the ongoing "active" vs "passive" debate

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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DanielCarrera
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Post by DanielCarrera »

mw wrote:Another choice or two for the poll list:

x) A passive investor does whatever their bank or insurance sales person tells them
xi) A passive investor complains about substandard returns but does nothing about the situation
Do I detect some hostility here? What do you have against passive investors?
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Post by DanielCarrera »

mw wrote:If unfettered (aka a hedge fund), I see no reason whatsoever why out performance over the long run should not be possible, assuming the managers are not clueless as to business cycles nor are blind to what the crowd are doing.
Some are bound to beat the average, and a majority are bound to under-perform the average after costs. This is just basic arithmetic (as I indicated above). You have expressed confusion over the arithmetic argument vs the coin-tossing illustration. Maybe I can clarify:

- The arithmetic from Sharpe says nothing about efficient markets, and merely proves that a majority of the active invested dollars must under-perform the passive invested dollars.

- The coin-tossing illustration is only meant to show that humans are bad at recognizing randomness. And to show that a winning streak does not automatically mean that there is skill involved.

In an inefficient market, it should be possible to identify investors who beat the market. Those investors must always be a minority, as per Sharpe's argument.
Are costs an issue? Sure, but less so than in the past.
So it might be that in the past only 20% of active investors beat the index and today 35% of them do. But the number must always be less than 50% (on a dollar basis).
But lets also point out that many people seem to argue that active management is always wrong or somehow bad,
I haven't noticed anyone saying that. Active managers are important to keep the market more efficient. And that's not just so passive investors can make money. A more efficient market also allocates fund better which helps the economy progress. Things that make a market inefficient (corruption, insider trading, bad accounting, poor information, etc) all lead to a poor allocation of capital.
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Post by mw »

DanielCarrera wrote:Do I detect some hostility here? What do you have against passive investors?
Not at all. I assumed the exercise was to describe *all* types of passive investors; like active investors or traders, the breed is not homogeneous.

If the goal is to pick the single best definition, then the exercise is pointless.

If the goal is to categorize via a poll, then you need my definitions.
Last edited by mw on 16 Apr 2008 15:58, edited 1 time in total.
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Post by mw »

DanielCarrera wrote:- The coin-tossing illustration is only meant to show that humans are bad at recognizing randomness. And to show that a winning streak does not automatically mean that there is skill involved.
The coin-tossing illustration in no way represents the market, a global auction which is driven by the actions of humans, not coin tosses.

That a human can recognize a pattern in data derived from randomness is absolutely meaningless as a proof. The coin toss experiment isn't a scientific proof of anything, and certainly it does not prove, or disprove, the notion that certain patterns tend to show up in market data with sufficient frequency so as to be exploitable.
In an inefficient market, it should be possible to identify investors who beat the market. Those investors must always be a minority, as per Sharpe's argument.
Frankly, I too expect to find only a minority of serious money managers to significantly beat the broad market with anything approaching consistency, over a long period of time.

But, as I've poked around the edges at a few times, my reason for agreeing with you on this point have nothing to do with efficient market theory or Sharpe or arithmetic (but I'll grant you that arithmetically, not all participants can be on the outperforming side), a notion which I certainly am not a charter subscriber to.
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Post by DenisD »

DanielCarrera wrote:
mw wrote:If unfettered (aka a hedge fund), I see no reason whatsoever why out performance over the long run should not be possible, assuming the managers are not clueless as to business cycles nor are blind to what the crowd are doing.
Some are bound to beat the average, and a majority are bound to under-perform the average after costs. This is just basic arithmetic (as I indicated above).
Doesn't Sharpe's arithmetic argument only apply to the universe of long-only funds? The returns of a long/short "market neutral" hedge fund should be independent of the market returns.
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Post by DanielCarrera »

mw wrote: The coin-tossing illustration in no way represents the market, a global auction which is driven by the actions of humans, not coin tosses.

That a human can recognize a pattern in data derived from randomness is absolutely meaningless as a proof.
Proof of what? You saying that it is not a proof but you don't state what it is it fails to prove. The coin-toss thought experiment illustrates that winning streaks are to be expected in random events. Therefore, you cannot say "this guy won 10 times in a row" and declare that he has skill at whatever he is doing, because you are ignoring the element of chance. Chance dictates that some people will have winning streaks, whether it is at baseball, flying aircraft, roulette or stocks. Notice that there is definitely evidence of skill at sports and flying aircraft, but that doesn't mean that a poor player can't have a winning streak purely by chance. It WILL happen from time to time. Basketball fans talk about a player with "the hot hand", but a player who has gotten 10 baskets in a row is not any more likely to get the next one than if the same player has missed 10 baskets in a row. And basketball is a sport that has a lot to do with skill too. But any endeavor has an element of chance. No matter how good or bad you are at basketball, when you shoot the ball there is a probability that you'll score and a probability that you'll miss and as soon as there are probabilities involved, the laws of chance come into play. And people (basketball fans and coaches, investors, pilots, gamblers) all have a strong tendency to severely under-estimate the roll of chance in the outcomes they see.
Frankly, I too expect to find only a minority of serious money managers to significantly beat the broad market with anything approaching consistency, over a long period of time.
Even inconsistently. On any given year, on any given month, whether consistently or not, only a minority (less than 50%) can ever beat the market on an after-cost bases, so long as the cost of active investing remains higher than the cost of passive investing. And this has nothing to do with market efficiency.

But, as I've poked around the edges at a few times, my reason for agreeing with you on this point have nothing to do with efficient market theory or Sharpe or arithmetic (but I'll grant you that arithmetically, not all participants can be on the outperforming side), a notion which I certainly am not a charter subscriber to.
The reason why most active traders cannot beat the index, indeed, has nothing at all to do with market efficiency.
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Post by DanielCarrera »

DenisD wrote: Doesn't Sharpe's arithmetic argument only apply to the universe of long-only funds? The returns of a long/short "market neutral" hedge fund should be independent of the market returns.
I don't see why it should have such restriction. Hedge fund return are not independent of the market. They are part of the market, and wherever they get their money from is part of the market. A hedge fund might hedge against the US dollar, for example, so its return might be independent of the US dollar. But that is not "the market". You can hedge against one industry, or one geographical region. But any return you get comes for "a" market which is part of the larger global market.
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Post by mw »

DanielCarrera wrote:Proof of what? You saying that it is not a proof but you don't state what it is it fails to prove. The coin-toss thought experiment illustrates that winning streaks are to be expected in random events. Therefore, you cannot say "this guy won 10 times in a row" and declare that he has skill at whatever he is doing, because you are ignoring the element of chance. Chance dictates that some people will have winning streaks, whether it is at baseball, flying aircraft, roulette or stocks.
I accept that chance can play a factor - short term in the case of a truly active manager, an even shorter period for the active trader - in determining outcomes. I further accept that a strongly trending market will tend to hide mistakes, provided the active manager/trader is trading on the right side of the market.

However, in the case of managers/active traders who manage to consistently deliver over achievement over longer periods -- a number years including at periods of rising and falling markets -- I have to conclude that human performance and financial freedom or lack of constraints, not chance, is more likely to underly such improved performance.

Perhaps I find Malkiel's hypothesis distasteful because doesn't even follow his own advice.

On pages 193-194, chapter "How the Pros Play the Game", of Malkiel's Random Walk on Wall Street:
Many professional investors move money from cash to equities or to long-term bonds based on their forecasts of fundamental economic conditions. Indeed, this is one reason many brokers give to support their belief in professional money management. The words of John Bogle, founder of The Vanguard Group of Investment Companies, are closest to my views on the subject of market timing. Bogle said: "In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully or consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counter productive."
Lets just pretend that Bogle isn't just offering self-serving advice in the service of selling his company to potential clients. Its difficult, but pretend.

Back to Malkiel: I think you'll agree that most people, particularly most men, vote with their money. If Malkiel truly believed in what he preached, he would commit all his funds to an index fund. To Vanguard, for example.
How to Judge? Flip a coin - Sept 17, 1995 - Even Mr. Malkiel, a Vanguard director, owns a significant stake in Vanguard Windsor, actively managed by John Neff, and Windsor II. According to 1993 proxy, he had more than 52,000 shares of the two funds.

The market value was about $730,000 at the time, calculated Daniel P. Wiener, editor of the Independent Adviser for Vanguard Investors, in Watertown, Mass. That amounted to more than Mr. Malkiel's holdings in Vanguard index funds, valued then at $490,000 by Mr. Wiener.
I accept Malkiel's *conclusion* that fewer active managers manage to beat the general market. Clearly chance is not the primary determining factor - when performance is measured over much longer periods - otherwise winners and losers would be spread along a much different curve.

Incidentally, in a 2003 interview he admits to dabbling in "gambling" with stocks, and wishes he'd sold his intel early in 2000. Perhaps its just more research, a case of a prof turned guinea pig. ;)

edit: After flipping through a few pages of Random Walk, a tome I have not picked up in many years, I recall the reason I dislike Malkiel's writings: they are poorly executed, reading more as a set of personal ramblings, contain factual errors, and on balance is a collection of opinion rather than fact or scientific analysis. Yet Malkiel is credited with being a market theorist - a scientist.

Does not compute.
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Post by DanielCarrera »

mw wrote: Perhaps I find Malkiel's hypothesis distasteful because doesn't even follow his own advice.
...
Back to Malkiel: I think you'll agree that most people, particularly most men, vote with their money. If Malkiel truly believed in what he preached, he would commit all his funds to an index fund. To Vanguard, for example.
Note that Malkiel doesn't say that the market is fully efficient. Just "very" efficient. He even buys some individual stocks. Years ago he made a profit predicting that close-ended funds would out-perform and today he is predicting that China will out-perform. So he is not a blind, dogmatic, "the market is perfectly efficient" guy.

But your point is well taken. I would have expected that index funds would be a larger part of his portfolio than what your quote indicates. I was indeed surprised that he has more invested in acive funds than index funds. At least it's one with a low MER, so he is following that much of his own advice.
edit: After flipping through a few pages of Random Walk, a tome I have not picked up in many years, I recall the reason I dislike Malkiel's writings: they are poorly executed, reading more as a set of personal ramblings, contain factual errors, and on balance is a collection of opinion rather than fact or scientific analysis. Yet Malkiel is credited with being a market theorist - a scientist.
Well, that's a literary commentary (except for the factual errors part) and reasonable men can have different opinions on what kind of writing they like. Heck, some people like Robert Kiyosaki's writing.

I hope the factual errors are corrected in later editions. My edition is 2007.
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Post by Bylo Selhi »

DanielCarrera wrote:But your point is well taken. I would have expected that index funds would be a larger part of his portfolio than what your quote indicates. I was indeed surprised that he has more invested in acive funds than index funds. At least it's one with a low MER, so he is following that much of his own advice.
First for someone who is as skeptical about peoples' motives as mw seems to be I'm astonished that he accepts Wiener at face value. Wiener, after all, sells a newsletter that advocates tactical trading of Vanguard funds, both active and index. In any case, Wiener's estimate was based on a 1993 proxy declaration. That hardly says much about Malkiel's portfolio today, some 15 years later.

Moreover, Jack Bogle's own portfolio is heavily weighted in actively-managed funds including Windsor. Does that make him and Malkiel hypocrites? Perhaps not. Perhaps they bought the bulk of their actively-managed funds in the 1950s, 1960s and early 1970s before index funds existed. Now time and compounding have worked their magic. They now have large positions in actively-managed funds. But they can't switch to index funds for the simple reason that the capital gains taxes would overwhelm any possible improvement in returns. (FWIW I'm in the same position and I only started investing in earnest in the early 1980s with the switch to indexing in the late 1990s. These guys have a 30-year head start on me.)

As for Malkiel's foray into close-end funds, he used CE funds in Random Walk as an example of situations where markets aren't always efficient. In this case he noticed that many CE funds were selling at substantial discounts to the values of their constituent stocks. Based on this discovery he invested his own money in CE funds and made an easy profit. Ironically his publication of this anomaly brought widespread attention to it and, like similar anomalies, the ability for people to profit from it quickly vanished. Some might conclude that this is yet another manifestation of, er, market efficiency.
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Post by DanielCarrera »

Bylo Selhi wrote:First for someone who is as skeptical about peoples' motives as mw seems to be I'm astonished that he accepts Wiener at face value. Wiener, after all, sells a newsletter that advocates tactical trading of Vanguard funds, both active and index. In any case, Wiener's estimate was based on a 1993 proxy declaration. That hardly says much about Malkiel's portfolio today, some 15 years later.

Moreover, Jack Bogle's own portfolio is heavily weighted in actively-managed funds including Windsor. Does that make him and Malkiel hypocrites? Perhaps not. Perhaps they bought the bulk of their actively-managed funds in the 1950s, 1960s and early 1970s before index funds existed. Now time and compounding have worked their magic. They now have large positions in actively-managed funds. But they can't switch to index funds for the simple reason that the capital gains taxes would overwhelm any possible improvement in returns. (FWIW I'm in the same position and I only started investing in earnest in the early 1980s with the switch to indexing in the late 1990s. These guys have a 30-year head start on me.)
Excellent points. Thank you. Now I've noticed another thing: This Wiener mutual fund is value-oriented and in 1993 the Vanguard value index fund was only a few MONTHS old. The inception date of the Vanguard Value Index fund is November 1992. So, if Malkiel was interested in exploiting the "value anomaly", there just wasn't an index fund available for that.

I think we can forgive Malkiel for not immediately selling half a million dollars worth of investments to put them in an index fund that was only a few months old at the time.
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Post by mw »

Bylo Selhi's "bug" is driving me batty. Even though it is not warm enough here for bugs to be attracted to my screens I find myself wanting to swat the thing. ;)

Somehow I suspect we are dancing on the head of a pin here, sharing some of the same space, some of the time.

If I were to net out my objection to Malkiel it probably comes down to this:

- many readers of his book, like readers of books promoting alternative market theories, accept what he says without question, yet,
- one of his oft-quoted experiments, that of students creating a data series by flipping coins, proves nothing other than coin-flipping can create a random set of data - which is what you would expect
- he contradicts himself in his own private investments (not just in the 90's but in this decade)
- being a book seller, he is in business of promoting his theories (some might prefer to call them opinions)

Having said that, for the great unwashed masses, I would have no trouble pushing a copy of his book in their hands, because perhaps the text will serve a purpose and keep them from mucking about with their funds unless or until they are ready to do so.
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Post by DanielCarrera »

I think we are finding a lot of common ground here.
mw wrote: - many readers of his book, like readers of books promoting alternative market theories, accept what he says without question, yet,
True. But that's the reader, not Malkiel. Some people read Kiyosaki's book and accept what he says without question. Even though his advice is poor, dangerous and some times downright illegal.
- one of his oft-quoted experiments, that of students creating a data series by flipping coins, proves nothing other than coin-flipping can create a random set of data - which is what you would expect
It shows that random data can create "patterns" and that we underestimate the role of randomness. Basketball fans really do think that because some player has scored 10 times in a row he is more likely to score next time than he was 2 months ago when he missed 10 times in a row.
- he contradicts himself in his own private investments (not just in the 90's but in this decade)
I reserve judgment on this one, until I know more about his portfolio.
- being a book seller, he is in business of promoting his theories (some might prefer to call them opinions)
That's true of any book you buy. I don't think it means anything. If his books came with a Vanguard coupon and he got a kickback for each coupon redeemed, I would feel different about him.
Having said that, for the great unwashed masses, I would have no trouble pushing a copy of his book in their hands, because perhaps the text will serve a purpose and keep them from mucking about with their funds unless or until they are ready to do so.
I share that feeling. I do plan to muck with my investment a little and I will deviate a little from Malkiel's guidelines. I will only do so to the extent that I feel competent (trying to factor for confidence bias), but I would not advice mucking about to most people.
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Post by Bylo Selhi »

mw wrote:Bylo Selhi's "bug" is driving me batty. Even though it is not warm enough here for bugs to be attracted to my screens I find myself wanting to swat the thing. ;)
Blame it on gummy ;)
- many readers of his book, like readers of books promoting alternative market theories, accept what he says without question
Many readers of many books accept what the author says without question. Why should Malkiel's books be any different?
- one of his oft-quoted experiments, that of students creating a data series by flipping coins, proves nothing other than coin-flipping can create a random set of data - which is what you would expect
The coin-flipping experiment provides much more profound insights. For example, that even though out of a large population of coin-flippers a small number will get all or mostly heads (or tails), there is no skill (or lack of skill) exhibited by those few. Another insight is that random events like coin flips can result in counterintuitive sequences of several heads (or tails) in a row. Indeed often naive people ascribe such sequences to an indication of non-randomness even though these runs are relatively common.
- he contradicts himself in his own private investments (not just in the 90's but in this decade)
We don't know that. It's quite possible that Malkiel invests the bulk of his money passively and uses a relatively small amount of "play money" for entertainment purposes. Other passive investors do likewise but they don't do it with their retirement nesteggs.
- being a book seller, he is in business of promoting his theories (some might prefer to call them opinions)
Again that's true of anyone with an opinion — including WADR you (and me.) Malkiel backs up his theories with academic research, most of which isn't his own. What do you back up your opinions with?
Having said that, for the great unwashed masses, I would have no trouble pushing a copy of his book in their hands, because perhaps the text will serve a purpose and keep them from mucking about with their funds unless or until they are ready to do so.
On that we agree. The vast majority of people are best served by investing passively. Even if a small number may (or not) exhibit enough skill to offset the added costs of investing actively, the odds are stacked against them.
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Post by IdOp »

My 2 cents on Malkiel's book: It's been a few years since I read it. I do agree it rambles around a lot, sometimes going over the same thing many times, and I doubt I agreed with everything in it (that could be said for any indexing book I've read). You have to read between the lines a bit, ignore the fluff, and give him credit as an early person who began to see the light and spoke out against the Wall St. fleecing machine. As for what he does in his personal investments, I care very little about that, it really has no bearing whatsoever in indexing theory, on what aspects can be considered correct and what questions are unresolved.
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Post by mw »

There is more common ground than you probably can guess. Some of what Malkiel says about technical analysis and fundamental analysis "gone bad" is absolutely in line with my own thinking. I could have written many of those passages.

I view the market as a giant auction, one which participants have many strategies available to them to get to their goal. Capitalistic approaches, human needs, rising standards of living world wide, not to mention population explosion - have conspired to engender a culture of growth, growth, growth. It would be difficult, over the long term, not to earn a return from the market if one simply merely jumps aboard (indexing).

Good managers and bad managers exist in every sector of the economy, thus in the financial sector, I fully accept that many equity market managers will under perform "just jumping aboard" whether its for reasons of transaction costs or lost/missed opportunities or just bad investments.

In the end an auction prices its goods based on supply and demand, and need is not the only factor which affects supply and demand - fear and greed play an important role.

Human nature being what it is, I firmly believe it is possible to exploit fear and greed, and there can be no doubt that businesses the world over already exploit supply and demand.

Malkiel makes some sweeping statements regarding technical analysis which I can not agree with, for not only do I believe that it is possible to exploit the auction based on technical analysis, my account depends on and benefits from this exploitation, regardless of market direction.

Where I agree with Malkiel on failed approaches tends to be in the area of cult worship, use of bizarre abstractions of price, heavy reliance on forecasting (beyond the relatively near term) and such things. There is all sorts of funky predictive work (FA or TA) being done, most of which has very little useful value. Malkiel rightly quotes some famous examples of those who were right on a big macro call and then wrong, wrong wrong. Most of these folks made big macro calls and then stuck with their opinion through thick and thin. That's dangerous.

Market participants should avoid the emotional burden such big calls impose, and be ready to bend their long term view when necessary. Both fundamental and technical oriented analysts frequently fail to be flexible enough.

For those who do not have the time or knowledge or emotional make up to adopt a system (value, growth, diversification, fundamental, technical, random-flipping) that works for them, an index fund, or a GIC, is the right place for them.

But for professionals or amateurs who wish to time markets (asset allocation, cyclical rotation and the like is just a form of same), out performance can be achieved. Perhaps out performance to some means earning "enough" and then pulling capital out of the market - away from risk (that's me, at times). Perhaps raw total performance is the only metric (when my capital is at risk, that is what matters to me). I don't see why losing less than another should be considered a bonus - not over a period of time as long as a year at any rate, but for some that suffices.

Keep it simple is an approach I very closely follow and in completely different ways, Malkiel and I agree on that. We probably also would agree that what happened long in the past is much less important than what is happening in the here and now, and what is right in front of us.

(minor edits for clarity)
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Post by parvus »

mw wrote:There is more common ground than you probably can guess. Some of what Malkiel says about technical analysis and fundamental analysis "gone bad" is absolutely in line with my own thinking. I could have written many of those passages.
Out of curiousity, may I ask where you draw the line on TA. I can understand things like overbought and oversold, even moving averages, in relation to large-cap, high-volume stocks that trade in the institutional universe. But are heads and shoulders, candlesticks and other chartist tools, in your experience, all that relevant?
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Post by mw »

Relevant to my experience? I'm mostly focussed on price action, with most emphasis on the recent / near term. I'm not one of those EWavers or folks who draw long term trendlines dating back decades as if they hold some magic on the present.

Bearing in mind that I weight more heavily what's happening in the recent past, I will say that there are many price-related formations that are useful. They don't have to have a lot of predictive value in order to provide a concept to work with. Support and resistance are valid concepts, for reasons that should be obvious. Narrowing ranges tend to precede large moves. Rising and falling wedges, if not played out over too long (days, perhaps a week or two) very often resolve to the norm - and even if they don't, they can still be exploited, since any wedge is a narrowing range. Perhaps most important, something many fail to recognize even though time horizon is talked about frequently, is that there are participants looking at the market(s) in different time frames. The best opportunities tend to show up when the setup is reinforced in more than one time frame, for example a narrowing wedge on a 15 minute or 65 minute chart might well be a classic bear or bull flag on the daily.

The reasons these formations show up so often is simple human nature. When the balance of power is in either bull or bear hands, price gets moving. Otherwise it gets stalled; players get restless. Eventually price breaks and at least 1/2 of the players are caught offside - this provides "fuel" for the fire, so to speak. And should the initial move not perfectly resolve, even that surprise can end up with a lot of trapped participants, quickly heading for the exits, or trying to pile on to avoid missing out.

If I had to net out what I find the most important tools are, a horizontal line or two marking the nearest and next nearest points of resistance and support, and a trendline drawing tool for identifying consolidation zones - I could get by with that and nothing but.

But given a choice, I'd also throw in two exponential moving averages, a 20 and 50 period, because after an extreme move, its common for price to revert to one or both of these, and that can be handy for stalking out entries (for reversal) or exits.

I realize that its difficult to get a feel for how "traders" work from simply reading some text; after years working with static and real time charts, making literally thousands of trades in equity and futures markets, one can't help but get attuned with the flow of things. Do that, or die.

Note that these short term patterns and observances do not help much in determining market direction for the longer run. Its not rocket science to pick extremes, although extremes can and do run on for longer than one would expect. Extremes in buying are the time the seasoned trader readies exits; and the reverse for selling extremes.

Commodities, like Nasdaq once upon a time, rising in parabolic fashion are emblematic of a market which may be closer to the end that we suspect. I say that despite having no reason to doubt my own bullish view (which is informed by a rather dark view on global energy and food/water politics). But it happens, so frequently, that I must consider the current trajectory of some markets as a big warning sign and at least be ready to act.

For the rest of the time its sufficient to detect if the market is trending up or down or not at all. That is easy enough. Higher swing highs, higher swing lows or the reverse. A market is really trending when all three major timeframes - daily, weekly, monthly - are exhibiting the same pattern of swing highs and lows. Finding the end is the key; sometimes folks like me will get that wrong its not difficult to rejoin a continuing trend so erring on the side of caution, especially when other factors suggest it, is never a bad idea.

Rounding up my answer: H&S tops and bottoms are common patterns which many try to find in every chart. Sometimes they are there and if so you can do some basic E&M price extension work to get a sense of where price *might* go if indeed its going to tumble far down the right side of the mountain.

They aren't high reliability patterns, partly because they tend to form over a very long time. But key in the H&S top/bottom is the upper or lower most trading range. If one can pick these out, you can clearly tell when price is moving away from that range - either continuing the current trend, or reversing it. One need not be concerned too much about the long distant future; if long a market, there is benefit from knowing price is more likely than not to go against you for some period of time.

As for candlesticks and such - these have some use. I look at simple bar charts most of the time, but I've been doing this so long I can "see" the candlestick. Certainly some patterns are useful. A "piercing line" at the end of a selling extreme is a good short term trade entry situation. Gap up / gap down days - in a well traded market - have significance and imply continuation or price exhaustion. Its not wishy washy to say either/or - the key issue here is that if a significant day of price action comes about *what will one do with it*. Technical trading - a series of IF/THEN questions and actions - makes it possible to rather unemotionally apply a solution and equally unemotionally exit the market if the thesis proves wrong.

Sorry for the novel - am trying to paint a picture to aid in understanding, not to convince.

Bottom line: less about "prediction" and more above observation.
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Post by randomwalker »

mw wrote:Having said that, for the great unwashed masses, I would have no trouble pushing a copy of his book in their hands, because perhaps the text will serve a purpose and keep them from mucking about with their funds unless or until they are ready to do so.
MW certainly seems to be a Market Wizard and perhaps should be profiled in the next edition of the similarly titled book by Jack Schwager http://www.amazon.com/Market-Wizards-In ... 0887306101

Until one actually has a public record of one's investing/ trading , performance then talking a great game remains just that, talk. As US Congressman Willard Duncan Vandiver famously said "I`m from Missouri, you'll have to show me."

http://www.marketocracy.com/
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Post by parvus »

mw wrote:Relevant to my experience? I'm mostly focussed on price action, with most emphasis on the recent / near term. I'm not one of those EWavers or folks who draw long term trendlines dating back decades as if they hold some magic on the present.
Thank you. I posed the question because I was interested in how you would be different in your personal investing decisions from Carrigan in the Star, or Vailoux in the Post. I don't put a lot of credence in either (none, in fact) so your situation intrigues me.
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Mike Schimek
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Post by Mike Schimek »

Passive investment to me means buying something like XIU exclusively, not even paying any attention to the stock market, and checking once per month on its value.

This is what I did for about a year before starting to do stock picking. Wish I had never changed.

Stock picking cost me quite a chunk during the past 10 months, mainly in the beginning when I waded in cautiously, thinking it would be wise to stick with super safe stuff like banks :rofl: until I knew more about what I was doing.

Twice now I've had poor results and said to myself, I'll stick it out till the end of the month, then I'll go back to indexing. Both times before the end of that month, I got lucky and my picks pulled back up, which made me sigh and continue to keep picking. Over the next 2-3 months if I do well I'll stick with picking even though it's extremely time consuming (40+ hours per week), if I don't do well I'll go back to sleep and index. Half of me hopes I fail to do well so that I can move on to spending my time on other things.

Unfortunately I'm pretty sure that the likely hood of doing well picking is proportional to the time spent doing it, the rest is if you have the knack or not, so I'm stuck spending tons of time on this till I see if I'm good at it or not.

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Post by mw »

randomwalker wrote:MW certainly seems to be a Market Wizard and perhaps should be profiled in the next edition of the similarly titled book by Jack Schwager
The Market Wizards I think far outperformed me, so no, I am not in their company. But would you like to borrow my copy of Schwager's book? I have all the classics; his was an enjoyable read, but not all that helpful to me at the time... and I doubt it would make a difference to my approach now. While we are on the topic of books, one of my favorite market books was written in the 30's, and provides the only sane unambiguous manner of determining when a new up or down swing begins. I've never seen the method documented in books written since.
Until one actually has a public record of one's investing/ trading , performance then talking a great game remains just that, talk. As US Congressman Willard Duncan Vandiver famously said "I`m from Missouri, you'll have to show me." http://www.marketocracy.com/
This entire forum is talk. Does everyone here have an account on marketocracy?

For kicks I visited the site. I see their own fund under performs the S&P at times, and doesn't over perform at others to an extent to make it interesting to investigate further let alone purchase.

Why the middling performance I wonder? Probably too many cooks in the kitchen. Someone has to decide which of their many "traders" (no doubt the bulk of which do very little actual trading with real money) ideas should be implemented. It would seem that they have trouble with that.

The bottom line is that I don't need to prove myself to anyone but myself (and ultimately to my wife and kids). I ask no proof from you on your record, nor do I care what anyone else is able to achieve. Clearly I'm willing and able to document my methods, engage in detailed conversations regarding the application of technical analysis to investing/trading, and I have even indicated in this forum what I've been buying or selling and certainly plan to continue that. If that's not enough for you, then I suggest you are asking for too much. I visit here for my own entertainment and edification first, not for anyone else's amusement.

I am what I say I am. Accept that or not as you see fit, but move on.
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Post by DanielCarrera »

Question for mw: How do you keep your expenses low? How much do you pay per trade? What broker do you use?
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Post by mw »

For some time I was with Priority Brokers bought by Charles Schwab Canada bought by Scotia Capital; costs were lower until Scotia took over. I did arrange my trading around their absurd costs but also volume and account size got me some piddling discounts. Last fall they implemented a flat rate - that was helpful.

But lack of electronic confirmations and statements (you can't believe how many discrete envelopes I have from SMDI), lack of a low cost fixed rate, and lacking a suitable platform for managing trading activity over a number of accounts (web site doesn't cut it) - SMDI just wasn't able to retain my business and I've not long ago moved all our accounts from Scotia (and from a couple of other institutions) to TD Waterhouse.

So far I'm very pleased. For Canadian equities trading I've never had such low transaction costs. It does make a difference when moving around several thousand shares - flat 9.99 is much better than Scotia Select pricing, and 50% cheaper than their flat rate (which in my case wasn't very flat). I can break up large positions and scale in and out without much concern over transaction costs - that certainly wasn't the case before.

Account setup and transfer went very smoothly.

I should indicate that for equities trading the bulk of my activity is in registered (RRSP, RESP) accounts. In the non tax protected accounts I have substantially less activity but the same approach - market timing trades. In registered accounts the combination of low fees (relative to trade, profit, account size - almost meaningless) and tax freedom = an ideal situation for exploiting "market inefficiencies" ;)
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Post by DanielCarrera »

Ok, so now your commissions are $9.99 at TDW. Unless I am confused, you would get the same at just about any major discount broker (E*Trade, Qtrade, Credential Direct).
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