Last month we looked at how the DOW was getting close to the key 18,000 mark and wondered whether it could break through this level and make new highs for 2015.

Earnings Catalyst For DOW Rally

To put a bit of context around this 2 week rally, the DOW rose 12% which is it’s best 2 week performance since 2000! And it’s not just the DOW that’s benefited, the S&P and Nasdaq have also surged upwards by similar percentages. This sharp run-up in the major US Indices has been mainly driven by some strong Q2 results from a lot of the blue chips. Of the S&P 500 companies who have reported Q2 earnings so far 77% have beat analysts estimates, albeit these are greatly reduced estimates, by an average of about 15%. The continued stream of earnings beats has given the market the incentive it needed to drive higher after its mini-pullback earlier in July.

Tech Still Leading The Way Higher

Not to be outdone by the DOW the Nasdaq has been setting records of it’s own…Prior to it’s small 0.4% pullback last Friday the Nasdaq had just completed a 12 day winning streak, it’s longest winning streak since 1992. I was a bit surprised when I read that the tech index hadn’t gone on such a winning run in so long and that even right throughout the tech bubble of 2000/2001 it never achieved such a feat. It was disappointing results from Microsoft that ultimately lead the Nassy lower on Friday, one of the few big tech companies to miss estimates. Prior to Big Blue’s results it was all bright and rosy in the world of tech with excellent results from Apple, Google, Intel and Amazon to name a few driving the Nasdaq onwards and upwards on a daily basis.

Apple once again did it’s usual party trick of blowing away it’s own very conservative guidance and the Street’s slightly less so conservative expectations. After an almost $20 run-up in it’s share price in the couple of weeks prior to announcing it’s results to $120 a share I wondered could Apple continue higher, well there was no need to fear, it’s added another $10 a share since last Wednesday’s results. The results themselves were very impressive, Apple just can’t ship it’s products quick enough, particularly it’s iPhones where it sold 5.2 million of those bad boys last quarter and is “currently experiencing some supply issues”. While in most cases supply issues would be a cause for concern, like when Boeing can’t get it’s new airbus out in time to meet contracted delivery dates, in Apple’s case it’s a very positive sign. With Apple it’s simply a case that they can’t manufacture enough iPhones quick enough. We shouldn’t really be surprised, with stories of 15 minute delays to just get to talk to an employee in Apple’s stores in the US and if anyone here in the UK has tried get their hands on a new iPhone 5GS recently I’m sure you too have being met with the response that sorry but they are currently not in stock….

Should We Be Concerned?

But should we be concerned about all this bullish talk, bottoming out became green shoots which  have now become talk of a proper recovery. What would concern me about this recent results driven rally is that the earnings beats have all come from an EPS perspective. In a lot of cases however when we look at the underlying results revenues continued to fall but it was the results of aggressive cost cutting programmes that meant profits held up and EPS looked good when compared side by side with what the Street’s analysts were expecting (analysts who had already slashed earnings expectations drastically in the face of the global economic environment these company’s were now operating in). So while I appreciate it is all about the bottom line, surely part of it must be about how that bottom line is achieved? And if chief executives are delivering that bottom line by cutting back staff numbers, reducing production levels and slashing spending rather than growing revenues, the question has to be, how long can they continue to do that for before they run out of costs to cut??

Certainly there are some positives out there, the global credit markets are at last starting to thaw and the US housing market is starting to pick up also with the number of housing starts announced yesterday up 11% month on month. But with US unemployment figures contining to rise (although at a lower rate) do the US public really have money in their pockets to spend? It will certainly be interesting to see if the US companies can continue to beat the street’s expectations in Q3 and Q4, especially as Wall Street’s analysts are likely to increase their expectations in light of what has happened in Q2.

The market is clearly in overbought condition right now and a pullback, at least short-term, is probably on the cards.  Keep your stops tight and be ready to go short if this run-up eventually runs out of steam.

When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing.

It’s funny, it comes back to timeframes again, and Buffett operates on the longest timescale going. His favourite holding period is “forever”, so he doesn’t need to concern himself with how the market values his shares, unless he wants to buy more. IMO a lot can be learned about future trends by watching Buffetts’ present investments. He is investing in the west and in America; and he is also investing in American oil without investing in a hole in the ground..

USA isn’t exactly powering ahead at the moment; but things are slowly changing. Have a peek at the fortunes in North Dakota due to fracking technology. This is expanding big time; and IMO is a technical revolution in the making.. Meanwhile Warren Buffett has positioned himself to take advantage of this revolution by buying up the railways; bearing in mind the massive increase in oil production and lack of pipeline to move the oil around. He certainly hasn’t forseen a sudden need to transport more teddy bears across the country:) 75% of the oil transported by rail out of North Dakota is transported by Burlington Santa Fe LLC; part of Buffetts’ empire

The Buffett mentality is an interesting one to understand, treating each investment as if buying a farm to hold for ten, fifteen, twenty years, as if there was no opportunity to sell that farm during that period. Using that analogy he compares day to day/cyclical analysis like fretting over whether it was going to rain in an hour, whether the temperature might drop by one degree the next day. An interesting way of thinking no doubt.

Warren Buffett insists that you should only own what you know. He says to be able to explain his mistakes, he says so he only does things he completely understands. Then he reveals just how easy it is to choose winning investments: ‘All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.’

In autumn 2008, as Warren Buffett justified putting his money in to stocks Buffett asserted ‘Price is what you pay, value is what you get’. He also said ‘Whether are talking socks or stocks, I like buying quality merchandise when it is marked down’. He particularly likes buying shares that are trading on low multiples of sales, or book value(BV), or mid-cycle earnings.

“I have no idea what the stock market’s going to do. I never do. Never will. It’s not something that I think about at all. When it goes down I think a bit harder about what I might buy”

“The American economy works that way. We’ve gone through… perhaps 15 recessions in this country. But the system overshoots periodically, we had a huge bubble, so a correction really should not be unexpected. But our system always comes back, it will this time, and it already is. We will come back, big time, when residential construction comes back. I think that could be reasonably soon. You will be surprised, in my view, at how quickly employment changes once we’ve sopped up the supply of housing. You hire when you have demand”

“When you look at those 15 recessions that our country has had, through most of them we didn’t really know what fiscal policy or monetary policy was. We fixed ourselves. Government can help. You’ve got low interest rates, but that can be like pushing on a string, until you decide to buy a house. When you do, it can help. But I would say by far the biggest factor in the business cycle, is the natural regenerative powers of capitalism. Capitalism works.”

During the mid-1980s major economic variables such as real GDP growth, industrial production, monthly payroll employment and the unemployment rate began to decline in volatility. Traditional business cycles have also declined in volatility in recent decades through structural changes that have occurred in the international economy, particularly increases in the economic stability of developing nations, (globalisation) diminishing the influence of macroeconomic (monetary and fiscal) policy. Buffet lived through a 50 year green candle, have you ever thought that the next 50 year candle could be a red one? I don’t want to frighten you but it’s a possibility 😉

If you are so blindly bullish why bother with stops? Just chuck it all in the market and switch off the screen for 30-40 years, it’s much less stress, and after all, it’s definitely a certainty isn’t it, cos it happened in Buffets era, so it’s bound to happen in yours…

The 100 year timeframe isn’t a holding period, it’s just to illuminate how succesful a “we’re doomed, we’re doomed” strategy has been over the years, despite centuries of wars, crises and disasters, and countless other times we’ve written ourselves off. It’s a reminder that on the longest timeframe we have, the chart starts at 25 and now rests in the tens of thousands 🙂

Of course learning to spot opportunities when they arise can be very profitable. For those investing in large FTSE 100 stocks, the time to buy is usually when the market is relatively low. Many of the constituents will have an attractive yield. Likewise, the time to sell could be when there is a profit for the investor and yields seem relatively low. A problem is mistiming the markets: sell off equities after a big market crash, then waiting for prices to start heading upwards again before re-entering the market.

That’s absolutely key to his strategy it seems, not investing with a view to say “here’s something new that is going to change the world”, but “here’s something that will weather the inevitable changes in the world, while paying for itself in dividends”. There are better articles online trying to explain why Buffett would take that view, but “a wonderful company at a fair price”, “with a strong economic moat” and “buying when it’s on the operating table” would be a fair conclusion from his previous advice.

Now there’s nothing stopping us from trying to emulate his approach in separate long term portfolios (i.e. having a Buffett portfolio, an active portfolio with risk management measures to protect month by month gains and then a day trading style spread betting account), because you can see why investors find it difficult to stick to Buffett’s timeframe.

Then there’s the small problem of having Buffett’s patience and security analysis skills, the experienced swing trader’s knack for adding to positions in growing momentum-fueled shares, and the day trader’s skills for reading a chart and making consistently profitable day trades!

But here’s where diversifying strategies work out – you have the comfort and knowledge that your long-term Buffett pension holdings will realise their value over time, maybe in time for your retirement, but how many investors get itchy feet with this method? Can you really stomach losing all that paper profit, can you last the course, when you have several years of bad performance in a row, and this is your only investment method?

In theory you’d need to be comfortable separating the three different strategies and giving them all due attention, not to mention being good at the very different disciplines of fundamental/technical analysis, investing and trading on short and long timeframes. But the reason why I like the idea, is the emotion/temptation of fiddling with those long term holdings is reduced if you have income being generated regularly from shorter term trades. This is far less likely to have a bad month or year than a rigid buy-and-hold for dividends and value approach, which may take 15-20 years to truly pay off. Instead you also have a strategy that year-to-year maybe you can use to generate a salary. You could feel almost unfazed by pullbacks in a buy and hold account, if you knew it would eventually realise its value, and you had a stream of income from momentum-trading the downwards move. In practice, you’d need to be a jack of all trades, in which case you’d probably not need to diversify your strategy in the first place lol, I dunno.

Investor Comment: We can’t compare today’s modern financial market with that of 1949. In Buffets era, i.e. the last 100 years, we had decades of growth coming from industry. The mass production of the motorcar began in 1914, which fuelled growth in associated infrastructure and business feeding from it. For instance the growth in the oil industry and construction industry lasted for decades. Our M1 motorway wasn’t constructed until the 1960’s. It was the knock on effect of the growth from those businesses that we were able to afford Coca Cola and McDonalds. Unfortunately for us that growth has come to the end of its cycle due to industry moving East and word unheard of when the M1 was under construction. “Globalisation”. What do we have to fuel growth over the next 100 years? In 2012 the FTSE is lower than it was in 2000. No doubt in year 2000 there were bulls calling the FTSE to be 10k by 2012. They are disappointed. Perhaps we will be even lower in another 12 years with nothing to fuel growth. Also in 1949 we weren’t facing the collapse of the European Union under the weight of record levels of sovereign debt in the western economy.

Comment by Dave: If you buy it right in the first place you have nothing to worry about ,so at a car auction the trader doesn’t buy any old crock of shit that goes under the hammer he waits till something is screaming out value, from then on his job is easy because he bought the car at the correct value; this is obviously Buffett’s strength he can value a company which leaves him unperturbed about market noise knowing eventually the cream will come to the top. Of course people who have been in the market the last 5 years are right to be nervous they would have seen share price rise an then get decimated in huge market sell offs, it’s much easier to go risk on than go risk off. Personally I think people get invested and fail to have an exit strategy. This then causes a lot of bad decision making when the stuff hit’s the fan, I’m one that has always stated that you need a bespoke strategy to suit your own individual needs aims and requirements, but it takes a long time before you realise that and that time can often come at a high financial price.

The traditional bakery has indeed been decimated from the likes of Tesco on one front, and by fast food retailers on the other front. That’s been in motion for maybe thirty years or so – although there are still around 3000 independent bakeries in Britain.  Greggs has suffered no such decline though – in fact, it’s been a big driver in the demise of many old fashioned bakeries, who cannot compete on cost and brand.

The Art of good governance is scaling up operations without forsaking quality of product or customer service. Specsavers managed it. Do Greggs make everything on site that morning, or do they outsource? Do their staff have a stake in each franchise and how carefully is quality and consistency managed across the group? A motorway outlet should be providing exactly the same standard of product as in a well-to-do high street. McDonalds manage it! There’s no excuse for feeding customers a lower quality product than advertised, Greggs should be ashamed of the difference between the picture and the plate. They wouldn’t last 5 minutes in North America and deserve to get taken out or go under if they don’t buck up….sorry, that doesn’t mean to sound like a rant!

Here’s what a pal told me about his opinion of Greggs:

Apparently Greggs shops are getting makeovers which involve :-

1. Getting rid of the existing tables and replacing them with wobbly ones.
2. Getting rid of knives and forks – there are some sort of plastic/wood sticks given to customers to use instead.
3. Getting rid of plates. Customers now have to use the brown paper bag in which their pie or cake was given to them as a plate.
4. Bringing in new lines like giant-size cup-cakes with green icing
5. Getting rid of seating arrangements which allow more than four people to eat together.
6 Sticking a Hovis-type bike (complete with wicker-basket) on the walls.
7. Oh – and repainting the outside a kind of dark khaki-colour

Their current USP is to provide for fresh, quick, take-away bites – not fancy, schmancy sit-down cupcakes sans kives, forks, or plates. They will alienate existing punters, and the new intended ones will already be heading for Starbucks etc. Even MacDonalds (surprisingly drinkable coffee).

Only their move into motorway sites makes any sense at all to me. But right now, I’d be a seller. I could always gatecrash the party if proven wrong.

I reply: On the quality of your Greggs sandwich — but how many times have you heard someone complain about McDonalds food?   People have made entire films showing how unhealthy their food is, how rubbish the quality is etc. Does it stop being one of the world’s greatest businesses? Of course not. Has the quality of Greggs’ food stopped it from enjoying one of the best track records on the UK stock market? The last 28 years says no 😉

On the comparison front, why not do the same with a Burger King Whopper, or a Big Mac, and compare it to the enlarged juiced up burgers they show on the TV adverts? You’re mistaking a fundamental flaw with how mass food retail advertising works.

If every food business deserved to go bust because one of its sandwiches wasn’t up to scratch (in a store over which it has limited control), then there wouldn’t be a single food outlet in the country.

McDonalds have never served a bad meal? How about KFC, Burger King? And they serve meals exactly as presented in their adverts? These are the most successful, profitable food businesses in history.

The sandwiches are made on site by staff with materials sent from Greggs’ central production sites. I’m less worried about anecdotal complaints (like I say, they aren’t hard to find with any food retailer).

I’m not saying Greggs should get away with serving sub-par produce, but it would be naive to pin an investment case on whether or not someone had a bad sandwich at a franchise store. I think they’ll be fine.

It does help that I don’t view the current high street problems as being permanent, and that I think more blue-collar workers will eventually be back in work compared to this year. New stores continue to be opened, total sales in this lousy quarter were up 1.5%. They have their problems – but none they can’t solve easily enough in my view. I’m very happy to take that risk at 11 times earnings or so.

So long as Starbucks and McDonalds keep their paws off the sausage roll and bakery markets, this one should work out over time!

Here’s what I say to your bad meal complaint.  I spoke to a group of 20 something’s to 30 something’s on Saturday.

They were eating Greggs produce. I asked them why they didn’t go for a healthier option or to a supermarket. The response was resounding, they love Greggs products and made a point of reminding me you can have everything in moderation! They loved the fact that sandwiches were fresh and their own choice of filling and fresh fillings at that. They all said if Tesco etc did sell the produce it wouldn’t taste the same and you’d need to have a microscope to see the filling lol.

It should be recognised though, a good business isn’t always best judged by anecdotal experience. Ryanair shareholders might agree — there’s another company that seems frankly detested by the very people who ring in the profits. Since we last spoke of chronically-unpopular Tesco, you can almost set your watch by the amount of £££ they’ve made in the UK alone, with every tick of the clock. Sometimes the long-term results speak for themselves, pictures not included!

And on whether 400 odd grand in sales is adequate on a per store basis, on a mass scale as market share continues to increase, I have no problem with that. It compares to £282k for every Sayers store, £252k for every Coopland store, £472k for every Costa Coffee, £523k for every (unprofitable) Starbucks UK store.

Pret A Manger is a different case though, and they take in far greater sales per store. Would I rather be in their shoes? Well, they enjoy most of their sales in the affluent London market. Greggs can outproduce and outprice them, but they can’t command the same kind of prices on average per-store.  I’d be interested to see how that would play out over time, but in my view, it’s better to be aligned with the company with better scale/economics.

I think it’s worth mentioning too, that when it comes to business success, I can’t think of many large-scale winners that have focused on being “healthy” eateries or pretentious cuisine. That’s despite “healthy eating” supposedly being a trend for the last two decades!

Domino’s Pizza, McDonalds, Greggs, they’ve not suddenly turned unhealthy overnight, yet they’ve enjoyed remarkable success for decades. I pick those examples because their business/market records are there for the public to see. The same criticisms could’ve been made about Greggs at any point in the last 20 years – they can’t suddenly be used as an excuse when they have a bad year 🙂

I may be wrong, but I’d rather invest in a profitable successful business that the average person enjoys, rather than invest in an unprofitable fancy restaurant that I’d eat at every evening myself.

Could Greggs buy out, or start up “Le Fancy Sandwich Shop”? And apply its productive power and scale while offering a more up-market fancy offering, to meet one’s lofty sandwich standards? Maybe, maybe not. It will not have a bearing on my long-term valuation of the business 🙂

Seriously though, give me a McDonalds or a blue-collar pasty shop over the countless loss-making pretentious eateries out there, any day of the week 😉

Only in the ludicrous world of the stock market could the Bakery business be “doomed” after a bad year. And in Britain, Greggs effectively is the bakery business, with around 11 times more stores than their nearest rival.

In short, I don’t think it’s a huge bet to say they’ll be fine. They’re remarkably well embedded, are by far the lowest cost producer, and I think the bakery business will look largely the same as today in 7-10 years.  I wouldn’t get too hung up about looking 40 years.

Please note that my personal belief for Greggs’ business is objective, based on its economic characteristics and record.

If I felt the business had fundamentally changed, I’d say so without hesitation. Of course things change. Some companies are better equipped than others to deal with that though, and I don’t see the bakery business changing any time soon. Sandwiches and sausage rolls aren’t complex – they’ve been around for a long time, and they’ll outlive me too.  But in my view, what has really changed is the market price, and the crowd’s sentiment. Neither of those things give me any worries – if anything, the opposite.

Those factors – commentators seeing it lower, the consensus opinions about the high street, commodity cost rises, the chart. None of those things affect my long-term view of Greggs as an operating business. Especially the technicals/bearish sentiment.

After all, if I owned a successful chain of stores that were by far the dominant leaders in their market, with a fantastic 20+ year record of cash generation and growth…

I wouldn’t rush to sell the company for half its worth, because of one bad year. I may be wrong, but I’d view that as the irrational thing to do.

I understand why the market is currently upset – but its fears are rooted in short-term concerns, and arguments that were just as valid when the company was producing blockbuster results. It doesn’t surprise me to see commentators rushing to criticise the company after a bad year – this is the nature of the stock market 🙂

I’m not in the business of predicting the end of the world though, or the death of long-standing institutions based on short-term concerns. My job is to invest in very desirable businesses, at prices that make sense. Selling my stake every time the market became hysterical would be a huge mistake 🙂

Worth adding though, that this really is a long-term business investment for me, rather than anything attractive in the short-term. Greggs is one of the most admirable businesses in the UK in my eyes, and it must be stressed that this is one for at least 7-10 years out.

 

Are they actually able to do the trade for you? For example Selftrade vary their online limit and leave you with an expensive sell, or having to repeatedly sell at smaller values. They’ve even repeatedly lowered their limit every time I put in a buy order obviously in an effort to get me to phone through and charge me more. Volume on that stock that day was Zero so it wasn’t a crowded entry.
My advice to you would be:-

1. Don’t over trade.
2a. Use an established and recommended online broker.
2b. Using a reputable personal Broker will often get a better price and an easier exit/entry but may charge more. Worth it for higher value trades.

After all, you should only really be buying if you’re convinced they’ll go up for a variety of reasons. It takes practiced discipline to keep to that rule!

Trader Comment:

iWeb – don’t bother, anyone! In a fit of pique with Barclayshare, I opened online an account with iWeb. I was surprised then to discover that there was no demo account, and then, (somewhat belatedly, you may say) that there was no Level 2.

Fastrade – Bonjovi is good looking isn’t he – want £30per annum per corporate bond holding. They won’t pay anything towards my move. Pass.

Barclays don’t trade Corporate Bond/gilts/pibs s online and want £65 per trade, they are having a larf. They will pay £150 towards the move (estimated £400)

Hargreaves Lansdown – don’t allow online trading in Corp Bonds/Gilts/Pibs and want…hmm…was it £45 per trade. They will pay all my moving costs.

Both Fastrade (part of Charles Stanley) and Barclays charge an annual fee.

TD Waterhouse is ignored because their website is too horrible to contemplate. Doesn’t work with Firefox and finding data requires a degree in computer science.

The rules say that my shares should be safe if Selftrade bites the dust. That assumes there is no fraud and they are obeying the nominee rules. Who says they are?

There is £50k compensation if they aren’t or if they go bust while some shares haven’t settled. That’s hopeless.

There is £85k compensation if one of Selftrade’s banking providers goes bust. Can’t worry about that but I can worry about whether HL use same as Selftrade…in which case nothing is gained by moving. There is only one £85k paid out per provider that goes bust.

The overwhelming risk is fraud. If Selftrade get into trouble (transactions were down 37% last year, not particular to them but that’s the number), there is more likely to be some wrong-doing with how our shares/money held. They are part of SocGen…so don’t say it can’t happen.

Bear markets have always been a fact of life for investors. Depending on how you count them, there have been about 4 or 5 prolonged periods of pessimism in the stock markets since 1900, of which the last started in 2000 and is still ongoing. These so-called ‘secular bear markets’ may contain some strong rallies, such as the one seen in 2009 and 2010. However, within a bear market, stock market indices will stop of previous highs and it won’t be long before they being to fall again, as happened during the second half of 2011.

One way to ride out a bear market is to adopt a more tactical approach to trading, playing the swings within the markets. If you’re willing to be tactical you could try to sell at the top and buy back at the bottom, holding cash for periods in between. The idea sound simple but in reality this strategy requires skills and experience. It is also important to remember that what looks cheap can get a lot cheaper.

Remember though, for every buyer prepared to buy a share, confident that it will rise in value, there is a seller who has lost confidence in that same share and believes it will be worth less tomorrow.

A good way to avoid losses is to buy good assets when the wider market is depressed. Looking at the crash of of 1987 and bear markets of 1991-93, 2000-03 and 2007-09 show how equities can reach very low levels and become sharply oversold. As soon as market sentiment improves, these stock are likely to bounce back sharply. The trick here being to spot those opportunities and buy and hold those shares in the confidence that the company’s profits and dividends in the long term will ultimately reveal its true worth.

Buying is the less onerous of the two decisions. Before you select a share you must do all your research: look at the website, the graphs, the financial facts, gather as much expert opinion and knowledge as you can, add a drop of gut instinct and take the plunge.

When to sell? Take the Slater mantra: Don’t be greedy. Easy to say, difficult to do. One of my friends has an inviolable rule: when he buys a share he makes a note of what he thinks would be a reasonable profit and puts a time limit on it. For example, if within 6 months the share rises 25% from the purchase price, he sells. But never look back.

Short Selling

Short selling is a strategy that spread traders can utilise to make material gains from falling prices. It is about selling a share without owning the underlying equity and buying it back at a lower price later in time. While institutions normally borrow shares so as to sell them short, retail traders can take short positions using internet trading platforms which permit spread betting or CFDs, effectively allowing you to take bets on a share or index falling in value.

Spread traders have to make a deposit on the stock which may be anything from 10% for FTSE 100 companies to 30% or more for FTSE 250 companies. However, individuals should be aware that they are still liable for the full market value of those shares and in the case of short positions, this liability is potentially unlimited.

My short positions are volatility based, so I “risk” 1.5% of my overall portfolio per bet, no more than about 6-8% overall (so 4-6 bets at most at any time), so reward is directly related to volatility, which I use ATR as a measure, multiplied by 2.5 to 3 times for a stop, for my 1.5% risk.

If however, as I would imagine, a lot of folks just “punt” without thinking about the amounts they are risking, especially if they are using a spread bet account (unlike a cfd account) they could quite easily over leverage, and wouldn’t realise it, as they think “its only £X/point, and it can’t move more than 20% against me, cos that is what I’m willing to sell at when it goes wrong” until the spread betting/CFD provider asks them to cough up the 30/50/100% margin even though it is suspended, short, and in profit.

I think quite a few on either side of this are going to get caught again by over leverage.

Needless to say I will be sleeping soundly every night until this is resolved.

As a side IG informed me that if I couldn’t meet the margin requirement, they would close any other open positions to cover the margin requirement without my say. If after that it still wasn’t covered then they would be chasing up for the extra monies to cover any margin.

I like to think in terms of total exposure not £/point.

So if I want to short £2k of shares and they are trading at 200p then that’s £10/pont.

Given that guaranteed stops are not always available and prevalence of spikes up in even the worst of companies that take out guaranteed stops I prefer to keep my total exposure to any one company low.

Of course when you get a likelihood of a total wipeout like we have in AFR I wish I had been braver but for long term results more small short positions beats 1 or 2 big bets. But small positions on stable markets is best, preferably distributed across short and long and not too concentrated in one sector. AFR is slightly different as one is betting against the herd. Of course as the herd move share prices irrationally one needs a very large available margin.

I also sometimes utilize limits, as sometimes shares move violently for a short period before returning to where they started.

The last period of severe stress for the markets was the 1970’s. There were big down years in excess of 19% and 26% but they were followed by up years of 43% and 28%. There is a fairly consistent pattern that after any down year or two, there will be a big up year. Back then we had 28% inflation, a three day working week, Suez canal closed, Middle east war, not forgetting ‘the winter of discontent’ and petrol rationing but the average gain over the decade was still 9% for bluechips and 12% for high yield bluechips – both EXCLUDING the 10 yr compound dividend gains of probably around 2-3% pa. O’shaughnessy’s Cornerstone strategy gained an average 16% pa over the decade.

Since 1952, bluechips have had a positive ten year rolling return every year. That is to say, your return over the previous ten years has never been negative.

A lot of companies had problems back in the 70’s recessions but overall the markets went up over 100% because governments inflated the problems away. They are in the process of doing the same now with issuing bonds, printing money, Quantitative easing and all the other things that make people poorer. Over time though, surviving companies can outperform inflation because they have to put their prices up or die. If governments inflate their debts, which they always have done since forever, company prices go up and profit go up together with wages and commodity prices. It doesn’t matter whether its war or debt, the outcome is the same – companies have to outperform inflation and bond rates else there would be no investors. My point is that going against the bull is statistically very long odds.

Ina Drew Chief Investment Officer at JPM “retires” following the $2 billion loss. Her salary was a hefty $500,000 but she managed to wangle an unbelievable $15.5m in 2010. Greedy bitch!

I also reckon Tim Cook (Apple CEO) could do with a hair cut, he snatched a pornographic $377,996,537 for one years work!

Here’s what the fat cats get paid: (Regulator Knackerd would soon sort em out)

http://executivepay.info/executive-compensation/2011

Executive pay is simply ridiculous. I can only relate to it when it’s performance related. Hedge funds are the biggest joke of all, the charges and fees mean the performance has to be unbelievable for you to see any gains but even bad performance will see the hedgies get paid, here’s a chart how hedgie money gets paid out red is hf fees yellow fund of fund fees and green clients profits.

Sure, all traders enter the markets with the intention of making, not losing money. However, there is a clear distinction between the part-time trader and the professional that extends beyond the number of hours trading, because when your livelihood is dependent on the success of your trades it is even more important to be mentally prepared for the daily battle with profit and loss margins. The transition to becoming a full time trader, especially for professionals coming from the corporate world and are new to self-employment, is often a tougher road to travel than many expect. And what’s worse, it can have a very real impact on your trading profitability.

So with that in mind, we break down some of the biggest stumbling blocks preventing new home-trader pros fulfilling their profit-making potential.

Keeping Your two Home Lives Separate

The first problem many pros find difficult to overcome when they first take to full time stay at-home trading is just that, the workplace is in their own home. The invisible divide between the trader’s office and his castle is often difficult to define, or doesn’t exist at all.

Throw into the mix the fact that the ones you love might be occupying the same space that you’re trying to work in and it’s even easier to appreciate the fact that things can get a difficult working in the midst of the environment you also live the rest of your life in.

The key to long successful trading sessions at home is to create a barrier between your new office and your home, and preferably a physical one at that. Trading at your kitchen table won’t optimise your performance, make sure you have a room in your house where you only trade. Not only will this help you “get in the zone” as whenever you go in there you’ll know it will be strictly for business, but it will also detract from the number of potential distractions around you, including the occasional rigmarole of family life.

Put in the Hours

If you’re planning on turning your hand to becoming a full-time trader then be prepared to put the hours in, because if you under-estimate the workload required to be successful then you’ll never reach anything close to your full potential.

Much like any other self-employed profession, research, market analysis and application all take time and dedication. Whilst being a full time trader might not mean confining yourself to solitude for fourteen hours a day, three hundred and sixty five days a year, it is a career choice you will have to commit to. Your family will also have to accept that the increase in the amount of time you’re spending at home isn’t an increase in the time you can necessarily spend with them.

Money Management

Money management and discipline are two of the most important concepts of being a profitable trader at any time, but are even more crucial when trading is your sole source of income. To be able to become a full-time trader, a move that will completely alter your lifestyle, you have to guarantee that you’ll be able to maintain a steady stream of profits, something that you don’t necessarily need to accomplish when only trading as a supplement to another job.

The most important thing to remember is to maintain the balance between keeping a healthy trading account and taking profits. Whilst it’s always tempting to take whatever profits you make immediately it is often more prudent to reinvest gains into successive trades, as this will enable you to be more profitable in the long run. If you manage your money correctly you can both reap a substantial income from trading whilst simultaneously increasing the size and frequency of your trades, which will lead to a growth in income in the medium term.

Realistic Expectations

Similar to money management, having realistic expectations as to what to expect from your trading performance has to be a priority for the new professional trader. To determine how much monthly profit you wish to make, and then trade attempt to chase this figure will more often than not result in rushing into inadvisable, poorly researched or overambitious trades.

Again,it is important is to be in the mindset of treating trading as a business, rather than a financial hobby. If you take the attitude that you can “get rich quick”, you’ll find yourself taking large positions and exposing yourself to losses you couldn’t recover from (again, this is connected to good trading account management). Taking a more systemic approach to making profitable trades, which may result in initially banking less as a monthly salary than you were being paid before, but will result in growing your new business far more successfully in the long term.

Some miners are binary trades – they will either resolve their issue or it is game over.  I think that some people can do very well out of commodity stocks, intellectual property stocks, technologies, biomedical companies etc. Unfortunately I also recognise that I’m not really one of those people. I’ve been fortunate to do well speculating or trading the upward momentum in HDY and RRR in 2009/2010, and RRL in early 2011, but I can’t see myself ever investing in that kind of project. (PXS also belongs on that list. I behaved like a fool and was lucky not to lose money – like with HDY, after making money on the “momentum up”, there was a fair bit of “momentum down” as the trend ended, if you know what I mean!).

I’m afraid the assets count for nothing once a company starts making profits. What’s the point of owning a company that only makes £1m profit from £100m assets if you can own a company making £2m profit from £50m of assets. Time and again oil speculators overvalue unprofitable companies on the basis of assets until the profits start coming in, and then the stock price drops or stagnates for a few years while return on investment takes over. They usually fall to a market cap of around 10x profits as per AFR. CEO will level out at about 10x next year’s profits. RKH will stagnate or drift down on placings until it makes a profit of about of around one tenth of market caps. Same tends to happen to unprofitable companies in other sectors – remember the talk of AVN and £28 per share because of their assets.

Give me a company that makes door handles, bits for speakers or radiator parts and I’m happy! Rather important day today, within a rather important week.

Value Investing in Terrible Times

In the very longest-run sense, a terrible economy in the present is exactly what you want, something akin to 2008, or 2000/2001. On that time horizon, you can be confident that so long as the world is still turning, you can effectively buy brilliant companies knowing you’re getting a good price. On that timescale, when anyone asks you about the economy you can say “I don’t care”, or if asked about the market say “It will fluctuate”, like the original J.P Morgan used to. You thank the market for giving you discounts, and avoid being flattered when it overvalues your business – but you act as the permanent owner of the company, without any regard for present market value.

On a slightly shorter time horizon where you might want to be in the market during bull cycles and out of them as they turn, you generally get a time period of about six months to a year to take advantage of major market mispricing, and you take the rough with the smooth inbetween. Fairly difficult, but not impossible. In this case, you pay more attention to the economy, but simply buy the dips until you can be sure the party is over.

Go a timescale further down and you’re at the peak of interest in the economy – you want to have consistently good years, a minimum number of bad months. Instead of accepting periods like late 2011, you attempt to avoid them by mitigating risk, “selling in May”, tactically changing your exposure to the market depending on the technical, economic and fundamental indicators. This is probably the most difficult ambition, into the region of hedge funds etc.

A timescale further down than that, and you have no worries about the economy at all, as your positions are open for an average of days rather than weeks or months. You use economic releases to take advantage of momentum in trades, but you look at the charts for guidance rather than fundamentals or the economy – you can make money in good times and bad, so long as you’re on the right side of the trade.

So it goes full circle – investing over decades and you don’t care what today’s economy looks like, the worse the better as you can reinvest or allocate more income to stocks at low prices without a care. Day trading and again there’s no worry about the economy – you just take advantage of what the market is indicating. You can be successful on any time horizon if you’re talented in that field or depending on personality – the forward-looking economy is only materially important if your time horizon is relevant to it. (so guys like Warren Buffett, and at the day trading timescale guys like Dave88 don’t need to worry at all about economic analysis other than for context!).

Note: Dividend reinvestment is absolutely key to growing your pot, have a look at companies who have consistently paid a dividend without a miss over a long period say 5 but preferably 10 years and preferably those who progressively increase it, try to look at dividend cover of at least 2, avoid companies whose dividend yield looks good because their share price has taken a hit because they are in trouble, it is good to have some of these elephants in the portfolio, dividend yield can help mitigate drawdown over longer timeframes.

Just picked up this link which says it all really. The business model for all these retailer businesses is out dated and plain old fashioned. Their products are either more easily sold over the internet without the need for large overheads or just simply of poor quality as in Shabitat or others do it better like Ikea.

• Habitat poor quality others better Ikea.
• Oddbins outlets in high street no parking Majestic better see their sp growth.
• TJ Hughes same as Habitat.
• Thomas Cook prices not competitive with internet companies.
• Thorntons business model all wrong should be in supermarkets and internet.
• Jane Norman no knowledge
• Borders does anyone buy books/CD’s in store anymore? Internet business.
• Barratts very competitive market place.
• HMV see Borders same bad business model.

The only business of these that you’d expect to have a chance is Barratts, in the end you have to try shoes on before you buy so I presume their stores were in poor locations and the business was badly managed.

The bottom line is if consumers can get it on the internet from the comfort of their armchair they will, rather than battle though the weather and “crowds” to shop in the high street.

I can only speak from personal experience and many of my friends are the same, i can’t remember the last time i bought either a book or a CD or organised a holiday in a retail shop. In essence the majority of these have bad business models.

Why is that the manufacturing industry keeps suffering in the UK and Europe? It’s not government engineered but a fact of globalisation. Labour across the globe has to align to make countries competitive. We have no god given right to a higher standard of living than Africans, Chinese or Indians. The companies we invest in go where the resources are and where manufacturing costs are competitive. Putting up trade barriers or labour barriers only makes countries less competitive in being able to trade with others. If your mate can’t get a good wage here then the answer may be doing what our immigrants have done – move to where labour is well paid and where his skills are in short supply such as the emerging markets and the Middle East. It’s been going on for hundreds of years, the ambitious are flexible and improve their standards of living. Those resisting change get poorer. You’ve got to be flexible and go where the demand is.

I’m only slightly in profit day trading, it sure isn’t easy and requires lots of dedication and screen time and I’ve not made enough to live off after losing all my initial big gains in my rouge trade but I’m not underwater (yet) I’m being more selective in my trades but all this chart watching is boring as hell and I’ve missed lots of opportunities through being too selective and not watching the right chart at the right time. Perhaps sticking exclusively to one instrument is best? I missed 8:05am long on DOW and been sat here watching it going sideways all afternoon!

If a trader decided they preferred day trading then it might be a case of continually monitoring the win: lose ratio and increasing stake size as ATR falls. That way it should be possible to produce a similar income with increased stake from a smaller ranging market.

My trades are still very much discretionary so I’m easily talked into or out of good/bad trades. I haven’t used indicators such as bollinger, adx, cci etc I just use support/resistance levels and then look for a signal by the break of a candle, i.e. bullish engulfing, pin bar etc. I’m going to keep working on a system which helps to take away that discretion and help with the discipline. At present I’m doing a little better than treading water!

Spread betting encourages you to day trade, many day traders lose money. It is a more prudent strategy to work on longer time frames, exploit the fat tail probability of trading

I tend to struggle on longer timeframe trades because I find it hard to disconnect from my daytrading mindset, sometimes you just need to play to your strengths, but the market can be very cruel…