Trading Vs Investing

[c kenneths]

Hey guys, lets argue constructively here, which is better among these two styles of participating in the stock market, some of my friends believe in the Buffet ideology of buy good company shares and wait for your dividends and bonuses for the long term ( play it safe) but there are some of my friends who do fast trades to make huge profits.
Now my question is, which style do you recommend, the first group or the second?.

[Naija4ward]

For me, it depends on individual outlook. When I started I got thoroughly confused, because I read books from both camps. When my stock position on First Bank went from N22 to N77 in 18 months, I was elated that value investing was the best. When it came down to earth at N32, I was sad I wasnt trading, then remember Robert Kiyosaki the author of Rich Dad Poor Dad who said "fast cash" wins.

Now I have divided my money and do both.

[SpecNomics]

Whether you are Trading or Investing its essentially thesame i.e. it would be based on some Fundamentals or (and) Technical reasons, the main difference is the Time Horizon; Trading being regarded as having the shorter horizon.

From this perspective, its not a question of which style, but when would the Trade(Investment) idea envisaged and analysed by the to be investor germinate, Since its at that point the returns expected can be extracted from the market.

Therefore an investment idea that could come to fruition over a couple of days or a month could be viewed as Trading, yes! e.g. Betting on the Price of Crude rising from its current low because the weather forecast shows a late but extremely cold winter!

Or an idea that'll take years to be realized can be viewed as Investing! e.g. Investing in Agriculture Commodities Indexes because increasing global warming might led to future droughts and famines!

So my two kobo is that no style is recommended, what is important is the investors or the investment ideas time horizon.

[paragon]

hi there, let me just say that the main aim of investing in the stock market is to generate wealth. The most important thing is to define your style and objective. that's why it is good to diversify your portfolio.

The market is cyclic in nature. There are times when you need to sell to take your profits and possibly reinvest it later. there are times when you hold so as to partake in the shareing of the big cake in future. The important thing is that you set a target for yourself and devise a means of acheiving it.

However, the Nigerian market is just coming of age, and to be a partaker, you need to be more of a trader than a long term player.

Think and Act....

[prof]

This discussion is becoming interesting. I think I agree partly with Paragon on the need to build a good portfolio and define ones investment objective. With the current pension scheme coming full on course and more institutional investors, I think long term investors stand to benefit more if there remain in the good market long enough. In all I think paragon summed it all, it depends on " your style and objective". Stick to what you know best - for now am a long term investor!

[SpecNomics]

Loss at Goldman Hedge Fund Racks Duo at Secretive Global Alpha

By Richard Teitelbaum

Jan. 31 (Bloomberg) -- Mark Carhart looks out over the packed New York conference and tells investors that Warren Buffett has it all wrong.

Carhart, 40, co-head of the quantitative strategies group at Goldman Sachs Group Inc., uses his July speech to poke fun at the Berkshire Hathaway Inc. chief executive officer's penchant for investing in market-leading brands like Coca-Cola and Gillette. He cites study after study showing that big-name companies with high price-earning multiples or rapid growth rates make poor bets.

Traditional stock pickers like Buffett, a fabled raconteur, do have one redeeming quality, Carhart jokes: ``They tell great stories.''

Carhart himself has a pretty good story to tell. Though he doesn't like to talk about it, Carhart is one of the world's most successful money managers, a mastermind behind Global Alpha, a $10 billion hedge fund for wealthy clients and employees of Goldman Sachs.

In 2005, Carhart and co-manager Raymond Iwanowski, 40, notched a 51 percent gross return at Global Alpha. Posting that kind of gain requires taking risks -- and last year, Alpha lost 6 percent, its first deficit since 1999.

Carhart, a former assistant professor of finance at the University of Southern California, helps oversee other hedge funds, four mutual funds and scores of separate accounts. In all, he and Iwanowski have $101.5 billion at their command. Carhart and Iwanowski use math-heavy trading tactics that fund consultant Sol Waksman likens to counting cards in a casino. The two lead a corps of computer-loving traders, statisticians and finance and economics Ph.D.s.

Behind the Scenes

Their team makes -- and sometimes loses -- millions of dollars a day. At the heart of their empire is Global Alpha, which generated about $700 million in fees for Goldman Sachs in fiscal 2006. This money machine hums mostly behind the scenes. Asked about the fund, Goldman spokeswoman Andrea Raphael declines to confirm even its name.

Carhart and Iwanowski, friends since their days at the University of Chicago Graduate School of Business, oversee about 10 other Goldman hedge funds, too. Together, they trade everything from Japanese stocks to U.S. soybeans, to Israeli shekels.

Global Alpha is part of the richest hedge fund empire the world has ever seen. Last year, Goldman Sachs eclipsed D.E. Shaw & Co. and Bridgewater Associates Inc. to become the largest hedge fund manager, with $29.5 billion in assets as of Dec. 31, according to Bloomberg and Chicago-based Hedge Fund Research Inc., which tracks the industry. That figure excludes Goldman's proprietary-trading funds and its funds of hedge funds.

Goldman Secrets

Working out of a granite-and-glass office tower a few blocks from Goldman Sachs's Broad Street headquarters in lower Manhattan, Carhart and Iwanowski hunt for market variables called risk factors that often lead to excess investment returns, or premiums, according to people familiar with the fund.

Some, such as a measure called the value premium -- the difference between the return of a group of stocks with high book values relative to their prices and that of a group with low book value-to-price ratios -- have been used by other money managers for years. Goldman Sachs has identified more than 20 new risk factors, which it doesn't disclose, even to its own investors.

Carhart never reveals the secrets. Old friends and people who've invested in the fund say they're not really sure how it works.

John Cochrane, one of Carhart's professors at the University of Chicago, says that based partly on what Carhart has told him -- not much, he admits -- Goldman Sachs has devised five or so proprietary risk factors for equity markets.

Inside Global Alpha

Kelly Welch, a Chicago classmate and former portfolio manager at the $2.1 billion Ewing Marion Kauffman Foundation in Kansas City, says Carhart builds computer models that use Goldman and other variables and historical data to decide what to buy and sell.

``Mark has never discussed the specifics of the new factors with me,'' says Welch, now a finance professor at the University of Kansas.

Interviews with Cochrane, Welch and others who are familiar with Carhart, Iwanowski and their fund provide a glimpse into Global Alpha. So do documents that Goldman Sachs has filed with the Irish Stock Exchange for Goldman Sachs Global Alpha Fund Plc, a Dublin-domiciled fund for non-U.S. investors. This Irish fund tracks its U.S. counterpart.

On any given day, Carhart's team of 50-60 investment professionals uses Global Alpha's factors to deploy 20 trading strategies in markets the world over, according to an investor in the fund and Global Alpha documents. During 2006, the fund's picks ranged from Japanese and Dutch stocks to bets on and against the Polish zloty.

Quant Shop

``It's in everything from commodities to emerging markets,'' says Dan Kapanak, manager of investment strategy at the $26 billion Arizona State Retirement System, which invests in a separate Goldman account.

At the center of the Global Alpha story are Carhart and Iwanowski, devotees of quantitative analysis, or quants, who came to Goldman Sachs from opposite ends of the financial world.

Carhart first turned heads in money circles as a doctoral candidate at the University of Chicago and later as an assistant finance professor at the University of Southern California's Gordon S. Marshall School of Business. Iwanowski, by contrast, has spent his entire career on Wall Street.

What unites them is that they're quants, who put their faith in data, rather than human judgment, when deciding what to buy or sell. To money managers like them, what you think about a company's management or products doesn't matter much.

for more of this article click http://www.bloomberg.com/apps/news?p...Q&refer=stocks

[c kenneths]

I was just making additional research and found out that its better to make clear divisions between your trading sum and your investment portfolio.
This is as to avoid confusing the two. There are also many strategies used by professional traders. Examples are shorting, fixed percentages, end of period dives etc.
For shorting, you need to buy shares with a fixed amount of money, like say 100 k then wait for the value to be around 120 - 130 k, then, sell only the units that will give you back 100 k. Then leave the rest in your cscs. You can now go back with 100 k and repeat the cycle.
Fixed percentages means setting a particular percentage of gain eg. 50% and insisting that you will not sell untill the stock adds that 50% before you consider selling and then buy another stock to wait for your 50%.
For end of period traders, they simply wait for the third quarter result to be announced, then they buy if only the result is good. They can now dive in and trade immediately after the announcement of full year results, when others are rushing in to pick bonuses and dividends. They put the cash away and fly back to the skies for future dives. And everyone goes home happy.
All in all, trading stocks is full of uncertinities. THINK BEFORE YOU LEAP

[ghm]

I 've learnt quite a lot from c Kenneth's posting. while I am trying to be careful, I also want to damn the consequences. Could you people advise on what precautions to take while borrowing money @ 23% p/a just for stock trading?

I am all ears.

[SpecNomics]

@ C Kenneths - I guess "Investing" is not full of uncertainty!

I am sorry but you make "Trading" seem like a Game of Darts. When in actual fact Mutual Fund Managers have been shown to no better at picking stocks than a bunch of Kindergarten kids.

Trading is not SPECULATING, it is ACTIVE INVESTING. The context of the "Investing" style you've been talking about is PASSIVE INVESTING.

If ACTIVE INVESTING is similar to setting up a NANOTECHNOLOGY company, PASSIVE INVESTING can be likened to openning a CORNER SHOP.

@ GHM - That is ABSURD!!! that means you must return a minimum of 23 per cent!!! And if you can do that, Well, YOU WILL NOT BE ASKING US ABOUT THE REPRECAUTIONS OF SUCH A DASTARDLY MOVE!!!

On a sober note, what stocks have you analysed would return so much that you are willing to borrow at that rate to invest?

[prof]

GHM
I agree completely with SpecNomics, boworring @ 23% is quite unreasonable even though some stocks have shown very good returns in the past. In stock trading there are no guarantees, all the same the discision is yours but the risk is unnecessary!

[ghm]

Thank you for your contributions.

Whether I borrow or not, I see 23% as the cost of capital in Nigeria as lending rate is about 23 % from financial institutions.

The way I reason is that; for me to drop money on investment or business, it should be able to yield above 23% before I can actually say that I am making any profit (unlike most people).

Criticizing the idea will not achieve the aim of unlocking our creativities, engagement of the resourses around us and exploration of the posibilities of such a yiield.

To start with:

There are a few relatively solid bets in the capital market, with fundamentals that make it relatively easy to predict future prospects. For example, the following companies have good fundamentals and are likely deliver minimum 40% ROI by EOY 07 (political and other associated risks not considered anyway) even though they have done it for a couple of years.

First bank
Oceanic
UBA
Intercontinental
Zenith Bank

Please add you ideas and precautions as well.

Thank you.

[paragon]

well GHM, i would like to congratulate you on the determination you have shown. Warren buffet did not become the greatest investor in the world today without taking some CALCULATED risk.

I just want to let you know that the Nigerian market is more trhan able to give you the returns you desire and much more if only you do you research homework well. 23% is not too much as some may think compared to the returns you will get at the end of the day.

Well i believe everyone bears risk at different levels, so have a determined mind and expect the best.

Ashaka cement, WAPCO, BCC and CCNN arte all good but they are already peaking. i would advise on stocks like UBA, Oceanic Bank, Fidelity Bank, Guiness etc because they are just beginning a new cycle and can as well give you a higher ROI.
Think and Act...

[SpecNomics]

Could you pls inform us on the Product that sent their Earnings soaring?

I find the figures hard to digest

[Tayo]

GHM, you need to weigh the amount of risk with the return. Most financial institutions have other hidden fees besides the 23%. There might be management fees, VAT on the interest, insurance fees, admin fees ... coupled with COT/VAT from your bank. You also need to put into consideration the brokerage commisions and other levies you pay when you trade. You might well be looking at an overall cost of 26%. If you can summarise an estimate of how much exactly your expenses will be, then you'll have a clearer picture about how much you must make before in order to break even (and extending beyond). Then compare that with what happens if you don't make that much.
IMO, the returns are not worth the risk. You might think otherwise, though. It's your call.

[c kenneths]

Supposing one Mr Brown has 100k and then decides to buy very good stocks with it at the NSE, then he takes a trip to california on vacation and stays a full year. Then there is this Mr Black who thinks he is a smart stock picker, he goes in and buys stock worth 100k, then he sold them a month later and makes a profit, only to buy more stock and sells them later for yet more profit, and on and on........
My question goes like this, is there any chance that after a full year, Mr Black can end up with more money than Mr Brown who has not touched his portfolio, but has dividend and even bonus shares?
Responses please.

[SpecNomics]

Scenario

Mr Brown
Y0 = N100k
Y1 = N110k
Cash Return = N10k

Mr Black
Y0= N100k
Y0 + 3mths = Took N10k Profit as NSE traded up N10k
Y0 + 5mths = NSE trds to N98k, Black sees a cheap buy and re-enters
Y0+ 6mths = NSE trds upwards at N120k, Black sees as over-valued, sells and takes Profit again
Y1 = NSE Protfolio finishes yr at N110K
Cash Return = N22k

I think Mr Black can earn more than Mr Brown, so long as Dvd Yield is not 12% on the NSE Portfolio, which is highly unlikely

The Active Investor gets a premium above market return for his(er) vigilance aka ALPHA, while the PAssive MR Brown gets market return for his inertia, BETA.