Is it time to worry?

The Economist has an article this week that asks “prices are high across a range of assets. Is it time to worry?”

Before the 2007-08 financial crash, I managed to cash-in early; this, I’m sure, was luck. I was, at the time, financing a business build; fortuitously, I went much further than cashing-in assets required to support the business.

Some lost up to 50% of their worth during the 2007-08 crash. (I learnt recently, that this had happened to someone who I had known very well and who now resides in Australia.)

As the Economist alludes, should we be concerned again?

I spent nearly a year in the development of original formulae based on Benjamin Graham’s ideas. His method principally determined a ‘margin of safety’. As the Economist article explains: “the price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once”.

In my technical trading, which is the only trading I now do, ‘margin of safety’ is everything: (1) I do not carry a trade overnight and probably not over a weekend. (2) The risk of each deal does not exceed a maximum. (3) I cannot multi-task, so I trade only one thing, watch it at the moment and with awareness of what (news) might affect it.

Not many have the will, the time or the inclination to do what I do. I understand that. So we use traditional fund managers.

Graham’s ‘margin of safety’ was buying a share at a 50% discount or better. Can we get that deal today? If not, fund managers may become increasingly incautious in their dealings.

Buffett said this week, as reported by the Economist, “stocks would look cheap in three years’ time if interest rates were one percentage point higher, but not if they were three percentage points higher”.

In the meantime, for my fund investors, I’m pleased to take ‘margin of safety’ into my own hands.

P.S. My articles are few and far between currently as I work on a strategy e-book and of course my trading.

Being conditional helps us win the pub quiz

With the possible exception of day trading, all trades or investments follow a simple process:

  • Conditional
  • Trend
  • Price

The above applies no matter what my preferred method.

Conditional is something that gives us a clue as to the probability of something happening in a defined way. In other words, it’s like taking a sneak peek at an answer sheet before a pub quiz.

Conditional can be any number of things. For example, our conditional could be as simple as knowing how popular a product is, or how well somewhere is managed, or we have a particular take on how to calculate the future value of a company, or we might have a specific talent in astrology!

Whatever it is, we need something conditional to give us an advantage. Without it, with regards to the big picture, we’re guessing.

I use different conditional guides for various items. For shares and stocks over the shorter term its consistent EPS (earnings per share) percentage growth over the past ten years. Sounds complicated but is easy to obtain with most trading software.

For longer-term buys its future value, what Benjamin Graham coined Margin of Safety (MOS). I couple the MOS with the consistency of growth.  If you’ve seen my first blogs, this is difficult to do well. However, you would be daft to trade (invest) long term without it – or something that gives us a similarly favourable condition. Maybe Nick, the author of the calculations I use, can provide this information online in the future.

Also, a current favourite of mine in the medium term time frame for foreign exchange pairings (FX) and commodities is the COT (commitment of traders) report. A simple chart but one, I have learnt, through lots of trial and error, that takes many consistent weeks and months to understand correctly and use well.

Ask yourself (or your fund manager) what ‘conditional’ you (fund manager) use. Are you happy with it? Does it work? Or are we guessing?