence when any of them are back-tested over a long enough period, the only way anyone could have possibly profited is if they arbitrarily adjusted stops and limits in each case, i.e. luck. The rub here is that people convince themselves that they would have placed the correct stops and limits, and that’s what keeps the religion of TA ticking over. Wishful thinking. TA, used for prediction, has become a cult of wishful thinking. It boils down to unfortunate people looking for a blunt probabilistic edge in randomness, which is a tragedy and a brutal sleight of hand that should come with a public warning, and those that stick around long enough discover this with some horror.

But, if they stick around longer again they might realise that there is a huge difference between using TA for prediction and using it for reaction. A (quite bonkers) thought experiment is to imagine a quant, versed and clued-up at the very cutting edge of predictive fluid dynamics, he’s challenged with predicting where and when salmon swimming up river will jump at the mouth of a water fall. Say he has some machinery that will stab a spike at the coordinates(time, height and depth) where the fish is predicted to jump due to some analysis of the random current; he stabs once, if he misses he has to start his analysis again.

Comparatively, take a man who lives in that environment, who fishes with nothing but a spear and his honed instincts. They both go head to head. Who goes hungry? What I am trying to say is that, the cult of TA consists of people looking at past currents of the river and assuming that they will never go hungry again, without ever learning how to hunt. That’s what keeps it all going, it’s a fucking fish fantasy. And when reality shows them that they wont be cornering the fish market anytime soon, it becomes a psychosis that doubles down on its efforts, hence you get all sorts of endless gibberish of looking at the same blank and white stills of a river. No one ever thinks of picking up the spear.

Fri, 06/15/2012 - 20:10 | Link to Comment Tsar Pointless
Tsar Pointless's picture

Whatever.

I'll see ya'll at S&P 1370-ish by Wednesday morning.

Fri, 06/15/2012 - 20:19 | Link to Comment riley martini
riley martini's picture

 Don't blame banks the banks only did what congress wanted" Out of the 2 million fradulent mortages written in 2006 the banks agent committed 90% of the fraud . All of the MBS fraud was committed by the banks . So Congress wanted the banks to committ mortage and securities fraud . So why are some of the small time fraudsters at banks being prosecuted now .

  I don't think you understand what happen to the economy how the fraud drove up prices for millions of honest people.

 Saudi Royals have the benefit of billions of barrels of oil.

 Warren Buffet is an inside fascist with keys to the White House . Buffet was in more lines for bailouts than Detroit.

 Go back to school son.

Fri, 06/15/2012 - 20:29 | Link to Comment Jones79
Jones79's picture

John Henry made his start in technical futures trading, and was in the Forbes 400 in 2011; see:  http://www.liverpooldailypost.co.uk/sport/liverpool-fc/liverpool-fc-news... Also, I can't imagine that one of the Ritchie brothers or both or one of the guys in Market Wizards is not on the top 400.  I don't even know what your article says, b/c I stopped reading after I saw the bold print on the main page about your claim re: technical trading and Forbes 400.  Also, Jim Simons was #29 in 2009, who does probably all algo trading.  http://www.forbes.com/lists/2009/54/rich-list-09_James-Simons_5GZ7.html. 

Fri, 06/15/2012 - 20:41 | Link to Comment Future Jim
Future Jim's picture

Just buy low - sell high.

Fri, 06/15/2012 - 21:24 | Link to Comment bagholder
bagholder's picture

Paul Tudor Jones?

Steven A Cohen?

 

Fri, 06/15/2012 - 22:26 | Link to Comment junkyardjack
junkyardjack's picture

Who ever heard of those amateurs? Certainly not John Goltermann.  He just finished leveraging up his value investments times 300 and made 6 trillion dollars using his process.  You might have seen his name in the news recently, he just bought Hawaii...

Funny that you got down voted for refuting his argument

Fri, 06/15/2012 - 21:29 | Link to Comment BlackholeDivestment
BlackholeDivestment's picture

...value based on a black hole, hmmm, how tricky. LMAO. http://www.youtube.com/watch?v=F8cXSqB5j0M

Fri, 06/15/2012 - 21:39 | Link to Comment reader2010
reader2010's picture

Instead of using TA on a single stock, you can use TA on sectors and it works to a certain extent. 

Fri, 06/15/2012 - 21:58 | Link to Comment Global Jackie
Global Jackie's picture

Volatility does not equal risk, unless you are unprepared or have unsure footing. Cash is volatile. Those looking for a quick turn-around face the greatest risk becuase they are likely investing based on price, not value. To your points regarding teh decrease in regulations that contributed to the financial bubble burst -- lax regulations aren't a green light for being socially or fiscally irresponsible. The problem with high finance, big banks and such is the mob mentality that rules once people enter the front door of the corporate behemoths. The checks and balances system needs to extend to the local communities so that the behaviors can be integrated with a measure of responsibility. I wrote about value and Facebook's valuation a few weeks back, "Facebook, Jazz, and the Possibilities of Global Scale." 

 

http://www.theglobalroundhouse.com

@GlobalJackie

Fri, 06/15/2012 - 22:06 | Link to Comment bigwavedave
bigwavedave's picture

I use the 198 and 48 SMA -- my mate down the road uses 199 and 49. Smart bastard thinks he can time critial 'levels' better than me. LOL

Fri, 06/15/2012 - 22:29 | Link to Comment geoffb
geoffb's picture

Grandpa is that you?

Fri, 06/15/2012 - 22:32 | Link to Comment bigwavedave
bigwavedave's picture

There really is nothing to worry about. The (next) President of the USA will surely fix it. He belives that Jesus Christ your Lord physically visited America and will one day return there. Personally, I believe that Jesus Christ has already returned in the form of a Kenyan who speaks fluent Indonesian.

Fri, 06/15/2012 - 23:16 | Link to Comment GMadScientist
GMadScientist's picture

First, let's establish whether or not there actually is value.

Fri, 06/15/2012 - 23:45 | Link to Comment michaelsmith_9
michaelsmith_9's picture

For those that pay attention to forex, currently the GBPUSD is very likely at a significant reversal point.  Premium service available at www.marketoverflow.com

Sat, 06/16/2012 - 00:55 | Link to Comment Tom Green Swedish
Tom Green Swedish's picture

So what will the muppets from Seasame Street come up with next? What is the next big thing?  What is the new bubble?  Seems like a new bubble cannot be created anymore.  BRICS are fucked, housing is fucked, dot-coms are fucked but making a little comeback, commodities are sort of fucked, the dow jones is beyond fucked there isn't enough gold to go around. All the possible bubbles have been exhausted.  What do they do now?  Milk from the old bubble while they continue to receive their bailout?  When and what should be the next bubble. Please someone tell me what the next bubble is. I want in on that bubble now.

 

But seriously, please do not mock these bankers. They are America's new freedom fighters.  The government's chosen ones.  They are doing gods work.  They are saving this country one trade after another.  They create liquidity for all of us. They allocate capitol.  There is nothing these new warriors cannot do to protect our freedoms.

Sat, 06/16/2012 - 02:58 | Link to Comment Clint Liquor
Clint Liquor's picture

Next bubble? Treasuries. Get them while they're hot.

Sat, 06/16/2012 - 01:12 | Link to Comment emersonreturn
emersonreturn's picture

tom green swedish...possibly hand baskets.

Sat, 06/16/2012 - 03:25 | Link to Comment Paul Thomason
Paul Thomason's picture

Yes technical analysis can be unreliable - that's why I use the stars to forecast the market!! (sic) 'Astro-Technical Market Update: Countdown To The Big Bang!!

Sat, 06/16/2012 - 04:36 | Link to Comment Alejandrito
Alejandrito's picture

All indicators show the U.S. economic downturn in the second half, which would lead to the stock market to fall.

But we are in an election year ..

 

http://agstock.blogspot.com.es/2012/06/decorrelation-telling-us-somethin...

http://agstock.blogspot.com.es/2012/06/long-term-vision-of-sp500.html

Sat, 06/16/2012 - 06:45 | Link to Comment Grand Supercycle
Grand Supercycle's picture

Rally warning continues...

SPX & EURUSD bullish daily charts dominate further.

As mentioned, shorts will be slaughtered next week.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Sat, 06/16/2012 - 08:52 | Link to Comment Segestan
Segestan's picture

Who needs value guessing when there is an ongoing war for you're mind. Don't you know who the enemy is ?......... Anyone who can't see the -value- of socialism.

Sat, 06/16/2012 - 11:37 | Link to Comment Calls and Putz
Calls and Putz's picture

"Question: How many market technicians occupy the Forbes 400? Answer: Zero."

 

False. Paul Tudor Jones' utilization of technical analysis is well documented. He is #336 on the Forbes list.

Sat, 06/16/2012 - 12:17 | Link to Comment Satan
Satan's picture

Unfortunately the only way to determine value today is via insider information and political connections.

The game is so hopelessly rigged. Official gov. data is manipulated and company data is fraudulent.

How do you find value with tainted info?

Sat, 06/16/2012 - 15:37 | Link to Comment TraderTimm
TraderTimm's picture

I've always thought that technical traders that made it in the markets did so only because they had defined parameters for getting out of losing trades, and cashing in winning ones. I prefer technical trading, but realize this market is now another animal entirely, and has been since the rise of HFT and FED chicanery.

Technical analysis now is likely a one-way ticket to whipsaw drawdown-city, compared to the early 80's and 90's. I really hope the markets get their true 'scare' so the HFT guys shut down and slink away for awhile. As for the FED, well - if they truly do a horrible enough job perhaps that will be taken care of as well.

I haven't done any statistical analysis on volatility lately, but one thing that stuck with me is how high the mean-reversion is. It's actually one of the few things that has a antipersistent outcome to present events. Just something to consider.

Sat, 06/16/2012 - 16:12 | Link to Comment Downtoolong
Downtoolong's picture

Some may point to Wall Street as the source of today’s problems, but the truth is that banks simply acted on incentives that were put in place by Congress (through Fannie Mae and Freddie Mac), by the Federal Reserve (through monetary policy), by the Glass- Steagall Act of 1933 (which created the FDIC) and by the repeal of the provisions of the Banking Act of 1933 that limited affiliations between commercial banking and securities firms.

Who do you think really initiated these changes? The Senate Banking Committee’s recent interview of Jamie Dimon is just a recent example of how checks, balances, and a Chinese Wall between government and Wall Street have never actually existed.    

Sat, 06/16/2012 - 23:36 | Link to Comment EZYJET PILOT
EZYJET PILOT's picture

"Some may point to Wall Street as the source of today’s problems, but the truth is that banks simply acted on incentives that were put in place by Congress (through Fannie Mae and Freddie Mac), by the Federal Reserve (through monetary policy), by the Glass- Steagall Act of 1933 (which created the FDIC) and by the repeal of the provisions of the Banking Act of 1933 that limited affiliations between commercial banking and securities firms."

 

Naive statement, who owns the congress, who owns the Fed? Jpmorgan etc.

Sun, 06/17/2012 - 03:33 | Link to Comment Paul Thomason
Paul Thomason's picture

This guy in clearly myopic and cannot comprehend anything beyond the end of his own nose - and clearly has zero understanding of technical based trading.  

I have traded pure technical analysis for 20 years and done correctly it is quite reliable actually contrary to the opinion of small minds.  For this mental giant to draw a broad assumption that technical analysis aligns volatility with risk is the stuff of someone who is either on their first day on the job or perhaps they haven't a clue of the rubbish they are rolling out as expert commentary.  Any technical trader who is worth their salt understands the relative 'uselessness' of the VIX and they rarely use it if ever??.  For this guy to link the use of the VIX to technical trading speaks to his either inexperience or worse his stupidity.

Last year I ran a model portfolio that traded 74 consecutive winning trades with an average gain of over 110% per trade and every single trade was done with zero regard for fundamentals (you can see them all here) - every single trade was conducted based on clear repeatable technical studies alone.

It actually might be worthwhile for incompetents of this ilk to stick to the other stuff that probably also know little about (but pretend otherwise) and this to the grown-ups?.

 

Sun, 06/17/2012 - 10:56 | Link to Comment Alejandrito
Alejandrito's picture

A view of Russell 2000:

http://agstock.blogspot.com.es/

Sun, 06/17/2012 - 11:14 | Link to Comment michaelsmith_9
michaelsmith_9's picture

  Is Apple suggesting more downside for the markets? It appears that way.  Her is a look at our Elliott wave chart analysis http://bit.ly/NB33eL

Sun, 06/17/2012 - 11:15 | Link to Comment michaelsmith_9
michaelsmith_9's picture

Regardless of the catylist, the markets remain in a down trend.  Whether its Greece or not, there will be a catylist soon.  Elliott Wave analysis allows traders to forecasts these movements, and our charts suggests more downside ahead.  www.marketoverlfow.com

Do NOT follow this link or you will be banned from the site!