Why I was wrong, by Dick Bove

Why I was wrong, by Dick Bove

Posted by Kate Mackenzie on Nov 28 12:56.

Rochedale’s Dick Bove has pondered why he’s been wrong on the banks — spurred on, he writes, by a Bloomberg survey (which we couldn’t find) showing analysts’ predictions on financial stocks have been dismal over most of the past two years.
The conclusion:

Why Was I Wrong in 2011 and Will This Continue Through 2012?
The answer to the question as to why I was wrong in 2011, and some other analysts may have been as shown in the Bloomberg survey, is clear. I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like Bank of America and Citigroup would simply be ignored.
The next question that arises concerns whether the fears in the marketplace are reasonable and whether it is true that the banking industry can suffer very negative consequences that do not impact the overall economy. The key issues are these:
Economy: While the economists and others are projecting upward movement in the United States economy, the market is not. It is reflecting fear that the European and Chinese economies will falter and bring the U.S. down with it. While one cannot argue that this will not happen it is important to note that while gross exports are 13.4% of real GDP net exports are 3.0%. Domestically, final sales continue to grow and there is some indication that inventories are too low to support this growth.
Housing: The housing crisis began in 2005, six years ago. Since that time the population has grown by an estimated 15 million people; housing affordability has soared; and housing construction has fallen below what in normal times would be replacement requirements. The crisis in this industry is certainly not over but it is close to ending.
Financial System: the biggest threat to the financial system is not coming from the economy. There are excess funds in the overall economy and in banks. The biggest threat is coming from the Federal Reserve which may be applying draconian standards to the banks crippling their ability to perform. Hopefully, the people in the Federal Reserve will come to their senses driven by a need to assist the economy.
Europe: There is a belief that the European debt crisis will result in a massive financial problem for United States banks. To date there is no evidence of this. In fact, it is clear that the American banks are benefitting meaningfully from this crisis as funds, loans, and customers leave Europe for the U.S. It also seems likely that the European Central Bank will ultimately resolve the debt crisis by accepting the cost of bailing out the profligate nations.
U.S. Financial Stress: There seems to be no likelihood that the U.S. government will resolve its debt problems. The main reason for this is that there seems to be no reason to do so. Money continues to flow into the dollar and the U.S. Treasury from lenders.
Rumors: Investors have fled the market as shown by the decline in mutual fund holdings. Therefore, by default the markets are driven solely by rumors and computer-driven, day-trading programs. In this environment, banks do not fare well since all of the rumors associated with these companies are negative and are likely to remain so.

Despite the stubborn inability of the market to follow Boveian fundamentals, he is maintaining a belief in the upside:

Presumably, at some point, fear will either be realized or dissipate. My assumption is it will dissipate. At this point, the industry’s fundamentals will drive bank stocks much higher. This was my view at the beginning of 2011 and it is my view at present.

市场含着泪收市

by ckchoy

市场含着泪收市
市场最后一天交易已结束，总结了2011。虽说最后一天起落参半，但都在近低位收市，尤其STI，不但见红，还在最低点收市。是历来晨差的年尾效应（橱窗粉饰），惨不忍睹。

一月份效应? Capricorn Effect?
爱的反面是恨，既然无力推高就干脆有多低压多低，至少明年可以轻松的来个开门红，一炮冲天!

Reading this won't make you great!

Business Times - 17 Nov 2007

Reading this won't make you great!

Mark Sellers, founder of a Chicago-based hedge fund, argues that the best investors are born with particular psychological traits that others can never learn

By TEH HOOI LING
SENIOR CORRESPONDENT

WHAT makes someone a great investor? It's something you have to be born with, said Mark Sellers, founder and managing member of Sellers Capital LLC, a long/short equity hedge fund based in Chicago.

Apparently, it's not about your IQ, the education you've had, the books you've read, or the experience you've accumulated. 'If it's experience, then all the great money managers would have their best years in their 60s and 70s and 80s, and we know that's not true,' he said in a speech to a class of Harvard MBA students.

Intelligence and learning are obviously necessary too, and are sources of competitive advantage for an investor, but there are structural assets some possess that cannot be copied or learnt by others. 'They have to do with psychology and psychology is hard wired into your brain. It's part of you. You can't do much to change it even if you read a lot of books on the subject,' said Mr Sellers.

He said that there are seven traits great investors share that are true sources of advantage because they cannot be learned. You are either born with them or you aren't.

The seven traits are:

One, the ability to buy stocks while others are panicking, and the ability to sell at a time when other investors are euphoric. 'Everyone thinks they can do this, but then when October 19, 1987, comes around and the market is crashing all around you, almost no one has the stomach to buy,' Mr Sellers said.

'When the year 1999 comes around and the market is going up almost every day, you can't bring yourself to sell, because if you do, you may fall behind your peers.

'The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn't bring themselves to take money off the table because of the 'institutional imperative', as Buffett calls it.'

Two, the great investor has to be obsessive about playing the game and wanting to win. 'These people don't just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they're still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they're going to neutralise that risk.

'They often have a hard time with personal relationships because, though they may truly enjoy other people, they don't always give them much time. Their head is always in the clouds, dreaming about stocks. Unfortunately, you can't learn to be obsessive about something. You either are, or you aren't. And if you aren't, you can't be the next Bruce Berkowitz.'

(Berkowitz was a managing director of Smith Barney and set up his fund Fairholme Capital Management in 1999. Since inception, Fairholme Fund has returned 18.7 per cent annually on average.)

The third trait of a great investor is the willingness to learn from past mistakes. 'The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they've done in the past.

'I believe the term for this is 'repression'. But if you ignore mistakes without fully analysing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyse them it's tough to avoid repeating the same mistakes.'

A fourth trait is an inherent sense of risk based on common sense. 'Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realise what, in retrospect, seemed obvious: they were dramatically overleveraged. They never stepped back and said to themselves, 'Hey, even though the computer says this is OK, does it really make sense in real life?'

'The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.'

Five, great investors have confidence in their own convictions and stick with them, even when facing criticism. 'Buffett never get into the dotcom mania, though he was being criticised publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron's was publishing a picture of him on the cover with the headline 'What's Wrong, Warren?'. Of course, it worked out brilliantly for him and made Barron's look like a perfect contrary indicator.'

Mr Sellers said that he is amazed at how little conviction most investors have in the stocks they buy. 'Instead of putting 20 per cent of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2 per cent into it. Mathematically, using the Kelly Formula, it can be shown that a 2 per cent position is the equivalent of betting on a stock which has only a 51 per cent chance of going up, and a 49 per cent chance of going down. Why would you waste your time even making that bet?'

The Kelly Formula arose from the work of John Kelly at AT&T's Bell Labs in 1956. His original formulas dealt with the signal noise of long-distance telephone transmission. It was then adapted to calculate the optimal amount to bet on something in order to maximise the growth of one's money over the long term.

Six, it is important to have both sides of your brain working, not just the left side - the side that's good at maths and organisation. 'In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn't write worth a damn and had a hard time coming up with inventive ways to look at a problem,' said Mr Sellers.

'I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses.

'On the other hand, if the right side of your brain is dominant, you probably loathe math and therefore you don't often find these people in the world of finance to begin with.'

So finance people tend to be very left-brain oriented - and Mr Sellers said that that is a problem. A great investor needs to have both sides turned on, he said. 'As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off.

'You need to be able to step back and take a big picture view of certain situations rather than analysing them to death. You need to have a sense of humour and humility and common sense. And most important, I believe you need to be a good writer.'

He cited Warren Buffett as one of the best writers ever in the business world. 'It's not a coincidence that he's also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly,' Mr Sellers said.

And finally the most important, and rarest, trait of all: the ability to live through volatility without changing your investment thought process.

This, said Mr Sellers, is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down.

'People don't like short-term pain even if it would result in better long-term results, he said. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk.

'This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss.

'But most people just can't see it that way; their brains won't let them. Their panic instinct steps in and shuts down the normal brain function.'

Everyone Is About To Make The Same Mistake They Made In March 2009

Everyone Is About To Make The Same Mistake They Made In March 2009

Earlier we speculated that the European crisis might in fact be over.
The point of the post wasn't to argue that Europe had been solved; rather the point was that crises can and do end without the fundamental problems being solved. So if you're waiting around for a "solution" then you'll inevitably end up missing the turn.
The US crisis of '08-'09 demonstrates this pretty nicely.
Back in the thick of the crisis, what was everyone screaming about?
Well, there was the housing collapse obviously. This was probably the essential economic event, as it set off the wave of defaults and foreclosures hit the financial system like a bomb. Closely associated with the housing collapse was the acknowledgment that consumers had drowned themselves in debt during the boom, and that it would likely take years and years to get back to normal.
And the truth is that these issues have not gone away.
Take a look at revolving consumer credit (credit cards, basically).
While the rate of decline has improved a little bit, consumers remain in non-stop deleveraging mode.

Or consider housing.
According to the government's house price index, 2009 was not the bottom there. That index has hit its lowest level yet earlier this year, fully two years after the stock market bottomed.

While we're at it, here's a big, scary looking at household debt (outstanding) vs. GDP.

The bottom line, which you should hopefully grasp, is that there are some big, honking economic overhangs -- trends that have arguably built up for decades -- that haven't gone away or even improved over the last couple of years. We're going to be wrestling with these for awhile.
But the crisis has gone away, because despite these big issues, the market isn't worried that the whole thing is a sandcastle that's about to blow away. So even as housing market and credit trends have gotten worse, the market has had a really nice 2 or 2.5 year-run.
For what it's worth, it's this contradiction of a crisis being over against the backdrop of ongoing fundamental problems that's caused so many experts to miss the incredible comeback in the market.
So what does this mean for the Eurozone crisis? Well, it's the same: You don't actually need to fix all the fundamental problems for the crisis to end; you just need to be fairly certain that the whole thing isn't headed for total collapse.
Let's back up...
There's no doubt that the Eurozone is deeply flawed. We talk about the problems all the time here, but there are really two huge issues.

• The competitiveness issue: It's very difficult for less productive, peripheral economies to compete. Greece, Italy, et. al. don't have the luxury of competitive currency devaluation like they used to, and so they run ongoing trade deficits with their core neighbors (Germany, chiefly) and it's not obvious how that gets fixed. So-called "internal devaluation" via austerity hasn't really worked at all, and has produced considerable political and social discomfort (which has further exacerbated economic weakness).
• The lack of sovereign currencies issue: A big problem for Italy and others is not their high debt loads, but that they lack their own currency to print. This is crucial as it explains why the UK is a safe haven and France is not. It explains why Sweden is a safe-haven but Finland is not. It explains why Japan has a monster debt-to-GDP but borrows at rates that are the envy of the world.

How are these big issues possibly going to get solved? It's really hard to wrap your head around that. Nothing we've seen so far from any government meeting has been even close to satisfying.
Any "fix" that you could come up with inevitably runs into the politics problem -- the fact that you have 17 sovereign Eurozone countries and none of them want to spend a dime of taxpayer money helping out their peers, especially the peers who live in nice climates on the beach.
Remember this Venn diagram?

Image: Pawelmorski

But as we established with the American crisis of 2008-2009, you don't actually need to solve the underlying problems to end a crisis. All you need is for the markets to think that it's not all about to collapse. The solution can then be worked out over years
So what would it take to end the crisis in Europe? Basically just the assurance that there isn't going to be an imminent banking collapse and that the various governments will be able to continue financing their deficits for awhile. And through two years of crisis meetings, and ECB tinkering, it's possible that we're limping towards some point of stability.
At the last ECB meeting, Mario Draghi announced an unprecedented spate of measures designed to pump liquidity into the system. It may turn out that banks can basically pledge very piece of junk on their balance sheets, including individual loans, as collateral for fresh, badly needed cash. In short, the ECB is doing a lot to stave off a banking collapse. And it may turn out that by plying the banks with so much liquidity, governments are then able to finance their deficits -- a form of arbitrage that FT Alphaville dubs "the Sarko trade", since it was Sarkozy's suggestion that banks use cheap capital to sop up sovereign debt.
There are a lot of problems with this solution: One is that banks themselves have said they don't intend to use cheap liquidity for the purchase of buying sovereign debt, and also the potential size of this trade might not really be big enough.
But this could start to fix the plumbing. And that's key.
Ultimately, the problem in Italy (and Spain and everywhere else) is not that debts and deficits are so big. That's really not the issue.
The problem is that the plumbing is broken...
See in normal times, government deficits should be self-financing in that the government spends, the private sector gets that money, that money then eventually gets deposit into a bank, which then uses those deposits to buy government debt (presumably because it's risk-free) and the process is repeated and everything works out fine. But clearly in Europe that all broke down. Greece convinced everyone that government debt is not risk free, and money flowed from peripheral banks to German banks (and Swiss banks) depriving the government of natural debt buyers. This is why, for example, Richard Koo has proposed the radical solution of governments only being able to sell debt to their own citizens -- basically so that the plumbing remains intact and money doesn't "leak" out.
If you start to fix the plumbing, you could get to where governments can start financing their deficits at sustainable rates again. Even if deficit targets are missed it can be okay provided that spending gets plumbed back into government bonds.
This isn't a "solution" but it is how the crisis could end.
People are in a state of panic right now. This is nicely illustrated by this recent chart from Nomura, which examines cross-border equity flows: When people start freaking out they dump foreign equity assets. Right now, these flows are at a level that's only been surpassed twice in over 25 years: The crash of '87 and the collapse of Lehman.

Image: Nomura

Bottom line: It's possible that the crisis/panic we're seeing now could subside long before the core problems in Europe get fixed, a process that at best will take years.

US House Republicans oppose Senate payroll tax bill

18 Dec 2011 - 15:06

(Adds quotes, background on payroll tax cut)
WASHINGTON, Dec 18 (Reuters) - U.S. House Speaker John Boehner threw into doubt the fate of a popular tax break for workers on Sunday, saying he and his fellow House Republicans oppose the two-month extension backed by the Senate and want something longer passed before the holiday break.
Boehner said on NBC's "Meet the Press" program he wants a one-year extension of the reduced rate for U.S. payroll tax paid by workers to fund Social Security.
"It's pretty clear that I and our members oppose the Senate bill. It's only for two months," Boehner said, adding this was "kicking the can down the road."
The Senate passed a two-month extension on Saturday but Boehner said he wanted to work out differences with the Senate before the end of the year, when the tax cut expires.
The biggest sticking point for a year-long extension is how to cover the $120 billion in lost revenue. Republicans are demanding spending cuts to cover the cost and Democrats want to pay for it by closing some tax breaks for the wealthy.
Boehner said Congress should stay in Washington and pass the longer extension before going home for the holiday break.
Beyond a one-year extension, Boehner said House Republicans are demanding reforms to the federal unemployment insurance program to cut the number of weeks for benefits - measures largely opposed by Democrats.
The package also includes a provision to avert a pay cut for doctors treating the elderly on the Medicare healthcare program.
"How can you do tax policy for two months?" Boehner said. "We really do believe it's time for the Senate to work with the House to complete our business for the year. We've got two weeks to get this done. Let's do it the right way."
President Barack Obama, a Democrat, says the lower 4.2 percent payroll tax rate will help boost economic growth. Without congressional action, the rate on the tax workers pay into the Social Security retirement fund will snap back to 6.2 percent.
White House economic adviser Gene Sperling was more optimistic about the prospects for the Senate-passed shorter extension.
"I really think it is very unlikely that the House would disrupt this compromise ... six days before Christmas," Sperling said on CNN's "State of the Union" program on Sunday.

Forget The Shanghai Composite, The Baltic Dry Index Tells The Real Story Of China's Economy

Tom McClellan, McClellan Market Report | Dec. 17, 2011, 4:02 AM
Tom McClellan is the editor of both The McClellan Market Report and The Daily Edition.

There is a growing chorus of analyst voices calling for an economic collapse in China.  This is based in part on how poorly Chinese stocks have done this year, and it sets up all sorts of worries about what an economic slowdown in China might do to prices of commodities, and to other world financial markets.

I have a different view, and it is based on the comparison we see in this week's chart.  The Baltic Dry Index (Source: bloomberg.com BDIY:IND) is an index of dry shipping lease rates.  In other words, it reflects how much it costs to rent a freighter for hauling non-liquid stuff.  The Baltic Exchange also tracks lease rates on oil tankers, and on specialized ships like Panamax ships designed to transit the Panama Canal, and Capesize ships that are too big to fit through the Suez Canal and which thus must go around Cape Horn.  The Baltic Dry Index includes pricing for Handymax, Supramax, Panamax, and Capesize dry bulk containers.
Economists and analysts like to watch the Baltic Dry Index because its pricing reflects demand for shipping stuff across the ocean.  Because the supply of such ships is fairly inelastic, changes in demand will flow through very quickly into lease rate pricing.  It takes a while to build new freighters in response to high lease rates, and that is part of the explanation for why BDIY crashed in late 2008.  A lot of shipyards had ramped up production earlier that year, and then those new freighters flooded a collapsing freight market during the 2008 financial meltdown.  This is a classic case of what's know as the Avocado Effect, or the Hog Cycle.

It is not surprising to see a correlation between Chinese stock prices and some indicator of world economic activity.  China is a mercantilist country which seeks to export a large amount of what it produces.  So when there is a change in world demand for "stuff", that is going to affect the country producing the stuff.  And because stock price movements can often precede changes in GDP, the big drop in Chinese stock prices during 2011 has people understandably concerned.
But the Baltic Dry Index is not confirming that drop.  BDIY bottomed in January 2011 and has been trending higher, in direct disagreement with the Shanghai B Stock Index.  When the two disagree, I have found that it is worth listening to what BDIY is saying.
BDIY did not confirm the higher highs in the Shanghai B Index in late 2010 and early 2011.  Now, as Chinese stocks are unwinding that big top, BDIY is saying that things are actually not as bad as the stock price decline seems to imply.

Personal Market View - HSI capitulation at 2011/12/15 10.39am ?

HSI capitulation at 2011/12/15 10.39am ?
by ckchoy

HSI today morning opening gapped down with downtrend started to gain momentum and suddenly accerelated down fast and reach a bottom at 10.39am around 17886.
If the capitulation is real, expect HSI has hit immediate bottom and started to rebound from here.
The reward of catching a real capitulation is huge. Suggest to long from here but must set a stop loss if HSI breach down 17886 again.

Personal Finance Part 26 – Wealth Cannot Last More Than 3 Generations

The above title represents a very intriguing concept which has been known to the Chinese for millennium, and there is even a Chinese Idiom which states so “Fu Bu Guo San Dai”. Interestingly, while reading “Millionaire Teacher” written by Andrew Hallam (a new book written on investing and personal finance, written by middle-class millionaire teacher Andrew Hallam), I also discovered that he had written about the exact same phrase, though he did not elaborate too much about it. Basically, this teaches us that wealth earned by the first generation can seldom, if ever, last past three generations. The reason for this is so obvious in its simplicity that it is surprising that most adults fail to grasp it – money which is not “earned” tends to be squandered. How does this fit into personal finance? A lot can be learnt about how people behave under various circumstances, and I will illustrate my point using this phrase as a backup; to also show evidence of how parents should teach their own children about money. Granted, it is not easy to “break the cycle” and prove an age-old adage wrong, but there’s no harm in trying to inculcate the right values in the younger generation from an early age.

The First Generation – Wealth Building

The first generation would represent, in most cases, the generation which possessed the highest degree of entrepreneurial spirit, and who believed in hard work, sweat and effort. Most of these people came from a faraway land (e.g. China, India) and arrived in Singapore with hardly a penny to their name, and worked as coolies or labourers doing menial tasks. The hard life made many of them strive to break free of their “bondage” and many of them undertook risks to start businesses in order to achieve freedom from their manual labour. Of course, many of them failed and disappeared into oblivion, but those who survived thrived and grew their businesses and eventually became very rich as a result. However, their frugal habits which were cultivated from their days as hard labourers stayed with them, and because they understood the value of their hard work, sweat and tears, there was also an appreciation of the wealth they had painstakingly accumulated.

Another class of successful first-generation wealth-builders are those who subsisted on a fixed salary (i.e. salaried employees), but who were prudent in spending, saved and invested throughout their lives to accumulate a substantial nest egg. Although these people did not run businesses or make breakthrough products like the iPhone, they nevertheless also understood the value of a dollar earned because they put in considerable effort in their day job, and now have the financial means to enjoy their olden years without having to slog like a dog. The same theme can be picked up here as well – hard work, effort and appreciation of a dollar earned will go towards building long-lasting wealth. These are the people who worked hard to get where they are, who appreciate every last dollar they own; and will never let anything or anyone ruin their plans for a comfortable retirement.

Just for the record, these people usually consist of those who came from the 1900’s to the 1940’s, who had seen Singapore’s rise as an entrepot trade centre to an economic powerhouse, and who had grown along with the country as well. They were our forefathers (grandparents and great-grandparents) who slogged hard and lived in an environment where there was little financial security, unlike what the young are enjoying today.

The Second Generation – Wealth Maintenance

Along came the second generation, which consists mainly of people born in the 50’s and 60’s (the baby boomers). These were the direct descendants of the entrepreneurs and businessmen, and grew up during the years after the World Wars, and who also experienced Singapore’s transformation into an economic miracle. These are the folk who grew up witnessing how their parents slogged to become who are they are now (successful people), and they may also have chipped into help their parents out in the business. However, not being the founders themselves, they would not have the same kind of emotional attachment to grow the business as their parents did. This is not to say that they do not have the competence to manage and grow the business, but they may never attain the same level of passion for the business as their parents did. In fact, there have also been known cases of children who refused to carry on their parents’ trade, and who chose a different career path; thus the business empire had to be taken on by “outsiders”, who would not have the same kind of loyalty to the business as blood kin. Other more stark examples may include a skilled Char Kway Teow hawker whose son is much more educated and does not wish to carry on this “menial” job, but instead prefers to pick up a pen to do accounting or law (I have heard of such cases by speaking personally to older hawkers in Singapore – this is why there is less and less great Hawker Food!).

So assuming in cases where the parents had built up a huge business empire and created massive amounts of wealth, the baby boomers simply had to maintain it and ensure it did not flow down the toilet bowl. This was somewhat easy as they had a direct hand in managing the business (in some cases), while in other cases where they did not, they had witnessed first-hand what their fathers and mothers had been through, and thus understood the importance of ensuring the wealth was retained, and not squandered. This is the so-called second generation effect – they help to maintain the wealth which was built up by the first generation. So far so good. Now let’s come to the third generation – Generation X and Y.

The Third Generation – Wealth Depletion

The third generation, affectionately known as Generation X and Y (born in 1970s to 1980s; and 1990’s to 2000’s) are the most blessed generation. They were born when Singapore was stable (after having broken away from Malaysia) and was on solid economic footing, with a strong Government (PAP) and sturdy policies. There was political stability, economic security and financial stability as well. Most of us (yes, myself included) grew up in an environment where we did not have to struggle and go hungry, where education was widely available, and where material pleasures were readily available (with a new invention called the Credit Card, no doubt). Therefore, this generation has also been given the label “Strawberry Generation” – looks good on the outside, but cannot last when encountering adversity. Because of the inherent stability in our lives and the lack of a push factor to strive hard and achieve, the spirit of entrepreneurship has all but died out and many of us are relegated to salaried jobs earning a fixed income which keeps us happy and contented.

It is this generation which is responsible for poor financial habits and for squandering away the wealth built up and maintained by the preceding two generations. Most of Generation X and Y were relatively insulated from the day to day operations of the business, and add to that the fact that parents (the baby boomers) were also over-indulgent in wanting to ensure their children lived a comfortable life; so much so that they provided too much of a comfortable life for this generation. Without the need to strive hard, this generation thus lacked the necessary appreciation of money and how hard it is to earn it, and proceeded to spend lavishly and wantonly. An easy supply of money coming from two previous generations also fuels this habit and exacerbates the careless (and callous) attitude in which this generation frivolously fritters away the wealth built up over 50-60 years.

While it might be a bit of an exaggeration in terms of my description of how the current generation behaves (for of course, there are also shining examples of youths who grasped the concept of delayed gratification and appreciate the value of hard-earned dollars), there have been ample examples in the newspapers over the years (yes, I can find examples stretching from 2003 till now) which serve to demonstrate, anecdotally, how the current generation has a higher tendency than the previous two to spend excessively and without due consideration.

I have read reports of fathers who spend lavishly on their children, buying them anything from branded goods to cars to the latest gadgets. With such constant pampering, it is no fault of the child that they grow up to be completely spoilt adults who are used to getting their own way, whether or not they have the financial means for it. A life hooked on materialism and on borrowed money (credit cards and loans), while living paycheck to paycheck, seems to be what errant parents have set up for their kids.

Lessons Learnt

I guess one can already tell what the moral of this post is – how to inculcate the proper financial habits and value system within a generation who is unused to struggle and hard work. For all of us aspiring parents or those who are already parents of young toddlers, make sure they understand the value of money. There are actually many websites which give advice on how to educate children about money, and to ensure they treasure it and appreciate it from a young age. Now that we are already moving into the fourth generation (Generation Z they are called), it is extremely important to educate them well financially so that the wealth depletion and drainage stops before it gets worse.

Of course, those parents who are already financial wrecks themselves are hardly in a good position to impart prudent values to their children, but perhaps this post also serves as a wake-up call for those who may be exhibiting poor financial discipline. If your lifestyle is ostentatious and you have poor money habits, it is perhaps a good time to sit down and review your finances and to ask yourself if you need some proper financial education. Call it self-discovery and soul-searching, if you will.

For parents who may have teenage children, do yourself a favour and stop the pampering. The key is to be like Warren Buffett – he believes in giving his children just enough so that they can do anything they want, yet not an excessive amount such that they do not need to do anything at all (i.e. sit on your butt all day, watch television and spend money). And we are talking about one of the richest men on the planet! If parents consistently help their kids to pay off their student loans, purchase cars for them, buy branded items and gadgets for them whenever they request, then there is simply no incentive for the young adult to work hard for these items and to manage their financial life. So the only way to “teach” is to let them pay for everything on their own – this not only builds discipline and perseverance, but also teaches the value of delayed gratification, striving hard and saving for what you desire and plays down the materialistic instinct residing in us. Over the long-term, this will definitely do more good than harm.

Go for win

Why Do Traders Lose? by Jeff Coglianese

by Jeff Coglianese, Senior Broker & CTA
November 14, 2005
Why Do Traders Lose?

Much time and attention in these articles is dedicated to winning trades in the futures markets. Today will we will identify some of the reasons why traders lose and hopefully learn how to avoid a few of these common pitfalls. Losing is a major part of commodity trading. How you handle losses can be the difference between being a successful trader and becoming a former trader.

I have personally, at one time or another, made most of these mistakes in my own trading. Identifying common mistakes is the easy part. Overcoming human nature is a career long struggle in trading. No trader is perfect. Traders who can best avoid the pitfalls have the best chance of being successful over time.
The futures industry is full of trading adages that for the most part are sage advice. The following are some of the most common adages in the business:
"Let your profits run and cut your losses short"
"The first loss is always the smallest"
"Plan your trade and trade your plan"
"Pigs get fat, hogs get slaughtered"
"The trend is your friend"

The above adages have been around as long the markets have been in existence. Their wisdom and validity has stood the test of time. We will discuss three of my own trading dictums that are listed as follows:
"Do you want to be right, or do you want to make money?"
"The hardest part of trading is between your ears"
"Would'a, should'a and could'a are the three best traders I know."

We will draw some parallels between trading and baseball. In the 2005 baseball season, Derrick Lee led all of major league baseball in batting average at .335. That equates to failing to get a hit 2 out of 3 times he steps up to the plate. Most players in the major leagues would be thrilled to bat .300. That would mean that 7 out of 10 times the batted, they failed to get a hit.

You may be starting to wonder what baseball has to do with trading futures. A baseball player knows that he will not get a hit every at bat. He also knows that if he goes 0-4 in a game, that he should not completely change his swing. The adage, plan your trade and trade your plan, draws a nice parallel to our baseball analogy. One of the most difficult parts of trading for most new traders is dealing with the losing. A few losing trades in a row and a trader is ready to try a different strategy.

The markets vary in their type frequently. Some of the time, markets trade in fairly well-defined ranges. At other times, markets experience well-defined trends. A person trading a trend following system will likely lose money when the market is choppy and directionless. On the other hand, a counter trend trader who sells resistance and buys support would tend to thrive in a choppy market. Neither of these strategies can be said to be better than the other, they just work better in different types of market conditions. It is difficult to see the big picture while you are in a trade, especially if you have had a string of losers. Many times, traders will switch strategies just as market conditions are about to change. These traders end up trading the wrong strategy in the wrong market and then switch strategies and do the same thing again only to find they are once again trading the wrong strategy in the wrong market.

Many times in trading, the best course of action is stick with your trading method. Going back to baseball, if Alex Rodriguez goes into a slump, he does not try a new swing or stance. What he will do is watch video of himself hitting at a time before the slump. He will find out what he is doing now that is different from what he did when he was successful. This will help him to return to his original method of success.

Human nature is a big part of the reason many traders lose. We are taught from the time we start grade school that we should be correct all the time. The way to get "A's" in school is to get 90% correct on your exams. It is hard to get away from wanting to be correct or right and that can be costly in trading. Successful traders learn that they want to make money over time, not be right all the time.

Many trend following traders lose on upwards of 70% of their trades. They believe that the 30% winning trades will make enough for their trading activities to be profitable. The average new trader would never stand for a system that lost 7 out of 10 trades. They want to be right 90% of the time and get an "A". Many new traders are attracted to programs and systems that advertise high winning percentages. Which is better, a system or method that wins 90% of time with $100 average winners and $1,000 average losers, or a system that wins 20% of the time with $1,000 winners and $100 losers. In this example, the 20% winning system is the better method.

The problem with low percentage winning systems is that after three or four losing trades in a row, the trader starts to doubt the validity of the system. Maybe the market has changed? Maybe the system is no longer valid? These are just a few of the thoughts that go through the mind of a trader who has had a several losers in a row. If an uninterested party were to view the big picture up to the most recent losing streak, they would easily identify that the method worked over time and not think about changing course. Successful traders learn to ignore these thoughts and focus on the fact that losing trades are part of their overall system.

Many novice and unsuccessful traders play the Would'a, Should'a, Could'a game. A trader sees a trade set up and does not act. He tells himself that he would have made money if he acted on the signal. The same trader is in a position that is making money and takes profit. The market continues in the same direction and our trader tells himself that he should have stayed with the position and made more money. A trader looks at the markets after the close of trading and tells himself that had he looked earlier he could have made had a winning trade. The words would, should and could are all past tense verbs. Trading the past is very easy because we know the outcome.

Trading is about making money, not being correct in market analysis or being a great prognosticator. Traders must be consistent in their approach and strive to completely remove emotion from trading decisions. This is often best achieved by having and sticking to a plan for every trade. We trade in the future markets, not in the past markets. We will never trade as well in real-time as we could by looking back. Trading in the past is an exercise in futility that will only harm your psyche going forward. You should view every trade you make as the best trade you could make at the time with the information available.

Why Do More Than 90% of Traders Lose? by Jaaks

by Jaaks

Traders lose primarily because the primitive part of the brain is wired to avoid loss and the primitive brain makes all the decisions. Once we incur a loss trading, we try to recoup the loss. This usually means riding the loss down to greater losses until the pain gets too great. Then we bail at a huge loss, with a lot of emotional pain. This loss is burned in our memory and subconsciously when we start trying to get the money we lost back. Let's be clear. This is occurring subconsciously. You are not aware it is happening. That is why you repeat the same behaviors, and lose over and over again even though your higher brain know it is wrong. By the way, the higher brain will think all sort of excuses to justify the primitive brains actions. None of which are true.

How do you counter this strong, unconscious force? First you need a plan. The first part of the the plan is cash management. You need goals based on the type of trading you are doing. You need strict loss stops above all, how much money you are willing to lose for the type of trading your are doing and if you hit it, you are DONE! The same go for profits. Once you reach you profit goal, never, never lose it. You can keep riding the the profit train in the market let you but if it reverses and returns to your min profit level, you are OUT! Once you have experience in the market, you can alter the latter part by taking partial profits and increasing your position size for really obscene profits but never, never violate your daily loss rule. Never. Keep a log and study it. You will find the best ratio of win to lost based on your trading style.

Why is the stop amount so important other than the obvious? Because starting out, you are likely going have more losing trades than winners. But you can still make money: Say you set a stop at $100 and it cost $2.00per buy and sell and the slippage is $.01/share and you profit goal is 4 times your loss amt. This means you could lose 3 times for every win. A 75% loss rate in trades. After 3 losses, you will have lost $312 + the slippage. That amount is based on the number of shares. Let's say it is 300 shares. so the slippage is $3. So your total loss is $315. The next trade in profitable, so you gain $396. You have profit of $81. If you do this every day, your profit is $405/wk. Couldn't live on this amount in America, but by increasing the amount, you can get to the point you could. But the best way is getting a win / loss ratio greater than one. Then you really make money. The only way to do this is accumulating trading time. If you could get to 3 wins for every loss, then your gain per day is 873 or $4365/wk. You could live on that! Note: this would be a very good winning ratio and depends on the stocks you trade and the type of trader you are.

The fist part of your plan is cash management. The next is a plan of when to buy, when to sell, when to take profit, when to increase your position size. Is there one better than another? Yes, depending on the type of trader you are and the market. Also different plans are needed in different market phases. But every plan fails if you don't relentlessly stick to it. Never vary, never vary, never vary. You can alter your plan when you are not trading, but while you are trading, sick to it. Is there a fool proof trading method? No. If there was, that method would soon get all the profit in the market and everyone would use it, resulting in it's failure as the rules would now have changed. Anyway, if you had a system, would you let anyone know about it? Not likely! At best, you could come up with something that work for the market conditions at that moment but would fail when the conditions change. "The market is always the same, the market is always changing." There are plenty of adaptive black box systems that supposedly are using fuzzy logic and neural programming. From what I know, their ratio is 35% winners, 65% losers. And they make money hand over fist because they have strict rules and they never vary from them.

The Real Reason Why 90% of Traders Lose, Nadeem Walayat's Trading Lesson's

The Real Reason Why 90% of Traders Lose, Nadeem Walayat's Trading Lesson's