Thursday, June 16, 2016

US stock market note 2

Invest on the company, not the stock.

So here we've come to a stage where all the statistics and technical facts explain nothing about how much trust should we endorse a company. There are highs and lows of a company, and even the best company has a life cycle. Nobody think Google or Apple or Amazon will be there forever, and for most people, the question why these companies are on the top of the pyramid of the value chain, has never pass their minds. 

'Why the fuck does that matter, Daniel ? They are there because they are Google, Amazon, and Apple. That's it.' 

That is a typical thought of most investor. They simply held a belief that these brand names themselves are the magic that make the stock price rise. They check the statistics, and do the analysis, and read some news, and say, 'Ok, I think the market shows we should buy/ sell/ hold.' , as if they are talking about the weather. Yes, they are, incredulously, treating a huge company of billions in market value, thousands of workers, and millions of customers, as a natural phenomena. They measure what is thought to be indicators- humidity, wind speed- using their cutting-edge technology - radar diagram - to forecast the weather in the stock market in the following 3 days. That's how ridiculous some professional traders that handles billions USD perceive stocks. They know nothing about how to run a company.

Enough ranting. The secret of withholding trust and belief in a good company, as if they are yours, is to observe how good are their employees. For tech companies whose product is the intellectual ideas, smart and skilled workers/managers are the very key to the destiny of the company. Only the best workers guarantee the success, others are secondary. Employees are the genes of a innovative companies. The best innovation is not how mush research budget they lay on the nest annual year, or how many research papers/ patents they published every year, but how they are able to innovate themselves. This always takes the best people to succeed, for they are not slackers in thinking, and practicing it. This gene is the seed of fire of a innovative company. However, a genuinely innovative company should be able to generate great technologies that challenge the state of the art.

There are some side indicators that 'might' be useful to infer if a company has the best employ, such as the salary, the welfare, and the most exciting atmosphere that you can find and evaluate objectively on Glassdoor or other job hunting websites. Many companies claims they possess them, but how do we get a more concrete measure of employee quality, which is a combinatory measure of skill, creativity, passion, teamwork, and entrepreneurship? Difficult, isn't it ?

I henceforth put down my final rule of employee investment: how much the company invests and trusts its employee determines the resistibility and perseverance when the company faces negativities from the market forecasters. Good companies always empowers their employees.

Forecasters can earn money because they controls the media, and controls the capitals, so they can sway the stock price in a short time. While here we are talking about the operation of a company, and how companies innovate and renovate itself continuously to avoid being outrun by the environment. We are talking about the mechanism that modulates the weather.

The difference between us, and them is analogous to the difference between geoscientists and weather forecasters. We are talking about the climate, while they are talking about weather. No matter how weather changes, climate prevails in the long run. If global warming is true, then we will see tropical habitat becomes inhabitable, while Antarctic regions start to thrive eventually. This rule of investment is superior to the weather forecast investment, since we buy in very early in very low price, years before weather forecasters start noticing the trend on their radar technologies, and making waves for them.

As for when to sell ?  I would say never, or any time. You can sell it any time since your return of investment is around 10 to 100 times. You can keep it as long as the trend persists, those who goes with the trend will keep rampage the market, just like a hurricane on the tropical pacific ocean. 

US stock market note 1

Some observations of United States stock market in the last month.

1.  Its enough to transact once a month. Transaction fee is so high that it doesn't make sense to do transaction more than once per week. The fluctuation between the period are just investing emotions and speculations. One month is already the shortest duration to draw conclusion and make prediction in the next month.   (just an empirical rule, can be falsify, especially due to technological reason, such as AI trader.)

1. You must make a transection once a month. It is not recommended just leave them their.  You should either sale those bad and bid in those good, and update your information library. Otherwise you will loose touch to the market. This is the basic of basic, just in case you are very r

2. Most traders also make transaction once a week for the same reason. It doesn't matter if you will hence miss the critical time point, since you shall profit from your long term prediction of the company, not from other trader's decision. (The huge fall or rise should have a very sane base, such as company actions or fiscal report, which should have been learned by you earlier if you are not lazy and stupid. The unpredictable rise and fall, are therefore, unpredictable to rational traders. Unpredictable unpredictables are what a good trader should avoid. What traders do is to predict unpredictables.) This kind of rise and fall are too short to capture, and again, too high the transaction fee to make it profitable.

3. Market rise slow like climbing mountains, and plunge fast like jumping from cliffs. It stems from human psychology. It is the nature of human beings to evade risks. Exploiting this is the only reason we are more probable to earn money than other 'instinct traders' who doesn't aware how emotion affects human decisions.  Practically speaking, we buy when people sell, we sale when people buy. How do you know when to buy if the stock price is falling. How do you know it is the time the stock will stop falling, and is about to rise ? 1. deceleration of the falling speed. 2. When the fear comes from the bottom of your heart, buy it. Your nature-born emotion is the best anti-indicator in stock market. It is the primary pitfall that most trader fall into.

4. Evaluate the objectives not by P/E (it is a fossil), but DIVIDEND AND EPS, the most direct number telling you how much you should expect to gain after a year. ROE decides the price of the stock. Second the growth of revenue by year. This also decides the price, but only partially. Third, the demand of the target market of the company. This decides the long term growth of the company. For example, Internet infrastructures such as cables and servers are in high demands, whilst energy production and downstream refinement, distribute and retail markets are shrinking. But there are nuances which require extensive study of the markets. 

5. Don't buy what experts or newspaper recommend you (those are almost always bullshit). Don't take action simply because of some information. Action follows your judgement. Always form judgement, and that's why you will have a better chance to profit if you start to write a blog about your judgements. You can later revisit your judgement and adjust is according to reality. 

However, do use public information to confirm/refute your portfolio selections by using their logic to challenging your logics. Besides, you can make a compare group to evaluate whether your portfolio performance is better than so called 'experts'.

6.  S&P500 is a very good benchmark to test your readiness. If your portfolio cannot outperform PURE500, you should just buy PURE500. Otherwise you are just wasting your money. 

7. Never buy any kind of trust, because those traders earn managing fees regardless their performance. They never take your money as seriously as you do. Second, You will feel disgruntled wether you earn money or lose money anyways, and you will always think you are better than them (which could be very likely true.) They Can make one VERY bad decision and ruined the whole years hard work and make you think are they idiots or not ? (rhetorical question here.)

8. Here are some observation of the market demands : First, uprising consumer market in China is huge and underdeveloped. China is a close market that protects local companies. Therefore, Chinese companies targeting consumers are likely to boom multiple times. Yirendai,  a online micro loan company in China. Its price has soared like rocket after POA. Second, the infrastructure of Internet are thriving due to the strong demand. Global Energy demand is shrinking, and has a VERY BAD prospect in the long run. US Domestic Energy companies are also suffering. (Warning, no liability of any consequence of any investments incurred.) This observation is subjective, which personal bias and preference, which breath in some fresh air to this hideous but inescapable chore.

9.  However, don't put all your eggs in one basket. Even some industries are not that hyped, it doesn't mean they are not a good objective for conservative, stable, and liquid source of revenue. You just don't want to loose all your money in a financial tsunami. Balance your portfolio by all means.