Stock-market

I like Tobin Smith on Bulls and Bears, and since I enjoy business books bought a copy of Changewave 2.0. The first 100 pages talk about "Changewave" ideas: cotton gin, auto, radio, tv, computer,web, etc. The idea is to buy the leaders as these trends emerge. Why that took a 100 pages is beyond me. Tobin fills the pages with words like ChangeQuake, FadQuake, Marketquake. (Even a glossary in the back for made up words)
I thought for a minute Miss Marsha had written an investment book. The second half of the book was ok, the most cogent point was that the only way you make money in stocks is when you sell.

My suggestion, is to pick up a copy of the Gorilla Game which I read a few years ago. It is the same concept, but is much more detailed and useful to individual investors. For the technical analysis/ growth investing segment of the book, How to Make Money in Stocks by William Oneil gives a reader far more insight on how to select stocks and protect profits.

Over the past year, with technology stocks in the toilet and most stocks significantly down, it was hard to believe in any investment program. But this fall, just as the Tobin Smith predicted, the stocks aligned with transformation change-- particularly cutting edge growth and technology companies-- have come roaring back. What makes ChangeWave Investing 2.0 so compelling, though, is the theory behind why these kinds of stocks enjoy monster returns, allowing readers to indentify emerging growth stocks before Wall Street -- and before they begin to take off. And by balancing your portfolio between less volatile "ballast" stocks, and stocks of companies connected to transformational change (what Smith calls a "change wave"), you can attain stellar growth with far less downside. My own portfolio is up 85% this year, and I feel like I'm extraordinarily well positioned for the rebound in the economy next year.

To qualify for a changewave company, the company must be $1 billion in size.

Changewave 1st Screen : They must have a growth rate in the top 10 percent companies in the new economy.

Changewave 2nd Screen (Top 10 sectors) : five times S & P 500 growth

Changewave 3rd Screen (Supersectors): Top 10% growth rate in each new economy industrial category.

Changewave 4th Screen (Market): Top 1%

Predicability is essential in changewave. The most predictable winner in a top secular growth space goes to the highest valuation - everytime.

All things being equal, the simplest to understand secular growth and competitive advantage logics wins the growth stock debate.

People buy stocks the same way they buy other products. People buy products they are comfortable with; the product is simple too understand and its indispesible to the consume.

Fundamentalist figure out stock value based on fundamental research and analysis. They predict the stock price will go up. P/E = Price of Share/Retain Earnings. This tells you if the investors are being unrealistic about the price in relationship to earnings growth. However, price is a function of present value and future earnings, It does not consider capital generators, such as, copy rights, intellectual property, and patents. Capital growth companies accounted for 50 percent of all the corporate profits.

When the dust settles in any information technology-based industry, there will be one company with 60 to 70 percent of the market share and the bulk of profits and valuation in the segment. The number two guy will have a 20 percent share.
Technical analysis is employed to decide buy and sell patterns. Technical analysis uses bar charts and indicators to buy and sell.

The momentum investor waits to see what everyone else is doing. If there's momentum behind a stock, he assumes that the momentum will continue and bets on that fact.

The innovators: Because only 3 to 5 percent of the world are innovators. The early adopters: 10 to 15 percent are early adopters. The early majority: "I need more evidence"

Change wave looks at marketing, first, and considers how marketing will use product superiority as a compeling motivator to buy. Product superiority does not guarantee a consumer buy trend. (Beta verse VHS, DVD verse CD,CD verse memory stick). Customer acceptance is more important than product superiority. The winning product will have the best marketing.

Suppose a company builds a car that rides on air and suppose it comes with special safety features than are 80 percent more effective at saving lives. Does everyone go out and buy the new car? Probably not because safety does sell just increases cost. Now suppose other companies are starting to build a similar vehicle. Its radical departure from terrestial ground transportation creates a changequake. It looks like the old transportation technology is being abandoned. Suppose, the technology is the hydrogen cell transportation; the changequake may not be felt, if it is felt than it qualifies; we are not looking for an incremental change; we are looking for radical change. Wealth opportunities are found from rapid and significant changes.

Entrepreneutrial companies harness their innovations and create new, order of magnitude improved ways of doing things. The law of distribution is controlled by product creation and consumer demand. Consumer demands does change suddenly, it changes when their is a disruption.

"Investing in the right stock in the best space gets all the money." This is the law of the free market. This is the law of distribution, its beautiful.

Where is the fastest, biggest, and most locked in sustainable growth in the economy today?

Which sectors are biggest beneficiaries of this hugh, predictable, and sustainable growth?

Which companies are best positioned to capture a disportionate percentage of this locked in growth?

The Top 10 Supersectors
1. optical internet infrastructure
2. wireless internet infrastructure
3. b2c
4. b2b
5. data storage
6. eService
7. digital services
8. eProcessing
9. non-pc computing
10 broadband to the home

The Top 10 Supersectors change from time to time. Optics technology investment continues to be appealing because it offers radical differences in change.

The Value Chain: New Economy -> Change Quake -> Killer Value Proposition -> ChangeWave ->SuperSector->SuperSpace->WaveRider companies

SuperSpace Criteria:
1. is the project growing at least eight to ten times faster then the economy in a three to five year period
2. does it hold an enabling control position
3. does it provide a killer value proposition
4. is it projected to become a billion dollar industry

The big idea
1.Buy on upward price movement trend. Buy above the 50-day average.Sell when the 200 day moving average crosses the 50 day average. (shift in momentum)

2.Select companies with 5 to 6 million available shares (float). Take advantage of the float
3.Buy if the stock moves up 20 percent from a temporary downward trend
4.Double up on the stock if has moved up 20 percent in the past three to four weeks.
5.Rising volumes are required to sustain higher prices. Volume increases as mutal funds and hedge funds start buying

As the cover of this book says: Liquidity! Accessibility! Transparency!

The authors take a European perspective to challenge the traditional way that financial markets have operated in the United States and elsewhere. They point out, correctly I think, that the revolution is here. Fully automated markets now do the bulk of the worldwide futures trading. For example the Chicago Board of Trade was overtaken in futures volume by the fully automated German-Swiss EUREX in Frankfurt in 1998. London was charging from behind to take a big piece of the automated futures business as well. Automated trading experiments are going on in a number of other places, as well.

The vision the authors have is captured by a quote from Ludwig von Mises: "Economic history is the story of the gradual extension of the economic community beyond its original limits of the single household to embrace the nation and the world."

This vision is essentially of convergence into one global market, with one clearinghouse, and one regulator to do everything. The need to get costs down will require that convergence as the ultimate solution. How imminent this vision is has to be a guess (the authors convey the vision in the form of a dream), but the stories in the book show how often the complacent, traditional view has been wrong. The authors are good at pointing out the speed bumps that will delay progress, and outline good ideas for better and faster implementation.

But they are definitely tolling the bell in the near future for face-to-face selling. "In the future there will only be electronic traders." They also see a rise of small traders, small banks (doing direct placements of IPOs over the Internet with traders without underwriting syndicates), and greatly squeezed paychecks for traditional investment banking and trading activities.

I found the book to be consistent with my own vision. I was still left with the question of why the transition has not been a faster one. Financial markets should be converging at a much faster rate, if one looks only at the technology and the use of the Internet. Which aspects of human stalls are the worst delayers? Probably the tradition and bureaucratic stalls, because the existing markets and regulators are very slow to see new opportunity. Consider how recently fixed trading commissions disappeared. Those should have been gone in the Roaring Twenties.

If you want good detailed information on the state of the electronic market revolution, this book is essential reading. If you own a seat on an exchange, your pocketbook requires immediate attention.

There is an excellent section on how to prepare for the transition, and another one on the dangers to be cautious of.

Good look in building your wealth faster through more efficient markets!

In reading the book, there are many things that would scare traditionalists in our business. The rules are changing, and unless we adapt as traders and exchanges, we will be doomed. As I have discussions with other board members, and other floor traders, some intuitively understand the coming electronic age. Others pass it off as a purely European phenomena. "It won't happpen here.", is a phrase I hear every day. Brokers and traders see that the computerized competitors are having a tough time gaining a foothold in the American futures market. They rest thinking that their future is secure, and that maybe their margins will be squeezed a little. The revolution has only begun. While some of the positions the book posits seem outlandish, Columbus was seen as outlandish in 1492 too. This is a must read for any person associated with floor trading or an exchange. This also makes good reading for anyone involved in government regulation. Barriers are being broken down. Borders set by politics are not relevant to the sea change taking place in the financial marketplace. The U.S. is the titan of investment capital today, but a government that shackles the growth of the marketplace due to over regulation, is doomed to see all that capital leave for less regulated environs. I am on the Board of Directors at the Chicago Mercantile Exchange, so I speak from experience. The revolution has begun, and we are trying to embrace it.

Building on the monthly news and insight from Patrick Young's ADTrading.com newsletter, Patrick Young and Thomas Theys have put together a concise history of recent developments in capital markets, especially the futures markets, and the steady advance of electronic trading. As a longtime reader of the newsletter I have been exposed to most of these ideas on a monthly basis; as an industry executive I have watched the events unfold day by day. Nevertheless, this compilation provides fresh insight into Capital Markets trends.

I recommend this book to anyone interested in an overview of the recent history of the futures, equity and FX markets and a plausible view where the markets are heading.

I would also recommend Capital Markets Revolution to industry insiders who are well aware of the events and ideas discussed, as they can benefit from the framework and view of the future into which current events are placed.

This book is primarily about the role of portfolio insurance in the market crash of 1987. Despite the Amazon listing, I don't believe that Harry Markowitz is a co-author. Unfortunately, unless a reader is already well informed about the crash, he will not realize that there are many factual misrepresentations, particularly those that have to do with Jacob's critique of the way portfolio insurance was marketed. I was an eyewitness at the time, so I know what actually happened. Jacobs also has a bad habit of using cited quotes or cited paraphasing, which gives the book an air of scholarly authority, that he then improperly interprets out of context. Jacobs clearly has some reason for his own vendeta and crusade against portfolio insurance that causes him to seriously overstate the case against it and even to attempt to unfairly damage the reputations of those involved.

This is a badly written, repetitive and self-serving account, largely, of the foolishness of "portflio insurance." That things which are "just like" something else may not be so in reality, and that magic fixes in the market (which after all fly in the face of the rational-expectations/efficient-market hypotheses which often are built into the view of the market being relied on) I guess needs to be pointed out regularly, since hope of quick, uninformed, and painless fixes seem to reoccur with each new wave of financial charlatans and the greed they feed on. Jacobs does point out such problems for a particular, rather bizarre episode, and suggests, not too coherently, that such "scams" are still prevalent. However, He does this in a horribly repetitive and self-laudatory way that is not really very clearly argued.

he book provides an extremely enlightening treatment of arcane financial strategies that have derived from Nobel Laureate winning option pricing theory. It is a well-written description of how very smart people are able to "outwit" other supposed very smart people by promising something for nothing. There will always be those who will dream up complicated strategies that purport to promise high return for low risk and thus demand a premium for providing their strategy. The book reminded me of Albert Einstein's work for the Swiss Patent Office at the turn of the century. He would daily receive applications for new and different perpetual motion ideas. Sometimes the ideas were so complicated Einstein could not readily find their flaw. (Finally, he encouraged the patent office to pass a ruling stating that anyone wishing to patent something which broke the second law of thermodynamics had to submit an actual working unit.)

Portfolio insurance was the first large scale application of option pricing theory. Long-Term Capital Management, a highly leveraged hedge fund partnered by the Nobelists, was the second large scale application. Both promised free lunches. It is easy for the disciplined, long-term, individual investor to look at the 1987 crash and the LTCM debacle and conclude that it doesn't matter. The ones who were harmed the most were the purveyors of these supposed perpetual motion machines as well as the investors who "played with this fire". In fact, however, Jacobs' book is a wake-up call that these new financial strategies have become so far reaching, that they can have significant impact not only on the financial markets, but on the global economy as well. The missing element in the book is a way for regulators to rein in an industry that is out of control and return it to its basic purpose: moving money from people that have it (investors) to people that need it and educating the investor on the risk/reward tradeoffs. The industry subrole of shifting risk from people who cannot accept it (e.g. farmers) to those who can (speculators) is also valid, however, it has become so pervasive and sophisticated that it begs for a return to sanity. Absent that, Jacobs' book is an eye-opener, and a must read for anyone hoping to cope with today's complicated markets.