Thursday, June 30, 2005
Weak end to a strong month
Despite two weak days in a row, my portfolio managed to increase $21,804 for the month of June (5.3 percent), making this the best one month performance since December. I've now been able to outperform the S&P 500 eleven months in a row. While I'm generally pleased about my performance so far this year, I'm disappointed that I haven't been able to diversify my portfolio away from its heavy reliance on value stocks. I suppose the prime reason for that is because I am a value investor at heart, and I feel like I'm in an alien world when I contemplate buying anything other than a value stock. However, as I'm pointed out before, reliance on one particular style of investing leaves one exposed to more risk than is optimal, especially in today's market environment where it is very hard to find good stocks at reasonable prices. If you don't believe me, take a look at figure 4 in this fascinating whitepaper by John Campbell.
Tuesday, June 28, 2005
If we all get rich, who will mow my lawn?
Another thought provoking column by Robert Shiller. Here's another way of looking at the same point. If the return on stocks is 6.9 percent per year in real terms for the next 60 years, $1,000 today will be worth (in today's money) about $55,000 sixty years from now. That's a factor of 55! Yet, if GDP grows at a real rate of 3 percent, then the economy will have grown by less than a factor of 6. Even if GDP grows by 4 percent, which would be spectacular indeed, GDP in 60 years will only be 11 times higher than today. Now remember, GDP is the value of all the goods and services produced in an economy. But if stock market wealth were to grow much faster than national income over a prolonged period of time, then eventually we would all want to buy more than the economy could produce. Unless one thinks that the trade deficit will swell to an unreasonable size, the only conclusion that one can sensibly draw is that 6.9 percent is way too high to be realistic.
When you can't succeed, sue your critics
Yeah, I'm sure this is why their stock trades at 3 cents per share.
Missed the bus
The Market Express thundered to one of its best gains for the year. Unfortunately, good ol' Stockcoach, holding his suitcase full of microcap stocks, wasn't on the bus. Up only $300 today.
Monday, June 27, 2005
Welcome back WSCI
All in all, it was a good day today, as my porfolio gained about $3300. I bought back 2000 shares of WSCI right before the close at $3.81. The stock is down 40 percent from the high it hit on Thursday. I think it's oversold. The stock hit a high of $3.80 on Wednesday of last week, right before the earnings were released. There's plenty of support under that price. All those people who missed out on the last week's rally will be eager to get back in. Although it's possible the stock will continue to drift down, I think the balance of probabilities favors a rebound above $4, especially since there are plenty of shorts who still need to buy back their shares.
Friday, June 24, 2005
Weekly Summary
I managed to squeak out ahead this week. My portfolio gained $3,277 (0.8 percent) to $430,778, outperforming the NASDAQ (down 1.8 percent), the S&P 500 (down 2.1 percent), and the Russell 2000 (down 2.2 percent). I think the downdraft we saw this week is temporary, and that the market will rebound next week. Nevertheless, I remain pessimistic about the long-term prospects for the stock market. I base this statement on valuation. Although the S&P 500 is trading at a reasonable 20 times earnings, this is not as bullish as it seems. First of all, the 20 times earnings multiple is based on S&P operating earnings. The earnings multiple based on net income that the media never seems to discuss (which includes such things as one-off charges) is closer to 25. Second, earnings growth has outpaced revenue growth for several years now. As a result, corporate margins are at all time record highs. This is not sustainable. Eventually margins will decline. If you don't believe this, then you don't believe in capitalism. For my money, the most telling statistic is that currently the average price to sales ratio for U.S. stocks is 1.4. The historic average is 0.8.
Thursday, June 23, 2005
Not so hidden gems
A friend of mine was kind enough to forward to me the latest issue of Motley Fool's Hidden Gems. This month's pick, which was released at exactly noon, was COLM. By about 12:05, the stock had jumped by a dollar. I went back and looked at prior recommendations. This happens on a regular basis. As soon as the pick is released, the stock price typically moves between 5 and 10 percent. Today's move was a bit more restrained because COLM has a market cap of nearly $2 billion, which is bigger than the market cap of the typical pick in Hidden Gems (how hidden is a stock when 21 anaylsts follow it???). Needless to say, the noon price (and not the day's closing price or the following day's opening price) is the one that is used in the advertising showing how the Hidden Gem newsletter performs relative to the market. Naughty, naughty in my opinion.
Coulda shoulda woulda
It was one of those days. First of all I had a splitting headache when I woke up. Then I powered up the ol' computer and saw that WSCI was trading at over $6 in the pre-market. That's a nice chunk of change that I left on the sidelines by selling too early. Fortunately, I've developed a pretty thick skin about such matters. Sometimes you make the right call, sometimes you don't. The best you can do is try to learn from your mistake and move on. My portfolio finished the day down $1,700. Let's hope tomorrow is a better day!
Wednesday, June 22, 2005
Bye Bye WSCI
Up $2,700 today thanks to an afterhours surge in WSCI. I sold my position at $5.10. The earnings report was solid, but not unexpected for anyone who has been following the company closely. WSCI has a bad habit of gapping up on good news and then selling off. This has happened each time in the past two quarters, and I don't think this quarter will be any different. Also, WSCI's valuation has become stretched. The company should generate about $15 million in revenue this year. At $5 a share, that implies a price to sales ratio of about 0.9. That's very high for a contract manufacturer. Very high. As a point for comparison, the other three contract manufactures that I own (KTCC, NSYS, and SMTX) have price to sales ratios of only 0.2, 0.15, and 0.05, respectively. I think those companies now represent much better values than WSCI.
Tuesday, June 21, 2005
HOTT or not?
Up $300 today. I got partially stopped out of AE today. My stop limit order got filled for 200 shares at $21.90. Too bad. The stock rebounded and finished down only marginally for the day. I haven't had much success with stop orders in the past. It always seems that somehow the stock falls just enough for my order to get triggered, and then jumps up again. Oh well. Let's see what happens with my remaining 200 shares.
I also shorted 500 shares of HOTT at $20.67. The company guided down last night and the stock fell 10 percent. Even Cramer gave it a "triple sell" during last night's Lighting Round. Yet, the stock managed to crawl back into the black today. This often happens when some hedge fund purposely buys shares to drive up the price in order sell even more shares at the higher price. The hedge fund gains. The poor idiot who bought just when the fund starts dumping stock ends up holding the bag. I figure when that happens the best strategy is to scalp the hedge fund and short some shares.
I also shorted 500 shares of HOTT at $20.67. The company guided down last night and the stock fell 10 percent. Even Cramer gave it a "triple sell" during last night's Lighting Round. Yet, the stock managed to crawl back into the black today. This often happens when some hedge fund purposely buys shares to drive up the price in order sell even more shares at the higher price. The hedge fund gains. The poor idiot who bought just when the fund starts dumping stock ends up holding the bag. I figure when that happens the best strategy is to scalp the hedge fund and short some shares.
Monday, June 20, 2005
The momentum moose is off and running
I picked up 400 shares of AE today at $20.89 today. Let me tell you, buying a stock that is up $3 from Friday morning is not easy. After all, I usually sell stocks like that, not buy them. But this is my experimental momentum portfolio, so I have to be true to the reason I created it. Luckily, the stock continued to move higher and finished the day above $22, so for the time being, the Momentum Moose portfolio is off to a good start.
I am starting to become concerned that rising petroleum prices will have a chilling effect on the economy and the stock market. So to hedge market risk, I bought two more energy stocks today: NGAS and DWSN. I reckon that if the rest of the market tanks, these two should go higher, thereby mitigating the negative impact on my portfolio.
Also, I think we are still in the 7th inning of the bull market in energy stocks. If this were any other sector, NGAS and DWSN would not have passed my value test. But I think energy stocks have become the new dotcoms. Of course, we all know what happened to dotcoms, but I'm willing to bet that as far as this analogy is concerned, we are still in late 1998 and not early 2000.
I am starting to become concerned that rising petroleum prices will have a chilling effect on the economy and the stock market. So to hedge market risk, I bought two more energy stocks today: NGAS and DWSN. I reckon that if the rest of the market tanks, these two should go higher, thereby mitigating the negative impact on my portfolio.
Also, I think we are still in the 7th inning of the bull market in energy stocks. If this were any other sector, NGAS and DWSN would not have passed my value test. But I think energy stocks have become the new dotcoms. Of course, we all know what happened to dotcoms, but I'm willing to bet that as far as this analogy is concerned, we are still in late 1998 and not early 2000.
Sunday, June 19, 2005
Academic Paper: Do Managers Detect Mispricing? Evidence from Insider Trading and Post-Earnings Announcement Drift
Abstract:
We find that insiders trade in a manner that indicates they are aware of post-earnings-announcement drift: they are more likely to buy (sell) after the announcement of good (bad) earnings news when the initial price reaction to such news is small in absolute magnitude. This result stands in contrast to the results of other researchers who, without controlling for the initial price reaction to earnings news, find that insiders tend to sell (buy) in response to good (bad) news. It also has important implications for corporate finance. By demonstrating that managers can spot mispricing when trading on their own account, it suggests that recent theories that assume managers are bad at judging the rationality of stock prices have limited applicability. It also supports theories that assert managers time new issues and repurchases to exploit mispricing. In addition, we find that insider purchases made after earnings announcements help the market more quickly incorporate positive earnings news into prices. Insider sales, however, do not appear to have this effect for negative earnings news. Further, neither insider purchases nor sales made after earnings announcements appear to get information about future earnings better reflected in stock prices.
We find that insiders trade in a manner that indicates they are aware of post-earnings-announcement drift: they are more likely to buy (sell) after the announcement of good (bad) earnings news when the initial price reaction to such news is small in absolute magnitude. This result stands in contrast to the results of other researchers who, without controlling for the initial price reaction to earnings news, find that insiders tend to sell (buy) in response to good (bad) news. It also has important implications for corporate finance. By demonstrating that managers can spot mispricing when trading on their own account, it suggests that recent theories that assume managers are bad at judging the rationality of stock prices have limited applicability. It also supports theories that assert managers time new issues and repurchases to exploit mispricing. In addition, we find that insider purchases made after earnings announcements help the market more quickly incorporate positive earnings news into prices. Insider sales, however, do not appear to have this effect for negative earnings news. Further, neither insider purchases nor sales made after earnings announcements appear to get information about future earnings better reflected in stock prices.
Academic Paper: Simple Technical Trading Strategies: Returns, Risk and Size
Abstract:
This paper investigates the efficacy of the most simple and commonly used technical trading strategies seen across firms of varying market capitalization. The results show that the success of trading strategies declines sharply with an increase in firm size, supporting the hypothesis that technical analysis is most appropriate for smaller stocks. Technical strategies applied to smaller stocks earn excess average monthly returns of 1.7%, even after adjusting for aggregate risk factors such as market, size, book-to-market, momentum, and liquidity. In contrast, when applied to large stocks, such strategies do not earn excess returns over a buy and hold strategy. The results are robust when adjusted for time varying expected returns, transactions costs, and nonsynchronous trading.
This paper investigates the efficacy of the most simple and commonly used technical trading strategies seen across firms of varying market capitalization. The results show that the success of trading strategies declines sharply with an increase in firm size, supporting the hypothesis that technical analysis is most appropriate for smaller stocks. Technical strategies applied to smaller stocks earn excess average monthly returns of 1.7%, even after adjusting for aggregate risk factors such as market, size, book-to-market, momentum, and liquidity. In contrast, when applied to large stocks, such strategies do not earn excess returns over a buy and hold strategy. The results are robust when adjusted for time varying expected returns, transactions costs, and nonsynchronous trading.
Academic Paper: Who Gains More by Trading - Individuals or Institutions?
Abstract:
We calculate a proxy for individual trading, and find a significant difference in the return patters of stocks with different proportions of individual and institutional trading activity. These differences indicate that individuals buy low and sell high, and that they realize superior gains by selling. Furthermore, in the late 1990s bubble, they gain about 2% per month more than institutions by buying. Our findings suggest the due to holding winners too long institutions mistime the momentum cycles and gain less than individuals. They do not support the self-evident truth that individuals are the noise traders who lose money by trading.
We calculate a proxy for individual trading, and find a significant difference in the return patters of stocks with different proportions of individual and institutional trading activity. These differences indicate that individuals buy low and sell high, and that they realize superior gains by selling. Furthermore, in the late 1990s bubble, they gain about 2% per month more than institutions by buying. Our findings suggest the due to holding winners too long institutions mistime the momentum cycles and gain less than individuals. They do not support the self-evident truth that individuals are the noise traders who lose money by trading.
Academic Paper: The Sound of Silence
Abstract:
We explore whether silent information (electronic information flows) affects future price, spread and quoted depth levels in the Nasdaq Stock Market. Controlling for the time-series properties of silent information, past price, volume, electronic communications network (ECN) volume, time-of-day effects, and firm-specific fixed effects, we find significant links between silent information measures and future market conditions. Most robustly, silent information is strongly related to changes in future price and quoted depths, but only weakly related to changes in effective spreads. When silent information is segregated by relative proximity to Nasdaq inside quotes, we find consistent relations between silent information both at and away from the inside and future changes in prices and quoted depths. Our results suggest that modern electronic trading systems may be able to effectively capture much of the information heretofore limited to face-to-face trading on the trading floor.
We explore whether silent information (electronic information flows) affects future price, spread and quoted depth levels in the Nasdaq Stock Market. Controlling for the time-series properties of silent information, past price, volume, electronic communications network (ECN) volume, time-of-day effects, and firm-specific fixed effects, we find significant links between silent information measures and future market conditions. Most robustly, silent information is strongly related to changes in future price and quoted depths, but only weakly related to changes in effective spreads. When silent information is segregated by relative proximity to Nasdaq inside quotes, we find consistent relations between silent information both at and away from the inside and future changes in prices and quoted depths. Our results suggest that modern electronic trading systems may be able to effectively capture much of the information heretofore limited to face-to-face trading on the trading floor.
Academic Paper: Shares Outstanding and Cross-Sectional Returns
Abstract:
Post-1970, the change in shares outstanding exhibits a strong cross-sectional ability to predict stock returns. This predictive ability is more statistically significant than the individual predictive ability of size, book-to-market, or momentum. Our finding is related to research that finds that long-run returns are associated with share repurchase announcements, seasoned equity offerings, and stock mergers, although our results remain strong even after exclusion of the data used in these studies. We also provide estimation of the share change relation pre-1970 and find no statistically significant predictive ability for most holding periods.
Post-1970, the change in shares outstanding exhibits a strong cross-sectional ability to predict stock returns. This predictive ability is more statistically significant than the individual predictive ability of size, book-to-market, or momentum. Our finding is related to research that finds that long-run returns are associated with share repurchase announcements, seasoned equity offerings, and stock mergers, although our results remain strong even after exclusion of the data used in these studies. We also provide estimation of the share change relation pre-1970 and find no statistically significant predictive ability for most holding periods.
Saturday, June 18, 2005
Trading Experiments!
Given my large cash position (now over $80,000) and the dearth of great value stocks out there, I've decided to put some of that money to work by doing something fun, informative, and hopefully profitable. I am going to use 10 percent of my capital and create four portfolios of $10,000 each. Each portfolio will adhere to a different trading strategy. The four portfolios are:
1. "The Good News Bear"
This portfolio will buy beaten down stocks after they have released good news. The idea is that investors will price in the good news only slowly, which will generate high returns to those who get in quickly.
Open Position: None
Closed Positions:
ZEUS bought at $15.20. Sold at $15.95 (Profit: 4.9 percent)
2. "Momentum Moose"
The Momentum Moose portfolio will buy stocks that are displaying strong upward momentum and a significant increase in trading volume.
Open Position: None
Closed Positions:
AE bought at $20.89. Sold at $21.95 (Profit: 5.0 percent)
MNTA bought at $24.01. Sold at $24.11 (Profit: 0.4 percent)
3. "Short the Pig"
As the name suggests, this portfolio will short some of those smallcap stocks that have been bid up by daytraders to unsustainable levels. To limit risk, I will only short stocks that have soared despite no discernible news and that are starting to show signs of breaking down.
Open Position: None
Closed Positions:
HOTT sold short at $20.90. Covered at $18.74 (Profit: 10.3 percent)
4. "Cuz Cramer Said So"
This portfolio will buy stocks that are being hyped by Cramer. I will not buy them at the open. Rather, I will wait for any dips in the stock price.
Open Position: None
Closed Positions:
TWX bought at $16.20. Sold at $17.21 (Profit: 6.2 percent)
1. "The Good News Bear"
This portfolio will buy beaten down stocks after they have released good news. The idea is that investors will price in the good news only slowly, which will generate high returns to those who get in quickly.
Open Position: None
Closed Positions:
ZEUS bought at $15.20. Sold at $15.95 (Profit: 4.9 percent)
2. "Momentum Moose"
The Momentum Moose portfolio will buy stocks that are displaying strong upward momentum and a significant increase in trading volume.
Open Position: None
Closed Positions:
AE bought at $20.89. Sold at $21.95 (Profit: 5.0 percent)
MNTA bought at $24.01. Sold at $24.11 (Profit: 0.4 percent)
3. "Short the Pig"
As the name suggests, this portfolio will short some of those smallcap stocks that have been bid up by daytraders to unsustainable levels. To limit risk, I will only short stocks that have soared despite no discernible news and that are starting to show signs of breaking down.
Open Position: None
Closed Positions:
HOTT sold short at $20.90. Covered at $18.74 (Profit: 10.3 percent)
4. "Cuz Cramer Said So"
This portfolio will buy stocks that are being hyped by Cramer. I will not buy them at the open. Rather, I will wait for any dips in the stock price.
Open Position: None
Closed Positions:
TWX bought at $16.20. Sold at $17.21 (Profit: 6.2 percent)
Weekly Summary
A solid week. My portfolio gained $12,328 to $427,501 (3.0 percent), in line with the Russell 2000 (2.9 percent), and better than the S&P 500 (1.6 percent), and the NASDAQ (1.3 percent). Despite this nice gain, I am wary about the future. I ran my favorite stockscreen this morning (looking for stocks with low P/B, P/E and P/S values) but found nothing. I keep seeing the same garbage names over and over again. A few years ago, you couldn't sneeze without seeing a great value stock. Those days are over. Value investors are now running on fumes. Sure, there are plenty of cheap stocks out there. But most of them deserve to be cheap, if not worse. While I continue to think that the stocks in my portfolio will continue to outperform the market, I don't think the margin of outperformance will be anywhere close to as large as I have achieved in the past.
Thursday, June 16, 2005
Cramer booyaheads 0. NYSE specialist 1
If you saw Mad Money yesterday, you would have known that Cramer spent the first segment of the show crowing about Kohls. This is what would have happened if you bought at the open. For those of you who don't know how the NYSE works, let me give you a refresher course. For each stock on the NYSE there is a specialist whose job is to ensure an "orderly" market for the stock. This means that the specialist is the buyer and seller of last resort. By moving the price and trading from his own account, he ensures that the stock moves in an orderly manner and that all market orders are more or less instantaneously filled.
If there is an excess of market orders to buy, the specialist is obliged to sell stock. If he doesn't have enough stock to sell, he must borrow stock (i.e. short the stock). Now, let me ask you a question. If an influx of buy orders forces a specialist to go short a stock, what do you expect to happen? Well, the answer should be obvious. The specialist will do two things: one, he will raise the bid for the stock to ensure it opens well above the previous day's close; and two, he will short even more stock at the open to ensure the price is driven down so that he can cover for a profit. And that's what happened today.
If there is an excess of market orders to buy, the specialist is obliged to sell stock. If he doesn't have enough stock to sell, he must borrow stock (i.e. short the stock). Now, let me ask you a question. If an influx of buy orders forces a specialist to go short a stock, what do you expect to happen? Well, the answer should be obvious. The specialist will do two things: one, he will raise the bid for the stock to ensure it opens well above the previous day's close; and two, he will short even more stock at the open to ensure the price is driven down so that he can cover for a profit. And that's what happened today.
Another strong day
Up $5,000 today due to strong moves in a bunch of my stocks. Shares of OSTE hit my target and I liquidated my position. Now I have even more cash in search of stock. That's okay. The market is up nicely and there's no shame in shifting some money to the sidelines in case there's another downdraft.
Wednesday, June 15, 2005
Is Google worth only 30 bucks?
John Hussman seems to think so. Although I tend to agree with his main point, as long as Cramer is hyping Google to $350, I still think Google is a bad short.
Trying to put some cash to work
Up $3,800 today thanks to modest gains in a bunch of my stocks. My cash position is starting to expand again. It's now back over $40,000. I've placed a few limit orders to buy stock, but so to far no one has taken the bait. I know I've mentioned before that I wanted to buy some momentum stocks. I've yet to do so, largely because I haven't found anything to my liking. Too bad I suppose, because a lot of the stocks that I had considered buying have moved significantly higher without me. Well, that's okay. One thing I've learnt is that if you want to invest successfully, you have to do it on your own terms. The worst thing to do is to put pressure on oneself to make a trade. Every time I've done that, I've regretted it.
Tuesday, June 14, 2005
A nice day (no thanks to GIGM)
Like a drunk buffoon with a lamp shade on his head, GIGM fell down the stairs today, dropping 7 percent by the close. Fortunately, good moves in the rest of my portfolio, particularly from a strong earnings report by OCCF, generated a gain for the day of about $4000. This is another reminder about the power of diversification, especially if your portfolio is full of microcap stocks like mine is. In other news, FCPO hit my price target, and I sold my shares.
Monday, June 13, 2005
How about that Gigamedia?
How about that Gigamedia? Up big today, for the second day in a row. And on huge volume too. It's a rare day indeed when one of my stocks trades over 6 million shares. Too bad I only own 5000 shares. I am kicking myself for not buying more when it dipped last week. Oh well, hindsight is always 20/20. As it is, even GIGM's good performance was not enough to keep me out of the red today: down $500.
Sunday, June 12, 2005
Weekly Summary
It was a pretty forgetable week for my portfolio: up $227 to $415,174. For the year to date I'm up 11.1 percent. Hopefully, some of the positions in my portfolio that have been in hibernation mode for the last few months will finally awake and move higher. The summer is often a boring time for Wall Street. This can often be good news for people like me whose portfolios are stuffed with microcaps. When the big caps aren't moving, traders often focus their attentions on the microcaps.
Thursday, June 09, 2005
What's Google worth?
Down $500 today. What's Google really worth? Well, if you listen to Cramer, the answer is simple: $350. But let's stand back a minute and ask a more general question: how do you decide how much a company ought to be worth? If you believe that in the long-run, fundamentals determine a stock's price, then the answer should be: the value of company should equal the present value of the cash that the company will return to shareholders over its existence, both in the form of dividends and buybacks. But the problem is that a company's ability to pay dividends and buy back stock will depend on how successful the company is, and that's not easy to gauge, especially for stocks like Google.
The future is impossible to know. It is possible that Google will continue to be the marquee company that is today. It's also possible that another company will eclipse Google's technology (remember AltaVista?). Currently, Google has a market cap of $80 billion. It may turn out that the present value of the cash that Google returns to shareholders will end up exceeding that number, in which case Google's stock is undervalued. Of course, Google may end up returning little or no cash back to shareholders, in which case Google is worth little or nothing.
What's the "average" scenario for the future? That's anyone's bet. But $80 billion is a lot of money. And don't forget, that's present value we are talking about. For my money, given the risks involved, Google is not worth anything close to $350. Still, I wouldn't short it here considering the momentum the stock is showing. But if the stock starts to break down, then I say "short away".
The future is impossible to know. It is possible that Google will continue to be the marquee company that is today. It's also possible that another company will eclipse Google's technology (remember AltaVista?). Currently, Google has a market cap of $80 billion. It may turn out that the present value of the cash that Google returns to shareholders will end up exceeding that number, in which case Google's stock is undervalued. Of course, Google may end up returning little or no cash back to shareholders, in which case Google is worth little or nothing.
What's the "average" scenario for the future? That's anyone's bet. But $80 billion is a lot of money. And don't forget, that's present value we are talking about. For my money, given the risks involved, Google is not worth anything close to $350. Still, I wouldn't short it here considering the momentum the stock is showing. But if the stock starts to break down, then I say "short away".
Tuesday, June 07, 2005
Down for the day
Down $2500 today. I was wondering why no one was leaving comments. Then I discovered that I had inadvertently set the comment setting to restrict all but registered users (that is anyone who doesn't have an account with blogger.com). I've changed that, so now anyone can post.
Monday, June 06, 2005
Lost my shorts
Up $2000, no thanks to my short positions. I got stopped out on FCS and HANS. So once again I am shortless (not a pretty sight, in any sense of the word, I assure you). One of these days I'll figure out how to make money shorting, but in general, it has been a losing pursuit for me. I think next time I will wait until there is a clear downward trend. If anyone has some good ideas about which stocks are ripe for shorting, please leave a comment!
Saturday, June 04, 2005
Academic Paper: Heterogeneous Beliefs and Momentum Profits
Abstract:
This paper tests the effect of disagreement on momentum. Previous empirical studies link measures of a stock's visibility and investor recognition to the speed of information diffusion, and establish that momentum is larger for small, less followed stocks. I test the hypothesis that heterogeneity of beliefs implies slower incorporation of information into prices and translates into return continuation. Using the dispersion of analyst forecasts of earnings and trading volume as measures of heterogeneity of beliefs, I find that momentum profits are significantly larger for portfolios characterized by higher heterogeneity. The effect of disagreement on return continuation is distinct from the effect of visibility and investor recognition measured by size, analyst coverage, and the quantity of news headlines about a stock. These results still hold for individual stock returns in a multiple regression setting, and are not driven by short-sale constraints.
Collectively, the findings in this paper suggest that heterogeneity of beliefs provides information on the profitability of momentum strategies that is not subsumed by conventional proxies for the speed of information diffusion. When studying the nature of return continuation, the quantity of information available about an asset should be considered together with investors' disagreement about it.
This paper tests the effect of disagreement on momentum. Previous empirical studies link measures of a stock's visibility and investor recognition to the speed of information diffusion, and establish that momentum is larger for small, less followed stocks. I test the hypothesis that heterogeneity of beliefs implies slower incorporation of information into prices and translates into return continuation. Using the dispersion of analyst forecasts of earnings and trading volume as measures of heterogeneity of beliefs, I find that momentum profits are significantly larger for portfolios characterized by higher heterogeneity. The effect of disagreement on return continuation is distinct from the effect of visibility and investor recognition measured by size, analyst coverage, and the quantity of news headlines about a stock. These results still hold for individual stock returns in a multiple regression setting, and are not driven by short-sale constraints.
Collectively, the findings in this paper suggest that heterogeneity of beliefs provides information on the profitability of momentum strategies that is not subsumed by conventional proxies for the speed of information diffusion. When studying the nature of return continuation, the quantity of information available about an asset should be considered together with investors' disagreement about it.
Academic Paper: Momentum Strategies and Financial Databases: An Investigation of Intraday Pattern in Price Momentum
Abstract:
How do different databases define a firm? What are the rules for listing/de-listing firms across different databases? In this paper we show that the divergence in the criteria for listing/de-listing firms between the CRSP and TAQ databases is significant enough to impact the magnitude and direction of statistical profits of momentum portfolios. We show that while the standard momentum returns established in the literature can be replicated using CRSP data, TAQ data leads to entirely different results due to listing/de-listing discrepancies. We construct a two-stage filtering process to eliminate new/de-listing discrepancies between CRSP and TAQ to show a convergence in results. We then document that intra-day momentum profits exhibit an inverted U-shape. Given that intra-day stock prices follow a U-shape, we then show that an investor can "time" the market and enhance the profits of momentum portfolios if (s)he buys at noon prices and sells at the close.
How do different databases define a firm? What are the rules for listing/de-listing firms across different databases? In this paper we show that the divergence in the criteria for listing/de-listing firms between the CRSP and TAQ databases is significant enough to impact the magnitude and direction of statistical profits of momentum portfolios. We show that while the standard momentum returns established in the literature can be replicated using CRSP data, TAQ data leads to entirely different results due to listing/de-listing discrepancies. We construct a two-stage filtering process to eliminate new/de-listing discrepancies between CRSP and TAQ to show a convergence in results. We then document that intra-day momentum profits exhibit an inverted U-shape. Given that intra-day stock prices follow a U-shape, we then show that an investor can "time" the market and enhance the profits of momentum portfolios if (s)he buys at noon prices and sells at the close.
Academic Paper: Fear and Greed in Financial Markets: A Clinical Study of Day-Traders
Abstract:
We investigate several possible links between psychological factors and trading performance in a sample of 80 anonymous day-traders. Using daily emotional-state surveys over a five-week period as well as personality inventory surveys, we construct measures of personality traits and emotional states for each subject and correlate these measures with daily normalized profits-and-losses records. We find that subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side exhibited significantly worse trading performance. Psychological traits derived from a standardized personality inventory survey do not reveal any specific "trader personality profile", raising the possibility that trading skills may not necessarily be innate, and that different personality types may be able to perform trading functions equally well after proper instruction and practice.
We investigate several possible links between psychological factors and trading performance in a sample of 80 anonymous day-traders. Using daily emotional-state surveys over a five-week period as well as personality inventory surveys, we construct measures of personality traits and emotional states for each subject and correlate these measures with daily normalized profits-and-losses records. We find that subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side exhibited significantly worse trading performance. Psychological traits derived from a standardized personality inventory survey do not reveal any specific "trader personality profile", raising the possibility that trading skills may not necessarily be innate, and that different personality types may be able to perform trading functions equally well after proper instruction and practice.
Academic Paper: Do Individual Day Traders Make Money? Evidence from Taiwan
Abstract:
When an investor buys and sells the same stock on the same day, he has made a day trade. We analyze the performance of day traders in Taiwan. Day trading by individual investors is prevalent in Taiwan - accounting for over 20 percent of total volume from 1995 through 1999. Individual investors account for over 97 percent of all day trading activity. Day trading is extremely concentrated. About one percent of individual investors account for half of day trading and one fourth of total trading by individual investors. Heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money. Despite these bleak findings, there is strong evidence of persistent ability for a relatively small group of day traders. Traders with strong past performance continue to earn strong returns. The stocks they buy outperform those they sell by 62 basis points per day. This spread is sufficiently large to cover transaction costs.
When an investor buys and sells the same stock on the same day, he has made a day trade. We analyze the performance of day traders in Taiwan. Day trading by individual investors is prevalent in Taiwan - accounting for over 20 percent of total volume from 1995 through 1999. Individual investors account for over 97 percent of all day trading activity. Day trading is extremely concentrated. About one percent of individual investors account for half of day trading and one fourth of total trading by individual investors. Heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money. Despite these bleak findings, there is strong evidence of persistent ability for a relatively small group of day traders. Traders with strong past performance continue to earn strong returns. The stocks they buy outperform those they sell by 62 basis points per day. This spread is sufficiently large to cover transaction costs.
Academic Paper: The Anatomy of Day Traders
Abstract:
This paper examines the complete trading records of all day traders in Finland. A typical day trader is a male in his late 30s, who lives in the metropolitan area and trades in larger quantities than an investor in a size-matched control group even after ignoring day trades. These traders day-trade stocks that grab their attention, that they own, or that they have day-traded before. They pay close attention to the state of the limit order book, are very active near the end of the trading session, and are strongly deterred by losses. Day traders do not earn better returns than investors in the control group. Their realized returns from day trades are high, but these returns are not representative of overall performance because of their strong reluctance to realize losses.
This paper examines the complete trading records of all day traders in Finland. A typical day trader is a male in his late 30s, who lives in the metropolitan area and trades in larger quantities than an investor in a size-matched control group even after ignoring day trades. These traders day-trade stocks that grab their attention, that they own, or that they have day-traded before. They pay close attention to the state of the limit order book, are very active near the end of the trading session, and are strongly deterred by losses. Day traders do not earn better returns than investors in the control group. Their realized returns from day trades are high, but these returns are not representative of overall performance because of their strong reluctance to realize losses.
Weekly Summary
My portfolio gained $3,794 (0.9 percent) for week, outperforming the S&P 500 and NASDAQ by about 1 percent. Three new position to report: I bought 2300 shares of OCCF. Yeah, I know, it's in the fiber optic cable industry, not exactly the most popular industry to be in these days (my, how times have changed). But the company is profitable, growing, and very undervalued. It's an $8 stock with a $4 price tag.
I also started two short positions. At the beginning of the year, I meant to increase my short positions, but as it turned out, I ended covering the two positions that I had (TZOO and MSO). Well, here are two new ones: FCS and HANS. FCS guided down for the quarter a few days ago. The stock didn't go down very much; I think it's vulnerable for a further pull back over the next few weeks. HANS is a rocket due for a fall back to earth. Greenberg slammed it on Thursday's Mad Money. I think that this could be the catalyst that this stock needs to give back a few points. I have a slight profit on both positions and plan to keep them on a very short leash. If it looks like a short squeeze is developing, I will bail.
I also started two short positions. At the beginning of the year, I meant to increase my short positions, but as it turned out, I ended covering the two positions that I had (TZOO and MSO). Well, here are two new ones: FCS and HANS. FCS guided down for the quarter a few days ago. The stock didn't go down very much; I think it's vulnerable for a further pull back over the next few weeks. HANS is a rocket due for a fall back to earth. Greenberg slammed it on Thursday's Mad Money. I think that this could be the catalyst that this stock needs to give back a few points. I have a slight profit on both positions and plan to keep them on a very short leash. If it looks like a short squeeze is developing, I will bail.
Wednesday, June 01, 2005
NSYS
Up $2,500 today. I picked up an extra 1000 shares of NSYS today when my long-standing limit order got filled at $4.61. I don't know why the stock dropped so percipitiously (probably someone panicked or decided they needed cash fast). Whatever the reason, the stock dropped nearly 20 percent and luckily, my order was waiting to be filled. Placing limit orders like that is risky business, especially for someone like me who rarely checks his portfolio during trading hours. When there is no reason for a stock's decline, the strategy works well. Indeed, by the close of trading, NSYS shares were back up to $5. However, sometimes a company will release lousy news during trading hours (an unethical practice in my opinion), and the stock will drop, leaving anyone with a limit order to buy holding the bag. I had that experience with COLL a few months ago.
