Trading - According to the Wizard
A case against investment funds
The mutual fund concept is sound and wise, but there are negatives. I'm not referring to the 4Q03 SEC investigation into Putnam Funds and others that allegedly cheated their unit-holders. It is just that with the availability on the Internet of all kinds of corporate and financial markets information, and with a few skills, you can do the same job as those fund managers, at a lot less cost. The downside is mostly from problems within the funds themselves. The key is the caliber of management. Just as with corporations, there are able, mediocre and poor money managers...
Selecting equity funds
You need help in selecting equity mutual funds if your long-term average annual net return is below 8% for a balanced fund, 10% for a large-cap equity fund, 14% for a small cap fund, and 20% for a micro-cap fund. Performance record is the key. The only way any investor can judge the future is on the past. The mutual fund industry rates managers each quarter-year on a quartile system, among their peers. It's too much to expect attaining first quartile performance always but I wouldn't invest in a fund if it cannot reach the top half (i.e., first two quartiles) every time...
Selecting bond funds
Without the financial resources to buy a diversified block of bonds, look at bond funds or bond exchange traded funds. ETFs are preferable to mutual funds because ETF commission costs and ongoing management costs are almost nil but the benefits are all there. Costs of investing in bond mutual funds are comparatively high. Some loads are as high as 8%; management fees are around 0.5% of assets plus 0.5% for operational expenses plus 2.5% of the fund's cash income. Thus, yield to shareholders will be about 1.5% less than an average bond portfolio or bond ETF...
About hedge funds
Hedge funds refer to funds that can use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage. The result is greater performance and less risk than mutual funds. At a time (1Q04) when stock markets appear to have reached excessive valuations and may be due for correction, hedge funds provide a good alternative to investors seeking capital appreciation as well as capital preservation...
A general discussion about options
There has always been a mystique about securities options. I suppose it's because options trading represents a zero-sum game which has one winner and one loser and no other value is created except for the employment of intermediaries. Professional traders who trade puts and calls for their living and for much of the bottom-line income of the broker-dealer firms that employ them now dominate. When trading options, which is a strategy I recommend, you are competing with Wall Street's most skilled people whose future depends on their ability to win and yours to lose...
About commodities, futures and currencies
The markets for commodities, financial and index futures, and currencies are (like options) zero-sum time-based contract markets. Most investors find these markets quite risky and believe trading them should involve only money you can afford to lose. I do know these markets offer opportunities to build capital quickly and, under certain conditions, can be used conservatively to hedge and sell short. They also can give the student of the market a vast amount of additional information to study when making even the simplest decisions to buy or sell a stock...
Equity Market Structure & Analysis: Sector & industry structure
The most critical element of equity market analysis is your understanding of the structure of the market. The equity market is classified by Standard & Poor's and by Dow Jones into the following hierarchical list of stocks: (i) sectors, (ii) industry groups, (iii) industries and (iv) sub-industries. By understanding equity market structure, you can use your knowledge to better analyze markets and make decisions. When you go to a large food market, you look to the aisle signs for guidance. Otherwise you just stumble around. Same thing should apply to the capital market...
A study of market relationships
By top-down study of market prices and sufficient analysis of time series data, you will see that the market does not operate in a vacuum. You will observe nested relationships existing within the data. You cannot effectively trade the capital markets without understanding these relationships. Some relationships are due to the sectors, industry groups, industries and sub-industries being affected by: (1) interest rates, i.e., related to paper assets, (2) the economy, i.e., related to spending and consumption, and (3) commodity prices, i.e., related to real assets...
