{ Elliott waves. Bull Market: Left to centre. Bear Market: Right to centre. | The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. | Wikipedia | Continue reading }

A paper by Mark Grinblatt and two Finnish guys whose names I can’t pronounce (Linnainmaa & Keloharju), took data from Finnish military IQ tests, and combined them with transactional data on the Helsinki Stock Exchange. The paper is cleanly titled, “Do Smart Investors Outperform Dumb Investors?”

From the abstract:

This study analyzes whether high IQ investors exhibit superior investment performance. It combines equity return, trade, and limit order book data with two decades of scores from an intelligence test administered to nearly every Finnish male of draft age. Controlling for wealth, trading frequency, age, and determinants of the cross-section of stock returns on each day, we find that high IQ investors exhibit superior stock-picking skills, particularly for purchases, which earn up to 11% more per year than the purchases of below average IQ nvestors.

{ Falken Blog | Continue reading }

photo { Justine Reyes }

While I am not a fan of most big firm fundamental analysts, over the years, Merrill Lynch has had some sharp guys in their Chief Strategist/Economist positions. (…)

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras – excesses are never permanent.

4. Exponential rising and falling markets usually go further than you think.

5. The public buys the most at the top and the least at the bottom.


{ Lessons from Merrill Lynch | via Barry Ritholtz | Continue reading }

Don Boudreaux had an oped in Saturday’s WSJ, on “Learning to Love Insider Trading.” The economic case against banning insider trading seems strong, yet the public overwhelmingly wants bans. (…)

Even with laws against insider trading, the speculation game is and must remain ridiculously uneven. Today most inside info gets into prices before official announcements, and well-connected well-organized investment groups are vastly better equipped to find and exploit pricing errors than almost all amateurs.

{ Overcoming Bias | Continue reading }

One of the nice aspects of trying to solve investment puzzles is recognizing that even though I am not always going to be right, I don’t have to be. Decent portfolio management allows for some bad luck and some bad decisions. When something does go wrong, I like to think about the bad decisions and learn from them so that hopefully I don’t repeat the same mistakes. This leaves me plenty of room to make fresh mistakes going forward. I’d like to start today by reviewing a bad decision I made and share with you what I’ve learned from that error and how I am attempting to apply the lessons to improve our funds’ prospects.

At the May 2005 Ira Sohn Investment Research Conference in New York, I recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky than its peers and would hold-up better in a down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about forty percent of his investment, instead of the seventy percent that the homebuilding sector lost.

I want to revisit this because the loss was not bad luck; it was bad analysis.

{ David Einhorn | Continue reading }

related { Glossary of Trading Terms and Phrases. }