Angell:

Posters,

Quick clarrfication.. I am not a girl (name is not Angel. It is Angell with another L, pronounded like a right angle).

Angell

 

 

Sorry, being new here I just went with the others, but at first I thought you were male.
As an undergrad I had an acquaintance from Bulgaria named Angel, pronounced with a hard G. On-Ghell. I thought it was a pretty cool name. His roommate was a hard-core Objectivist, and everyone thought he was nuts, then he transferred to Julliard junior year.

PS Angell, why don't you have a profile on here? I wanted to PM you. Drop me a line chribstrades@gmail.com

As I lay in bed earlier trying to fall asleep in anticipation of what is undoubtedly going to be a hectic trading day, given this: http://ptv-investing.com/blog/2008/08/24/weekend-outlook-24aug08

I started thinking about pension benefit obligations and how the underlying assumptions (i.e., 12% growth) are the same as those used by Angell in the earlier post. These basically made-up figures get translated in an insanely roundabout way into pension assets and liabilities that then flow into the balance sheet, bolstering assets or liabilities in materially distortive ways. I have a masters in accounting, and I have no recollection of how the PBO breaks down into those two figures, because it was so complicated and unintuitive. So anyway, those assumptions end up becoming a part of what is considered a fair representation of a company's financial condition.

Fundamentals-based analysis relies heavily on the financial statements provided by public companies. As an accounting student I learned that many of the figures in the statements are really management estimates - undoubtedly biased. These estimates then flow into a responsible investor's discounted cash flow analyses, ROE/ROIC calculations, P/E ratios, etc. A bit of garbage in. Public accounting firms are now tougher in their review of the statements post Sarbanes and the fall of Arthur Andersen, but if you are a fundamentals investor you must recognize that you bear the risk of material departures in actual financial condition from what is provided by the statements.

Also, Van Tharp, one of my favorite thinkers on trading, is very fair-minded about fundamentals-based investing. In the ad for his new book, he says:

If you are a value investor, then all you need to understand is why something is undervalued and be confident in your ability to determine that.  The other two things you need to understand are (1) when your investments are no longer undervalued, meaning it’s probably time to sell, and (2) when you might be wrong about your evaluation so you can safely abort and preserve your capital.  You don’t need to understand the market at all.  Warren Buffett doesn’t—he thinks the markets are irrational.

http://www.iitm.com/

Here he is describing fundamentals-based trading. Angell alluded to this earlier. I think most value investors do the above, but don't consider it trading. Now I think I am tired enough to fall asleep.

Here is a link for some books on systems also before you go out and buy any see if you can get a copy from your library if it is not on the shelf ask about a inter-library loan.If there is a copy of the book in a library somewhere your local libray can get it for you in most cases.

New Trading Systems and Methods

http://books.google.com/

The Trading Systems Toolkit

http://books.google.com/

 

Chrib,

A "respondible investor's discounted cash flow" analysis would remove the accounting gimmickry that is inherent in GAAP based reporting. For example, in your PBO example I would simply remove the  reported portion of the funded (or unfunded) pension asset/liability from the balance sheet. Then I would make an adjustment to the income statement for interest cost and the amortization of the defererred gain or loss that flows into pension expense (this is where the distortion related to the expected return on plan assets ends up). Then I would value the business excluding theses items (and after intelligent adjustment for any other necessary items). Once I derived an operating value for the company (that is a value that excludeds non-operating assets such as the PBO) I simply add/deduct the correct net pension benfit/obligation to the operating value of the business, which by the way is relatively easy to do since all the information is reported in the footnotes of the financial statements. Also, as an aside, most of the time this PBO adjustment is unncessary since the net pension benefit/obligation is so small (and the distortion so insignificant) that is bears no material weight on the valuation, especially when the business trades at a signficiant discount to instinsic worth. Nonetheless, you are right that GAAP based accounting bears very little resemblence to what matters in a valuation. But if you know anything about valuing business you would know how to adjust for these erros with relative ease. Some common adjustments include

1. Add back for depreciation and other non-cash charges

2. Adjustment for non-recurring and unsuaul items

3. Removal of non-operating income/loss (i.e. gains from investment income in a manufacturing company)

4. Removal of non-operating assets/liabilities from the balance sheet (I.e. investments or excess real estate)

5. Adjustmenting from LIFO to FIFO based reporting (especially when using a market approach)

6. Adjustments for the PBO

7.  Adjustments to capitize Operating Leases

8. Adjustments to capitaliz R&D expense

9. Adjustments to account for the value of Stock Based Compensation

10.  Adjustments for minority interest value

This is just a s small list of accounting statement adjustments. Nonetheless, they all can be adjusted for so that a correct indication of value may be derived. By the way, given the complexity of GAAP based reporting I do not ecommend that most individuals even based their investments on fundamental analysis unless they have a very strong understanding on how to accurately adjust for all of the items listed above. I suspect that most of your don't. Therefore, I think most of you would do far better off buying a diversified basket of securities and holding it for the long-run. After all, investing (or trading) is not easy! If it was everyone would be doing it and consistently outperformin the market (obviously this doesn't happy, even with the "smart" money). The reality, however, is that active investing (or trading) is very difficult because markets are for the most part very very efficient. Thus, do not expect to make consistent easy gains trading or actively investing. Although, it is possible to do most people will fail, especially overtime.

Angell

Angell:

Chrib,

A "respondible investor's discounted cash flow" analysis would remove the accounting gimmickry that is inherent in GAAP based reporting. For example, in your PBO example I would simply remove the  reported portion of the funded (or unfunded) pension asset/liability from the balance sheet. Then I would make an adjustment to the income statement for interest cost and the amortization of the defererred gain or loss that flows into pension expense (this is where the distortion related to the expected return on plan assets ends up). Then I would value the business excluding theses items (and after intelligent adjustment for any other necessary items). Once I derived an operating value for the company (that is a value that excludeds non-operating assets such as the PBO) I simply add/deduct the correct net pension benfit/obligation to the operating value of the business, which by the way is relatively easy to do since all the information is reported in the footnotes of the financial statements. Also, as an aside, most of the time this PBO adjustment is unncessary since the net pension benefit/obligation is so small (and the distortion so insignificant) that is bears no material weight on the valuation, especially when the business trades at a signficiant discount to instinsic worth. Nonetheless, you are right that GAAP based accounting bears very little resemblence to what matters in a valuation. But if you know anything about valuing business you would know how to adjust for these erros with relative ease. Some common adjustments include

1. Add back for depreciation and other non-cash charges

2. Adjustment for non-recurring and unsuaul items

3. Removal of non-operating income/loss (i.e. gains from investment income in a manufacturing company)

4. Removal of non-operating assets/liabilities from the balance sheet (I.e. investments or excess real estate)

5. Adjustmenting from LIFO to FIFO based reporting (especially when using a market approach)

6. Adjustments for the PBO

7.  Adjustments to capitize Operating Leases

8. Adjustments to capitaliz R&D expense

9. Adjustments to account for the value of Stock Based Compensation

10.  Adjustments for minority interest value

This is just a s small list of accounting statement adjustments. Nonetheless, they all can be adjusted for so that a correct indication of value may be derived. By the way, given the complexity of GAAP based reporting I do not ecommend that most individuals even based their investments on fundamental analysis unless they have a very strong understanding on how to accurately adjust for all of the items listed above. I suspect that most of your don't. Therefore, I think most of you would do far better off buying a diversified basket of securities and holding it for the long-run. After all, investing (or trading) is not easy! If it was everyone would be doing it and consistently outperformin the market (obviously this doesn't happy, even with the "smart" money). The reality, however, is that active investing (or trading) is very difficult because markets are for the most part very very efficient. Thus, do not expect to make consistent easy gains trading or actively investing. Although, it is possible to do most people will fail, especially overtime.

Angell

You do know your GAAP!! I'm impressed!

Markets are efficient? Classical economics would certainly say so. But I find classical economics to be patently false. Homo economus does not exist. I don't want to buy an SVU at 50% off (savings of $17,000) because I'm afraid of paying 2x more for gas vs. a Ford Focus (extra payment of a $1,000 a year) Rational? Pah. The collapse in the SUV market is a fantastic illustration of technical vs. fundamental analysis, by the way. This is a good whose "intrinsic value" is $34,000. Now you have a situation where no one wants to buy. Supply and demand factors have been responsible for bringing the market value down 50%. Would you say it's undervalued at $17,000? It may very well be, but how long do you have to hold it to make a profit, and what kind of profit can you expect (taking into account depreciation)? LTBH SUVs - maybe it's a better investment vehicle than stocks right now (pardon pun).

I believe studies on EMT average the returns of Wall Street money managers. Well of course returns will be a bit worse than market return in such a case. Their average return will be the market return, and then add in fees to drop them lower. Averaging mixes the dross with the cream of the crop. Again I submit, if you find ONE individual who outperforms, that shows markets are not efficient. Let the rabble make their market or sub-market returns. It is achievable to become that cream of the crop, if you are willing to work hard, work on yourself, and if you have the discipline - and this is true for fundamental & technical analysts. #1 is you have to reverse your psychology from the masses, who are powerless against their own fear and greed. Not for everyone, and definitely beware if you have a propensity for gambling.

There have been many questions about behavioral finance/ behavioral economics- and (in)efficient markets-  I took an undergrad class on the subject and read this book which I suggest to anyone who is interested:

Inefficient Markets: An Introduction to Behavioral Finance by Andrei Schliefer (link to Amazon at bottom)

Pretty dry- but anyone reading these forums wil probably like it- and I believe Schleifer developed the theory of behavioral finance/economics. 

 

http://www.amazon.com/

 

 

Angell:

Posters,

Quick clarrfication.. I am not a girl (name is not Angel. It is Angell with another L, pronounded like a right angle).

Angell

 

Angell, I don’t think this discussion does much to further the cause of showing the inexperienced how to become an investor. I think all you’ve managed to do is get the experts arguing about which is better. In fact, your stated intent in the first few sentences of the first post resembles NOT the subject of this thread. You said….

 

Over the past few months I have (for the most part) silently sat back as many of you have debated the pros and cons of fundamental vs. technical analysis. More specifically, I have calmly observed certain individuals, who purport to be so called experts on the markets (whether explicitly or implicitly), give faulty, or at least very poor, investment advice to many innocent and inquisitive new investors. I feel obligated to finally speak up and dispel some of these faulty notions.

 

The title of the thread is….. “An Argument Against Trading”

 

First, that’s ridiculous! Seriously. Like I’ve mentioned before, in a slightly humorous way, you’ve tried to set up a false dichotomy. It doesn’t fly. Trading is not bad. Investing is not bad. There is a use for each style in the speculators toolbox.

 

I SLAP ye investor with mine gauntlet!

 

I hereby throw down the gauntlet.....

 

A challenge if you will…. I challenge the experienced investors to come up with a thread that competes for the hearts and minds of young and old, fledgling investors, to steal them away from the evil clutched of the banished and horrid TRADERS, by thus providing an thread for the education of their moldable minds!

 

Ya know, maybe you experienced Buy and Hold people could help out the beginner "investors" on "how to develop an investing plan."

 

The challenge is thus and such…..

 

Come up with an educational thread, simplifying for beginner investors, just how to start out. I can’t speak on what you would teach them, because hey, I’m not an investor; but I would think some potent content would include how to select a stock for the long term. When to dump one. Do investors have a money management plan? Include that. Are there different types of investors, hey, mention them, or even dedicate a separate thread to different forms of investing.

 

I would however make one itty bitty suggestion. KISS – Keep it simple stupid! Angell, your are obviously very intelligent and well educated, but you need to dumb down your talk a little when you’re talking to beginners. Not that beginners are stupid, but you have to remember they probably don’t have the extensive financial education you have. Beginners need to learn how to walk before they can run.

 

Do this, and I’d probably read through the stuff myself, and I promise not to ridicule or in any way derail the efforts!

 

Ya know? Like man, instead of cursing the darkness (TRADERS ARE EVIL) you could light a candle (Here’s how investing is done).  

 

Cool dude?

 

I'd just like to post some topics in relation to technical analysis that maybe some traders may elaborate on somehow:

1) Trend Analysis

2) Turning-point analysis

3) Charting techniques

4) Volume and Open Interest Indicators

5) Contrary Opinion Theories

6) Technical Theories such as the Dow Theory or Elliot Waves

Of interest to me are 4) and 5) as I have not very familiar with these topics.  So anyone feel free to pick a particular stock and incorporate the above or do whatever you want as long as you illustrate the topics.