Trading on Expectations.

Firstly, an Expectation is the Average Payoff after taking into consideration the likelihood of a desirable outcome, payoff and the cost of invesment. You would do something if an expectation is positive. (i.e. a positive bet.)

E(x) = p(x). payoff - cost of investment.

Found this insightful synopsis on the various types of expectations traders (investors?) form when they buy and sell commodities in Moosa, "International Finance: An Analytical Approach", 2nd Ed. Ch. 4 pp. 107

Moosa quotes Pilbeam's[1] research concerning expectation formation mechanisms:

Extrapolative expectations mean that the exchange rate is expected to rise if it rises in the current period, and vice versa. (If ER rise now, it will continue to rise in future.)

Adaptive expectations mean that if exchange rate rises in at least 2 of the last 3 periods, then it should be expected to rise in the coming period. (If ER rising for past 2 out of 3 periods, then it will continue to rise in future.)

Regressive expectations mean that the exchange rate is expected to rise if it falls in the current period, and vice versa. (If ER is falling now, then it will rise in future.)

Rational expectations mean that expectations is formed on the basis of all available information. If this information is reflected in the forward (i.e. type of derivative) spread, then a currency that sells at a premium should be expected to rise, and vice versa. (If Forward Spread indicates rise, then a currency that sells at a premium should rise in future.)

Heterogenous expectations occur when the trader follows the majority signal. (Monkey see, monkey do.)

Contrarian expectations occur when the trader follows the opposite of the majority signal. (Monkey see, monkey do opposite.)

So as an investor with an element of speculation in you, how do u form your expectations?

[1] K. Pilbeam, 'The Profitability of Trading in the Foreign Exchange Market: Chartists, Fundamentalists and Simpletons', Oxford Economic Papers, 47, 1995, pp. 437 - 52.

Books to read for Financial Statement Analysis

This may sound obvious but if you would like to learn how to perform Fundamental Analysis on a stock the best place to start would be to get your hands on a university approved textbook for any module teaching Financial Statement Analysis.

I am using Stephen H. Penman's "Financial Statement Analysis and Security Valuation".

The textbook I am using is clear and succint and the maths isn't too complex. Just a series of Present Value calculations. (Remember Arithmetic progressions and Geometric progressions in A. Maths? Yup. its along those lines!)

Forget about spending $20 - 30 on those skimpy 300 page paperbacks that tells you how to read and analyse financial stocks. They don't have the exercises and supplementary notes and in my opinion the detail necessary to help you gain any insight into what's going on in the financial statements.

You can get cheap copies of these textbooks on University noticeboards, especially towards the end of semester. I got mine for $50. Best value for money ever.

Everything Probability.

After months of searching high and low for a primer on Applied Probability (I like stuff with Gambling involved cos its immediately applicable!), I did a search for Spread Betting on Google and came across this site: bethelp.com

In their "Learn-to Win" segment I came across several links to Probability as applied to betting:
Mathpages - The Gambler's Ruin
Probabilistic Thinking
Probability Theory
Saliu - The Fund. Formula of Gambling
Saliu - Theory of Probability

Tikam-tikam trade.

Any form of activity dependent on the vageries of the market is a gamble because the outcomes are uncertain. Therefore its best to just go with your gut feel and hope that you have lady luck on your side!

Vested in:
5 lots Aqua-Terra Supply Co. @ $0.545 - Ship Chandler
3 lots HGMetal @ $0.415. - Metal Distributor
1 lot City Spring Infrastructure Trust IPO @ $0.89

Exciting times ahead!

Life is Random.

I have been doing a lot of thinking on trading.

The more I look, read and think about the market the more I believe that the market's actions are completely random. Its behaviour is unpredictable, and that no single reason predominates.

No matter how convincing the argument, the outcome of the choices we make is uncertain. Whether we use TA, FA or a combination of both to forecast the price movements of a warrant or stock, it is only a guess.

When we risk our hardearned money on a trade with an uncertain outcome, it is in fact a gamble.

Therefore more thought should be directed at generating good trading signals, determining the optimum amount of wager per trade and the risk undertaken for a winning trade.

Blog: etfxray.wordpress.com

ETFs are all the rage these days.

Found this blog at http://etfxray.wordpress.com that offers the goss on ETF funds. Who's buying and why. How it works that sorta thing.

Check it out.

Back from a Long Break!

Sorry for the delay in updates, coming up with new entries for this post took a back seat while I sorted out my life.

I am very excited to share with you readers an interesting email I received from SGX-MAS Research Incentive Scheme detailing upcoming free seminars as part of SGX Investor Education programmes:

NLB-SGX COLLABORATION

Jan 10 "Learning about Investment Products: What are Exchange Traded Funds?"
Speaker: Ms Christine Huang
Vice President, Lyxor Asset Management

Date/Time: Wed, 10 Jan 07, 7-9pm

Venue: National Library, Level 5, Possibility Room, 100 Victoria Street

- Introduction of Exchange Traded Funds (ETFs)

- Benefits of investing in ETFs

- Overview of SGX Listed ETFs

- Investment strategies using ETFs

- Commodities ETFs

- Upcoming ETFs

PLUS - find out more about IRIS (Investment Resource Information Service at NLB). Enjoy FREE access to SGX archive information going back 10 years, ShareInvestor's market data and trading tools, NextView Advisor's investment dashboard including charting and analytics tools and Standard and Poor's credit ratings and investment research information)

Admission is FREE.
For more information on this seminar contact the National Library or SGX on 1800- CALL SGX (2255 749).

Why I am going.

Firstly, I want to know more about ETFs as a tool for accumulating wealth by an investor.

ETFs are wonderful devices to lock in your wealth while at the same time preserving it from the ravages of inflation. I am interested in getting some ETFs cos I want some exposure to blue chips which tend to do better in bullish economic cycles.

But I was thinking the other day, if you can buy blue chip stocks such as SIA, DBS, etc in Odd Lots using POEMs Unit Share function to keep your accumulation costs low. Why bother with ETFs at all?

Secondly, NLB (National Library Board) and SGX have collaborated to create this platform called the IRIS (Investment Resource Information Service at NLB). Key: Enjoy FREE access to SGX archive information going back 10 years

There's a gold mine of information right there for you. We used to have to pay to get that data, now they're offering it for free!

Stock Selection Criteria: High Dividend Yields

When selecting stocks, do not overlook Dividend Yields. I admit that there are tax implications when you receive dividend income but there is a co-relation between better managed firms and dividend payouts which should not be overlooked.

Assoc Professor Julia Sawicki of NTU Business School presented a paper at my uni entitled, "Changes in Corporate Governance and Dividend Policy Prompted by the Asian Financial Crisis" [URL][PDF], she cites the work of LaPorta(2000) in which she establishes the case that 'better governed firms pay higher dividends.'

Do a stock screen of companies paying dividends of between 5 and 10%. The average dividend yield in Singapore according to POEMS stock screen is 2.4%.

Stock Market Bubbles, Market Corrections & Bear Markets

The more you learn about investing, the scarier it gets.

I've been reading about stock market bubbles and trading psychology - the Tulipmania of 1636, the South Sea Bubble, the Great Depression, Black Monday 1987, Asian Financial Crisis and the Dot.com Bomb of 2001 - and my god, I've never been more fearful of the present state of things.

We're not just talking about market corrections here, we're talking of stock prices going down for long periods of time. Stock markets are also a leading indicator of economic activity and if the stock market points south, the entire economy is likely to go down as well!

Its easy to pick a winning stock during a bull market, but what happens in a bear market? Every stock is going down and they're all equally likely to keep going down.

Sooner or later, there'll be a major stock market correction. And I need to be prepared.

My investment focus right now is to increase income (for future investments) and protect net wealth against losses. I should look for companies that pay high dividend yields. I should stick the money in the money market or t-bills to protect. Since I am on the lowest tax bracket, I should be earning as much as I can.

Sharejunction.com

I was checking out a company which I felt had good prospects. However, I felt that the prices it is trading at today is nearing its peak and I want to get in at a lower price. I don't want to be logging on every other day to check on this stock. I want a service that sends me an email when the price hits a certain low.

So I figure surely my online brokerage service would offer me this service for free. I was wrong. They want me to pay SGD$52 for Stock Alerts which I feel should be given away for free. I say screw them.

A fellow blogger recommended sharejunction.com. Its Singapore's First Online Stock Portal and I must say, they've got a pretty sweet setup. It has useful contents (active forums with lots of people talking about this or that share), userfriendly features, clean and simple design, easy to use. I love it.

They offer a comprehensive list of Financial ratios and Technical analysis snapshots of all the company's listed on the Singapore Stock Exchange to help you figure out if the stocks are worth buying or not.

Their online portfolio valuation incorporates brokerage fees so that you're always aware of how much the middleman is getting from you.

I'm signing up only because of their free Stock Alerts via Email feature.
Best thing is: Its all Free. Thats money saved for the next stock buying spree my friends!

Snapshots:

Tags: sharejunction.com, online stock portal, free stock alerts via sharejunction.com

How to develop a penny stock portfolio

1 way to get started in stock investing on a budget without a huge capital outlay or having to borrow money is to develop a penny stock portfolio.

I recommend developing a penny stock portfolio because its a good way of developing your instincts as an investor and business acumen. The aim is to make consistent and sound investment decisions that allows you to grow your money over time.

Small Stocks are very sensitive to the Market trend. They have among the largest Betas in the market. Betas are a measure of uncertainty - it also measures the tendency of a stock to move in relation to the market. A positive beta means the stock moves with the market. The size of the beta determines the magnitude of the move. When Market is up by 1%, a stock with a beta of 2 would deliver 2% return. Conversely, when the Market is down by 1%, small stock would be down by 2%.

The rules are:
1. 3 - 5 year time frame.
2. Buy and Hold strategy.
3. Dividends to be retained and accumulated for future investments.
4. Preference for Value over Growth. Defensive. Be very defensive.

Portfolio Performance Measurement:
1. Year-on-Year returns
2. Year-to-Date returns
3. Because your holdings are so small, you could have put the money in a money market fund and earn on average 3% return. You win if your portfolio returns more than 3%.

Stock Selection Criteria:
1. Share Price: $0.01 - $0.30
2. History of Dividend Payments
3. Dividend Yields: 5% - 20%
4. Operating Margin: More than 20%

Valuations:
1. Good management.
2. 'Deliverable' Earnings - that means they've got customers, and income booked.
3. Competitive Advantage.
4. Promising future.
5. Transparency in business activities.
6. Business is linked to major market trends - aging population, growth of China, increasing energy and oil demand, Integrated Resort development.
7. Determine share price Fair Value (Take Company's Market Cap (printed in end of year report) divide by Outstanding Number of Shares. Use this Price as Default Price. Buy the stock when it is trading less than this default price.

Timing:
1. Buy when everybody else is selling - usually in December or June! Identify the trend, determine market sentiment and be patient.

When to sell:
1. Definite sell: When a better investment arises.
2. Maybe sell: When you lose confidence in Management.
A business is only as good as its Leaders. No matter how good a product, or profitable a business is, or how smart the managers are, if the bosses are unethical, and behave inconsistently with how good business leaders should behave the earnings stream becomes very questionable.

Think Long Term. Form your own judgments. Trust your instincts.

Tags: How to develop a penny stock portfolio

Keeping track of investments.

To track the performance of my stock investments I need to know:

• The price I paid for the share
  
• The amount I paid in brokerage fees
  
• The date when I bought the share
  
• The amount of dividends I received
  
• The date when I was paid the dividends

I've also got a spreadsheet to capture all of the above information for easy reference as well as to track the cash inflows and outflows. I also note down the following in my PDA Calendar function:

• The company's financial year
  
• The release dates of their quarterly and annual reports
  
• The forecasted dividend payment dates
  

I prefer to keep the money earned from dividend payments separated from my daily expenditure. The Changes in Share Price (i.e. Capital Gains), Dividend Payments and Transactions Costs are all taken into consideration when I review the stock's overall performance. I use a stock's annual return as a measure of the satisfaction gained from holding the stock.

Next time I'll blog about the spreadsheet functions you can create to keep track of all this data in a coherent manner. Very useful if you need to make a snap decision as to which stock to liquidate in the event of a real need for immediate cash or to pursue new investment opportunities.

Tags: Stock investment administration, keeping track of stock investments

Need data? Join a library!

Members of the general public have a very difficult time gaining access standardized financial data for companies.

It's a Herculean task to standardize financial data. It takes a lot of time and energy to trawl through annual reports and translate those financial figures into an Excel spreadsheet for each company. Don't forget you also have to maintain the data for relevance and accuracy.

What I want is standardized financial data for the Asia Pacific Region done by people who know what they're doing cos they're getting paid for it. I found a data supplier: bvdep.com

They have this product called: ORIANA. Problem is they want you to pay per view.

The work around: I went to visit NUS Library website and did a search on their databases for standardized financial data. Voila!

The link: http://www.lib.nus.edu.sg/lion/hlb/companydata.html

Of interest is Orbis (Orianna Coverage)
"Orbis (Oriana coverage) provides balance sheet items, profit and loss account items and ratios, security and price data, ownership information of public and private companies in Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam."

There's one slight problem: If you're not a student of NUS i.e. if you don't pay fees at the Uni, then you're out of luck.

Not a problem... all you gotta do is pay $300 for annual subscription to the library. Small price to pay considering that you gain access to not only the database but also to technical search expertise and latest financial data.

If you're thinking of signing up, here's the [link]

Libraries are now my new favourite hang out places!

Tags: Orbis, Orianna Coverage, Getting Corporate Financial Data, joining NUS library

Googling your Stock

Did you know that Google has a dedicated section for each listed company's finance? Its a beta version called Google Finance.

They offer a Summary, Key Ratios, News as well as related Companies.

Screen Capture:

Tags: Google Finance

Recommended Free Tools for the Beginner Investor

SGX and the Monetary Authority of Singapore have introduced a new feature on SGX.com called the SGX-MAS Research Incentive.

Clued-in investors can now gain access to the latest broker and financial analyst reports for free. Brokerages receive $5000 per company reviewed and in return they publish their findings on SGX.

All you have to do is register a USERID and password and you're all set. Here's the [link] to the Research Reports on SGX.com

The cool thing about it is that they offer RSS feeds of the latest reports.

Personally, I hate the layout and appearance of SGX website - its untidy and counterintuitive, so what I did was download an application for the Firefox web browser called Sage Feeds which automatically loads from my list of saved RSS feeds sources onto a single page. Here's the [link] to Firefox SAGE feed browswer.

Screen Capture:

Tags: SGX MAS Research Incentive, Sage, firefox tools, RSS feeds